History of Greed: Financial Fraud from Tulip Mania to Bernie Madoff

419 Pages·2010·1.98 MB·English

by  David E. Y. Sarna

ffffiirrss..iinndddd vvii 66//2244//1100 77::4444::2211 AAMM
Praise for
History of Greed
“David Sarna has written an important, readable, erudite, and compelling
book that delves into all of the dark corners of the fi nancial markets in a
way that only one who is a knowledgeable intellectual like David and
who has seen, as David has, the inner workings of the markets can do.”
—Andrew Malick
Chairman, Needham & Co.
“David Sarna has provided a close-up, insider’s view of some of the
shenanigans going on in and around the fi nancial capitals of the world.
It is very readable, entertaining, and almost funny until you realize
all the lives that have been hurt by the combination of at best amoral
and more correctly criminal acts aimed at investors of all stripes who
foolishly expected and chased outsized returns. Sarna describes all this
against a backdrop of regulatory complacency, along with overgenerous
bonuses and salaries for the titans of fi nance and industry who added
little if anything to the quality of life for those who did not ride the
gravy train with them.”
—Jonathan Harris, CPA
Retired Senior Partner, Big Four accounting fi rm
“David Sarna is a visionary technologist. He is also a sophisticated
investor and fi nancier. He has written a readable, comprehensive, fasci-
nating, and well-researched book that explores troublesome aspects of
the fi nancial system in a way only an experienced insider could.”
—Jay N. Goldberg
Senior Managing Director, Hudson Ventures
“A comprehensive review of what has happened to us in our fi nancial
markets over and over and over and over again. It’s an important history,
written with wit and delivered with wisdom. Undoubtedly, History of
Greed will become required reading by anyone serious about under-
standing the capital markets.”
—Frederick L. Gorsetman
Founder and Managing Member, Oxbridge Financial Group LLC
ffffiirrss..iinndddd ii 66//2244//1100 77::4444::1199 AAMM
“Fascinating! I did not think the trading of securities and reading
about it could be that absorbing.”
—Carl Nisser
Counsel, McGuire Woods
Former Judge at Svea Court of Appeal, Stockholm
“History of Greed is right on the money and quite timely. I found a lot
of information and much I did not know, and I have been around the
industry for a while. It made me feel like a dunce once I saw how
the manipulative trading on the over-the-counter (OTC) stock market
really works.”
—Philip Fox
Insurance Executive and Former Broker
ffffiirrss..iinndddd iiii 66//2244//1100 77::4444::2200 AAMM
History of Greed
F inancial F raud from T ulip Mania
to Bernie Madoff
David E. Y. Sarna
John Wiley & Sons, Inc.
ffffiirrss..iinndddd iiiiii 66//2244//1100 77::4444::2200 AAMM
Copyright © 2010 by David E. Y. Sarna. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or
otherwise, except as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without either the prior written permission of the Publisher, or authorization
through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc.,
222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the
web at www.copyright.com. Requests to the Publisher for permission should be addressed to
the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,
[phone], fax [phone], or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used
their best efforts in preparing this book, they make no representations or warranties
with respect to the accuracy or completeness of the contents of this book and specifi cally
disclaim any implied warranties of merchantability or fi tness for a particular purpose. No
warranty may be created or extended by sales representatives or written sales materials.
The advice and strategies contained herein may not be suitable for your situation. You
should consult with a professional where appropriate. Neither the publisher nor author
shall be liable for any loss of profi t or any other commercial damages, including but not
limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please
contact our Customer Care Department within the United States at [phone],
outside the United States at [phone] or fax [phone].
Wiley also publishes its books in a variety of electronic formats. Some content that appears
in print may not be available in electronic books. For more information about Wiley
products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Sarna, David E. Y.
History of greed : fi nancial fraud from tulip mania to Bernie Madoff / David E. Y.
Sarna ; [foreword by] Andrew Malik.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-470-60180-8 (hardback); ISBN 978-0-470-87769-2 (ebk);
ISBN 978-0-470-87742-5 (ebk); ISBN 978-0-470-87770-8 (ebk)
1. Fraud—Case studies. 2. Commercial crimes—Case studies. 3. Avarice—
Case studies. I. Title.
HV6691.S27 2010
364.16'3—dc22
2010010929
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
ffffiirrss..iinndddd iivv 66//2244//1100 77::4444::2200 AAMM
For my family,
with all my love
ffffiirrss..iinndddd vv 66//2244//1100 77::4444::2211 AAMM
ffffiirrss..iinndddd vvii 66//2244//1100 77::4444::2211 AAMM
Contents
Foreword xi
Acknowledgments xiii
Introduction xv
Chapter 1 Selling Air 1
Why Now?
Chapter 2 Crash Postmortem 7
H ow Greed, Hubris, and Lack of Supervision
Did Investors In
Chapter 3 Why We Do It 14
Bubbles and Fraud
Chapter 4 Securities Fraud 20
Its Long and Storied Past
Chapter 5 The Perils of Greed 31
It’s All for the Easy Money
Chapter 6 The Elements of Financial Fraud 36
A Case Study with “Crazy Eddie” Antar
Chapter 7 “Other People’s Money” 43
The O.P.M. Leasing Fraud
Chapter 8 Smaller-Company Fraud 48
The “ISC” Story
Chapter 9 Selling Long and Short 58
But Mostly Short
vii
ffttoocc..iinndddd vviiii 66//2244//1100 77::4444::5599 AAMM
c o n t e n t s
viii
Chapter 10 Market Manipulation 63
Improper Short Selling and Other Abuses
Chapter 11 PIPEs 73
Investing Unfairly
Chapter 12 Promotion Fraud 91
Pump and Dump
Chapter 13 Leaks, Front-Running, and Insider Trading 100
Test Yourself
Chapter 14 Fictitious Volume 108
A Pump-and-Dump Scam with Intrigue
Chapter 15 Parachute into Prison 116
U.S. v. Schrenker
Chapter 16 Affi nity Group Fraud 121
Scamming Your Own Community
Chapter 17 Twentieth-Century Ponzi Schemes 127
Larger and Longer-Lasting Scams
Chapter 18 Hit Charade 132
Lou Pearlman
Chapter 19 Hedge Fund Ponzi Fraud 137
Hedge Funds Are for Big Boys
Chapter 20 Madoff and the World’s Largest Ponzi Scheme 146
The Mother of All Ponzi Schemes
Chapter 21 How Madoff Got Away with It 161
W ho Helped Plot in the Mother of
All Ponzi Schemes; Who Can Be Made to Pay?
Chapter 22 Madoff Plea and Its Aftermath 186
G overnments Go after Merkin, Kohn, and Maybe
Others in the Mother of All Ponzi Schemes
Chapter 23 Mopping up after Madoff 204
L awyers Feast on Madoff Feeders in
the Mother of All Ponzi Schemes
Chapter 24 Other Recent Ponzi Schemes 225
M adoff was a Crook but He Had No
Monopoly on Recent Ponzi Schemes
Chapter 25 Stanford Group 244
M assive $7 Billion, Multinational Fraud
Comes to Light
ffttoocc..iinndddd vviiiiii 66//2244//1100 77::4455::0000 AAMM