Fraud in the Time of Corona

Reactance, Failures of Leadership, Corona Scammers

In light of the global pandemic we’re all sheltering in place through right now, this week’s newsletter will delve into how people deal with bad news, how the people in charge act, and the ways scammers try to take advantage of a crisis.

Reactance

There is a trick hustlers use to get keep marks on the hook during a con. They give them a suggestion that is the opposite of their desired outcome - either letting them walk away with winnings, or suggesting they stop playing before they lose more. It is a calculated risk, but it works more often than not, because of something known in behavioral psychology as reactance:

People using reverse psychology are playing on reactance, attempting to influence someone to choose the opposite of what they request.

This is a particularly important concept right now, as we face a global pandemic that could kill millions of people around the globe. Alarmingly, many people do not seem to be taking it all that seriously! Syon Bhanot has written a piece for Behavioral Scientist talking about this phenomenon, and its dangers:

Psychological reactance is also made worse by a number of other factors at this unique time. First, in recent years America has seen growing antipathy toward expertise and intellectualism in our public discourse. Increasingly, experts are branded cultural elites who snobbishly look down on the common man. This makes reactance a convenient way to stick it to the elites who are trying to stifle our freedom by dictating to the masses.

Second, the nature of this crisis is fundamentally different than many that have come before—that is, the catastrophe is coming, but it has not fully “arrived” yet. Experts suggest that the peak of the pandemic wave is still several weeks away. In light of this, it is easy to wave a dismissive hand at the advice; “I mean, no one seems sick—this is a hoax!” (Worryingly, climate change is a crisis with a similar character.)

The concept of reactance was on my mind because I was just listening to the Grift episode about the carnival, and how the carnies used these psychological tricks to keep people playing - and losing - at rigged games. Anyone who’s lost money gambling can likely relate. In poker, “tilt” refers to an emotional overreaction to losing, when the player becomes sloppy and starts making mistakes. The expression originates in another game - one I quite enjoy! - pinball, when a player would attempt to tilt the machine if they sensed the ball was going to drop between the flippers.

All of these very human tendencies are on full display now, as countries around the world attempt to grapple with the coronavirus pandemic. We - Americans, especially - don’t trust experts, because we aren’t yet seeing the effects of the virus. The concept of an infection curve is difficult for even professionals to grasp - our brains do not do well with unknown future consequences.

What can we do about this? Probably, not much. While the world’s health experts are telling us what we should be doing, our political leadership is reinforcing the reactance - it doesn’t help that we have a carnival barker in the White House (more on that later). Of the various suggestions Bhanot makes, this is the most difficult for me to personally grapple with:

[…] we need to rid ourselves of the idea that we have complete agency in this situation. The virus is not a social being, it is a biological entity. You cannot will it away by being “tough” or “clever,” nor can you simply rely on medical care to be available for you if you do become sick.

Our society is wholly unprepared for what could happen if COVID-19 spreads more widely and rapidly than predicted, because a chunk of our population neither trusts nor is willing to listen to health experts. We may see sickeningly steep curves in places like Florida, where retirees and college kids alike don’t seem to care. I truly hope we do not, but decades of research in behavioral science tell us it may already be too late.

What we need is responsible people running things. How’s that going?

The People in Charge

Many countries are dealing decisively with coronavirus. We’ve seen stories about South Korea’s drive-through testing stations, administering tens of thousands of tests a day and enacting strict quarantines on those who test positive. China, uniquely positioned as an authoritarian state, locked down entire cities to “flatten the curve” on the virus - though, depressingly, people returning home may now cause another outbreak.

There’s a much longer list of leaders who have bungled the response, or been utterly negligent in the face of calamity. Let’s take a look at a few.

Remember Jerry Falwell, Jr? The son of a famous evangelical preacher who has turned his father’s empire into a slush fund to funnel money to himself and his friends? He’s decided to reopen his college, Liberty University:

On Sunday, Liberty University president Jerry Falwell Jr. announced that unlike virtually all other colleges and universities in the United States, Liberty would soon be reopening and permitting thousands of students and faculty to return to campus

They’re forcing faculty to have office hours - despite classes being taught online - and interact with students, who are interacting with one another in dorms and dining halls. 15,000 students attend Liberty in person, with hundreds more faculty and facilities workers who could potentially be exposed. I’m not sure whether it’s pure hubris or whether Falwell needs to keep cash flow going to fund his lifestyle, but his lunacy is putting an untold number of people at risk.

Then we have American governors. Some states refuse to take the necessary steps to curb the spread of the virus, even if mayors of their major cities are doing so. A few governors have gone so far as to overrule their mayors, claiming things like hair salons, gun stores, and golf courses are “essential” and exempt from business closure orders:

In Delaware, florists count, but not dog groomers. Arizona considers golf courses and gun stores to be indispensable. And Athens, Ga., has shuttered vape shops, but allowed lawn maintenance services and sporting goods shops to remain open amid the spread of the novel coronavirus.

Arizona is leading the charge in ensuring payday lenders are still open to bilk desperate residents out of whatever money they have left:

Florida has stepped in to defend pawn brokers:

The shops had been ordered closed last week as part of Miami-Dade County Mayor Carlos Gimenez’s sweeping mandate to shutter non-essential businesses in a bid to slow the spread of the coronavirus. Now pawn shops and jewelers join banks, grocery stores and gas stations as so-called essential companies still open for business.

What does this mean for people living in these states? Not coincidentally, they also have some of the highest numbers of vulnerable residents, many of whom lack insurance:

About one-fifth of Texas’ 29 million people lacks health insurance, and nearly one-quarter of Florida’s 21 million residents are elderly.

[…]

Jenkins displayed a chart showing the projected spread of the coronavirus far exceeded Texas’ available hospital beds. According to the projection, a statewide stay-at-home order could decrease coronavirus deaths from 430,000 to 5,000.

He noted that Dallas has 250,000 uninsured residents, the most of any U.S. city.

Is the governor of Texas sentencing up to a half a million people to death because he doesn’t believe in science? Unfortunately, we won’t know until the hospitals are overflowing and they’re putting corpses in refrigerated trucks, which is happening right now in New York City. It’s putting Texas mayors in impossible positions, because they have limited control over how they react to the crisis, since their cities could be affected via travel:

[Johnson] and Houston’s mayor, Sylvester Turner, declared emergencies before the governor did, but he said the orders have been difficult to enforce without statewide support.

“It makes all the economic pain you’re inflicting on one city a wasted effort if a neighboring city is doing something different — if people are continuing to congregate on the other side of an imaginary line,” he said. “The approach probably should have been statewide from the outset. I think the governor is there now.”

So, yes, we need state governors to step up and do the right thing. Ideally, they wouldn’t need to do this under threat that their state could be unfairly hurt economically by doing the right thing, because the federal government would be helping them out, ensuring that needed supplies go to the right places, and preventing states from undercutting one another*.

Well, yeah. Ideally that’d be happening. It is obviously not happening. The most glaring shortfall in local efforts to combat the coronavirus is lack of supplies. The federal government has something called the Defense Production Act, which could help solve this critical problem:

The DPA provides the president with the power to direct civilian businesses to help meet orders for products necessary for the national defense. Congress passed it in 1950 and has since gradually expanded its scope to include homeland security and domestic emergency management.

Essentially, the government could direct companies and government resources to maximize the production of things like masks and ventilators, and ensure they get delivered to the places hardest hit by the crisis. Instead, because our wise president refuses to use these tools, states are competing with each other - and with hospitals - for critical equipment at the worst possible time:

The market for medical supplies has descended into chaos, according to state officials and health-care leaders. They are begging the federal government to use a wartime law to bring order and ensure the United States has the gear it needs to battle the coronavirus. So far, the Trump administration has declined.

So, from the top down American is failing the test, and it’s going to worsen the crisis. As with reactance, human decisions - science denial, venal desires of Wall Street, and electoral fear - is driving a confused, deeply dangerous non-strategy that will result in hundreds of thousands or millions of people dead. For some, however, it’s an opportunity to make money.

The Scammers

Last week we talked Jim Bakker and Alex Jones, two of the most visible of the chorus of shitheads who are attempting to use fear to make a buck in a crisis. This is nothing new for them, since they’ve been scaring seniors into prepping for doomsday for years. However, a crisis like COVID-19 has opened all sorts of exciting new frontiers in scam. Shoshana Wodinsky writes about unemployment ads in Gizmodo:

Naturally, similarly predatory companies have found their way onto the search results for the newly unemployed. Looking up something like “unemployment benefits,” for example, will typically turn up predatory—if not outright scammy—ads alongside legitimate results.

Companies using people seeking work in a pandemic to pitch them on work-from-home scams, overpriced credit reports, or payday loans? Sure, of course.

According to a blog post published this week by the FTC, there are quite a few other creative ways scammers are fleecing people:

Online sellers claim they have in-demand products, like cleaning, household, and health and medical supplies. You place an order, but you never get your shipment.

Anyone who’s tried to go to a grocery store in the last week knows cleaning supplies are hard to find at any price. How are the online platforms like eBay and Amazon handling the shortage? Oh, you know:

The online shopping platforms eBay and Amazon Marketplace are failing to crackdown on a surge in profiteering by sellers due to the coronavirus, a consumer group has warned, after its investigation uncovered a wide range of products on sale at “extortionate” prices.

Mmmm, yes. That’s the stuff. Maybe they’ll be forced to “donate” the products instead. What else we got?

When a major health event — like the Coronavirus — happens, you might be looking for ways to help. Scammers use the same events to take advantage of your generosity. Some scammers use names that sound a lot like the names of real charities.

Charity scams! Nice. I wasn’t able to find any evidence of these on the Internet, maybe because they are only just getting going - GoFundMe seems like a platform ripe for this sort of con - but will certainly keep an eye out.

Did you know there is a law against committing fraud in connection with a major disaster or emergency? I didn’t either! They even set up a division within the Justice Department to prosecute these offenses. It was set up after Katrina, and while I won’t get into the undertones of the decision, there is certainly a lot of disaster scam content out there. Two men impersonated Salvation Army workers after Katrina to steal identities. Companies were accused of over-billing the government to clean up after a wildfire in California wine country. After the Paradise Camp Fire a year later, six people submitted homeowner’s claims for homes they…didn’t own.

The first arrest of an American coronavirus fraudster happened just last night! A guy in California was caught selling pills he claimed would prevent the virus:

Keith Lawrence Middlebrook, 53, was arrested by the FBI on Wednesday during a meeting in which he delivered pills to a potential “investor” — an undercover agent — that Middlebrook claimed would prevent covid-19

I’d never heard of this person before, but apparently he’s an actor with 2.4 million followers on Instagram? He seems very stable and normal:

The self-described “Genius Entrepreneur” frequently accused Democrats, the media and federal and world health officials of creating mass hysteria as a ploy to hurt President Trump. And at one point, he claimed his drugs had the support of a doctor with the Trump administration.

“Not only did I make the cure, but this pill right here is the prevention,” he said in one video. “Meaning, if I walk into the Staples Center and everyone’s testing coronavirus positive, I can’t contract it. It’s impossible. … I have what makes you immune to the coronavirus.”

I talk often about how our nearly non-existent consumer protections make Americans particularly vulnerable to fraudulent products and claims but, in Keith’s case, law enforcement had their work cut out for them. I hope his pills actually work, because he’s headed to one of the places most likely to have a deadly outbreak.

Short CoronaCons

WSJ - “[…] the group steers recipients to a petition to President Trump that asks him to “immediately cut through this red tape” to get more hydroxychloroquine into the marketplace, noting the drug is in short supply. There is no strong evidence that the drug has anti-coronavirus effects, though the U.S. is now testing that theory.

Tom’s Guide - “Coronavirus scams are flooding the internet from every alley, and the latest one might land in a text message from a friend. If you've been asked to click on a link to help your pal get a $100 gift card from Starbucks, don't.

Business Insider - “False messages are circulating on social media and in text messages that claim Netflix is offering free passes to people in isolation during the coronavirus pandemic if they visit a specific link. It's not.

* My first footnote! As I was writing this section, talking about governors of states fucking each other over, Greg Abbott in Texas issued this utterly insane executive order, to prove my point for me:

Tips, scams, and vaccine pills to scammerdarkly@gmail.com

Reap and Sow

Fake Dead Sea Scrolls, Provenance, Tendies, Theranos Patents, Jim Bakker, Performance Reviews, and Richard Burr

Proverbs 14:14

Ahh, the Museum of the Bible. Remember them? The ones who, like a month ago were embroiled in a scandal because they had bought stolen papyrus fragments? The ones who had to give 5,500 stolen clay tablets back to Iraq in 2017? Yeah, so it turns out their fragments of the Dead Sea Scrolls are fakes:

On Friday, independent researchers funded by the Museum of the Bible announced that all 16 of the museum’s Dead Sea Scroll fragments are modern forgeries that duped outside collectors, the museum’s founder, and some of the world’s leading biblical scholars.

Rather than the typical whodunit story, however, National Geographic takes us on a more interesting journey - how the experts figured out the fragments were fakes, and how the forgers likely created them in the first place. There were some pretty obvious clues:

First, the team concluded that the fragments were seemingly made of the wrong material. Nearly all the authentic Dead Sea Scrolls fragments are made of tanned or lightly tanned parchment, but at least 15 of the Museum of the Bible’s fragments were made of leather, which is thicker, bumpier, and more fibrous.

Okay, so, like…what? Note that in the first quoted paragraph the author says the fragments duped some of the world’s leading biblical scholars which leaves me with questions. What does a leading biblical scholar do if they can’t tell the difference between parchment and leather? This is the second time this year I’ve written about forged ancient texts and it is the second time I’ve been surprised by how obvious the fakes seem in hindsight, and how the entire scholarly community seems to go along with it, right up until the moment they smack their collective forehead and say “Of course! These aren’t even written on the right material!”

The answer, I think, has to do with provenance. In the art world, a compelling story is nearly as important as the underlying work itself. In this case, some of the fragments appear to have originated from the original source of the Dead Sea Scrolls, an antique dealer nicknamed Kando, who had bought and re-sold the original fragments when they were first discovered in 1947 in Palestine. Selling the scrolls became illegal in the 1970s, which created an opening for forgers to step into, claiming that their pieces had either escaped the ban - meaning they were looted - or had been acquired prior to the law change.

From 2002 to 2009 the market became saturated with Dead Sea Scroll fragments, and then along came the Green family, their Hobby Lobby wealth, and their Museum of the Bible to snap a bunch up. Some of them were even purchased directly from Kando - one way to avoid questions of provenance, and to convince scholars of their authenticity.

How were these forgeries created? The researchers speculate that Bedouin tribesmen acquired old artifacts from different times, dusted them with sediment and soil from the area the original scrolls had been recovered, and wrote Biblical verse on them:

Charlesworth also says he has seen pieces of blank, ancient leather in circulation. “In the past, when I told the Bedouin that a piece was worthless because it had no writing, I inadvertently suggested how to make it valuable,” he says.

This is what happens when wealthy, dumb people throw money at things. Why is there a private Museum of the Bible? What can they provide to the public that the thousands of respectable university and public museums cannot? It is another billionaire vanity project, and in this case it also happens to be a way for people to launder millions of dollars. I feel like the authors of the Bible might have had something to say about people like the Greens.

Provenance

Since we’re talking forgeries, let’s talk more about provenance. In the art world, especially, establishing provenance is critical for art dealers trying to sell works from famous artists. It was central to the stolen Gospel of Mark fragments story I wrote about back in January. Essentially, you either need convincing provenance, or you need to be considered an authority, like Kando was in Palestine.

Maria Konnikova has written about provenance in the world of art forgers in her book The Confidence Game, and talked about it on her podcast The Grift. Two examples in particular illustrate the importance of provenance in the art world.

First there’s Glafira Rosales. The New York Times describes her as:

The Long Island dealer at the center of an $80 million art forgery scheme that duped dozens of experts and buyers

Her case was interesting because it hinged on the provenance of the works, which Rosales was able to launder through one of the most famous New York art galleries, leading to its collapse:

Investigators have said that 40 of the counterfeits were sold through Knoedler & Company, a venerable Upper East Side gallery that abruptly closed in November 2011 after being in business for more than 165 years.

How did she do it? This in-depth account of the affair in Art News sheds some light on things:

All of the Rosales works supposedly came from a collector who had made his riches in the sugar business and had homes in Switzerland and Mexico. Freedman told collectors he was very secretive and wished to remain anonymous

[…]

He had obtained the works directly from the studios of Abstract Expressionist artists, she said. When he died, his son wanted Rosales’s help to sell some of the works.

This would normally not be enough for a storied art gallery to accept a work as authentic, but it seems that Ann Freedman, the director of the Knoedler gallery at the time, was eager to make some big ticket sales, and did not do sufficient due diligence. It’s a familiar pattern - people desperate to believe that a fake is real, especially if they have a monetary interest.

At trial, it was revealed that Freedman and other Knoedler staff were happy to craft more and more elaborate stories of provenance to sell the paintings, and tens of millions in art was purchased by unsuspecting buyers.

The Art News piece also digs into the thorny issue of experts and how they exist within the world of authentication and appraisals. When a wealthy collector brings in an appraiser or expert to authenticate a painting, there is often a conflict of interest - the expert is being paid for their time, and if they call a painting a forgery but other experts call it authentic, they could lose out on future commissions. This discourages experts from following their doubts or suspicions when authenticating a painting. The author of the piece struggles with this:

The painting’s presence in the courtroom was uncomfortable for everyone. When I looked at it, all I could see was a black splotch of color on top of a red one. “Of course it’s a fake,” I thought every time I saw it, trying to avoid the possibility that if I viewed it in a museum I might have have scratched my chin thoughtfully while looking at its majestic colors.

Okay, so it’s a bad idea to fudge the provenance of paintings that sell for millions of dollars. The stakes are high, and you will eventually be found out. What if, instead of trying to forge big name artists, you set your sights a bit lower? Enter Ken Perenyi:

For nearly three decades Ken Perenyi made a small fortune forging works by popular 18th- and 19th-century artists like Martin Johnson Heade, Gilbert Stuart and Charles Bird King.

Perenyi made quite a lot of money over many years by forging works by second- and third-tier painters, selling paintings for thousands or tens of thousands of dollars. For much of his early career - Konnikova interviews him for an episode of her podcast - he would simply walk his pieces in the door at art galleries, claiming he had found them at a yard or estate sale. Dealers would, at times, write him a check on the spot. Provenance be damned!

One thing I found particularly interesting, listening to Perenyi talk about his experiences, was that he would ask the art dealers to describe what they thought the painting was, and let them create the provenance out of thin air. Perenyi was particularly good at faking other small details, like adding scuffed chalk writing to the back of his works to make them appear like they had been sold at auction in the past. All of these small touches allowed the imaginations of greedy gallery owners to run wild.

So, what is provenance? In some cases it is a meticulously constructed, verified history of a piece of art, tracing its existence from the time the creator finished it in the studio to the present. Other times, it’s a story of a secret inheritance and a reclusive sugar magnate. Sometimes it’s just a guy who walked in to a gallery and said he found a painting at a garage sale.

Don’t Take My Tendies

If you aren’t familiar with the subreddit WallStreetBets, that’s probably a good thing. It’s a forum for stock trading enthusiasts - I wouldn’t go so far as to label them day traders, as many of them likely do not trade at all - to talk about crazy speculation in the markets. Some people think WSB has the power to move markets, and Bloomberg recently did a cover story on it.

Whether they are market manipulators, kids doing it for the memes, or some other thing, WSB moderators decided to take the sub private after it hit one million subscribers, meaning the general public could no longer read it. This lasted less than a day, because scammers immediately started trying to sell access to the sub for money:

Due to some bad characters trying to take advantage of WallStreetBets going private, we have decided to make it public again and clarify something very important: r/WallStreetBets will NEVER, and has never, charge for access. There are scammers going around Twitter and other platforms pretending to be moderators and asking for donations in order to gain access. Do not send money to these scammers.

Whoops! Anyhow, WSB is public again, so if you need investment advice in these trying times, definitely do not go there.

Theranos AND SoftBank??

I was reeeeally ready to write about this story earlier in the week, but thankfully I am a procrastinator and waited until Thursday to finish up the newsletter, because there have been significant updates. Of course, I’ll write about it anyhow.

Basically, a shell company that owns a couple of Theranos patents was suing a company called BioFire for violating those patents. BioFire is currently working on tests for coronavirus, which would have been interrupted thanks to the lawsuit. When this horrific abuse of the justice system came out, the company, Labrador Diagnostics, backpedaled and had to issue a press release saying they were not suing over anything COVID-19 related. It’s a good thing journalists exist to save us from patent trolls seeking to profit off a global pandemic.

It doesn’t end there, though, because guess who owns the holding company that owns Labrador? SoftBank! These fucking guys!

In other news, SoftBank may be pulling out of bailing out WeWork, which, good. Can you imagine if WeWork was a public company right now? They’d be begging the government for a bailout while offering their offices as temporary hospitals. Free beer with every ventilator!

Speaking of Coronavirus

This motherfucker has been sued for selling fake COVID-19 cures:

That’s Jim Bakker, the guy who was convicted of fraud in the 80’s and is currently back in the televangelist racket selling things like colloidal silver and other dangerous snake oil.

His show is essentially one long advertisement for panic buying and disaster prepping. Think Alex Jones, but with more Jesus. We’re going to see a lot of coronavirus profiteering in the weeks and months to come, so buckle up. It’s going to get a lot worse before it gets better.

Performance Reviews

No one likes performance reviews at work. They are highly subjective, typically administered by someone who is hardly qualified to assess your performance, and have been shown time and time again to be biased against women and minorities.

So, basically, they’re a giant fucking scam! Need more proof? Facebook has just announced as much:

Facebook Inc. will give all of its full-time employees an additional $1,000 in their next paycheck and will give everyone the same “exceeds expectations” performance review for the first half of the year.

By giving all of its roughly 45,000 full-time staffers the same review, Facebook is ensuring that all of those employees receive their biannual bonuses.

I mean, sure, this is good in the short term. The last thing a Facebook employee needs to be worried about right now is their job performance. Wait, maybe they should be worried about that.

In case you weren’t incredulous enough, read this:

Facebook’s performance ratings are a hallmark of the company’s culture, requiring employees to collect feedback from five colleagues, among other things. The top rating is “redefines,” followed by “greatly exceeds expectations” and “exceeds expectations.”

So, basically they gave everyone in the company the third-highest rating as they attempt to grapple with a global pandemic. Okay. Also, what the fuck is “redefines” expectations? Is it me or does that sound like the rating you should be giving the lowest performers, since you now have to put them on a Personal Improvement Plan? It also puts what I assume is a fairly ridiculous amount of pressure on the highest performers to, uh, redefine expectations twice a year? No thank you.

At least they don’t have to go through the actual review process:

Facebook employees will still gather reviews from colleagues and managers, a spokeswoman said, but everyone’s rating will be set to “exceeds expectations” during the first half of 2020.

Oh come on, man! So you have to waste five of your coworkers’ time, when everyone already knows the outcome? I remember a time when the tech press used to fawn over how cool it as that tech companies had ping pong tables and nap pods or whatever, but in very short order they’ve become bureaucratic Bosch triptychs just like the rest of corporate America.

It’s Been a Busy Week, Okay?

I was going to stick this in Short Cons, but now I’ve just read a second story about him and you know what? Fuck it. He gets a section. Richard Burr, come on down:

The chairman of the Senate Intelligence Committee warned a small group of well-connected constituents three weeks ago to prepare for dire economic and societal effects of the coronavirus, according to a secret recording obtained by NPR.

First, he warned a room full of rich donors about coronavirus weeks ahead of the public:

"Every company should be cognizant of the fact that you may have to alter your travel. You may have to look at your employees and judge whether the trip they're making to Europe is essential or whether it can be done on video conference. Why risk it?" Burr said.

Then, for good measure, he dumped a bunch of his stock holdings, right before the markets tanked:

His biggest sales included companies that are among the most vulnerable to an economic slowdown. He dumped up to $150,000 worth of shares of Wyndham Hotels and Resorts, a chain based in the United States that has lost two-thirds of its value. And he sold up to $100,000 of shares of Extended Stay America, an economy hospitality chain. Shares of that company are now worth less than half of what they did at the time Burr sold.

How about that? I’m sure that the rich donors who were in the room when Burr warned them that the outbreak would be “akin to the 1918 pandemic” just went home and sat on that information - I am sure they did not also call their brokers and sell off hospitality and airline stocks.

There will need to be a lot of investigations into how our government bungled the response to COVID-19 in the coming years, but the sheer gall of these people to not only warn their friends weeks in advance - while making public statements to the contrary - and then profit off that knowledge? Unreal.

Check Out My SoundCloud (again)

Last week I tried to do a reading of the entire newsletter for audiophiles and I kind of hated the result, so this week I am attempting a different format, and doing an air quotes “podcast” of me talking about last week’s newsletter and expounding on what I found interesting about the stories. I’ve done this one fairly drunk, which I will blame on life under quarantine. Anyhow here it is, for those who prefer listening to reading. If you have comments or suggestions, my inbox and DMs are open.

Short Cons

NPR - “John "Fast Jack" Farrell died August 1, 2019 at the age of 82.” RIP

Newsweek - “New York Attorney General Letitia James ordered [Alex Jones] to immediately cease and desist selling and marketing products such as toothpaste and dietary supplements that claim to prevent the spread of COVID-19.

Wired - “At the height of its powers, Necurs was one of the most disruptive forces on the internet. A sort of Swiss Army botnet, over the years it has harnessed more than 9 million computers unwittingly under its control to send spam, distribute ransomware, attack financial institutions, and more. Last week, Microsoft pulled its plug.

Inquirer - “Comcast mistakenly posted online the contact information of nearly 200,000 customers who paid the company a monthly fee to keep their phone numbers private.

Citations Definitely Needed

This week Walt Hickey at Numlock News featured one of my stories in his newsletter, so by way of thanks I will tell all of you to subscribe to it. Some of the stories I find for ASD are from Numlock. It’s good! Tips to scammerdarkly@gmail.com as always.

Turn on the Stabilizers

Gift Card Laundering, Self-Driving Tech, Fake Coronavirus Books, Medicare Fraud, and Scam Judge

Laundering Gift Cards

Last week I wrote about North Korean hackers who stole a bunch of cryptocurrency, sold and traded a bunch of it, and laundered some of the proceeds through iTunes gift cards. Many of the most common scams feature gift cards as payment vehicles, presumably because they are difficult to trace and can be emptied of funds quickly. My efforts to learn more about the gift card laundering underworld came up mostly empty - there aren’t very many articles written about the phenomenon. It’s difficult to estimate how much money is lost to scams each year around the world, but American seniors alone lose over $3 billion a year. The worldwide figure must run into the tens of billions. How is there so little attention paid to the ways these criminals launder their ill-gotten gains?

Anyhow, I did come across one piece in Forbes that sheds some light on what happens after illicit gift cards change hands. It’s helpfully titled “The Idiot’s Guide to Laundering $9 Million” and it includes some…alarming statements:

“Had the 9/11 terrorists used prepaid (stored-value) cards to cover their expenses, none of these financial footprints would have been available,” observed a U.S. Treasury Department report. The IRS has declared prepaid cards "the currency of criminals."

In this case, the Idiot in question had purchased millions of dollars’ worth of gift cards with stolen credit cards and used online marketplaces to turn them into cash. Since they used stolen credit cards and laundered the funds into US bank accounts, authorities were able to trace and catch the culprits. Had they been offshore, as the helpful Treasury Department folks explained to us above, the funds would have vanished out of the US banking system and into the ether.

This is…not a great system? The global market for gift cards was $338 billion dollars in 2018, and is estimated to grow around 6% per year. Surely companies who issue these cards - Apple being one of the biggest - can do something to improve the security of the ecosystem. Back in 2017, when the Forbes story takes place, the responses from retailers were less than inspiring:

At Walmart, you must show identification for gift card purchases of $5,000 or more, according to a spokesperson, and store managers have the authority to halt a transaction at any point. In 2014, drugstore chain CVS began requiring identification for $300 or more in gift card purchases; it also won't let you walk out of the store with more than $2,000 in gift cards in a given day.

The FTC tracks scam and fraud reports in a public database, and their most recent statistics peg the median loss per scam at $700, which is well within the daily purchasing limits of both Walmart and CVS. See if you can spot any other interesting trends in their report:

Huh! So with gift card fraud on the rise, companies seem mostly unwilling to do anything about it. Why is that, I wonder?

Back in 2011, the Treasury Department attempted to close a loophole that allowed drug cartels to move money across borders with gift and prepaid credit cards. You’ll never guess what happened:

The department’s Financial Crimes Enforcement Network (FinCEN) proposed that money stored on these cards count toward a U.S. requirement to report cross-border movement of cash of $10,000 or more.

But FinCEN later withdrew its proposed rule after pushback from the prepaid card industry, according to law enforcement sources. The move has not been previously reported.

[…]

The prepaid card industry opposed the rule, saying it would have discouraged people from using the cards.

Now, I realize I may not be a “normal” consumer, but I buy gift cards for distant relatives or friends-of-friends occasionally. Typically I’ll spend $25 or $100 if I really like someone. Can someone - anyone - explain to me who the target consumer is who needs to put more than $10,000 on a gift card?

Industry lobbyists were able to lump prepaid credit cards - which can potentially offer some needed services to the un-banked - together with gift cards, which are “closed loop” and can only be used with specific merchants. Thus, gift cards remain largely unregulated, with only transactions over $10,000 requiring any reporting to the government.

So, you may be asking, why wouldn’t Walmart or CVS be more interested in cracking down on gift card fraud? They are big profit centers for the retailers, with billions a year going unused on gift cards. It’s become so lucrative that states are getting in on the act, starting to claim unused card funds to plug holes in state budgets:

As the Trump administration continues to cut federal funding for state programs, legislators desperate to make up the shortfall are turning to a patchwork of forgotten microtransactions you meant to spend on lattes or in-game wardrobe upgrades to help.

Cool. Gift card marketing has become so aggressive that many stores regularly sell them at discounts - yes, it’s essentially free money - because they have profit margins to work with. No retailer has the kind of margins Apple does with iTunes. Their app store takes around 30% on everything sold, so it can afford to offer big incentives on its gift cards. Once the card is purchased, Apple already has the customer’s money, and there’s a chance they may not spend it at all! The company booked $10.9 billion in “services” revenue in a single quarter last year, the app store making up a sizable chunk.

Who’s buying these gift cards? A lot of them go to people who buy virtual currency for mobile and online games. The tech companies got us addicted to their games, and are enabling criminals and cartels to launder their money through the way we are forced to pay for them. It’s quite a picture of our modern economy.

I have reached out to Apple for comment on what they’re doing to curb the money laundering on the iTunes platform, and will update if I hear back.

WayNo

Everyone has heard of Uber. Uber rose to the top of the US rideshare heap by lighting billions of Softbank dollars on fire, and capturing massive market share without making any money. Since 2016, Uber has spent over a billion dollars trying to build self-driving vehicle tech that would eliminate the need for human drivers - arguably the biggest cost of its ride hailing business. So, how’s that going?

Well, Uber killed a woman in Arizona in 2018 during testing. They were in Arizona because the state had the most lax safety laws. Who was in charge of all of this? A guy named Anthony Levandowski. Uber hired him away from Google, where he had been running their self-driving car program, called WayMo.

Why do we care about Anthony Levandowski? Because he’s in the news again, this time because he declared bankruptcy in the fact of a $179 million dollar judgment against him, on behalf of Google. Also, because he sucks in so, so many ways. Let’s talk about a few of them!

First off, if you haven’t read Mike Isaac’s book Super Pumped, which details the rise and fall of the former CEO of Uber Travis Kalanick, go pick it up. Our friend Anthony features heavily in it, because he was at the center of a very public and very costly dispute between Google and Uber.

Levandowski got his start by entering the Darpa Challenges, a series of autonomous vehicle races. He was, by all accounts, a talented engineer, but his real talent was in generating buzz around his projects. His team built a self-driving motorcycle, he got sponsors amid a lot of hype, and the competition went well:

It didn’t do much: Because Levandowski forgot to turn on the stabilizing system, the motorcycle fell over a few feet from the starting line. Even for a race in which no vehicle went more than 7.4 miles, it was a particularly ignoble failure.

It will make sense later, but I am absolutely dying at the mental image of his motorcycle making it off the line and tipping over. Anyhow, this early “success” led him to become a bit of a celebrity inventor, helping other engineers sell their lidar (my engineer friend describes lidar as “radar, but with light, capable of much finer detail and more accurate measurements at short range” for those wondering) and appearing on reality TV shows. In one, Levandowski rigged a Prius with self-driving tech and attempted to deliver a pizza in San Francisco. It suffered “one minor crash” along the way which really foreshadowed this guy’s career.

Amidst all of this minor celebrity, Levandowski was hired by Google, and in 2008 he was put on their self-driving vehicle team. Prior to this Levandowski had founded two other businesses which sold products and services to Google, one of which Google bought for $20 million dollars, half of it going to Levandowski himself. Apparently this was an “open secret” at the company and they were okay with it - Google once encouraged its employees to work on their own projects as part of their jobs. If it seems a bit ludicrous to you that a well-paid employee was also able to run a 20-person start-up on the side selling tech to his employer and then cash out $10 mil from it, yeah, I feel you.

Despite making obscene amounts of money at Google - $120 million, according to court records - Levandowski was a toxic manager and some people refused to work with or under him. He was sidelined and taken off the self-driving project, which pissed him off. When Travis Kalanick and Uber came calling, he was eager to talk.

What happened next has been the subject of a lot of court testimony but basically, once he’d decided to quit, Levandowski downloaded 14,000 files from Google (WayMo) and resigned. Four months later, he announced his new project - a self-driving truck company called Otto. He hired away employees from Google to staff his team and - wouldn’t you know it! - three months later Uber announced it had acquired the start-up for $680 million dollars. Levandowski came on board, and took over Uber’s self-driving program. All very normal stuff!

Then, lawsuits happened. WayMo sued Uber, Google sued Levandowski, and Uber fired Levandowski. Levandowski went on to found another self-driving company called Pronto, which is making kits to help commercial truck fleets drive “more safely”. Investors are still funding this venture because, sure, why not.

Then! In August of this year Levandowski was charged by the federal government with 33 counts of theft and attempted theft of trade secrets:

The criminal complaint filed by the U.S. Attorney's Office in Northern California alleges that in the months before he abruptly resigned from Google in January 2016, Levandowski downloaded and copied key files onto his laptop. He then used those trade secrets to create his own self-driving truck company called Otto, according to the documents. Months later that startup was acquired by Uber for roughly $680 million.

Not to be confused with the arbitration case with Google which Levandowski recently lost, leading to the bankruptcy filing. That lawsuit alleged Levandowski had secretly poached former Google colleagues to work at Otto. I know it’s a lot of to keep track of, but this guy has been busy.

So, Levandowski is now claiming bankruptcy protection - with an estimated net worth of only $50 to $120 million. He’s facing a giant settlement with Google, and has to pay legal fees to defend himself from federal criminal charges, which could land him in prison.

There’s some question whether the charges the government is bringing against him will stick, and perhaps for good reason:

Cases brought against employees like Aleynikov and Levandowski have been controversial, in part because the nature of the modern workplace often necessitates the transfer of company information to personal computing devices like iPads and home computers during the normal course of work. When an employee leaves, it’s difficult to determine whether that employee purposely stole information or simply possessed it.

Google allowed Levandowski, for instance, to work on a personal start-up while also working on Google’s top-secret self-driving car division.

I am not a fan of the government re-appropriating old laws, or twisting them in ways they may not have originally been intended to be used:

The former Fitbit employees and Levandowski were charged under the Economic Espionage Act, passed by Congress in 1996 in part to combat state-sponsored industrial espionage. While the law has been used to help curb countries like China from stealing secrets from U.S. companies, it has also been used to punish employees who leave one U.S. company for another, allegedly taking proprietary information with them.

One of the most famous cases was the prosecution of Sergey Aleynikov, a Goldman Sachs employee sentenced in 2011 to eight years in federal prison for taking computer code to a high frequency trading start-up. Aleynikov’s conviction was overturned on appeal.

It certainly seems like the government is trying to make an example out of Levandowski, who is not what I would call a sympathetic character. He did a lot of really shady shit! Charge him for, I don’t know, killing someone through negligence while at Uber. On his list of potential crimes, “taking some files on a laptop” seems fairly minor. Law enforcement becoming an enforcer of workplace contract disputes on behalf of employers is not going to end well for the rest of us.

I was surprised I hadn’t written about Levandowski before, since he has been one of Silicon Valley’s most prolific tech frauds in recent years, but now that he’s caught himself a case, we can all feel a little better than he may have to temper his ambition and learn to live modestly, which in San Francisco means $50 to $120 million dollars, if you don’t want roommates.

Ay, Corona!

If you head over to Amazon and type in “coronavirus” you will be shown a listing of books and products to help keep you safe during the pandemic. Maybe. As it turns out, scammers are creating plagiarized books and gaming Amazon’s search results to appear at the top:

At first glance, Richard J. Baily’s book, “Coronavirus: Everything You Need to Know About the Wuhan Corona Virus and How to Prevent It,” appears to be an authoritative deep dive on how to prepare for the pandemic.

The book was the top “coronavirus” search result on Amazon for many users Tuesday — and not just in Amazon’s books section. The guidebook appeared before Clorox wipes and hand sanitizer, let alone any book written by a doctor or public health specialist.

Not only is the book a literal copy and paste from news stories about COVID-19, the author doesn’t appear to exist either. Amazon claims they are taking steps to prevent this:

“Amazon maintains content guidelines for the books it sells, and we continue to evaluate our catalog, listening to customer feedback. We have always required sellers, authors and publishers to provide accurate information on product detail pages, and we remove those that violate our policies,” an Amazon spokesperson said.

However, uh:

No contact information is provided for Baily or Wang, who both have empty author pages with no biographical details. The contents of the books offer no credentials for their authors. The books do not appear to have a traditional publisher, and orders for physical copies of the books are printed using an on-demand book printing service.

I guess, in a way, having an empty author page is providing accurate information, in this case. This is not a new problem, though it takes on a particularly grim importance in the face of a worldwide public health crisis. The largest e-commerce marketplace in the United States is actively peddling misinformation, because it is unable to police its platform. While it’s not an apples-to-apples comparison with Facebook’s enabling of the genocide in Myanmar, it is another case of tech companies being unwilling to address the very real world consequences of their structural failures.

Amazon has known about this problem for years, and has done little to stop it. Here’s a New York Times piece from last year talking about the problem:

But Amazon takes a hands-off approach to what goes on in its bookstore, never checking the authenticity, much less the quality, of what it sells. It does not oversee the sellers who have flocked to its site in any organized way.

That has resulted in a kind of lawlessness. Publishers, writers and groups such as the Authors Guild said counterfeiting of books on Amazon had surged.

I have written about fake reviews and counterfeit goods on Amazon in the past, but the problem of fake or plagiarized books is one Amazon has had years to address and chosen not to:

In Amazon’s bookstore, the unruly behavior has been widespread, aided by print-on-demand technology. Booksellers that seem to have no verifiable existence outside Amazon offer $10 books for $100 or even $1,000 on the site, raising suspicions of algorithms run wild or even money-laundering.

The Times doesn’t put too fine a point on it:

This is not really negligence on Amazon’s part. It is the company’s business model. Amazon, which does not break out revenue or profit from bookselling or publishing, assumes that everyone on its platform operates in good faith until proven otherwise. “It is your responsibility to ensure that your content doesn’t violate laws or copyright, trademark, privacy, publicity or other rights,” it tells prospective publishers and sellers.

As I once said, putting it mildly:

Amazon’s hands-off approach to verifying the authenticity of items has a lot of real world consequences.

In this case, the real world consequences could be killing people with fake coronavirus books, or obstructing their access to good medical information. It’s reassuring to know that during any crisis, bad actors will exploit vulnerabilities in our global marketplace to make money. It’s extra reassuring to know that the elite class of tech engineers and executives not only aren’t aware but clearly don’t give a shit any of this is happening.

Private Bounty Hunters

I have written quite a bit about Medicare fraud. Since the government introduced an element of privatization to the service in the 1980s - yes, of course it was Reagan - companies have been stealing billions from the government by over-billing for services.

This piece in the New Yorker talks about the whistle-blowers who have been involved in exposing some of the biggest Medicare frauds in our country’s history. It’s a compelling read if you’re so inclined, but as usual I am going to talk about the fraud, and less about the whistle-blowers. I’m sure they are lovely people, but this is what I’m all about:

[Sewell] believed that Freedom was intentionally rooting out sicker, more expensive enrollees by having sales agents target them and then encourage them to leave Freedom, an illegal practice known as “lemon-dropping.”

Lemon-dropping, huh. When an illegal practice is so common you come up with cute names for it, that can’t be a good sign. What else were these crooks up to?

Sewell told her that he believed Freedom was “cherry-picking”—recruiting healthy enrollees who needed little or no medical care—in addition to lemon-dropping. He said that the company had offered sales agents cash bonuses for getting seniors who required a lot of health care off Freedom’s insurance rolls.

Cherry-picking and lemon-dropping. So we’ve established that some of the smaller companies can engage in questionable practices and get caught up in whistleblower stings. Surely the big, publicly-traded companies with high profile CEOs don’t engage in the same stuff:

In 2017, the Department of Justice joined a multimillion-dollar case against the nation’s largest insurer, UnitedHealth Group, alleging widespread fraud dating back to 2006. The Justice Department is also investigating several other health insurers, including Anthem, Humana, Cigna, Health Net, and Aetna. An analysis co-authored by Fred Schulte, at the Center for Public Integrity, estimated that insurance companies had received nearly seventy billion dollars in undeserved Medicare Advantage payments between 2008 and 2013.

That’s $70 billion in theft from the United States government by health insurers in five years. Or, maaaaybe it’s even more?

Peter Budetti, who served in health-policy roles in Congress and as a deputy administrator at the Centers for Medicare and Medicaid Services (C.M.S.), told me that experts believe the real figures are up to ten times what the government actually recoups. “We’ve never been able to get a direct measure of exactly how much fraud there is, but one of the clearest indicators is that, the more money is spent on fighting fraud, the more money is recovered by the government,” he said.

Come on! Seriously?? Do these companies make any legitimate revenue, or is the entire Medicare Advantage system premised entirely on fraudulent billing?

Fraud perpetrated by companies in the health-care industry, he said, is especially pernicious. “On the one hand, they are stealing public money,” [Budetti] told me. “And on the other hand that money is not going to where it’s supposed to go, which is to taking care of people. They aren’t stealing from people who are selling imported shoes. They are stealing from people who would otherwise be immunizing kids or delivering babies. That’s the heart of it.”

Hey now, let’s not knock the imported shoe market. But Budetti brings up a good point, which is that the $70 or $700 billion dollars in Medicare fraud isn’t just going into the pockets of shareholders and health insurance executives, it’s coming out of the care delivered to the people it’s supposed to be helping. This is why it’s especially maddening - the government tasked with overseeing the health program for more than 60 million seniors is absolutely asleep at the wheel, as the corporate profiteers run wild.

The chief law enforcement officer in the United States right now is not a big fan of whistleblowers, or really any corporate accountability:

Critics of the whistle-blower payments argue that the windfalls could encourage people to induce corporate sabotage. William P. Barr, President Trump’s nominee for Attorney General, has called the False Claims Act an “abomination” spurred by “the mercenary motives of private bounty hunters.”

Yes, how did it go for the mercenary bounty hunter in the Freedom case? He was blackballed by his former employer for two years, nearly went broke, and then suffered a clot in his brain after a fall at home and died at age 39. Three years later, after the government finally joined the case as a plaintiff - keep in mind the FBI had been using Sewell to wiretap and gather documents on Freedom for years - the company settled for $31.7 million dollars. Sewell’s estate got $6.4 million, though the lawyers got a sizable chunk. The owner of Freedom sold the company to Anthem for more than a billion dollars.

Scam Judge!

Last week I wrote about Judge Mike Cummins, who legally changed his name in order to try to win a judicial election in Los Angeles. It didn’t work, and he got obliterated:

Judge Mike Results

I don’t know whether Judge Mike would have been any good as a judge, but he certainly stirred up the race, and forced his opponent to put out videos like this explaining he’s not currently a judge:

Ah, to be a retired white dude with nothing better to do than run for DA and judgeships. Does he make his friends call him Judge Mike?

Short Cons

WSJ - “…the CFPB said Cincinnati-based Fifth Third knew for years that employees were opening unauthorized accounts but didn’t do enough to monitor or adjust sales goals and incentive-based compensation programs to discourage the behavior.

New Republic - “Millions of readers visit Zero Hedge each month, drawn by the site’s deeply pessimistic view of Wall Street and its alarmist, conspiratorial take on international affairs. In the world according to Zero Hedge, the financial markets are always on the verge of collapse and the United States is always a power in decline.

The Atlantic - “But a simple intuition had propelled Trump throughout his life: Human beings are weak. They have their illusions, appetites, vanities, fears. They can be cowed, corrupted, or crushed. A government is composed of human beings. This was the flaw in the brilliant design of the Framers, and Trump learned how to exploit it.

Tips, corrections, love letters to scammerdarkly@gmail.com

OneLife, OneFraud

Crypto Coins, Crypto Cult Leaders, Crypto Hackers, and Scam Judge

OneCoin

There are a lot of cryptocurrencies in the world. According to Coin Market Cap, a site which tracks prices and trading volumes, there are a hundred tokens (since they are not all “coins” I will call them “tokens” for clarity) with total value over $44 million dollars. The total value of all the tracked tokens on the site is $249 billion dollars as of this writing. That’s a lot! There are a variety of uses for cryptocurrency, and a lot of people trying to sell you on one of them, so the value of their tokens can go up.

Then there’s OneCoin. Back in 2014, a woman calling herself Dr. Ruja Ignatova came up with the idea for a cryptocurrency, and enlisted the help of a global network of marketers to promote her coin. It went on to make somewhere between 4 and 15 billion dollars for the group behind it. The problem? There wasn’t a coin. There was no blockchain. It was a complete fraud.

I’ll talk about Ignatova in the next section, for now let’s focus on OneCoin, and how it spread across the globe. Some people have called it a Ponzi scheme, and perhaps it…sort of was? In the sense that people thought they were investing in an asset that would go up in value, perhaps. Like a Ponzi scheme, the people behind it were simply taking the money from “investors” and using it to buy yachts and mansions, and to pay the marketers who brought them new investors. They would periodically give out new “coins” to their network, but that’s easy to do when you don’t actually have a blockchain or any coins. They were simply changing numbers in a database.

So, was it a Ponzi? Okay, let’s call it a Ponzi. Was it also a pyramid scheme? You bet! The key to the success of OneCoin was its vast group of “network marketers” aka MLMers who brought people in to buy “packages” of OneCoin. The marketers then got a cut of each package they sold. Some of them made millions of dollars off the deal, by leveraging the same networks they used to sell beauty products or leggings. The intrepid folks at Behind MLM have a useful write-up of the primary actors in the pyramid side of the business:

At the peak of his thievery, Ted Nuyten’s Business For Home was celebrating Parhiala’s monthly theft of over 4 million euros from OneCoin victims.

OneCoin had leader boards for its MLMers, showing how a few guys were stealing millions of Euros a month from unsuspecting marks around the globe, much of it from their “downline” or the marketers they had recruited into the network. Pyramid scheme? Yup.

Was OneCoin also a money laundering operation backed by organized crime? Hell yeah it was! The recent conviction of Mark Scott, the lawyer who helped set up a web of international shell corporations OneCoin used to launder its proceeds, tells the tale:

Scott was convicted of washing a sizable portion of that haul. He was found guilty Thursday with laundering $400 million starting in 2016. He now faces potentially up to 50 years in prison, as well as disbarment.

The money flowed through an elaborate network of fraudulent private equity investment funds and between international tax havens, from the British Virgin Islands to Ireland, to the Cayman Islands, that obfuscated their source, according to the press release. 

In the process, Scott skimmed off $50 million for himself.

Fake investment funds in tax havens? Check! Co-conspirators being put in witness protection because they fear for their lives? Check:

The BBC said [Konstantin] Ignatov could be moved into the U.S. witness protection program depending on the longevity of his sentence. Court documents say individuals have come forward with threats against him.

Warnings not to use email because “Russians guys” can read them? Check:

…audio of Ruja Ignatova telling Gilbert Armenta: "Gilbert, we can get access to your emails between now and 24 hours if we want to. You cannot prevent this shit. You have to be fucking careful. What these Russian guys can do, you cannot imagine. I mean, if they can do it, everybody can do it. The only advice that you get from me, do not use emails. Do not -- like, just face-to-face or encrypted phones. Nothing else is safe. Just believe me. Please.”

To sum up, a Bulgarian woman with impressive-seeming credentials appeared on the scene out of nowhere, claiming she had a crypto coin that would yield unbelievable investment returns. She teamed up with some of the world’s most potent network marketers to sell billions of dollars’ worth of coins. When people tried to reveal OneCoin as a sham, she and her army of sycophants would form a virtual mob to silence them, giving cover for the scheme to continue. At some point the mafia appears to have become involved, perhaps to help launder the proceeds, or perhaps because they saw there was money to be made and wanted a piece. After two years, countries began cracking down and arresting members of the organization, seizing whatever funds hadn’t been funneled away. Dr Ruja remains at large, having disappeared in 2017.

I am unable to reach OneCoin’s website at this time, though their faux “marketplace” DealShaker still exists on the web. Reports from last year indicate OneCoin is still doing business in the developing world, in part because pyramid schemes can thrive in places with lax consumer protection laws and limited access to information.

Since the organization behind OneCoin started to break apart, many of its primary actors have gone elsewhere, attempting to start new coins - some of them actual crypto tokens - to cash in on the phenomenon. None appear to be all that successful, which brings us back to the central question - how did this happen? The answer may lie in the story of OneCoin’s founder. Who is Ruja Ignatova?

The Crypto Queen

Ruja Ignatova came to my attention thanks to an excellent podcast and associated article from Jaime Bartlett at the BBC. His team went on a hunt to find out why Dr Ruja disappeared in late 2017 - spoiler, the most believable theory is that she caught wind of a sealed indictment by the FBI and fled - and whether she is still alive. While this makes for good listening, it is not the story I am interested in talking about. What I want to explore is how Ignatova and OneCoin rose to such dominance, how she was able to recruit armies of true believers, and what this means for the future of online scams.

Bartlett’s podcast explores Ignatova’s past - a modest upbringing in Bulgaria and Germany. Out of nowhere, she and her father purchased an ironworks in southern Germany, running it quickly into bankruptcy and skipping town. She was eventually convicted of fraud by the government and received a suspended sentence. The nature of the deal - employees fired with no notice, documents and records destroyed in the factory - sounded like organized crime to me.

As Bitcoin and cryptocurrency surged in the early 2010s, Ignatova seized upon it as the next big thing. It wasn’t so much her creation of a coin - as I’ve said, there were hundreds in existence by 2014 - as her framing of the thing. Using some resumé fluffing, Ignatova presented OneCoin as the first coin created by an ex-finance professional. She talked up her Oxford PhD, claimed she had worked at McKinsey advising banks. Here was someone who understood how bad the banking system was, and wanted to bring financial freedom to ordinary people.

Any good scam requires a bit of luck, and Ignatova’s timing couldn’t have been better. By 2014 much of the world was still reeling from the financial crisis - especially in Europe and Africa, austerity imposed by governments had made things worse. Average citizens watched bankers get away with destroying the global economy, as they were asked to tighten their belts. Along comes a woman - when you listen to OneCoin enthusiasts describe Ignatova it sounds cult-like - who tells them that there is hope. They can become part of a movement - a family - to free the world from oppressive bankers and governments. This message played particularly well in poorer parts of Europe, China, and Africa.

Then, there was the meteoric rise of Bitcoin during these years. Ignatova rode that rocketship, promising her adherents that OneCoin would grow faster and bigger than Bitcoin. Anyone who stopped to do the math - OneCoin marketers promised buyers returns that would have made them millionaires many times over - would have realized it was impossible, but people don’t do math when they are swept up in emotion.

It was, in retrospect, the perfect combination of a charismatic evangelist, and an aggressive network of MLM kings who had spent years honing the ability to get people to buy into fads. They preyed ruthlessly on the hopelessness of people who had just survived a terrible recession, and used their lack of technical sophistication to sell them on a miracle coin that would make them rich.

How much did Ignatova know? Did she set out to build a multi-billion dollar scam selling non-existent cryptocurrency, or did she really believe she could help the poor and desperate become wealthy? Emails unearthed in the Department of Justice investigation that led to her indictment show that she knew exactly what she was doing:

On June 11, 2014, Ruja wrote to Founder-2 concerning the OneCoin business plan:

“It might not be [something] really clean or that I normally work on or even can be proud of (except with you in private when we make the money) – but … I am especially good in this very borderline cases [sic], where the things become gray – and you as the magic sales machine – and me as someone who really can work with numbers, legal and back you up in a good and professional way.

We could really make it big – like MLM meets bitch of wall street”

She emailed her co-conspirator about exit strategies:

The first option that Ruja listed was,

“Take the money and run and blame someone for this (standard approach, see Wenyard.)”

Her blockchain was…not a blockchain:

“We are building our own cryptocurrency – and would like to set up an internal exchange service for them.

We would like to be able to set the price manually and automatically and also control the traded volume.”

They never intended to allow outside control of the price or trading volume information they showed their customers:

Goals:

6. Trading coin, stable exchange, always close on a high price end of day open day with high price, build confidence – better manipulation so they (investors) are happy.

[…]

We can manipulate the exchange by simulating some volatility and intraday pricing [sic].

The damning emails go on, but what emerges is a picture of a willful conwoman, who created OneCoin with full knowledge of what she was doing.

As Bartlett and the BBC tried to rack down Ignatova, they realized she was very likely not only still alive but hiding in plain sight, likely in a European country. This speaks to a thing I talk a lot about in this newsletter - how ill-equipped law enforcement is to deal with criminal fraudsters in the digital age. Bartlett speculates that Ignatova had extensive plastic surgery, acquired a new identity, and has been able to move freely around Europe and the Middle East for years. This is probably due to the lack of tools international law enforcement agencies have - when criminals are caught, it is almost always at the airport. Ignatova’s brother was picked up at an airport in 2019, waiting to board a plane to Bulgaria. For moderately more clever (and wealthy) criminals, it is possible to slip into anonymity and move around using either false identities or private yachts and planes. Jho Low, who I’ve written about a couple times, is still on the run despite being a higher profile thief than Ignatova.

The OneCoin scam exposes the gaping holes in our global digital economy. Charismatic hucksters used to be limited by geography - now they can spread their sleazy gospel to an audience of millions, or billions. Pyramid schemes used to be constrained by overhead costs, or the complexity of putting together fake financial documents - now, a halfway competent programmer can create a website with a stock ticker and an online store and steal billions of dollars in a matter of a year or two. Law enforcement agencies simply lack jurisdiction to shut these scams down. They can go after criminals or funds located within their borders, but smart thieves can take advantage of the banking infrastructure created by the wealthy to hide their money and make off with huge sums, staying out of the reach of the cops.

This will happen again. There is no amount of digital literacy we can impart to stop this - the impulses driving people to take part in scams, pyramids, and Ponzis predate the Internet by a hundred years. Until we address the reasons people feel so desperate they cling to the promise of riches, savvy fraudsters like Ignatova will continue to prey on the weak and innocent.

In unrelated news, the BBB has released its Scam Tracker report for 2019 and cryptocurrency scams are on the rise:

Lazarus Group

This week, the Treasury Department issued sanctions against two Chinese nationals they claim were involved in a scheme to launder stolen cryptocurrency using iTunes gift cards:

Lazarus Group cyber actors used the private keys to steal virtual currencies ($250 million dollar equivalent at date of theft) from this exchange, accounting for nearly half of the DPRK’s estimated virtual currency heists that year. 

Tian ultimately moved the equivalent of more than $34 million of these illicit funds through a newly added bank account linked to his exchange account. Tian also transferred nearly $1.4 million dollars’ worth of Bitcoin into prepaid Apple iTunes gift cards, which at certain exchanges can be used for the purchase of additional Bitcoin.

Yes, you’re reading that correctly. They also provided a helpful infographic:

The Exchange Hack Flow of Funds

I assume someone at Treasury got to spend a few days making that, and I support this use of my tax dollars. More people in government should be like the CPSC guy and make dank memes I can use to explain complicated financial crimes. Anyhow, someone who worked for a large cryptocurrency exchange downloaded North Korean malware and gave Lazarus Group access to all of their customer wallets. I would like to imagine people who work for crypto exchanges have better security protocols than an 80-year-old grandmother, but the reality is that, as I wrote about last week, email phishing has become highly sophisticated. If you work for a company that controls hundreds of millions of dollars’ worth of cryptocurrency, which cannot be retrieved once it’s stolen, you are absolutely going to be a prime target for hackers.

The laundering of funds through iTunes is a real cherry on top - iTunes gift cards are a favorite currency of scammers. At what point is Apple in some way liable for this? The FTC has been warning people about this for years, and Apple has a page saying it’s bad but, like, they can stop this if they want? They could make the cards easier to trace, or harder to trade? What are people buying with all these App Store dollars? I have reached out to Apple, I will report back if I learn anything.

Scam Judge??

Scam Judge:

A cursory Google search tells me there is no law against it, so I’m changing my name to President Colin for the hotel upgrades.

Short Cons

McClatchy - “CryptoMB is part of an aggressive marketing pitch and alleged global fraud scheme run through a Ukrainian telemarketing center named Milton Group. It offers investment in so-called cryptocurrencies, commodity trading and foreign currency markets.

Vox - “Yet, while the law firm is unlikely to receive much relief from the Supreme Court, the case is likely to fundamentally alter the relationship between the president and at least some federal agencies.

AARP - “Nearly half (47%) of U.S. adults have been targets of an impostor scam. Specifically, this study examined adults’ experiences with relationship scams (i.e., online romance scams and grandparent scams) and government impostor scams (including Census scams).

Check Out My SoundCloud

At the request of a few people, I am experimenting with reading my newsletter each week and turning it into a pod…cast? Or something like that. Anyway, here is the audio version of this newsletter, in case you want to hear it. In the future, I will probably stick the audio at the top of the newsletter, so you don’t have to read all the way through to find it.

Happy Consumer Protection Week! Tips to scammerdarkly@gmail.com

Eye of the Beholder

Manuscript Ponzis, Business Email Scams, Baltimore Mayors, and Amish Influencers

High Voltaire

The value of art, it is said, is what someone is willing to pay for it. It’s part of the reason so many people use paintings to launder money - you can overpay for art, because its value is almost entirely subjective.

Generally, for this to be successful, there needs to be a large volume of transactions in the art world you want to use to facilitate your crimes. If there aren’t a lot of people buying and selling French impressionist paintings, for instance, it’s difficult to use them as a way to hide from the authorities. Market size is important.

So what if you wanted to take a relatively small, sleepy art market and turn it into a turbocharged cash furnace? For that, you need marketing. Enter one Gérard Lhéritier, the scrappy son of a plumber who turned the collector’s market for rare manuscripts into a billion-dollar investment scheme:

[…] Aristophil, which starting in 2002 built one of the largest collections of rare books, autographs and manuscripts in history — some 136,000 pieces in all.

The buying spree turned the company’s founder and president, a stout 71-year-old named Gérard Lhéritier, into a celebrity. He opened the stately Museum of Letters and Manuscripts in a pricey neighborhood in Paris, and surrounded himself with French luminaries. They included former presidents, authors and journalists, who crowned him the “king of manuscripts.”

What Lhéritier did was go around and outbid every other buyer in the space for everything, quickly amassing a large collection of valuable items. He would then have his purchases appraised at dramatically inflated values, and sell off “shares” of his company’s collection to private investors, promising them both the prestige of being associated with the collection, and potential future financial returns. Then, he used their money to expand his collection, and attract more investors.

This sounds an awful lot like a Ponzi scheme, and the French authorities certainly thought so - they shut his company down in 2014 following an investigation:

Some investors who wanted to cash in found that Aristophil would not pay out. In 2014, their complaints, along with a growing number of skeptical articles in the French media, prompted a police investigation, which concluded that Aristophil was sustained only by a regular flow of new investors and thus was doomed.

This would fit the traditional definition of a Ponzi scheme, sure. But was it really? Unlike many Ponzi schemes, Aristophil was buying real assets with the expectation that they would increase in value over time. Lhéritier was using the money from his investors to both expand the collection and raise public awareness of rare manuscripts and letters, by doing lots of marketing and building a museum in Paris. As Matt Levine argued earlier this week, this sounds more like a Silicon Valley start-up than it does a Ponzi:

It all feels … Ponzi-ish … but Ponzi-ish in almost the normal way, the way in which you have a vision for how to develop a market, and you sell people on that vision, and fine yes of course you sell people shares in that vision at a valuation assuming it has already been achieved, but then you go out and use their money try to make the vision a reality. That’s not so different from, you know, WeWork.

Selling people on an unrealistic vision? Spending lavishly with no investor oversight? Eventually being uncovered as a fraud and having your assets sold off for pennies on the dollar? It does sound an awful lot like WeWork! One difference might be that Aristophil’s investors signed agreements that did seem a bit sketchy:

The wording of Aristophil’s contracts left investors with the vivid impression that after five years, the company would buy back their shares for at least 40 percent more than their original price. Lawyers for Mr. Lhéritier say the contracts never made any such a promise.

[…]

The facts here are not black and white, and there were dozens of variations of Aristophil contracts. A consumer group, Que Choisir, studied one and described it in 2011 as “frighteningly ambiguous.” Its report ended with an ominous prediction: “The last investors to enter the dance are likely to be losers.”

So, at this point we’ve established that Aristophil was probably not entirely on the level. Whatever Lhéritier may have been trying to do to the manuscript market, he was also probably misleading 18,000 private investors who had given him their money expecting to see some sort of return on it in the near term. Negative press started to take its toll on the company, and it became harder to attract new investors to fuel its buying spree:

Few knew that by 2012, the final dance seemed imminent. Mr. Lhéritier said in the interview that articles like Que Choisir’s had reduced the number of new clients and that his cash flow was dangerously low.

It was all about to come crumbling down, and then:

He needed a miracle — and he got the secular version of just that. On Nov. 13, 2012, Mr. Lhéritier hit the lottery. Specifically, he hit the EuroMillions, which paid him €169 million, then worth about $215 million.

“When I looked at my computer, I checked the numbers 10 times,” Mr. Lhéritier recalled. “I couldn’t believe it.”

Neither could the police. They studied the ticket and concluded, to their astonishment, that the win was legitimate. Mr. Lhéritier had been playing the same numbers for years — the birth dates of children and grandchildren — and the ticket was bought at the tobacco shop where he had dropped thousands of euros on lottery tickets in the past.

What??? A good fraud story has at least a few twists and turns, but I did not see that coming! I do appreciate the utterly incredulous French police who launched an investigation into his lottery win. Unfortunately for Lhéritier, even $215 million dollars was not enough, and within 2 years the police shut him down after more investors complained.

One problem with being the only buyer in a market is that if you need to sell some of your assets, there’s no one willing to pay much for them:

Mr. Lhéritier scrambled. Through an intermediary, he tried to sell his Einstein documents to a list of notables, including the Aga Khan, Harvey Weinstein and Steven Spielberg, for $32 million. “They all require second opinions,” the intermediary wrote to Mr. Lhéritier. The potential buyers passed.

I don’t know whether Lhéritier simply did not take this into account or whether he truly believed he could keep his scheme going indefinitely. However, I do give him credit for continuing to both defend his behavior and blame the French authorities for ruining his business:

“The government will see it made a huge mistake,” he said, by turns indignant and impishly grinning. “I hope that in the coming years, my 18,000 investors file a lawsuit against the government, demanding compensation. I would be happy to help.”

There is an argument to be made that by shutting the company down and putting all of its items up for auction - essentially flooding the market - the authorities will be damaging his investors, who will recoup far less if the works sell for pennies on the dollar. What a conundrum! It seems the French government isn’t very good at running a rare manuscript business, either.

Just like we couldn’t have had the financial crisis without credit ratings companies saying toxic mortgages were good, actually, Lhéritier couldn’t have run his scheme without the help of some friendly appraisers. One of them - who’s actually been indicted for his role - is using the money he made inflating the manuscript bubble to add to his own collection:

Now, because nothing in his legal situation prevents it, [Jean-Claude Vrain] is discovering bargains in the wreckage. He has been spending liberally at Aristophil auctions, starting with the first in 2015, when he spent nearly $2 million. His haul included a copy of “Madame Bovary” dedicated by Flaubert to Victor Hugo. In an article published by L’Express the next day, he sounded pleased by the $400,000 price.

“I think it’s not very expensive,” he said.

Business Email Scams

A business email scam is a form of phishing - hackers compromise the email account of a high level person at a company, and convince their subordinates to send wire transfers to an overseas bank account the hackers control. It’s a less sophisticated version of the audio deepfake theft I wrote about last year, but it’s become big business - the FBI had reports of $1.8 billion in losses from business email scams last year alone.

Here’s a story about a guy who lost $450,000 in three days:

In 2018, Frank Krasovec took on a $1 million personal line of credit from PlainsCapital Bank. A few months later, he went on a business trip. When he returned, $450,000 was missing.

Mr. Krasovec, the chairman of Dash Brands Ltd., which owns Domino’s Pizza Inc. franchises in China, said he soon learned that someone had hijacked his email and asked his assistant to wire the money to a Hong Kong account.

The hackers were able to comb through Krasovec’s email and glean enough data to craft a believable email to his assistant, doing so when he was out of the country, so he was less likely to catch on to the fraud:

Meanwhile, in China, Mr. Krasovec powered through 14-hour workdays unaware anything was amiss. The pizza chain has grown quickly there after switching to a local menu that includes seafood toppings.

Three days after the first transfer, at 10:26 p.m. local time, intruders asked Mr. Krasovec’s assistant to wire another $300,000, according to Mr. Krasovec.

Domino’s…seafood…pizza? Maybe this guy deserved to be robbed? I am just saying. Anyhow, unlike some of the banks I wrote about who make their customers sign NDAs when they are victims of wire fraud, Krasovec’s took a different approach:

He frantically called his banker at PlainsCapital Bank, who said there was nothing the bank could do. Mr. Krasovec said the bank then stopped returning his calls.

He is now suing PlainsCapital, saying he shouldn’t have to repay the stolen money because the bank failed to put proper antifraud controls in place.

PlainsCapital Bank said in a court filing that the loss was “undoubtedly the fault of [Mr. Krasovec’s] own failure to implement appropriate internal controls to prevent his company and its employees from falling victim to a third-party scam.” The bank said in filings that Mr. Krasovec must repay the money with interest.

Ouch! That is certainly one way to handle customer service for your new clients. As I said a couple of weeks ago:

Commercial banks have a base level of “KYC” or know your customer rules. They spend millions of dollars developing risk and fraud algorithms designed to prevent the very sort of thing that happened to this customer.

Suddenly deciding to wire $150,000 from a brand new account to a bank in China seems like the sort of thing that might trip a few alarms? I am not the sort of person who takes out million dollar credit lines, so I don’t know whether it is common to personally wire six figure sums to foreign accounts via email. Banks perhaps need to be a bit less accommodating to their clients to avoid these sorts of losses. At least the lawyers are doing okay:

Legal costs have added $300,000 to his already-sizable loss, and he is concerned about his reputation.

“It makes me look like a dummy,” he said of the fraud.

In other business scam news, the government of Puerto Rico was taken for $2.6 million last month.

Holly Goes to Prison

Catherine Pugh, former mayor of Baltimore, has been sentenced to 3 years in prison:

In handing down the prison sentence, which was to be followed by three years of probation, Chasanow called Pugh’s crime “astounding.”

“I have yet frankly to hear any explanation that makes sense," the judge said. "This was not a tiny mistake, lapse of judgment. This became a very large fraud. The nature and circumstances of this offense clearly I think are extremely, extremely serious.”

I wrote about the case last year, and I have to agree with the judge - this was a very large fraud! For once, however, I think the sentence was fairly reasonable? We have a long history of giving unusually harsh sentences to corrupt politicians, especially politicians of color. While Pugh’s fraud was very large, she’s going to end up paying a lot of it back:

Chasanow ordered Pugh to pay restitution of $400,000 to the medical system and nearly $12,000 to the Maryland Auto Insurance Fund, which also paid Pugh for books. She also will have to forfeit nearly $670,000, including her Ashburton home and $17,800 in her campaign account. Pugh has also agreed that all copies of “Healthy Holly” in government custody will be destroyed.

Aw, c’mon. At least let them keep the books! Destroying them seems so petty.

“Ms. Pugh has become a tragic figure — an inspiring person dedicated to helping her community who is now a disgraced, unemployed felon, and who has lost everything that she had,” her attorneys wrote in a sentencing memorandum earlier this month.

I’m not sure I’d go that far, but it is nice to have some closure to one of the more bizarre stories of political corruption and fraud. Shame about those books, though.

Plain Pyramids

Back in November, I wrote about MLMs and the ways they take advantage of women in tight-knit religious communities to make money. I can’t say I saw this coming, but they’ve infiltrated the Amish:

Young Amish women have been known in the past to sell products from companies such as Pampered Chef and Tupperware through get-togethers, wrote James Cates

[…]

Other Plain women — those of the Mennonite and River Brethren churches, similar to the Amish — also sell products.

One of these pyramid companies is Arbonne, who sells skincare products and natural supplements. Three years ago, they awarded an “MVP” consultant a custom buggy:

Is that a shirt…for the horse? I am confused. Apparently, with the rise of Instagram influencers, Amish and other Plain women are taking to social media to hawk snake oil:

Many Plain women also post products to their Instagram stories — a feature that allows users to post photos or videos that disappear after 24 hours. The women often post updates of how they're incorporating their products into their day — a video of themselves making a supplement-filled, acai-flavored "elixir" for breakfast, a protein-packed shake before a workout.

I confess that my knowledge of the Amish is quite limited, and while I support young women having access to the world via technology, I wish they wouldn’t use it to do this!

As to whether this is allowed by their religious orders, it appears it kind of isn’t?

If the women were reported to their church district, more likely than not, they would be asked to stop selling products via Instagram, said Kraybill. But if they continued their behavior, Kraybill said they could be punished. 

"At that point, the punishment will likely vary a great deal from district to district depending on the leadership team," he said.

As if it wasn’t hard enough being an influencer!

Short Cons

NY Times - “The markups on the food deliveries were 7 percent to 91 percent more than what you would pay if you bought the meal directly from the restaurant.

SEC - “Seagal—a well-known Hollywood actor and producer—touted on social media a security that was being offered and sold in an initial coin offering (“ICO”) without disclosing that the issuer was paying him for the promotions

WSJ - “The tactics included planting negative news stories about them, concocting a shareholder campaign to pressure SoftBank to fire them and even attempting to lure one of them into a “honey trap” of sexual blackmail, according to people familiar with the matter

Tips, required reading, or skin care offers to scammerdarkly@gmail.com

Loading more posts…