There’s only one thing that’s worse than selling something that isn’t there to sell, and that’s buying something and not paying for it.

Michael Bond, Paddington at Work

The Salad Oil King

Anthony “Tino” De Angelis, often seen crushing knuckles in a bully’s shake, used to attribute his exceptional physical strength in hands and legs to his days in bicycle racing. Despite his shorter stature, he stood tall at five feet five inches and weighed over 240 pounds during the peak of his power. His countenance, reminiscent of a disgruntled Robert De Niro, mirrored his robust presence. De Angelis, known for sponsoring cycle races and donating bikes to disadvantaged children through his company, Allied Crude Vegetable Oil, became synonymous with dominating the soybean market, challenging industry giants.

However, beneath his charitable facade lay a shadowy past. Originating as one of the quickest butchers in the Bronx, he ventured into pork processing in his early twenties. An occupation in hog butchering shielded him from wartime duties during World War II, though allegations of his involvement in black market dealings lingered. In the 1950s, his company faced charges of defrauding the US government on school meal provisions. Despite accusations of false accounting and perjury against De Angelis, key witness amnesia derailed the legal pursuit, painting a backstory akin to a Mario Puzo novel, albeit more greasy.

Given his Italian American heritage and controversial background, rumors and suspicions swirled around De Angelis. Some believed he fueled these rumors himself, aiming to present hidden, illicit money sources to creditors. However, despite multiple criminal trials, no substantial evidence linked De Angelis to significant mob ties. His generosity resembled that of a godfather, reflecting his self-made millionaire status as the son of a pizza chef. Loyal workers at Allied Crude were generously compensated, fostering unwavering allegiance.

Headquartered in Bayonne, New Jersey, Allied Crude Vegetable Oil sat opposite Wall Street, visible from the seafront warehouses. The company’s proximity to major banks facilitated its operations. However, transporting fraudulent securities across state lines, a federal offense, became pivotal during the eventual trial.

The salad oil, intricately linked with De Angelis and his deceit, epitomized the scandal, particularly documented in Norman Miller’s Pulitzer Prize-winning exposé, “The Great Salad Oil Swindle.” Beyond this notorious scam, Allied Crude’s ventures encompassed a wide spectrum of soybean-derived products. Notably, the high-grade soy oil in the US denoted “salad oil,” distinct from the European frauds involving olive oil, a heavily subsidized commodity susceptible to various fraudulent practices.

Soybean oil’s abundant surplus in the USA drove De Angelis’s interest, especially due to government subsidies under the Food for Peace program, promoting exports to Europe. However, this trade was shrouded in political complexities, navigated adeptly by a select few international players. Opus Dei, intriguingly, oversaw trade with Spain in this realm. Dealing with these governments offered a significant advantage, albeit cloaked in corruption. Notably, soybean oil’s value then exceeded current standards, making Tino’s deals involving thousands of tonnes incredibly lucrative.

De Angelis’s astute deal-making and adept pricing strategies propelled Allied Crude’s market dominance, sidelining Midwest oil producers. However, expansion necessitated substantial investments and consequent borrowings.

Who would extend loans to a figure like De Angelis? Greed, desperation, and ignorance played pivotal roles. American Express’s nascent business lending arm fell prey to these traits, setting the stage for De Angelis’s infamous exploitation.

The evolving 1960s business culture, characterized by lavish lunches and relaxed corporate attitudes, created a breeding ground for financial malpractice. American Express, driven by profit quotas, overlooked the risks, enabling De Angelis’s manipulative schemes.

Warehouse lending, a traditional financing method for traders’ inventories, received an ill-conceived innovation at American Express—the concept of a “field warehouse.” This novel approach extended lending to borrowers managing their collateral in personal storage, supervised by the guarantor bank. Allied Crude’s Bayonne tank farm embodied this risky practice.

De Angelis’s misdeeds began with exploiting this flawed system. He borrowed against fabricated warehouse receipts, leveraging collateral non-existent in reality. American Express’s oversight cost them $150 million in guarantees when the truth unraveled. De Angelis’s colossal embezzlement, speculative ventures, and legal disputes culminated in bankruptcy.

The salad oil fraud revealed systemic vulnerabilities: flawed financial technologies, lax oversight, and the temptation to cut corners in checks and balances. Fraud emerged as an equilibrium factor, highlighting the perennial challenge of balancing fraud prevention costs with potential savings.

De Angelis’s transformation from a legitimate trader into a fraudulent actor exemplified how a reputable trading reputation could be used to camouflage deceitful practices, distinguishing it from spontaneous fraudulent operations like the OPM Leasing debacle.

Other People’s Money

Oddly enough, the acronym behind OPM’s name had an interesting origin story. Back in 1970, Mordecai Weissman intended to name his new business “Leasing Services Division” (LSD), but worried it might carry a disreputable connotation. Hence, the company was named after its core business. Acronyms were a fascination for OPM’s founders. In a curious move, the other partner attempted to bid for Madison Square Garden primarily because its initials mirrored his own name—Myron S. Goodman.

Weissman and Goodman formed an eccentric yet effective duo, resembling a blend of the Marx Brothers and Gordon Gekko. As brothers-in-law, they were highly esteemed in the Orthodox Jewish community for their philanthropy and devout religious demeanor. Goodman often commenced meetings with scripture while Weissman briefly diverted from business in 1973 to participate in the conflict against Egypt. They commuted via helicopter from Long Island to Manhattan until objections from neighbors due to the noise. Mordy was the charismatic salesman, known for distributing kickbacks, while Myron operated as the obsessively secretive office manager, issuing menacing memos. One might dub them both influential figures and good-hearted individuals, were it not for their remarkable lack of business ethics or common sense.

OPM’s business model centered on utilizing other people’s money, specializing in computer leasing during an era when computers were hefty investments. Back then, computers were colossal metal boxes requiring dedicated air-conditioned rooms and costing millions. Corporations maintained specialized teams solely for tracking technological advancements, and the “Head of Computer Strategy” was a coveted role in 1970s corporate America.

Due to the high cost and rapid obsolescence of computers, leasing became preferable over purchasing. OPM’s approach involved Mordy liaising with clients for technical specifications, while Myron arranged short-term bank loans to purchase computers. Mordy then attended to non-technical requirements, often involving bribes or charitable donations. Subsequently, leases were signed.

However, the key involved roping in Other People’s Money. With the aid of an investment banker (initially Goldman Sachs, later Lehman Brothers after Goldman Sachs withdrew due to OPM’s chaotic aspirations), Mordy and Myron secured long-term lease payments from pension funds or insurance companies. These leases were then “sold” to investors, generating cash to repay the initial loans, maintaining OPM’s credit, and enabling Mordy to pursue new clients.

But there was a catch. Myron’s control obsession mandated that all payments flow through OPM rather than directly to investors. This information void became crucial in the subsequent fraud. Transactions on both ends occurred solely at Myron’s discretion, often labeled as “mirrored” transactions—reminiscent of Groucho Marx’s antics in “Duck Soup.”

Another critical aspect was the residual value responsibility at the end of leases. As a competitive market, leasing companies often priced lease payments lower than the computer’s cost, aiming to recover through residual value. Overestimating these values would secure market share initially but spell long-term trouble. Mordy and Myron, aggressive and growth-focused, lacked scruples and failed in maintaining proper records. Their approach led OPM to lose money yearly, despite showcasing apparent profits by manipulating accounting methods.

Their signature deals focused on winning clients without economic feasibility in mind. Their close ties with Rockwell Inc. led to a misplaced trust in their ability to surpass competitors’ terms, a decision Rockwell later regretted. Meanwhile, OPM’s misjudgment in estimating residual values and offering generous early break terms backfired dramatically due to the rapid evolution in computer technology.

The introduction of new computer models rendered OPM’s leased ones obsolete, leaving them in dire straits. Their desperate measures included forging lease documents, borrowing against the same assets from multiple lenders, and a failed attempt at maintaining a facade of profitability. Eventually, by 1981, OPM’s collapse was inevitable, leading to bankruptcy and legal consequences for Weissman and Goodman.

The progression from a legitimate business to a fraudulent venture highlights how even well-established enterprises can succumb to ethical dilemmas or intentional fraud. This slippery slope effect isn’t exclusive to extreme cases like OPM but extends to more subtle instances, where otherwise honest businesses inadvertently slip into fraudulent practices, causing significant repercussions for stakeholders.

Rifle, shotgun, and 1980s Medicare

At one point, Medicare fraud stood as perhaps the most extensive fraud category globally until the banking sector reclaimed that notoriety in the 2000s. Reliable estimates suggested that fraudulent payments in the Medicare system could reach a staggering 25-30%, equating to hundreds of billions of dollars. The nature of the fraud mirrored the classic long-term scheme—a simple act of billing local Medicare insurers for expensive medical services never rendered.

However, when executing such fraud, a critical decision loomed—should fraudsters involve patients? The advantages and drawbacks of this decision were distinct. Submitting fake bills for non-existent patients allowed quick setup and mass issuance of fraudulent bills without dealing with actual patients. Yet, if caught, fabricating invoices for non-existent medical procedures became a tougher case to defend, lacking the guise of genuine administrative error or legitimate medical disputes. It was a trade-off between the ease of initiating fraud and the potential consequences if exposed.

In reality, Medicare fraudsters employed both strategies. Two viable models emerged based on how fraud controls operated at the time. Some clinics, devoid of patients, aimed to send numerous deceptive bills, usually for standard treatments at common rates, maximizing chances of unscrutinized payments within a single billing cycle before shutting down and relocating. At that time, Medicare’s billing check systems couldn’t detect sudden spikes in claims from a single provider, often catching such frauds purely by chance due to the unremarkable individual claims.

Additionally, longer-lasting Medicare frauds persisted over multiple billing cycles, incrementally inflating claims of existing patients. These frauds exploited the system’s trust in medical professionals, often slipping through by adding unnecessary tests, billing for pricier procedures than performed, or delivering cheaper items than billed.

This situation highlighted a stark difference between a once-legitimate enterprise gone astray and an enterprise purposefully designed for fraud. While the former was harder to detect through standard checks, the latter was easier to construct. Medicare exemplified a fraudulent technique termed “shotgun, then rifle” by Malcolm Sparrow, where initial fake transactions provided insight into the checking process, allowing fraudsters to refine subsequent fraudulent submissions that passed the checks.

This approach was effective against government entities due to their size and reluctance to turn customers away, a tactic similarly employed in defense procurement frauds. However, large private-sector entities were also susceptible to such methods, often seen in organized insurance, credit card, and mortgage frauds.

Operating a fictitious company demanded minimal investment, granting fraudsters room for experimentation. While advantageous in the beginning, if caught, it left a trail of evidence indicating dishonesty and conspiracy. Hit-and-run fraudsters simply vanished, but those engaged in more substantial and enduring operations often found themselves facing bankruptcy proceedings as a means to conclude their schemes and handle the embezzled funds.

Bankruptcy

“Bankruptcy” and “going bust” aren’t interchangeable terms. When you’re “bust,” it simply means you owe money that you can’t repay. But being “bankrupt” refers specifically to entering a legal process to manage this situation.

This distinction hasn’t always existed. Throughout history, debt didn’t usually come with a bankruptcy code. Except for rare occasions of debt forgiveness, borrowers were expected to pay back what they owed indefinitely. Ancient societies could even sell defaulting debtors as slaves to settle their debts (with Athens being considered lenient at a maximum of five years of debt slavery). The contract in The Merchant of Venice, with Shylock demanding a pound of flesh, dramatized this reality. Debtors’ prisons existed until the nineteenth century. As debt became more integral to the economy, it became evident that this system was unjust and inefficient. The law needed to recognize limits on what could be demanded of a debtor.

The evolution of bankruptcy law introduced “limited liability,” originating from maritime practices and firmly established in Anglo-Saxon commercial law by the mid-nineteenth century. It granted companies an independent legal existence, allowing them to assume debts and obligations in their name rather than their owners’. The liability was “limited” because, in bankruptcy, lenders couldn’t pursue individual owners for losses unless they’d explicitly guaranteed the debts. Predictably, this concept was exploited by fraudsters almost immediately.

Among economists, accountants, and lawyers, there’s consensus on two types of insolvency, though not always on the terms used. “Commercial insolvency,” also called “legal” or “cash-flow insolvency,” occurs when a payment is due and cannot be made. The creditor can then seek bankruptcy through the courts. Conversely, “technical insolvency,” termed “factually” or “balance-sheet insolvency,” happens when a company’s liabilities exceed its assets. These concepts don’t always align; it’s possible to face cash-flow insolvency while owning valuable assets, leaving creditors with these assets.

In our context, the opposite scenario arises—a company with debts surpassing its assets but not yet legally insolvent because no payments are due and unpayable. This situation, known as “wrongful trading,” involves accumulating debts that increase eventual bankruptcy losses for creditors. It resembles the behavior of long-firm fraudsters. Those overseeing a bankrupt company can expect scrutiny and potential restrictions from holding directorial roles in future companies, unless they’re exceptional cases.

The special case of Donald Trump

Special, such as a flamboyant real-estate developer who later became the President of the United States of America. As far back as the early 2000s, the left-wing economist Doug Henwood formulated a monetary policy rule stating that “any time Donald Trump is able to borrow money to buy or build anything, interest rates are probably too low.” This observation highlighted the tendency of the Trump organization to heavily leverage its properties, extract cash from them in unconventional ways, and then find itself in situations where Trump gained multiples of his initial investment while lenders were left grappling with defaulted debt and assets valued considerably lower than their appraisal.

For clarification, Donald Trump’s real-estate ventures were not deemed fraudulent, not even the infamous casino empire in Atlantic City. No one, not even the creditors who incurred losses, accused him of fraud, though several lawsuits (usually settled) were filed concerning specific events and transactions. Nevertheless, delving into the affairs of Trump Taj Mahal, Trump Plaza Hotel, Trump Castle, Trump Hotels & Casino Resorts, and Trump Entertainment Resorts Holdings remains instructive. This saga underscores the challenge in prosecuting commercial fraud when actions, well within the legal boundaries and devoid of criminal implication, closely resemble those of risk-taking entrepreneurs we encourage. The defining line lies in the intent.

Casinos, primarily driven by gambling licenses, generate substantial cash flow. To acquire a significant gambling license, establishments are required to construct hotels that attract business and often contribute to social housing. Consequently, casino companies rely heavily on capital investments in hospitality infrastructure while generating substantial cash flows. This financial setup often leads to high debt levels, collateral for interest payments, and a reluctance to dilute ownership by selling shares.

However, casino operations differ markedly from standard hospitality businesses. In a casino, deferring maintenance is more feasible compared to a typical hotel, albeit at the expense of the establishment’s long-term condition, given that profits are derived from gamblers rather than traditional guests. Casinos also offer numerous complimentary services to entice “rated” players, and determining what to offer to whom is often subjective. This industry poses challenges in tracking transactions and ownership, given the complexity of partnerships between various corporate entities striving to amalgamate land, gambling licenses, capital, and management expertise. Nonetheless, the pivotal takeaway remains—the immense cash generation casinos entail.

Donald Trump’s Atlantic City journey commenced in 1982 when he assembled a site, securing long leases on adjoining lands and convincing the gambling commission to overlook the questionable backgrounds of some lessors. Subsequently, he partnered with Holiday Inn to establish what initially began as a local Harrah’s franchise but quickly transformed into Trump Plaza. Holiday Inn financed the project, with a fifty-fifty profit split planned. However, issues emerged due to inadequate parking at Trump Plaza, leading to disputes over constructing an indoor parking lot on a neighboring site. The relationship soured further when Trump acquired the Hilton Marina Casino, renamed it “Trump Castle,” and subsequently bought out Holiday Inn’s stake in Trump Plaza by 1986.

The turning point occurred when Resorts International, up for sale after its founder’s demise, was acquired by Trump, gaining voting control despite owning only 12 percent of the shares. This acquisition included the half-finished Taj Mahal, destined to be the world’s largest casino but entailing housing construction obligations. After taking control, Trump halted construction, awarded himself a lucrative management contract, and eventually bid to take the company private, sparking a bidding war that left him parting ways with his Resorts International shares but owning the rechristened Trump Taj Mahal, minus the housing obligation.

At this stage, Trump Plaza, Trump Castle, and Trump Taj Mahal operated as distinct entities, each with independent obligations. The Plaza carried $250 million in bonds for various purposes, including buyouts and construction. The Castle was purchased via a loan under Trump’s personal guarantee, refinanced by issuing $350 million in bonds. The Taj Mahal acquisition, financed with $675 million in high-interest junk bonds, departed from the promise of low-cost loans, unsettling the New Jersey gambling commission.

Executives transitioned among these casinos due to contracts for “management services” and using the Trump name. Ivana Trump initially oversaw the Castle but relinquished control due to Marla Maples’ presence at Plaza. A bond prospectus for the Plaza revealed minimal involvement of the Executive Committee in its operations.

At this point, despite no financial downfall, Trump had leveraged his initial investment to acquire three casinos, control cash flow after servicing interest, claim management fees, and possess personal benefits. Crucially, everything was shielded within limited-liability vehicles, allowing for potential bankruptcy without personal cost. Multiple methods were employed to extract funds, such as bulk purchases of The Art of the Deal, strategically placed in hotel bookshops. Despite the absence of external shareholders initially, this would change, leaving bondholders concerned as Trump maneuvered assets between corporate entities, sometimes at questionable valuations, and shifted personal guarantees into debts of companies already facing separate creditors.

In essence, while resembling fraudulent actions, these maneuvers were deemed legal due to the causes of bondholder losses being rooted in ego, arrogance, refusal to acknowledge negative feedback, and astute use of corporate structures to safeguard personal assets. None of these actions were illegal, and Trump openly conveyed his opportunistic business approach, even authoring a book on his persona, showcased in Plaza and Castle lobbies.

Presently, Trump-branded properties often represent others’ real-estate developments, paying a licensing fee to use a name that retains considerable allure, especially for newly wealthy individuals from emerging-market countries seeking to store their wealth in different jurisdictions. However, distinguishing between overconfident individuals to avoid as business partners and culpable fraudsters to prosecute remains challenging, offering corporate wrongdoers an advantage in evading legal repercussions.

Getting away with it

After examining methods to build the commercial confidence necessary for the initial stage of a long-firm fraud, attention shifts to the second stage—evading detection. Achieving this entails either masking the fraud as a routine business collapse or introducing numerous layers of complexity to distance oneself from the long firm.

Amidst confusion, outright denial coupled with counteraccusations against creditors can surprisingly serve as a successful tactic. Sir Gregor MacGregor notably adopted this approach; as survivors returned, he initiated libel lawsuits and disseminated defamatory material targeting Belizean merchants who attempted a rescue—a narrative suggesting these merchants were robbers hindering a prosperous Poyais. While these battles eventually led to the Cazique’s disgrace, they sowed enough uncertainty in London, enabling his departure to Paris, where he resumed selling Poyais bonds. Even upon his death in 1845, he persisted in this endeavor, albeit with declining success.

In modern times, fraud conviction rates hover around 90 percent in New York State courts. However, this figure misleads as the cases reaching court represent only a fraction of actual fraud occurrences. At face value, failure to repay debts is often treated as a civil issue (breach of contract), placing the onus on the victim to prove misrepresentation, dishonesty, or conspiracy. Few crimes afford criminals the chance to “cool out the mark,” but if a bankrupt company can secure three-quarters of creditors for a payment plan, it’s improbable for the remaining quarter to incite further law enforcement investigations.

While presenting an innocent facade amid financial ruin is remarkably effective, a secondary defense can significantly mitigate risk. What’s essential is finding an individual to shoulder blame for insolvency and, if the insolvency can’t be framed as misfortune, to bear criminal consequences. If this person is part of the fraud, they’re termed a “front”; if not, they’re a “patsy.”

Why would anyone become a front for a long firm? Sometimes bribery is involved. Syndicates have been known to transform homeless individuals, offering them a taste of luxury as temporary figureheads for a new trading company, only to discard them back into their former lives shortly after. Alternatively, seasoned criminals may specialize in fronting long firms, considering the risk/reward ratio amidst conviction rates and typical sentences. However, another reason individuals become involved unknowingly, dubbed a patsy.

There’s a more insidious way to exploit a legitimate firm’s trading reputation, far more malignant than previously discussed methods. This entails a version of Vincent Teresa’s “bust-out,” reminiscent of scenarios seen in Goodfellas, often practiced by New York and New Jersey mobs. In this scheme, control of a moderately successful business—like a bar or restaurant—transfers to a new, crooked owner who leverages the company’s trading record to fraudulently build credit. This tactic surpasses the straightforward torching of businesses employed by the New England Mafia.

Acquiring another company’s trading name doesn’t always involve violence. Fraudsters eye businesses available at bargain prices, convincing owners to accept installment payments. This approach not only reduces initial cash outlay but also obscures firm ownership. If the previous owner remains associated with the company’s success, appearing on official documents, credit bureaus and controllers are less likely to detect management changes, thereby decreasing scrutiny on potential fraudulent activity.

Even more audacious tactics exist to hijack another company’s trading reputation. When fraudsters pay upfront for a company, finalizing the transfer of title can surprisingly become a challenge for the selling owner. Missing minutes from pivotal board meetings can leave the prior owner as the sole representative, unwittingly linked to a long firm, struggling to convince authorities of innocence. This serves as a cautionary tale against selling a company solely for cash.

Business owners must be vigilant about who has access to their letterheads, as these often substitute for identity proof in dealings. They’re accepted by credit controllers, and if mishandled, can lead to fraudsters issuing credit references or placing orders under false pretenses.

Lastly, a note about the “fence”—the party converting stolen goods into cash. Fencing goods acquired in a long-firm fraud is somewhat easier due to the time dimension involved. The crime arises only when payment defaults. Consequently, fences often claim innocence, arguing they had no indication of fraudulent dealings, making convictions challenging.

Although time provides a buffer between the crime and its discovery, it comes with its own cost. While fraud remains undetected, its magnitude often grows, complicating the economics of the deception significantly.

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Fraud: The Art of Stealing Wealth and Trust - The long firm (Ch. 3)

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