In light of the most recent Wells Fargo scandal, the subject of fraud surfaces. For those who may not know, the Wells Fargo scandal involves the employees creating about 2 million fraudulent accounts. As a result, Wells Fargo has to reportedly pay a fine of $185 million dollars. This scandal is a major banking fraud; however, this is “not a classic fraud,” according to Scott. In fact, this fraud compared to other scandals may pale in comparison because the victims were not as affected as much, as each victim in this scandal is probably only owed a couple of hundred dollars.
Scott describes this scandal as “nothing like the housing crisis,” either. The housing crisis, also known as the mortgage crisis, is another major banking scandal that created a fracture in the economy due to a snowballing effect contributing to a recession known as the financial crisis in 2008. This crisis was essentially the result of many problems with mortgages, such as banks making loans with low down payment, making loans that may seem dodgy, and even making mortgages with adjustable interest rates. This crisis can be grouped with classical fraud itself as both can cause major disruptions in the economy.
“Classic fraud is done by someone who gains your trust. Often, they look the part: drive a nice car, might have a nice history of being a successful investor, or that’s the story they tell. And usually they gain trust [because they] go to same church or come from the same country or the same city [as the victims],” said Scott.
Therefore, classical fraud can happen to people due to trust. This happens in many cases of fraud, with the Bernie Madoff scandal being recent. This fraud involved Madoff, who was a trusted individual due to his previous role in launching Nasdaq stock, offering high returns to investors, but he did not have a way to make profit to fuel the returns. Instead, without the investors’ knowledge, Madoff utilized the newer investors’ funds as the returns to pay the earlier investors, according to Business Insider, and he was able to cheat victims out of $65 billion. This fraud was exposed in 2008 and was essentially a Ponzi scheme – a system named after Charles Ponzi who offered investors a large amount of return in short amount of time. Many victims of the Madoff scandal were still not able to recoup their entire investments, unlike the Wells Fargo scandal where the victims already received funds or are going to receive their funds in the near future. There are many examples of Ponzi schemes and frauds that are not as high-profiled.
“For instance, there was a fraudulent investment scheme where the man running it [Gregory Crabtree] got an ex-coach of the University of Georgia [Jim Donnan]; well, the coach believed in him. But then he had that coach who [had connections] to lots of alumni from the University of Georgia and other places he coached,” said Scott. “And so people thought this is a guy [the coach] that earns a million dollars a year … and isn’t out ripping people off because he is a millionaire. Well, he [Donnan] was involved and didn’t even know it, and so this guy, [Crabtree], got access to someone who was trusted and used that trusted person to bring in the victims.”
It’s astonishing that so many Ponzi schemes and other frauds, as with the case of the Wells Fargo scandal, can go on undetected for months or even years.
“I am still surprised when I hear commercials out in the open for investments that I know are too good to be true. So, they are setting people up for fraud. I remember a commercial just a couple years ago that ran for several months on the radio,” said Scott, “It’s a work at home, make tens of thousands of dollars with no training, no effort [program]. This is obviously a fraud. [There has to be] government employees and regulators out there that can hear this, and there is nothing they can do to stop it? Sounds insane to me.”
“This is an important thing if you’re talking about classic fraud; usually the people that are victims are victims because of their own greed. Someone sells them something that’s too good to be true and they take the bait,” said Scott. “So, if someone is telling you can get 20% return or 50% return with no risk, don’t trust them.”