BULL STREET - The art of the Con

No-Account Software

Theft comes in all sizes and shapes and it ranges from the pickpocket in the subway train to the sophisticated criminal that plots for hours on a way to separate you from your money without you even being any the wiser. This is usually done by magical accounting.

One of the most sophisticated thefts that I ever beheld was one pulled off by an old acquaintance of mine who appeared on the surface to be a great business man. He ran a small public company that had supposedly developed a sophisticated new type of software that was used in place of a cash-register at checkout counters of retail stores. His software would do just about everything that software could be imagined to do, at least that is what he told me along with the rest of the investment community. He said it would keep an exact inventory of the store’s merchandise, segregate sales tax from regular sales and keep a record for restocking while naturally at the same time ringing up the day’s receipts.

My friend, Bob the con man, was of impeccable character and when he was in New York, we would often have dinner together and just chat. He could talk amazing knowingly on just about any subject. Bob was also a preacher who would donate his time to churches in his area that did not have a pastor. He would drive as much as 500 miles each way just to give a sermon on Sunday morning to an unrepresented flock. He was a truly religious man with a wonderful family, and wanted to return something to the community he lived in. His boys were just starting to go into his software business and he was extremely proud of them and used to tell me that it was they that had written the software programs that had made the company successful Moreover, Pastor Bob had been married to one woman for over 40-years and to the best of my knowledge his eyes never roved.

However, all that glistens is not gold and the first clue that something may be wrong with Bob and this idyllic lifestyle came down like a thunderbolt. We were walking down the street together heading towards a restaurant when he said, “This is 86th Street, I have a customer of this street, why don’t I introduce you to him and you will see what a great product my company produces?’ This sounded fine to me and we soon entered small but elegant department store which specialized in products for the house. He asked for the owner who soon arrived. My friend introduced himself and the owner immediately went into an uncontrollable rage. “Your software doesn’t work, it is ruining my business, I have called your people and told them to get it out of here and if I ever see any of you again, I will call the police.” Or something to that effect.

My friend did not seem to be all that taken aback by the experience but I felt terribly bad for him. Such a nice man, the store keeper probably just got a bad copy of the software. However, this was only the beginning of a longer episode.

Not too much later I was reading the papers and saw that the Securities and Exchange Commission was conducting an investigation into my friend’s company and that they had also called in the local police. My first reaction was, “you can’t arrest a man for turning out bad software, so what on earth were they talking about.” I soon found out.

The earnings of my friend’s company had recently started to climb geometrically, which certainly didn’t make any sense if the software didn’t work. However, sales were climbing, and they were rising particularly sharply in Europe. “Maybe there was something about the software that made it perform better overseas,” I thought to myself. However, I didn’t have long to think about what was going on, within a few more day, just about every law enforcement agency that could possibly get involved in something criminal was crawling around his plant and when I tried to get through to him on the phone, I was told that he had suddenly left town and no one knew either where he was or when he would be back My immediate thought was the fact that the SEC ruins more lives over their shoot first and investigate later form of enforcement but that did not happen to be the case here.

Finally the reason for their actions became apparent. It turns out that he was selling this software that didn’t work through a network of European software dealers. Simultaneously he was giving this group of sales people, freely tradable stock in his company in exchange for some consulting work[43] that they were doing for his company. What was effectively happening was simply this; they would buy the software, he would simultaneously send them a bill for what they had purchased along with a substantial amount of freely tradable stock in his public company. Software as we know is highly replicable at little or no cost once the original program is written, so any additional sales become almost pure profit. The more software he sold the higher his stock went. Simultaneously, his cohorts The Europeans would sell their stock to pay for the software and spilt the profit with the company.

This became the ultimate Ponzi scheme and it was truly of the first magnitude. Sales could be increased whenever the conspirators pressed the button. The only factor that was decisive in this process was the price and volume of the company’s stock. However, the more phony software ware that was purchased, the higher the earnings, the higher the earning the better price they could sell the stock at and the more software that they could purchase. Overall, this was becoming what we on Wall Street would call a growth company and a number of the analysts were now not only taking an interest in the company but were also recommending the stock. The ultimate self-fulfilling prophesy.

In reality, all of this could well have been accomplished by nothing more than a series of bookkeeping entries and no software ever really had to be delivered. However, by delivering even a poorly conceived product, the black and white laws on the subject could become highly skewed. If people wanted to buy a lousy product and never use it, that was probably their own prerogative and if Bob wanted to use his ever increasing stock price to pay for more and more consulting, who could argue that?

One would have thought that this was close to the perfect crime because under normal circumstances, even if the participants were caught, without someone on the inside giving testimony that they were purposely manipulating the stock, it would seem almost impossible to convict anyone of anything. Making bad software is not a crime, rigging a market or using consulting stock to make money is but, go and prove it. If my friend had not been accidentally tripped up, he would now probably be the richest man in the world. However, as fate would have it, the last I heard from him, he was living in a country that had no extradition treaties with the United States and had been indicted on about 100 counts. His concept has become exceedingly popular among thieves and I have seen a number of variations on this theme since Bob left town, but how do you prove. The only thing I can tell you is this, be very careful when you buy stock in a company that manufacturers software that pays enormous consulting fees, they may just know Bob.

 

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