Behind the Curtain
Apologies for the delay in this week’s newsletter, I had an unexpected event throw my schedule off but, as you’ll soon learn, it has provided some good content.
Personal History
I have clear memories of times in my life when I fell victim to a scam or fraud. The first one was very low stakes, but I think it is interesting that I still remember it so many years later. When I was 20 I was playing the game Diablo 2, and another player in the game convinced me he’d show me a “bug” that would let me create duplicate items on my character. He lured me to a private server, killed me twice, and stole all my digital armor and weapons. My character wasn’t particularly high level, but it still pissed me off. I felt like such an idiot! I’m sure most people have had things like this happen to them, because it is easy to fall for scams and cons. Despite how immune we may think we are to them, our brains betray us.
This example is a bit silly, but many people do not encounter professional con men in their lives, and so they fall for other things. Perhaps a friend lied to you to get you to do something, or you lent someone money under false pretenses. It’s perfectly okay to trust people, and sometimes people abuse that trust. The hope is that nothing bad comes of it.
The second time I was scammed, it was more serious. The same year I had my video game mishap, I bought a car from a police officer in California, where I had just moved. The car was ridiculous for a young person - a 1980s-era Mercedes Benz sedan. It was a private sale, and did not involve a loan. The seller knew the car had a variety of issues, but did not tell me about them, and attempted to absolve himself of liability by writing “AS-IS” on the back of the contract we signed. Had I been older, wiser, or more curious about California law I could likely have forced him to give me my money back when I discovered his deception, but I was young and ignorant, and ended up having to pay to fix a bunch of things simply so I could get the car to pass inspection. My parents had to bail me out of this bad decision - by the time I traded the car in, I had spent almost twice the purchase price on repairs. In my early twenties, this was a serious financial mistake, and if not for my parents I’d have been in real trouble.
The third and fourth times I was scammed, it was a big company. In my twenties, as my business started to take off, I bought a house in New Jersey. It was a relatively modest house, and I used a “liar loan” (I did not have to give the bank proof of income, only show I had money in a bank account) to buy it. Quicken Loans was my lender. They told me that my monthly payment on my mortgage would be X, and I was okay paying X. A few months later I received a letter from my new lender, the bank who had purchased my loan off Quicken, that my payment was incorrect. Quicken had failed to add my property tax payment into my mortgage payment, so my payment was now X + Y, a few hundred dollars more per month than I’d originally been told. I was still young, and still dumb - sensing a pattern? - and I paid without raising a stink about it.
A year later, I decided I wanted a bigger house - still dumb! - so I went back to Quicken, bought a bigger house with another liar loan, and sold my first house. This time, rather than getting a letter after a few months, it took almost a year, and this one told me that I had to immediately pay them thousands of dollars or I would be in tax default. You see, Quicken Loans had once again “miscalculated” my property tax payments and had not been sending them to the city for almost a year, which meant I was now potentially in trouble unless I paid the full balance. Here’s when my dumber, younger self finally noticed something - Quicken claimed they had used an “old” tax assessment which pegged my tax burden at less than half of what was due. The problem with this was that the house had never had a lower tax assessment since it had only been built a few years before I bought it. They flat out lied! However they’d lied in a clever way, because rather than errors in my interest or principal payments, they’d shorted money I owed to the city, which was taxes, and I had to pay it. There was no way I could blame my mortgage company and offer to pay half of what I owed the local government.
Now, in theory it is the job of title companies, realtors, and real estate lawyers to catch these things and tell me so that I, the home buyer, do not accidentally violate the law or get stuck with a much larger mortgage payment than I had been expecting. Quicken had done this to me not once, but twice! Quicken Loans has a long history of illegal conduct and has paid billions of dollars to settle lawsuits over its deceptive practices. I count myself as one of their early victims, though I was never a party to any of the lawsuits or settlements. Fortunately, in both cases I had enough income to cover the increased costs. Many people do not. It’s one of the many way banks, lenders, and the powerful wreaked havoc on homeowners leading up to the housing crisis.
What I Did This Week
Where is all this going? Well, the reason my newsletter is late this week is that I sat on a jury for five days. In a cosmic twist of fate, it was a civil dispute between the buyers and seller of a house, with the plaintiffs alleging that the seller committed - you guessed it - fraud!
The plaintiffs were taking an advantage of a first time home buyer’s program from their employer, a university here in Philadelphia. They got help with a down payment if they purchased a house within a certain area nearby campus. After some back and forth over repairs, they purchased the home, which they hoped to settle down and raise a family in.
I will spare you the details of the many problems they found with the home, but to put it mildly, the place was a dump. The seller had failed to disclose a variety of serious issues. They were understandably pissed! By the time my fellow jurors and I heard the case, the lawsuit had been going on for almost two years, with all the other defendants having settled with the buyers. The former owner, the seller, was the final holdout. He and his lawyer believed he had a credible defense.
This was the first time I’d been selected for a jury, so the experience was new and interesting. We received basic instructions from the judge as to what was considered evidence and what was not. The plaintiffs both testified, and were grilled by the defense lawyer. His client’s case rested on the fact that the buyers had agreed to a “amendment” which offered them a few thousand dollars if certain repairs were not completed prior to closing. The seller did not complete the repairs - he is a general contractor, and did many of the repairs himself - and the buyers received the funds. Case closed, in the defense’s mind.
But it wasn’t closed. The buyers claimed he had lied about the damage to the house, intentionally tried to cover up defects - he put new carpet over a broken staircase, for instance - and had caused them over a year of distress as they were forced to live in a house that had leaks, electrical problems, and plumbing issues.
What I found fascinating as I sat and listened to both sides of the legal argument was how my own opinions were shaped by the lawyers. The dispute boiled down to whether or not the buyers had access to enough expert opinion and information, and chose to disregard warnings about the property, or whether the seller had withheld enough information that they and their representatives could not make an informed decision about whether it was a good purchase. I could see compelling arguments for both sides! I went into the case nearly certain I would come down on the side of the plaintiffs, but during defense’s closing arguments I found myself with doubts - was I going to let my own biases influence my verdict? Did I want to help the innocent-seeming young couple and punish the greedy rent-seeking seller, whether or not he’d actually misled them?
Civil cases, and juries, are different from criminal ones. A lot less Law & Order, and a little more Judge Judy. No one is going to jail - unless they fail to pay a settlement, which can lead to civil contempt - but the amounts of money involved can be a big deal to those involved in the case. Additionally, only 7 of the 8 jurors are needed to reach a “unanimous” verdict on any charge. I walked into the jury room after hearing 3 days’ worth of testimony and evidence with no clue what my seven fellow jurors were thinking. It was fascinating!
I was the only white male on the jury, so naturally I volunteered to be the foreman. In truth, I was doing it with the hope I could move things along swiftly, since we were already a day over the judge’s initial estimate, and it was nearly the end of the week. None of us wanted to come back the following Monday.
Despite our general annoyance with defense counsel - he was very contentious, and had caused hours’ worth of delays - everyone took the job seriously. We requested copies of all the evidence, and set to mapping out a timeline. We made sure we fully understood the charges, and engaged in discussion if anyone was uncertain on a vote. It was a heartening moment for democracy and the rule of law!
The sticking point for some of my fellow jurors was whether the plaintiffs relied on the statements the seller made when buying the house. This was central to the claims they had filed against him, which is apparently a particular quirk of real estate law? It was also of interest to me, since a lot of what I write about in this newsletter has to do with whether people are concealing material information from others! That’s pretty much the definition of fraud!
In the end, it was the timeline that sealed the verdict. The defense attorney hadn’t brought it to our attention, but we discovered from the evidence that the seller had given the buyer’s agent two letters certifying that the plumbing and electric in the house were in good condition. Spoiler: they were not. One of the conditions of sale was that the seller would have licensed professionals inspect and certify the house. Maybe they had lied at his direction, or he’d fabricated the letters. Either way, not good! Fraud detected!
I cannot imagine how difficult it is to litigate a complicated real estate case over two years. To her credit, the plaintiff’s attorney was extremely organized and calm under pressure - she told us after the trial it was her first jury. However! She neglected to highlight a key piece of evidence that was central to three of the four claims she’d made on behalf of her clients! Yikes! Fortunately, she had an intrepid jury led by a fraud blogger to help her out.
One thing I had not considered when I volunteered to be the foreman was that I’d have to read out the verdicts in court. It was easy, for much of the trial, for me to mentally side with the plaintiffs. Now I had to read out a very favorable verdict for them, but it was not a zero sum game. The seller was going to have to pay all of that money, either now or after appeal. Did he have that money? Were we about to open a new legal front, and put the plaintiffs through more hell? Fortunately, it’s no longer our problem. The jury did its job, and tried our best to come up with a fair result based on the facts.
I hope that no one reading this newsletter ends up on the wrong end of a fraud or scam. I’ve been on the wrong end of a couple, though none that created great hardship in my life. I’ve spent the last 6 months writing, reading, and thinking about fraud and cons. Puzzling over why people take advantage of one another. Now, by absolute dumb luck, I had a chance to deliver some amount of justice to the victims of a fraud. It felt…good? But also, kind of nerve-wracking? I had an adrenaline rush for an hour after I walked out of the courtroom. It was definitely not as easy as I’d imagined to make those kinds of decisions about the lives of others. Show up for jury duty, everyone! You never know when you might get the chance to help someone.
We tried not to speculate too much on why the seller didn’t simply repair the house properly before selling it - without going into specifics, he profited nicely from the sale - and to focus on the evidence in front of us. But, if I had to guess? I don’t think he intended to sell a nice young couple a house that’d put them in any danger. I think he was like a lot of people - lazy, greedy, negligent. There doesn’t need to be malice in every fraud, though as he learned, negligence can be expensive, too!
The people who were supposed to be helping the buyers make informed decisions about the largest financial purchase they’d made in their lives did not do their jobs either. Like 26-year-old me, they had bad counsel when it came to their closing paperwork. Sometimes there is nothing you can do, if someone is really out to defraud you. Quicken Loans did it to me, and maybe if I’d known then what I know now, I would have tried to do something about it. But, suing a multi-billion dollar corporation with teams of lawyers over a few thousand bucks? Despite paying out huge settlements, the owner of Quicken is still a billionaire, he still owns sports teams and his company sells things called “Rocket Mortgages” which, if I had to guess, I’ll probably be writing about in these pages at some point.
DC Solar
Phew! That was a lot! Let’s talk about something way less serious, like how Warren Buffett’s company got ripped off by two scammers selling solar tax credits:
Not only did Berkshire bite, sinking $340 million alone, but so did insurer Progressive Corp. It had to reverse tax benefits worth more than $150 million due mostly to its DC Solar investments. A half-dozen or so regional banks were financial backers, too, including East West Bancorp Inc., Valley National Bancorp and United Financial Bancorp Inc. All plunked their money in funds set up by DC Solar that afforded significant tax credits and possible profits.
Backing up, what happened here was that a husband and wife who ran a company called DC Solar set up a clever tax credit scheme, and for some reason lots of people poured hundreds of millions of dollars into it. Wild! Here’s how it worked - DC Solar took advantage of an Obama-era solar tax credit that allowed investors in renewable energy to write said investments off on their taxes. So, if DC Solar was going to build a solar generator for $150,000, investors would be able to claim $45,000 worth of tax credits. Pretty good!
They set up an investment fund, and sold that fund the generators they were supposed to be building. The clever fraud-ish bit was that they only asked investors to put up the 30% for the generators so it worked out to be the same amount as the tax credit. They weren’t out of pocket at all, and the investment fund would pay them more money down the road as it sold the generators and leased them out to customers for power production. So the initial investment cost $0, and it became profitable over time. What a deal! The math gets a bit involved, so read the excellent Matt Levine on how the finances behind it worked if you want a full explanation.
However! DC Solar was having difficulty finding people who needed solar generators, so they eventually just stopped making them and…kept the cash? Spending it on, well, I wouldn’t call them green investments:
Their business, making mobile solar generators, had afforded them lavish goodies. They owned more than 90 cars, from classic Fords and Plymouths to Bentleys, at least 20 properties, and even a professional baseball team in Martinez, just northeast of San Francisco.
The guy who stole all the solar energy money used it to buy classic cars. Of course he did! He also sponsored a race car:
Anyhow, they’re back in the news because they both just plead guilty:
The government’s investigation has resulted in the largest criminal forfeiture in the history of the District with over $120 million in assets forfeited that will go to victims, and has returned $500 million to the United States Treasury, with more to come, U.S. Attorney McGregor W. Scott announced.
Dang! Also, as Levine points out, this is not really a Ponzi scheme. They weren’t using money from investors to pay other investors, they just kept it and never paid any of it out, because the investors broke even on the initial investment! It’s great, until you get caught. In this case, they really screwed the marks because they all now owe the United States government for the fake tax credits, and that’s the one organization you do not want to owe money to. They can just show up and take it.
Many of the investors they scammed were supposed to be highly sophisticated. Warren Buffett got taken for more than $300 mil! The scheme should have raised a lot of red flags! How do you not look into whether an investment fund is legit before you hand it hundreds of millions of your money? I’ll let Levine sum up:
The point that I want to convey here is that the whole trade was so neat and elegant that it is a little hard to sympathize that much with the investors. They “bought” “solar generators” at no up-front cost to them and without ever taking delivery of the generators. They entered into a purely financial trade to buy a dollar’s worth of tax benefits for ninety cents. Doesn’t it … doesn’t it just sound too good to be true? If you pay someone $340 million for $377 million of tax benefits, generated by solar generators you never see, shouldn’t you kind of know that something is up?
Short Cons
Bloomberg - “Seawave Invest Ltd., which was paid $600,000 by Lekoil Ltd. for arranging financing from Qatar’s sovereign wealth fund, is investigating allegations of fraud after it emerged the loan wasn’t real.”
SEC - “Instead, Griffithe allegedly spent approximately $1.8 million of investor funds on personal and unrelated business expenses, including payments toward several luxury cars for himself and a yacht for Russell.”
The Verge - “The Department of Justice is taking a new approach to robocalls, seeking approval to hold telecommunications companies responsible for calls on their networks instead of just going after the often-overseas criminals who actually do the dialing.”
Tips and summonses to scammerdarkly@gmail.com