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Chamber hears history of white-collar crimes

Posted: June 1, 2012 - 12:07am
Jeff Pantages of Alaska Permanent Capital Management delivers a speech titled "Dirty Rotten Scoundrels"  to the Juneau Chamber of Commerce at the Moose Lodge on Thursday.  Michael Penn / Juneau Empire
Michael Penn / Juneau Empire
Jeff Pantages of Alaska Permanent Capital Management delivers a speech titled "Dirty Rotten Scoundrels" to the Juneau Chamber of Commerce at the Moose Lodge on Thursday.

Jeff Pantages, chief investment officer of Alaska Permanent Capital Management, described a line-up of recent history’s greatest financial scoundrels to the Juneau Chamber of Commerce Thursday at the Moose Lodge.

“Wall Street scandals,” Pantages said.

His speech was titled “Dirty Rotten Scoundrels” with the subtitle reading “a short history of financial skullduggery.”

The list of scoundrels included recognizable names like Charles Ponzi, who famously used money provided by incoming investors to pay older investors, instead of profits from investments. One of his much later successors is Bernie Madoff.

One name few remember, “the Mephistopheles of Wall Street,” as Pantages said, is the Gilded Age financial genius, Jay Gould.

“He was a human carnivore,” a newspaper wrote at his death, and he “flitted bat-like across the vision of the America’s people.”

Though Gould is the seventh wealthiest man in history, J.D. Rockefeller is No. 1 on that list and Warren Buffet and Bill Gates rank in the 30s, adjusted for inflation, Pantages said.

“He didn’t really build anything per se,” Pantages said of Gould. And “he always makes the list of worst CEOs of histories. But he did play by the rules of the game that existed at the time, there were no rules.

“This was raw capitalism. He bribed politicians, he bribed judges — everybody did that.”

Things have changed “somewhat” since then, Pantages said.

Ponzi moved to America in 1903 and bounced around jobs until 1920 when he fell in love with a girl and wanted to give her the world. Ponzi came up with a scheme to buy cheap stamps in Italy and sell them at their higher price in the United States.

“An arbitrage strategy,” Pantages said.

To raise money to buy the Italian stamps, Ponzi sold Ponzi notes, offering the holder a 50 percent return on their investment. Ponzi couldn’t make the scheme work, but he’d already made promises.

“So he robbed Peter to pay Paul,” Pantages said.

Ponzi raised $10 million in the first year and was venerated by Wall Street.

When the Boston Post uncovered Ponzi’s “checkered past,” Pantages said, Ponzi note holders started to withdraw their money. Ponzi couldn’t pay up.

A newspaper headline of the day called Ponzi “hopelessly insolvent,” Pantages said.

Richard “Dick” Whitney was “admired, respected and trusted on Wall Street” in the 1920s, Pantages said. He was also an embezzler. Whitney lost a lot of money in the market, Pantages said, and hid it with stolen money from his family, employers and even his church.

Jump ahead to the 1980s and the philosophy of the “Wall Street” movie character, Gordon Gekko, that “Greed is good. Greed is right. Greed works.”

“That speech was taken from another individual, who was a bit of a scandalous person, Ivan Boesky,” Pantages said. Boesky’s specialty was to look for companies that were ripe for a takeover and buy them in advance. He was also convicted of insider trading — trading on material, non-public information.

“He did it the old fashioned way,” Pantages said. “He just stole information, he bought inside information. This undermines the confidence in our market.”

Boesky spent two years in Lompoc Prison.

“Junk Bond King” Michael Milken took away about $2 billion from his financial firm Drexel Burnham, Pantages said — more than $600 million in one year alone. He was ratted out for shady dealings with junk bonds and spent two years in prison.

When the judge announced his fine of $500 million dollars, Milken replied “cash or check?” Pantages said.

Rogue Trader Nick Leeson brought down the long-established Barings Bank in the mid 1990s. Barings Bank helped finance the Louisiana Purchase, Pantages said.

“A very cream of the crop kind of bank,” Pantages said.

Leeson caused $1.3 billion in losses from unauthorized derivatives trading and served 3 1/2 years in Changi Prison in Singapore. He covered up loses at his bank branch and then did what gamblers often do and doubled down, Pantages said.

Leeson paid his time and is now a consultant on risk management and ethics, Pantages said.

When Enron collapsed in 2001 it took with it $80 billion in market capital and 28,000 jobs, Pantages said.

Shortly before its collapse, Pantages said, Enron was voted the most innovative company in the world.

“Everybody lost their money,” Pantages said. And worse, a lot of employees had all of their 401(k)s in Enron stock, he said.

“It is OK to diversify,” Pantages said.

By the late 1990s and the arrival of the tech bubble, prison sentences for white collar crime started to climb.

Bernard Ebbers helped WorldCom’s baseline increase sixfold in only three years, Pantages said. But “The Telecom Cowboy” and his CFO were found to be “fudging their numbers,” Pantages said. “They were dipping into cookie jar reserves.”

The $11 billion accounting scam earned Ebbers 25 years in prison, Pantages said.

Dennis Kozlowski, another book cooker from the tech bubble era, also received a sentence of 25 years. The “Piggybank CEO” borrowed money from his company to throw lavish parties, Pantages said. Pantages said a “60 Minutes” report on Koslowski reflects “the real greed and silliness of this era.”

The length of the sentence is “quite remarkable,” Pantages said.

Bernie Madoff’s $65 billion Ponzi scheme landed the “sophisticated schemer” with a 150-year prison sentence. Madoff’s scheme was based around his own proprietary Ponzi software, Pantages said. The scam went on for nearly 25 years, he said.

“He was very clever,” Pantages said. “He saved old typewriters and if the Security Exchange Commission wanted an old document, he would recreate it on this old equipment.

“He was a very sophisticated schemer,” Pantages said.

Though net loses from Madoff’s scheme totaled around $20 billion, Pantages said, clawbacks have returned about $10 billion.

How to prevent white-collar crimes?

“Reward whistleblowers,” Pantages said. ”Train and pay regulators.”

Companies should also reconsider their compensation for managers, he said.

“So the system doesn’t pay so big of bonuses it hurts their judgment,” Pantages said. “And imprison the scoundrels. Which is what I think we are doing.

“Trust in the Lord, but check out the church,” Pantages said.

“So how come all the guys in the panic of 2008 didn’t go to jail?” Pantages said. “At this point, the story seems to be … they may have been stupid, but they didn’t do things illegally.”

• Contact reporter Russell Stigall at 523-2276 or at russell.stigall@juneauempire.com.

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