The Dude Indicts
A jury found Texas attorney James Balagia aka “The DWI Dude” guilty this week, in what I can only call an insane fraud scheme. He and his co-conspirators were defrauding Colombian drug traffickers and cartel members out of millions of dollars in fake bribe money.
Totally nuts! Balagia and his partner would approach Colombian drug lords who were fighting extradition to the US and shake them down for bribe money, which they claimed they’d use to grease “high level” officials in the US government to get their cases dropped. It will shock you to learn that they did not bribe anyone.
Rather than handling this…situation like television script writers might think they would, the drug traffickers recorded the lawyers, and sent the tape to the FBI. What a twist!
An undercover FBI agent got a job as Balagia’s “bookkeeper” to help him keep track of the drug cash flowing in to his bank accounts.
The undercover agent asked Balagia if he was concerned that Aldemar Villota Segura’s payments would come from his narcotics operation. It “would be no issue,” Balagia assured him, Rennie testified.
What…other source of funds does a narcotics trafficker have? Did he cash out his cartel pension to make his illegal bribe installments? Again, I am not trying to tell The Dude how to do business, but when you’re taking in hundreds of thousands of dollars’ worth of cash in a fake bribery scam, maybe hire someone you trust to keep track of it all? Maybe don’t admit you know it’s drug cash to your employees? This guy is a former cop!
Granted, maybe he wasn’t a very good cop? He certainly doesn’t seem to be a very good lawyer:
Trying to explain away [a $120,000 cash] payment to the Internal Revenue Service, Balagia suggested the money just fell in his lap: “The person that delivered the money only provided the name Coco and then walked away with no other information,” he claimed, according to court documents.
Balagia attempted to blame the entire thing on his business partner Chuck Morgan, who had already plead guilty and was serving time. The jury was not convinced.
I say it a lot - being greedy will get in the way of the best scams. Another good rule of thumb if you’re planning to run a con is - don’t try to rip off highly sophisticated criminals. They’re probably a lot better at this than you are.
Getting an “A” in Ponzi
A 22-year-old student at the University of Georgia admitted to running a $1 million dollar Ponzi scheme out of his dorm room. Yes, he spent the money on booze and gambling, but that’s not what interests me about the story. Apparently 117 people gave him money for his fake investment fund. That’s a lot of people!
Arbab said he raised $1 million by fabricating account statements, the nature of the investments, and the total number of funds invested. He also promised risk-free “guarantees” on rates of returns up to 22 percent or 56 percent, according to federal prosecutors.
How does this still happen? Has anyone heard of Bernie Madoff? Do they not understand how Ponzi schemes work? No one guarantees investment returns! Why would a 22-year-old with no finance background be a secret genius? I am a relatively boring investor, lazily putting my money in low cost index funds, but if I were preparing to give a stranger tens or hundreds of thousands of dollars, I think I’d do a little due diligence! Or would I?
Ponzi schemes play on a number of cognitive biases. Our fixation on material wealth (greed) makes us susceptible to wild claims of profits. Availability bias makes us believe the schemer in the absence of contradictory information. Herding makes us follow along with the other investors involved in the Ponzi. Risk preference makes certain people into especially willing marks; their high tolerance for personal or financial risk means they’re more likely to invest in a scheme.
It’s a story for another day, but I once encountered a group of “pump and dump” financial fraudsters while living in Vancouver. Some of them were able to successfully extract millions of dollars from people who thought of themselves as highly sophisticated investors. Unfortunately for these bankers, the brain’s natural tendencies are very difficult to overcome, especially when large amounts of money are on the line.
What’s the lesson here? Don’t invest your money with, well, I guess anyone? (Note: this is very much not investment advice.) Use 401(k)s and index funds, folks. Boring is good, and you don’t end up quoted anonymously in a story about how a college kid spent your retirement account at the strip club.
LuLaNo
MLM legging company LaLaRoe is laying off all of its warehouse employees, according to BuzzFeed News.
LuLaRoe said it will "permanently lay-off [its] warehouse workforce" in Corona five days before Christmas.
Happy holidays! It does seem awfully cynical to have your staff fill Christmas orders, then fire them, and tell them about it in advance.
LuLaRoe has had its share of troubles in the last couple of years, with many lawsuits and accusations it’s a giant pyramid scheme (it is, just like all MLMs) that aggressively encouraged women to go deep into debt, leaving them with lots of unsold product.
For those unfamiliar with how multi-level-marketing, or MLM, companies work, people are encouraged to sign up as “consultants” (all independent contractors, of course) and purchase a lot of product. They’re usually shown extremely optimistic sales charts and receive maybe-not-quite-promises from the company that they’ll be rich in no time.
Mostly what MLMs do is extract money from the consultants, many of whom never sell any product. Casey Bond of The Huffington Post explains:
MLMs are big business. According to the Direct Selling Association, a lobbying group for MLMs, the industry produced $35.4 billion in retail sales in 2018.
What is not emphasized is that only a handful of recruiters are successful; one study by AARP found 73% percent of participants either don’t make money or lose money. That number could be as high as 99%, according to a report by a longtime consumer advocate who studied MLMs.
Herbalife had to pay a lot of money to settle a class action lawsuit by its sellers, almost all of whom went into debt due to the company’s promises. Unfortunately, the government has decided to allow these businesses to continue to exist, so opportunists like LuLaRoe will continue to take advantage of bored housewives and their access to credit.
The FTC’s rules - no doubt written at least in part by MLM industry lobbyists - say that the difference between a pyramid scheme, which is illegal, and a legal “network marketing company” is whether all or most of the product sales go to recruits within the network rather than new consumers. I’ll leave it up to the reader to determine whether they feel a 73% to 99% failure rate among sellers is a business model built around consumers.
MLMs got their start in the 19th century and grew to a huge industry in the US, with its large number of suburban and rural communities. At a time when women had fewer opportunities to work outside the home, it made some sense as a way to earn some extra money on a flexible schedule. You may recognize Tupperware, Mary Kay, and Avon - all iconic MLM brands from a prior generation. All products targeted at women, and almost exclusively sold by women.
The primary difference today is that knocking on doors has been replaced with social media and digital outreach. Companies employ aggressive marketing tactics to encourage their recruits to spend money they may not have. While their pitch may be slick, the same problems that plagued Mary Kay ladies in the eighties still exist.
When [Traci] started selling in August 2016, there were only a couple of other LuLaRoe consultants in the surrounding area. And Traci was killing it. In fact, she earned about $1,500 after her launch and an additional $20,000 that year. But once Thanksgiving rolled around, “it died,” she said. The number of sellers in her community grew to 40 and the market became oversaturated. By December, she could barely pull in $500.
Why do women continue to sign on to these schemes, when there’s decades of evidence they hardly ever pay off? One trick the companies use is playing to the emotions of lonely single mothers:
Perhaps the most sinister marketing tactic MLMs can employ with stay-at-home mothers, according to Burnside, is preying off loneliness. It can feel isolating to be home with the kids all day, and MLMs promise an upline of sponsors who will support them as they launch their business.
Mormons are also especially susceptible to these pleas, and many of the biggest MLMs are in Utah and run by members of the Church. Many companies have discovered that developing countries are prime targets to siphon money from, due to lax consumer laws. Herbalife makes a ton of money in Central and South America, as well as poorer Asian countries.
I support anyone who’s got entrepreneurial spirit but MLMs, as the kids say, ain’t it. They are pyramid schemes, they almost never result in profits for the recruits, and they are yet another wealth extraction tool the rich use on the poor and desperate. Any company that’d fire its workers right before the holidays is pretty awful, no matter how comfy the leggings are.
Small Cons
Vice News - ““However, worldwide fraud networks have recently shifted to using CS:GO keys to liquidate their gains. At this point, nearly all key purchases that end up being traded or sold on the marketplace are believed to be fraud-sourced.””
NBC 10 Philadelphia - “The most common form of the scam is perpetrated by fraudsters who steal house deeds, often by forging sales documents and notary stamps, then sell the houses to an unaware third party.”
As always, tips and feedback at scammerdarkly@gmail.com