Financial fraud can be traced back to 300 BC, when a Greek businessman named Hegestratos insured a large insurance policy called bottomry. The merchant borrowed money and agreed to pay the interest with the principal when the goods (corn in this case) were delivered. If the merchant refuses to repay the loan, the lender can claim the goods and the ship used for transportation. Hegestratos plans to sink his empty ship, keep the loan and sell corn. The plan failed. When the crew and passengers caught him in the action, he tried to escape his crew and passengers and drowned.
This was the first recorded financial fraud incident, and many more have occurred since then. This article will focus on the growth of U.S. stock market fraud, as tracked by a series of scandals-all of which are cunning schemes based on greed and a thirst for power.
- William Duer committed an insider trading scandal in the late 1920s when he relied on his information advantage to stay ahead of the market.
- Civil War general Ulysses S. Grant was unable to raise funds to save his son’s closed business in 1884, which caused a financial panic.
- In the late 1800s, Daniel Drew used techniques known as corners, poop and shovel, and pumping and selling to deceive stock market investors.
- After the First World War, a stock pool of wealthy people manipulated large stocks such as Chrysler, RCA and Standard Oil until the market crash in 1929.
The first insider trading scandal
In 1792, just a few years after the United States officially became independent, the country experienced its first fraud. At the time, US bonds were similar to today’s developing country bonds or junk bonds-their value fluctuated with every news about the wealth of the colonies that issued them. The trick to investing in such a turbulent market is to be one step ahead of the news that pushes the value of bonds up or down.
Secretary of the Treasury Alexander Hamilton began to reorganize the American finances, replacing the outstanding bonds of the colonies with the bonds of the new central government. Therefore, large bond investors are looking for people who have access to the Treasury Department to understand which bonds Hamilton will replace.
William Duer, a member of President George Washington’s inner circle and assistant secretary of the Treasury, is the ideal person to profit from inside information. Dürr understands all the actions of the Ministry of Finance. He will disclose information to his friends and trade in his own investment portfolio, and then disclose to the public specific information that he knows will push up prices. Then Durr would simply sell it for an easy profit. After years of such manipulation, even plundering the treasury funds to make a bigger bet, Durr left his position but retained his internal contacts. He continued to invest his and other investors’ funds in bond issuances and bank stocks emerging across the country.
However, as all European and domestic funds chase bonds, as issuers rush to cash out, there is a speculative excess. Durr did not shrink from an overheated market, but instead counted on his information advantage to maintain a leading position. He put the ill-gotten gains and investors’ ill-gotten gains into the market. Durr also borrowed heavily to further use his bond bets.
It all came out—it finally collapsed; Dürr and many other New Yorkers were left on worthless investments and huge debts.Hamilton had to save the market by buying bonds and acting as the lender of last resort
William Durr was eventually imprisoned in debtors’ prison and died there in 1799. Interestingly, the financial panic of 1792 was the catalyst for the Buttonwood Agreement, which marked the beginning of the Wall Street investment community and the New York Stock Exchange.
Fraud to wipe out the president
The famous Civil War hero and President of the United States Ulysses S. Grant (Ulysses S. Grant) only wanted to help his son succeed in business, but in the end he created a financial panic.
Grant’s son Buck has failed in several businesses, but he is determined to succeed on Wall Street. Buck formed a partnership with Ferdinand Ward. Ferdinand Ward was an unscrupulous man who was only interested in the legitimacy gained from the name Grant. The two opened a company called Grant & Ward. Ward immediately sought funding from investors, falsely claiming that the former president had agreed to help them obtain lucrative government contracts. Ward then used the cash to speculate in the market. Sadly, Ward’s talent for speculation is not as good as his talent for speaking, and he lost miserably.
Among Ward’s squandered funds, $600,000 was related to the Ocean State Bank, and soon this bank and Grant & Ward were on the verge of bankruptcy. Ward persuaded Buck to ask his father for more money. Grant Sr., who has invested heavily in the company, was unable to come up with enough funds and was forced to apply for a personal loan of US$150,000 from William Vanderbilt.
Ward basically took the money and ran away, leaving Grant, Ocean National Bank and investors with the bags. The Marine National Bank went bankrupt after a bank run, and its bankruptcy triggered a panic in 1884.
Mr. Grant used all his personal belongings, including his uniform, swords, medals and other war memorabilia, to repay his debt to Vanderbilt. Ward was eventually arrested and jailed for six years.
Trailblazer Daniel Drew
In the second half of the 19th century, people like Jay Gould, James Fisk, Russell Sage, Edward Henry Harriman, and JP Morgan turned the just-starting stock market into their personal playground. Their operations were not always the most glorious. However, Daniel Drew was a true pioneer of fraud and manipulation of the stock market.
Drew started with a cow and brought the term “watering stocks” into our vocabulary-watering stocks are stocks that are issued with a value much higher than their underlying assets, usually as part of a fraudulent investor plan. Drew later became a financier because the loan portfolio he provided to other herders gave him the funds to start buying large positions in transportation stocks.
Drew lived in an era before information disclosure, when there were only the most basic rules. His technique is called the corner. He would buy all the shares of a company, and then spread false news about the company to drive down the stock price. This will encourage traders to short-sell stocks. Unlike today, the actual issued shares can be sold short multiple times.
When a short position needs to be covered, traders will find that the only person holding the stock is Daniel Drew, who expects a high premium. Drew’s success in corner kicks led to new operations. Drew often trades wholly-owned stocks between himself and other manipulators at higher and higher prices. When this action caught the attention of other traders, the group would throw the stock back to the market.
The danger of Drew’s combined poop and shovel and pump and dumping plan is to take a short position. In 1864, Drew was trapped in his corner by Vanderbilt. Drew tried to short a company that Vanderbilt was also trying to acquire. Drew shorted heavily, but Vanderbilt bought all the stock. Therefore, Drew had to make up for his position with a premium paid directly to Vanderbilt.
Drew and Vanderbilt fought for the railroad again in 1866, but this time Drew was smarter, or at least more corrupt. When Vanderbilt tried to buy one of Drew’s railways, Drew printed more and more illegal shares. Vanderbilt followed his previous strategy and used his funds to purchase additional shares. This allowed Drew to break the law by pouring stocks, and made Vanderbilt short of cash.
The two combatants reached a disturbing truce: Drew’s manipulating partners Fisk and Gould were angered by the truce and plotted to destroy Drew. He died penniless in 1879.
Until the 1920s, most market fraud only affected a few Americans who made investments. When it was mainly limited to fighting between wealthy manipulators, the government felt that there was no need to intervene.
However, after the First World War, ordinary Americans discovered the stock market. In order to take advantage of the urgent influx of new funds, the manipulators teamed up to create a stock pool. Basically, the stock pool was manipulated in a Daniel Drew style on a larger scale. With the participation of more investors, the profits from manipulating stocks are enough to convince the target company’s management. The stock pool has become so powerful that it can even manipulate large-cap stocks such as Chrysler, RCA and Standard Oil.
Prices continue to spiral upward. However, in the end, the feeling that the market was overvalued began to spread-investors began to sell. The inflated stock price plummeted, and as the panic spread, the entire stock market collapsed in 1929.
Both the public and the government were shocked by the level of corruption that led to the financial disaster. The announcement in October 1929 that public utility holding companies would be regulated may have been the actual trigger for the crash. The stock pool took most of the responsibility, leading to the establishment of the Securities and Exchange Commission.
Ironically, the first head of the US Securities and Exchange Commission was a speculator and former pool insider, Joseph Kennedy Sr.
With the establishment of the US Securities and Exchange Commission, market rules formalized and defined stock fraud. Common manipulations and large-scale transactions of inside information have been banned. Wall Street will no longer be the Wild West where gunmen like Drew and Vanderbilt meet for a showdown. This is not to say that skyrocketing prices or insider trading has disappeared. In the SEC era, investors were still attracted by fraud, but there is now legal protection that provides investors with some recourse.