You Can't Cheat an Honest Man - James Walsh [75]
Bogus Loans Made Behind the Scenes
One of the best examples of how secrecy about money sets people up to be conned is the second mortgage scam that we considered in Chapter 2. A quick recap of how this works:
The Ponzi perp approaches Investor A and says that Mutual Acquaintance B is in a cash crunch and needs to take out a second mortgage on his house. The perp explains that Acquaintance B will pay a high interest rate, typically 12 percent or 13 percent, and even a bonus on the loan—if it can be arranged quickly and quietly.
Acquaintance B knows nothing about the bogus deal. The perp forges or manipulates information and signatures onto phony documents. These documents are not filed or registered as required by law. The Ponzi perp simply pockets the loan money.
In these deals, the perp will usually tell an investor that the loan will be blind. That means that the mutual acquaintance won’t know who loaned the money. Even if the Ponzi perp is a little questionable, the legitimacy of the mutual acquaintance is often compelling.
For the Ponzi perp, the blind loan makes it less likely that the investor will ever try to contact the mutual acquaintance directly.
The blind loan also makes it easy for the perp to sell a phony mortgage a second time. In this situation, the perp tells a second investor that the first needs to get his money back and will sell the mortgage at a discounted price. All of the same terms—including the need for secrecy—apply.
“It’s amazing how well this works, even when all the principles know one another. In fact, it usually works even better when they do,” says a northern California lawyer who’s prosecuted several Ponzi cases. “People who have a certain amount of money and not very much sense will be used to the idea of secrecy in money matters. And they’ll put a great deal of unspoken trust in people they consider financial equals. If a crook has the guts to take a chance on this secrecy and trust, he can steal a lot of money.”
Secrecy and Trust
The relationship between secrecy and trust sometimes leads to a fundamental logic flaw that makes most pyramids and Ponzi schemes possible. The logic flaw can be explained, roughly, like this: Trust sometimes results in exclusion. Exclusion often results in secrecy. Therefore, secrecy is (always) the result of trust.
You don’t have to get out your college philosophy notes to realize a premise that includes sometimes can’t lead to an affirmative conclusion that includes always.
The emphasis that many pyramid marketing schemes put on recruiting friends and family results from the misunderstanding of the link between trust and secrecy. “You’ve got to understand the temptation,” says one pyramid scheme participant. “It’s not only to make money. It’s also to let the people closest to you—many times, people who think you’re a loser—in on a secret for success. That’s what draws in so many families.”
The sadly mistaken idea that redemption comes from sharing secrets fuels the growth of most pyramid marketing schemes. This mistake is built on another notion that’s as old as society: Financial success is a secret kept by a few people; and getting rich is a matter of being let in on the secret.
People who achieve financial success know that it comes from a combination of hard work, some good timing and a little luck. People who haven’t enjoyed financial success are often intimidated by any part of that combination. Their lack of achievement is more easily rationalized by the belief that success is a secret.
Pyramid schemes recognize this weak tendency and play to it. They tell losers that they’re right—the winners have a secret. And, by joining the pyramid, you don’t have to work hard or have good timing to make money.
Secrecy Attracts Ponzi Perps and Politicians
Political power seems to thrive on secrecy. Again, this is a mutation of trust. In democratic systems, political leaders have the explicitly articulated trust of the people. A majority