Before Enron: Stock scams of rich and infamous in U.S. history
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It's an outrage! It's a scandal! And it is, of course, a time-honored American tradition.
America has a grand and glorious history of stock chicanery. In the early days of our history, stock-market skulduggery was a perfectly respectable way to achieve wealth.
Much of the United States' awesome industrial colossus was built on financial scams. The 19th-century railroad barons considered stock fraud an indispensable business tool, as much a part of their working lives as bribing legislators or hiring Pinkerton agents to beat up union organizers.
Some of the greatest names in U.S. history made their fortunes through shameless deception — Vanderbilt, Morgan, Rockefeller, Stanford, Gould, Kennedy. But even a poor immigrant named Charles Ponzi could rise from rags to riches by inventing a scam so infamous that it still bears his name.
Here is a rogue's gallery of U.S. financial crooks, a small sampling of the scalawags, schemers and scoundrels who have bilked and swindled Americans over the centuries:
Wall Street's first scandal
In the 1790s, when stocks were sold outdoors on Wall Street, speculator William Duer nearly destroyed the fledgling market.
British-born, Eton-educated, a former member of the Continental Congress and a New York judge, Duer had made his fortune selling supplies to George Washington's army. After the Revolution, Alexander Hamilton appointed him assistant secretary of the Treasury, but Duer quit when he learned the law prohibited Treasury officials from speculating in federal securities.
Free of this inconvenient rule, Duer promptly began using his inside knowledge of the Treasury Department to speculate in bank stocks, using large sums of money borrowed from banks and his rich friends. Meanwhile, an audit of Duer's books at the Treasury Department found $238,000 missing. Hamilton ordered the Treasury to sue Duer.
That caused Duer's financial empire to collapse, which bankrupted many of his creditors, bankers and brokers, which in turn caused a financial panic on Wall Street. While Duer went to a debtors prison, 24 Wall Street brokers met under a buttonwood tree in 1792 to draw up the first rules to regulate trading.
" 'Tis time," Hamilton wrote, "there should be a separation between honest Men & knaves, between respectable Stockbrokers ... and mere unprincipled gamblers."
"Finding that line of separation," wrote John Steele Gordon in "The Great Game," a history of Wall Street, "has occupied the finest minds of Wall Street and the government ever since, with mixed results at best."
Fleecing the commodore
The most colorful stock swindle in U.S. history came in 1868, when Commodore Cornelius Vanderbilt, proprietor of the New York Central Railroad, attempted to take over the rival Erie Railroad, which was controlled by three of the most crooked rascals ever to sell stock: Daniel Drew, Jay Gould and Jim Fisk.
Vanderbilt, one of America's richest men, instructed his brokers to buy every Erie share they could find. Drew, who was Erie's treasurer, responded by printing up more Erie shares — tens of thousands more. Peeved, Vanderbilt prevailed upon a judge he had on his payroll to issue an injunction forbidding Erie to issue any more stock. Drew responded by getting a judge who was on his payroll to order Erie to keep printing stock.
"If this printing press don't break down," said the flamboyant Fisk, "I'll be damned if I don't give the old hog all he wants of Erie."
When Vanderbilt's judge issued a warrant for the arrest of Drew, Fisk and Gould, the three fled across the Hudson River to New Jersey with $7 million of Vanderbilt's money. They took up residence in a Jersey City hotel and hired cops armed with cannons to protect them from arrest.
Next, the battle shifted to the legislatures of New York and New Jersey, where agents for each side generously spread around bribe money, hoping for favorable legislation. Gould himself appeared in Albany, carrying a trunk that was, the New York Herald reported, "stuffed with thousand-dollar bills which are to be used for some mysterious purpose in connection with legislation."
Ultimately, Vanderbilt failed to take over the Erie. But he wasn't hurt too badly: He unloaded his 100,000 Erie shares in London. The real losers in the affair were Erie's other stockholders, who saw the value of their shares diluted by nearly half.
Ponzi's scheme
Charles Ponzi came to the U.S. around the start of the 20th century, a poor Italian lad armed with nothing but a dream and a devious mind. He started out with small swindles that didn't always pay off — he was jailed in Atlanta and Montreal — but he refused to give up his dream.
In Boston in 1919, Ponzi founded the presciently named Securities and Exchange Co. and guaranteed investors a 50 percent profit in 45 days. And he kept that promise — for a while. The first investors were paid with money obtained from later investors. Thrilled, they touted Ponzi's magic to their friends. By summer 1920, Ponzi was taking in $250,000 a day — so much cash that he was stashing it in desk drawers, file cabinets, even wastepaper baskets.
He bought hundreds of suits, a dozen gold-handled canes, a limousine and a 20-room mansion in the tony Boston suburb of Lexington. He should have taken the money and run. He couldn't keep paying early investors with the money from later investors, particularly because he wasn't actually investing the money. The Boston Post unmasked his scam and he spent a decade in jail.
On his way to prison, a reporter asked him to explain his actions, saying the public deserved an explanation.
"The public deserves exactly what it gets," Ponzi replied. "No more, no less."
Master of hounds
After the stock market crashed in 1929, Congress investigated Wall Street, exposing countless instances of fraud. Reformers called for creation of a federal agency — the Securities and Exchange Commission — to regulate and police the market.
Richard Whitney, president of the New York Stock Exchange, disagreed. Whitney told Congress the exchange could police itself without any interference from meddlesome bureaucrats.
Alas, Whitney proved to be an imperfect spokesman for his message. Despite his impressive Establishment credentials — Groton, Harvard, master of hounds at the prestigious Essex fox hunt — Whitney was as crooked as a pretzel. He formed a company to produce an apple liquor called Jersey Lightning, but the hooch didn't sell, and the company's stock tanked. So Whitney started stealing. First he stole $150,200 worth of bonds belonging to the New York Yacht Club. Then he stole $667,000 from the Stock Exchange Gratuity Fund, which had been set up to aid the widows and orphans of brokers.
Caught by stock-exchange officials in 1937, Whitney demanded that they cover up his crimes. "After all, I'm Richard Whitney," he said. "I mean the stock market to millions of people."
When he was sentenced to five to 10 years in Sing Sing, cynics chortled as they recalled the title of his much-quoted speech to the Philadelphia Chamber of Commerce: "Business Honesty."
Greed is good
"Greed is all right, by the way — I want you to know that," Ivan Boesky told an audience of business students in 1985. "I think greed is healthy. You can be greedy and still feel good about yourself."
Boesky lived those words. He made hundreds of millions of dollars trading in stocks and bonds, but he always wanted more. In an interview, he admitted that he fantasized about climbing atop a huge pile of silver dollars: "Imagine — wouldn't that be an aphrodisiac experience?"
Seeking ever more wealth, Boesky paid Dennis Levine, an investment banker with Drexel Burnham Lambert, millions of dollars for inside information on corporate takeover bids. Boesky then used the information to speculate in the companies' stocks, making tens of millions more. It was insider trading at its most lucrative.
When Levine was caught by the SEC, he ratted on Boesky. When Boesky was caught, he ratted on several other Wall Street wheeler-dealers, including Michael Milken, Drexel's legendary "junk-bond king." Boesky even lured Milken to a hotel room, where they discussed their illicit deals in a conversation recorded using a microphone hidden in Boesky's clothes.
When the smoke cleared, Boesky served about 18 months in prison and paid a $100 million fine. Milken did three years and paid $200 million. Drexel went bankrupt.
Boesky's story inspired the 1987 movie "Wall Street," with Michael Douglas playing a reptilian character named Gordon Gekko — who recited, nearly word for word, Boesky's now-legendary "greed is good" speech.
The list of financial scandals goes on and on: Ivar "The Match King" Kreuger, Bernie Cornfeld, Robert "Fugitive Financier" Vesco, and the savings-and-loan crooks of the 1980s.
Now, as congressional committees, reporters and the SEC struggle to unravel the Enron scandal, concerned Americans might be forgiven for wondering: Given the history of wheeling, dealing, scheming and scamming in the world of high finance, can we expect more of these scandals in the future?
"It's never going to change," says Gordon, the Wall Street historian. "As long as there's a great deal of money to be made on Wall Street, there will always be people of dubious morals coming up with new ways to fleece the sheep. Welcome to capitalism."