- Dan Davies: Lying for Money: How Legendary Frauds Reveal the Workings of Our World (Profile UK, 2018; Scribner US, 2021)
Well, I didn’t get part 2 of my summer reading suggestions done before summer ended. But what better to warm your heart through the autumn evenings than tales of fraud, fraud, fraud!
Dan Davies’ Lying for Money is another of those books I recommend to everyone, all the time. Only Chapter 2, on darknet markets, is directly about crypto — but the rest of the book’s totally about crypto. Also, you need both editions.
Davies outlines a taxonomy of frauds:
- long firms, when you set up a company and just don’t pay the bills;
- counterfeiting;
- control frauds, when a manager steals from the company, and distributed control frauds — the latter is close to what we see in ICOs, for instance;
- market crimes — when you lie to milk money from an entire market, e.g. dumping unregistered securities on retail, or the LIBOR scandal.
Per Davies:
A long firm makes you question whether you can trust anyone. A counterfeit makes you question the evidence of your eyes. A control fraud makes you question your trust in the institutions of society and a market crime makes you question society itself.
Fraud works by slipping between the cracks of normal inspection. When you first find something amiss, it will likely appear to just be an error. It can be very hard to tell deliberate fraud from mere incompetence or bad luck — which is why prosecuting fraud is so hard.
But frauds tend to grow and spiral outward, as the fraudster tries to cover the hole in the books with more fraud.
Fraudsters also tend to be serial fraudsters — “it is really quite rare to find a major commercial fraud which was the fraudster’s first attempt.”
Most fraudsters in crypto have left a trail of destruction behind them, if you go looking — like how the Quadriga CX crypto exchange collapsed with $200 million missing after owner Gerry Cotten’s apparent death, and Cotten turned out to have been running Ponzi schemes since he was fifteen.
Davies has a Golden Rule for detecting fraud:
Anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before. Nearly all of the frauds in this book could have been stopped a lot earlier if people had been a bit more cynical about growth.
(Dan doesn’t look forward to the day he has to write up Tether; enough people ask him about it.)
Market frauds — such as the LIBOR scandal, or Tether, or most of crypto — ultimately steal from retail. “Retail investors have one hugely attractive property when considered by a professional — they’re dumb money.”
Crypto is suffused with fraud because it operates almost entirely outside any effective regulation. This attracts sincere libertarians who are morally offended by government regulation and are sure that a free market can work it out for itself — despite the evidence of all history — but it’s also catnip for fraudsters, keen to prey on rubes foolish enough to believe such fairy tales:
If a fraud is operating outside the regulated sphere, it can only be dealt with by the authorities as a fraud (rather than merely as a lousy or Mittyish investment scheme), and unless the scheme is blatant, it is usually difficult to assemble this kind of proof until after it has collapsed.
Regulation tends to come in only when an entire market is seen as having gone bad:
The normal state of the political economy of fraud is one of constant pressure toward laxity and deregulation, and this tends only to be reversed when things have got so bad that the whole system is under imminent threat of losing its legitimacy.
The UK edition came out in 2018. The US edition, published 2021, has the same structure, but makes its points with stories from the US instead, because nobody in America knows who the Kray twins were — which is a pity, ‘cos the tales from their accountant, Leslie Payne, are marvellous:
Payne wasn’t the Krays’ accountant in the sense of keeping books for their crime syndicate — Reggie did that himself, writing ‘Protection from club in Walthamstow — £30’ and ‘Bribe to Dalston Police — £40’ in expensive ledgers that he had purchased despite Leslie begging him not to.
Davies likes the US edition better — he thinks he makes his points more clearly — but really, I’d like to see an omnibus edition with all the stories from both.
In the meantime, you just need to buy both editions. If you’re in the UK or US, getting the other edition will be fraught; I ended up getting the US edition from a popular book piracy cultural preservation site. Find a gambling charity to send some money to. And tell everyone else about the book.
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There have been at least two films made about the Krays so yeah some people in the United States DO know who they were.
I do, but only because I read up on the Monty Python “Piranha Brothers” sketch- I got the sense there was a reference I had been missing and I was right.
“It can be very hard to tell deliberate fraud from mere incompetence or bad luck — which is why prosecuting fraud is so hard.”
I’m currently listening to a weekly podcast about the trial of Elizabeth Holmes and this is exactly the defense’s strategy: “Holmes did not *commit fraud*, she was a largely a poorly-informed CEO who *made a lot of mistakes* and said a lot of things that turned out not to be true because she did not know any better”.
The prosecution’s strategy apparently is, besides showing that she was *well*-informed through documenting how much info she was given and when and evidence that she understood it in later exchanges, to point out that her “mistakes” tended to happen whenever Theranos was running low on money or up against a deadline.
“Nearly all of the frauds in this book could have been stopped a lot earlier if people had been a bit more cynical about growth.”
The investors and regulators who tried to raise alarms about Bernie Madoff often found that despite showing conclusively, *mathematically* that his returns were so extraordinarily unlikely as to be impossible in their consistency, he was assumed to be above reproach because he’d been known as a solid moneymaker for decades. The logic was entirely circular and was one of the biggest factors in his scheme going on as long as it did. Likewise Enron in many instances. And when I was in government contracting, it was known through countless examples that in every single major intelligence breach ever, it was later discovered that somebody saw something which *if they had reported it* might have stopped the incident from occurring or at least terminated it earlier… but they *didn’t* report it.