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Learn financial and business lessons from some of the biggest frauds in history
Why does financial fraud persist? History is full of sensational financial frauds and scams. Enron was forced to declare bankruptcy after allegations of massive accounting fraud, wiping out $78 billion in stock market value. Bernie Madoff, the largest individual fraudster in history, built a $65 billion Ponzi scheme that ultimately resulted in his being sentenced to 150 years in prison. People from all walks of life have been scammed out of their money: French and British nobility looking to get rich quickly, farmers looking for a miracle cure for their health ailments, several professional athletes, and some of Hollywood's biggest stars. No one is immune from getting deceived when money is involved. Don't Fall For It is a fascinating look into some of the biggest financial frauds and scams ever.
This compelling book explores specific instances of financial fraud as well as some of the most successful charlatans and hucksters of all-time. Sharing lessons that apply to business, money management, and investing, author Ben Carlson answers questions such as: Why do even the most intelligent among us get taken advantage of in financial scams? What make fraudsters successful? Why is it often harder to stay rich than to get rich? Each chapter in examines different frauds, perpetrators, or victims of scams. These real-life stories include anecdotes about how these frauds were carried out and discussions of what can be learned from these events. This engaging book:
Don't Fall For It: A Short History of Financial Scams is filled with engrossing real-life stories and valuable insights, written for finance professionals, investors, and general interest readers alike.
BEN CARLSON is the Director of Institutional Asset Management at Ritholtz Wealth Management. He has spent his career helping various nonprofit, institutional, and high-net-worth clients plan and invest their money wisely. Ben is the creator of a popular financial blog and podcast and is the author of several books including A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan and Organizational Alpha: How to Add Value in Institutional Asset Management.
Introduction 1
Chapter 1 No One Sells Miracles 5
Goats as Viagra? 7
Radio 9
The Placebo Effect 10
Correlation Does Not Imply Causation 11
Same as It Ever Was 13
Chapter 2 How to Sell Anything 17
The Count 18
Selling the Eiffel Tower 20
Everyone is in Sales 22
Chapter 3 Fast Money 27
The Promise of Huge Returns with Minimal Effort 29
When Trust Goes too Far 32
Do Your Homework 33
Chapter 4 It's the End of the World as We Know It 39
Cognitive Dissonance 41
The Man Who Walked on Water 43
No One Knows What's Going to Happen 45
Why Pessimism Sells Better than Optimism 47
The Value of 'I Don't Know' 48
Chapter 5 Sleight of Hand 51
Bad Brad 53
A Magician Reveals His Secrets 56
Chapter 6 When Success Doesn't Translate 61
Defeated by Decency 62
Don't Try to Get Rich Twice 66
Chapter 7 When Fraud Flourishes 71
When There's an 'Expert' with a Good Story 71
When Greed is Abundant 73
When Capital Becomes Blind 74
When the Banking Industry Gets Involved 76
When Individuals Begin Taking Their Cues from the Crowd 77
When Markets are Rocking 79
When the Opportunity Presents Itself 80
When Human Beings are Involved 81
When Innovation Runs Rampant 82
Chapter 8 The Siren Song of New Technologies 85
The Railway Napoleon 87
The Media's Role in a Bubble 90
The Other Side 93
The Silver Lining of a Market Crash 94
Chapter 9 The Seductive Power of FOMO 97
How to Create a Monopoly 98
The Roaring 20s 100
When the Tide Goes Out 102
Not a Ponzi but Close Enough 103
The Seductive Power of FOMO 104
Chapter 10 Type I Charlatan 109
John Law and the Mississippi Company 111
Speculation is a Hell of a Drug 113
Pop Goes the Bubble 115
Type I and Type II Charlatans 116
Chapter 11 Type II Charlatan 121
The South Sea Company 123
Type II Charlatan John Blunt 124
The Bubble Act 127
The Echo Bubble and Dunbar's Number 128
Chapter 12 Fooled by Intelligence 131
Newton's Mania 134
The Problem with Smartest People in the Room 135
Why Smart People Make Dumb Decisions 137
Fooling Yourself with Complexity 138
Chapter 13 How Gullible are You? 141
Ponzi versus Bernie 146
The Sacred Relationship 148
Chapter 14 The Easiest Person to Fool 153
Getting Rich versus Staying Rich 156
Shot out of a Cannon 157
The Biggest Fraud of All 158
Conclusion: Six Signs of Financial Fraud 163
1. The Money Manager Has Custody of Your Assets 163
2. There is an Aura of Exclusivity in the Pitch 164
3. When the Strategy is too Complicated to Understand 165
4. When the Story is too Good to Be True 166
5. When the Returns are Ridiculously Good 167
6. When They Tell You Exactly What You Want to Hear 168
Index 171
It's not a lie if you believe it.
-George Costanza
In the late 1980s a group of chemists from Pfizer created a compound called sildenafil citrate. It was developed to fight cardiovascular diseases such as high blood pressure and chest pain. The project was called UK92480 (the UK is because the chemists were based in the United Kingdom) - but even though it sounds top secret, it ended up being a low drug on the totem pole because of disappointing test results. No one involved with the effort thought they were onto something groundbreaking at the time.[1]
In fact, in the summer of 1993, the group was given an ultimatum that unless they could come back in the fall with conclusive data, it was time to close up shop and move on. Just a few short days later the researchers were doing a study on a group of miners in South Wales. Per protocol, they asked the miners if they noticed anything different after taking the drug. One of the men spoke up and said, "Well, I seemed to have more erections during the night than normal." The other men grinned and nodded in agreement.[2] One of the nurses in another clinical trial around the same time also noticed many of the men were lying on their stomachs, embarrassed that they ended up with an erection after taking the drug. A drug that was meant to treat cardiovascular disease was having very surprising unintended consequences.[3]
One of the main causes of chest pain is a condition called angina, which has to do with a reduced flow of blood to the heart. The reason this chest pain occurs is because the vessels that supply your heart with blood become constricted, which leads to pain in your chest as well as shortness of breath. Scientists often know how certain compounds are supposed to work but they don't always know if they will have the intended effect on the intended area of the body. The idea behind sildenafil was that it would dilate the blood vessels in the heart, thus reducing chest pain and breathlessness. Instead, the blood vessels in the penis became dilated. This drug inhibited the enzyme that breaks down a chemical that is key to the biology behind an erection.[4]
This isn't the first time a drug was discovered by accident. After vacationing in Scotland for a month in 1928, a pathologist named Andrew Fleming returned to his laboratory to discover he had left a petri dish on a windowsill at a hospital in London. Fleming was growing bacteria in these dishes but noticed the one he accidentally left out had grown an airborne fungus. The fungus stopped the bacteria dead in its tracks. This mold was called Penicillium notatum. Fleming inadvertently made one of the most important discoveries in the history of medicine. He created the antibiotic penicillin.[5]
It can't be overstated how huge this discovery was. At the time, the average life span in the United States was under 60 years of age. That number is now around 80 years old, and Fleming's accidental discovery had a lot to do with this. Fleming would later say, "When I woke up just after dawn on 28 September, 1928, I certainly didn't plan to revolutionize all medicine by discovering the world's first antibiotic, or bacteria killer. But I suppose that was exactly what I did." [6]
A failed cardiovascular drug that gave men erections didn't have quite the same impact as penicillin, but these scientists did stumble across one of the most successful drugs of the modern era. Today we know of this drug as Viagra. According to Pfizer, since it was officially launched in 1998, 62 million men from around the globe have purchased the erectile dysfunction drug. It's estimated that people in the US alone spend almost $1.5 billion on Viagra each year. Even the US military is said to spend almost $42 million on the little blue pill.[7]
A few months after the drug was released, there were over 300,000 prescriptions filled in a single week. Obviously, there was a ton of pent-up demand for this product. Before Viagra's approval by the FDA in 1998, there really was no treatment for erectile dysfunction. The only options available included a painful injection or an implant, not exactly as easy as popping a little blue pill in your mouth. And before even penicillin was discovered, men went to far greater lengths to cure their libido.[8]
Before the discovery of penicillin the field of medicine was full of quacks, hucksters, and charlatans. The general public knew so little about their healthcare options that it was easy to take advantage of people's ignorance. In the early 1900s the entire field of medicine was still in its infancy in many ways. The American Medical Association was founded in 1847 but each state still had its own licensing board which led to a lax system of oversight and ease of corruption because no one knew any better. Medical quackery isn't exactly like the typical financial scams that go after our need for greed. Instead, it preys on our worst fears: mainly death, disease, and our hope that miracles do truly exist when it comes to healing.
Samuel Hopkins Adams wrote a series of articles in 1905 entitled "The Great American Fraud." He wrote, "Gullible America will spend some $75 million (that's more than $2.1 billion in today's dollars) in the purchase of patent medicines. In consideration of this sum it will swallow huge quantities of alcohol, an appalling amount of opiates and narcotics, a wide assortment of varied drugs ranging from powerful and dangerous heart depressants to insidious liver stimulants; and, far in excess of other ingredients, undiluted fraud."[9]
The wild west that was the medical profession was the perfect fit for Dr. John Brinkley. Brinkley never actually finished medical school, instead opting to purchase a diploma for $100 which granted him the ability to practice medicine in eight states. Unbelievably, this was all it took to practice medicine in the early twentieth century. Still in his 20s, Brinkley opened up a doctor's office in Greenville, South Carolina with a partner. They took out ads in the local paper which asked:
Each morning the two "doctors" would ask the patients who answered the ad different questions, take some notes, collect $25 - a massive sum at the time - and inject colored water into their posteriors. They called the treatment electric medicine and claimed it came from Germany. The two men skipped town a few months later to avoid those who figured out their scam. After running out of money, Brinkley found a newspaper ad looking for a doctor in Kansas, in a town called Milford with a population of just 200 people. So he and his wife Minnie moved to Milford to open up a doctor's office and drugstore.[10]
The couple were barely making ends meet when a 46-year-old farmer named Bill Stittsworth came into their office. Stittsworth said he and his wife had been unsuccessfully trying to get pregnant for 16 years. "I'm a flat tire," he told the Brinkleys. Then Stittsworth looked out the window at a nearby farm and observed, "Too bad I don't have billy goat nuts." You see, billy goats are known to be some of the healthiest, most fertile animals on the planet. The farmer knew firsthand a goat's appetite for sex was famous.[11]
No one really knows exactly what happened next. Brinkley claims the farmer begged him to try an experimental procedure using goat glands. The farmer's family claims Brinkley paid Stittsworth to experiment on him. Regardless of whose idea it was, a few nights later both men were back in the office prepping for a unique surgical procedure. Brinkley slit the farmer's scrotum, after which he reached for two goat testicles that were sitting on a small silver tray, implanted a goat testis on each side of the scrotum, and sutured them to the loose tissue. Stittsworth had his man parts sewn up and the whole ordeal was over in 15 minutes.[12]
Two weeks later the farmer showed up and told Brinkley the good news - his wife was finally pregnant! They named their child Billy, after a goat, of course. The second couple who conceived a child after having the goat gland surgery named their child Charles Darwin Mellinger, in honor of science of all things. Brinkley unwittingly stumbled onto a genius marketing campaign for the rural population in a small Kansas town. The goat gland surgery became an instant hit. His operation became so personalized he would even let the patients select their own goat from his backyard. Brinkley was averaging 50 procedures a month in no time, at $750 a pop (a lot of money for the 1920s and around $9,000 in today's dollars). Eventually he began implanting goat ovaries in women as well, to double his clientele.[13]
Spoiler alert: Implanting goat testicles into men's scrotums is not a scientifically backed procedure. Most people didn't stop to think about how insane this was at the time because they were desperate. A few weeks after his first goat gland transplant, Brinkley told a classroom full of other doctors, "I have a scheme up my sleeve and the whole world will hear of it." The way he was going to get the whole world to hear about his plan was through a brand-new technology that would take his operation to...
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