Fraud: A Class Act

By Linda Davies

Programme note for the 2006 revival of The Voysey Inheritance by Harley Granville Barker at the National Theatre, London, directed by Peter Gill

“If dishonesty can live in a gorgeous palace with pictures on all its walls, and gems in all its cupboards, with marble and ivory in all its corners, and can give Apician dinners and get into Parliament, and deal in millions, then dishonesty is not disgraceful, and the man dishonest after such a fashion is not a low scoundrel.” Trollope’s voluptuous description of fraud reveals the elegant ease with which the middle and upper classes have historically stolen their money. All that has changed is that greater social mobility into the financial sector has democratised fraud, slightly, in recent decades.

They mug so elegantly, the financially literate. They have no need of the glinting knife or the raised fist. A champagne glass raised in a salute to greed at the dinners of the great and good or in a braying wine bar is a far more powerful weapon for them. And where is the harm? And to whom done? There is no bloodied corpse. The victims of fraud are very often not known or identifiable to the perpetrators, and the impact of the fraud often not felt for years after the commission of the crime. Sometimes the impact is never felt at all.

Insider trading was described as “generally a victimless crime” by none other than Sir Martin Jacomb, then Deputy Chairman of the Securities and Investments Board, a City regulatory body. Fraud is a kind of crime lite, with minimal impact on the conscience, minimal effort, little risk of detection, but with spectacular returns.

Jabez Spencer Balfour

That is why fraud has always been endemic to the financial system. Take one corpulent, bullying former MP who lived in splendour for many years whilst swindling the life savings of thousands of employees. That was Robert Maxwell in the Nineties, but he was only mirroring the antics a century on, of another high-living self-aggrandizing, over-sized MP – Jabez Spencer Balfour. In 1872, Balfour set up a building society, The Liberator, to look after the savings of working men and women. Within ten years it was one of the UK’s largest financial institutions affording Balfour an opulent lifestyle. Evry year, while completing the annual accounts, Balfour calculated how much money he and his cronies needed to maintain their gilded lifestyles, liberated it from the accounts and inflated the turnover figure to disguise his fraud. He was a man of power, position and great wealth, a former MP, and his position afforded him a certain immunity from scrutiny, so he was able to perpetuate the fraud until The Liberator collapsed, leaving thousands of savers destitute and bound for the poorhouse. Why did he do this? Because he could.

Most financial fraud is either opportunistic, or ‘need’ driven. I’m not sure that Robert Maxwell, who bilked the pension funds of his companies of £440 million, set out to do so. What is more likely is that he thought he might just dip into them for the necessary cash to trade his way out of trouble. If he could just leverage the next acquisition, finesse the next deal. And then stop. But what many fraudsters find is once they have been ‘blooded’ in this way, it becomes hard to stop. The fraud continues, becomes more audacious. The longer it continues undetected, the greater becomes the fraudster’s sense of invulnerability, and his daring. Perhaps the fraudster even develops a taste for the illicit. Speculation is, after all, gambling. Fraud adds the risk of discovery and a certain amount of disgrace to the gamble. How much greater is the high when the swindle is pulled off? So addictive is the process that in many cases discovery or suicide is the only way out.

In The Voysey Inheritance, Mr Voysey defends his fraudulent practices by saying to his son, Edward: “I have done what I had to do.” His fraud was originally ‘need’ driven. He had to attempt to trade his way out of his own father’s frauds, but it appears that once he had successfully done that he could not stop.

He was addicted, aided in his fraud by the swindler’s common self-deceit that a crime has not really been committed. “I have had to go beyond the letter of the law,” he tells Edward. The law has not been broken, just stretched. It is elastic, accomodating, and conveniently, the arena it legislates is huge, opaque, riven with legitimate sharp practice such as traders lying to conceal their positions, so it is wonderfully difficult to know how to apply the law and hence when one might or might not actually be breaking it.

Fraud has always been and will remain spectacularly easy. It just took a few pencil strokes to enable Harold Jaggard to liberate £7 million from Grays Building Society which collapsed in 1978. The original accounts were kept in pencil, making it sublimely easy for Jaggard, the Chief Executive, to rub out figures and write in new ones. After forty years of fraud, the proceeds of which Jaggard spent on women and horses, an auditor finally spotted something suspicious and Jaggard committed suicide. Like Maxwell after him, he found the fall from grace and the loss of position unendurable.

All that Ivan Boesky, a legendary arbitrageur from the 1980s, needed to commit his crime was information that the rest of the market was not given. A whisper here, a whisper there, passed on for a fee from from corporate insiders. What is the crime in that? It certainly doesn’t feel like a crime. It’s just conversation, after all, albeit sufficiently profitable to allow him to pay a fine of $100 million when he was caught. For his crime he also served two years in prison. A trade worth making, many people would say, especially given that most insider traders get away with it most of the time because it is a notoriously difficult crime to prove if committed with a modicum of subtlety.

A convenient moral justification regularly dredged up is that greed is good, and further, everyone’s at it so why shouldn’t I be? As if the prevalence of an act changes its legal status. “Business nowadays is run on the lines of a confidence trick,” says Mr Voysey. “Greed is healthy. You can be greedy and still feel good about yourself,” says Mr Boesky.

This gives a kind of Darwinian justification to sharp practice, a macho validation of it which Mr Voysey shared. “You must either be the master of money or its servant,” he tells Edward. The entrepreneurs and financial sophisticates of the nineteenth century, like the corporate raiders and arbitrageurs of the late twentieth, approached the bending and breaking of the law with a testosterone-rich muscularity.

Thomas, Lord Cochrane

In 1814, Thomas, Lord Cochrane, naval hero and radical Member of Parliament staged an elaborate hoax involving thundering news carriages and uniformed horsemen trumpeting the (false) news that Napoleon had been slain by the Cossacks. The UK stock market rose enabling Cochrane to offload securities that he had purchased the week before in readiness for his scam. Cochrane was a prominent anti-corruption campaigner, yet he found fraud irresistible. Similarly, in 1887, Harry Marks, founding editor of the Financial News, a rigorously fraud-busting publication, used his position as Editor to puff up the fortunes of a gold company, the Rae-Transvaal, that had just been floated and in which he was heavily invested. He quoted its shares at a false premium in the paper and recommended it no less than 33 times in three months. He sold out before it went into liquidation in 1888, leaving shareholders with nothing.

Periods of rapid expansion such as in the commercial sectors during the nineteenth century, or of liberalisation such as in the 1980s are often accompanied by a contagion of fraud. Greed triumphs over scepticism and the prevailing commercial morality is challenged by new practices and becomes similarly liberalised.

A common trait amongst fraudsters is their apparent respectability. Members of Parliament; football clubs. Mr Voysey himself insisted that, “I must, at any cost inspire confidence.” So he justified his own opulent lifestyle, funded by fraud. The fruits of fraud – wealth, position, respect, provide a certain insulation against its detection, as well as the ability to buy off its detector.

What a wonderful crime where the spoils offer their own protection.

Surely the lawmakers can do something? They have tried, but the creativity of the fraudulent and the sheer enormity of their incentives will always be greater than that of the lawmakers. Constructing fences is much duller than leaping over them. The financial classes will keep leaping, as they always have done.

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