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