Michael Zhan

5/8/18

BMGT423

Section 0201

How Fraud Has Evolved and Stayed the Same Over the Past Century

Ever since the 1920s, there has been an unprecedented amount of fraud in the business

world. From small-time offenses such as weighing cheeses incorrectly to larger corporate level

scandals involving financial statement fraud, there is no doubt that fraud will continue to exist in

the modern world. Whether people like it or not, fraud is an inevitable and infamous part of any

business. It is an event that is born out of the innate human nature of greed combined with

common elements of selfish and egotistical desires. This common theme within all the different

kinds of fraud is what makes them so similar to one another; it also explains why fraud continues

to happen and simply will not disappear. Specifically, these undesirable human traits present

themselves as part of the fraud triangle. The factors that play into pressure, opportunity, and

rationalization remain largely the same throughout each and every fraud in history and in present

day.

Although there are many ways in which fraud has remained the same, the ways more

modern-day frauds have been planned, structured, and executed are very different from the past.

As technology becomes a more integral part of everyone’s daily lives, it has also transformed the

stock market and overall economy in the 20th century. Essentially, it has allowed for the

development of mass markets, more efficient methods of creating value, and the end result of

greater wealth than ever before. This has tempted more and more people to lie and cheat because
of the advantages that came with economic growth and technological innovation. Business

activity flourished, and with it, cons and crooks who sought only more for themselves.

Throughout this analysis, we will examine the specific techniques fraudulent individuals

have used throughout history. These methods have evolved and transformed into more

complicated and intricate strategies that involve multiple layers of wrongdoing. These frauds

have adapted to the ever-changing world, as government policy becomes stricter and as the

public becomes more aware. In response, fraudulent individuals are craftier and learn to get

around legal obstacles. Although the way frauds have been carried out vary and change as time

goes on, the reasons and motives behind the scandals remain largely unchanged.

Back in the 1920s, many frauds that were committed originated from very small

businesses, such as groceries and stores. An individual by the name of Philip Musica, who was

born in 1877in Naples, Italy, committed numerous frauds involving physical tampering with

goods and products. For example, Philip Musica committed a cheese fraud in 1909, where he

paid bribes to have their imported cheeses listed lower than their actual weights. This allowed

Musica and his father to avoid tariffs on the imported cheeses. In October 29, 1909, Musica and

his father were indicted for fraud in which Philip took full responsibility. The charges against his

father were dropped and Philip was fined $5000 and sentenced to a year in a reformatory. He

was later dismissed by President Taft five and a half months later.

Philip Musica was also notorious for his hair fraud in 1912. With the United States Hair

Company, the actual “hair product” was merely hair sweepings. Musica started borrowing

money to purchase nonexistent inventories. Four months in, the company had $2,000,000 I assets

and $600,000 in human hair. None of this hair actually existed physically or on the books.
Musica and his father fled but were caught in which Musica took full responsibility again and

was sent to the Tombs.

Finally, Philip Musica involved himself in a partnership with a pharmaceutical company.

To hide from the numerous frauds he was involved in previously, Philip Musica went by the

name of Frank B. Costa throughout this time period. This specific scandal was the Frank B.

Costa and Adelphi Pharmaceutical in 1919. The Prohibition Act was recently passed, and on

January 17, 1920, the United States went “dry.” Frank B. Costa entered into a partnership ith a

man he met in prison to begin the Adelphia Pharmaceutical Company in Brooklyn, New York.

This company was said to manufacture hair tonic and cosmetics; in reality, they were actually

selling alcohol. They were able to legally obtain 5,000 gallons of denatured alcohol every month.

If customers distilled the alcohol, they could sell it as bootlegged whiskey. Through this scandal,

Frank B. Costa was able to win his future wife after he cut ties with the company.

There was a specific scammer extraordinaire who paved the way for future frauds. An

infamous man by the name of Charles Ponzi created a specific scheme that many followed and

used long after, even today. Charles Ponzi was monumental with what is known today as the

Ponzi Scheme. Born in 1882 in Parma, Italy, Charles Ponzi attended the University of Rome, La

Sapienza. He arrived in Boston, Massachusetts in 1903. Like Philip Musica, Charles Ponzi was

also involved in small-scale physical scandals. He participated in numerous odd jobs which

resulted in a lot of jail time for him. For example, he forged bad checks (three years of jail time)

and smuggled in Italian immigrants (two years of jail time). However, his most significant

contribution to fraud history is his Ponzi Scheme. The Ponzi Scheme is an investment fraud that

pays existing investors with funds collected from new investors. The fraudster does not invest

the money; instead, he or she uses it to pay earlier investors, and are also likely to keep some for
themselves. Essentially, Charles Ponzi “flipped” international postage stamps that were less

expensive in Country A and redeemed them elsewhere in Country B. This was a huge step up

from simple product tampering with cheese, wine, or checks. Rather, this new standard of fraud

involved developing a network of individuals, cleverly using their assets to create artificial value.

The Ponzi Scheme has been replicated numerous times in history. One of the most

notable scandals of all time was that of Bernard Madoff. This was a fraud on a much larger size

and breadth than that of Philip Musica or Charles Ponzi; it involved deep analysis and interaction

with a global firm’s financial statements including securities fraud, money laundering, false

statements, and false filings. Madoff was the founder of Bernard L. Madoff Investment

Securities in 1960, one of the largest hedge funds in the world. Born April 29, 1938, Madoff

received a B.A. in Political Science from Hofstra University in 1960. He was Chairman of the

NASDAQ in 1990, 1991, and 1993. The Bernard Madoff scandal involved a variation of the

Ponzi Scheme; in this specific case, Madoff was running a fraudulent investment structure that

promised high returns to its customers with very little risk. In reality, these “new” returns were

generated by the investments of new clients, thus creating a cycle where no real money was

actually made. On December 11, 2008, Bernard Madoff was arrested on suspicion for

committing the world’s largest Ponzi Scheme and the firm’s assets were later frozen. On March

12, 2009, he pleaded guilty to eleven felony charges including money laundering, perjury, and

false filings with the SEC.

As technology grew and played a more prevalent role in the modern world, more and

more of the frauds that occurred involved the use of internet services and other online software.

With internet fraud came identity theft, a new generation of fraud that defrauded victims through

the malware/scareware, phishing/spoofing, data breach, denial of services, internet auction fraud,
business fraud, credit card fraud, investment schemes, etc. Identity theft is when someone

assumes the identity of another person by accessing personal/financial information found on

cards, statements, or documents in order to purchase goods, engage in criminal activity, or

perpetrate other types of fraud. The most common items used for identity theft include stolen

checks, ATM cards, credit cards, passports, social security cards, drivers’ licenses, bank

statements, etc. The most common examples of identity theft include tax identity theft, child

identity theft, social media identity theft, and financial identity theft. In the real life case of

involving a Florida mother and daughter, these individuals suffered tax fraud and identity theft.

They filed false federal income tax returns using stolen persona identity information (PII) to

obtain tax refunds. The daughter illegally obtained these stolen personal identity information,

much of which belonged to individuals who were physically and mentally disabled. The mother

prepared and filed the fraudulent returns using the stolen personal identity information, then

directed the refunds electronically into a bank account that the daughter controlled. This resulted

in a total of two hundred and twenty-six fraudulent tax returns, with around $493,697 of

fraudulent refunds. The daughter was sentenced to eighty four months in prison while her mother

was sentenced to sixty one months in prison. Frauds and scams like these typically target older

people who are less familiar with technology and fall for phone scams and internet fraud. Friends

and family of the criminals are also targeted, since personal information is much more accessible

from close networks. Sometimes, friends and family of the criminals typically give too much

trust to the perpetrator. This is especially popular among young adults from eighteen to twenty

four, as they are inexperienced and unfamiliar with these matters.

As demonstrated above, the rapidly growing technological environment and Internet

setting has transformed the way frauds are being performed. More and more creative ways of
committing fraud are being discovered. Compared to a time of physical and tangible fraud,

modern world frauds are switching to intangible methods and forms of fraud. It is easier to

commit frauds, and much more efficient and threatening than ever before.

Although there is a plethora of fraud and countless ways of performing fraud, the motives

and driving factors for fraud has not changed throughout history. Philip Musica, Charles Ponzi,

Bernard Madoff, and identity theft cases all carry similar pressures, rationalizations, and

opportunities within the Fraud Triangle. For example, Charles Ponzi faced financial pressures

with his social status and family. Bernard Madoff was also pressured financially with Wall Street

and his family. Madoff desperately wanted to be a part of the Wall Street lifestyle and also

needed to maintain his perception of a rich lifestyle. He also needed to keep his big secret from

his family who was allegedly unaware of the fraud he was committing. Ponzi’s rationalization of

his fraud involved his sense of ego and charm; he saw himself as a charismatic individual who

was capable of performing these schemes. Madoff was not that much different; he felt obligated

to maintain this scheme not only for his own pride, but for his family and his other investors

involved. He was quoted to have said, “I did it for all of them,” referring to individuals such as

the woman from L’Oréal and Christian Dior. Their opportunities also overlapped. Due to lack of

regulation, inability to judge quality of performance, and ignorance & incapacity, Ponzi saw

these as possibilities to make his dreams a reality. Madoff experienced the very same

opportunities. His investment firm had been up and running since 1960, so he had a stream of

wealthy clients and continued referrals, many from France who used him to avoid local

regulations. Madoff was also chairman of the NASDAQ index, involved in the Board of the

Depository Trust & Cleaning Corporation, and was vie-chairman of the NASD, the industry’s

self-regulatory body. Due to his reputation, his employees and even banks and regulators trusted
everything he said. Themes of lax control and regulation as well as ignorance of seemingly

unbiased opinion are what made it possible for these frauds to occur.

There is a lot to be learned from these incidents. Government policies, laws, and

regulations are constantly being updated in order to combat new fraud tactics and strategies. It is

important to recognize the specific types of fraud at hand and the red flags that present

themselves. With Charles Ponzi and Bernard Madoff, looking out for high returns with little-to-

no risk, unregistered investments, secretive or complex strategies, difficulties receiving

payments, issues with paperwork, and overly consistent returns can be key in catching the

perpetrators. Furthermore, in today’s increasingly virtual world, prosecutors must look for more

subtle clues in transactions. More specifically, transactions in bitcoin and other blockchain

technology have more privacy and less regulatory oversight. With fake cryptocurrency platforms

like Bitconnect, users were scammed in loaning cryptocurrency to companies in exchange for

outsized returns depending on how long the loan was for. It is to be conscious of how easily

information can be obtained nowadays. Knowing how to keep sensitive information secure,

reviewing financial statements on a regular basis, avoiding/ignoring unsolicited requests for

personal information, and installing firewalls, creating complex passwords, and scanning for

viruses are just some of the ways individuals can protect themselves from modern day fraud.

Nowadays, the responsibility has shifted more towards the general public. The government still

has a duty to combat all types of business frauds; however, this is on a more macroeconomic

scale. We as individuals need to recognize how frauds influence the microeconomic

environment. It is up to us to be more conscious of the different ways fraud can affect our daily

personal lives, not only for us, but for our family, friends, and peers. As everyone becomes more
and more connected with each other, everyone is more exposed and at risk. In the end, it is on us

to fight fraud.