Hungry Alligators
Sierra
The name Sierra may conjure fond memories for people who grew up in the 80’s or 90’s - for a time, they were one the biggest video game manufacturers in the world. Sierra was known for its “adventure” style games, like Leisure Suit Larry, and King’s Quest. In the late 1990’s the company was shuttered by French telecom giant Vivendi. So, what happened to Sierra?
Vice’s Duncan Fyfe tells the tale:
Williams wasn’t a game designer, but a visionary who saw the company always moving forward, leading the market with other genres, other software, online worlds connecting every kind of person. That Sierra is instead remembered, basically entirely, for these 2D adventure games from the eighties and nineties is, he says, because the company was killed.
Ken Williams founded Sierra in 1979 with his wife Roberta, who was the creative talent behind many of its most popular games. They ran the company for years, until they came into contact with a Wall Street investor named Walter Forbes. Forbes had joined the board of Sierra after the company went public, and ran a company called Comp-U-Card. He approached the Williamses with an offer - CUC would buy Sierra for a billion dollars in stock. He wanted to turn his consumer loyalty card business into a software giant.
CUC eventually inked a deal to purchase both Sierra and another software company Davidson. Wall Street liked it. Mostly everyone seemed happy. There were…signs that things at CUC were a little too perfect:
Forbes boasted to Williams that CUC had “a long history” of “beating Wall Street expectations”; that its stock “consistently outperformed the market.”
Huh, where have we heard that line before? Maybe they were just really good at finance?
“Nobody beats Wall Street estimates exactly by a penny 24 quarters in a row,” [Bowerman] remembers warning Williams of CUC. “That’s categorically impossible. Does not happen.”
Hmmm. That does seem a little fishy. But Forbes was able to purchase two software companies for billions of dollars in stock - not cash, critically - without opening CUC’s books to outsiders. Surely that wouldn’t go wrong! Sierra’s Ken Williams, as the CEO of a public company, was obligated to bring the deal to his board and shareholders, and the deal was approved despite the protests from his employees.
Once CUC had acquired both Davidson and Sierra, Williams learned Forbes had promised the founder of Davidson he’d be in charge of the newly merged software division of the company. Williams was forced into a subordinate role, which he eventually abandoned to work on a different project at the company. Roberta, the brains behind many of Sierra’s hit games, started being overruled on projects, as new leadership decided it didn’t like her adventure story format. Things were not going well for the creative staff at Sierra.
Meanwhile, things at CUC were going great! A year after the company acquired Sierra, Forbes merged his company with a company called HFS, run by a guy named Henry Silverman. HFS was an owner and licensor of hotel, real estate, and car rental brands you may recognize - Days Inn, Ramada, Avis. They called the new entity Cendant. Forbes had sold Silverman on the financial stability of CUC - they looked great on paper.
For all his experience, Silverman may have been a bit too trusting of his new business partner:
Forbes had preserved CUC’s “financial-reporting autonomy” by keeping in post CUC’s chief financial officer Cosmo Corigliano and corporate controller Anne Pember. All CUC’s financial reporting would be filtered through those two; neither Silverman nor his team would have direct access to the data. Even during merger negotiations, CUC had refused to share its private financials with HFS, out of supposed concern that HFS might then decide to purchase a competitor instead.
It all seemed strange to Silverman. “[But] every time I was nervous, they would show up with another quarter of spectacular earnings,” he said. “This business was producing 20% to 30% growth in a company where nobody worked…. this could be a gold mine.”
Uh, yeah! It could be a gold mine! Or, it could be something else. Once Silverman’s accounting team finally got access to the CUC books, they found irregularities. Word spread, and executives resigned, which hit the company’s stock price.
So, what was the deal with CUC? Well, there were a few signs that it wasn’t being run like a serious business:
The board began with a robust round of golf talk, while [Ken] Williams sat silently and strategically for the opportunity to demonstrate that he was a real businessman.
“How’s business?” someone finally asked Walter Forbes, after an hour.
“It’s good,” Forbes said, and ended the meeting.
Seems good, right? Who actually worked at CUC?
Bob Davidson, the chief executive officer of Davidson and Associates, acknowledged that similar acquisitions had failed in the past, but one thing about CUC gave him confidence. He had visited CUC’s headquarters in Stamford, Connecticut, and had been “amazed” to find that despite CUC reporting annual sales of over a billion dollars, there were just twenty people in the office. What work ethic; what an entrepreneurial culture.
That’s…certainly one way to look at it! Anyhow, we know there this is headed:
A year and a half later, two CUC managers revealed to Cendant’s chief financial officer that they had been instructed by executives to inflate revenue through fabricated income and arbitrary adjustments “to meet Wall Street expectations,” and that this had been going on for years. One of the whistleblowers recalled being told by Anne Pember that it was too suspicious to declare fake income in excess of five million; much better to make it under three, and add a random number of pennies at the end.
On April 15, 1998, Cendant announced that the earnings it had declared for 1997 would need to be revised down by about $115 million. The next day, Cendant’s stock dropped from $36 to $19, erasing $14 billion from its market capitalization.
Oops! Unfortunately for many Sierra employees, much of their compensation was tied up in Cendant stock, and many of them took a financial hit. Williams and his wife had cashed out as they saw things starting to go downhill, but everyone else was caught unawares. In August of 1998 Cendant sold its software business to a subsidiary of Vivendi.
As for Walter Forbes:
Forbes was convicted in 2007—after two mistrials—on one count of conspiracy to commit securities fraud and two counts of making false statements, and sentenced to 151 months in prison and to make restitution in the order of $3.28 billion.
Well, okay then. Despite his criminal conviction, Ken Williams still wasn’t convinced he was a crook:
“To this day,” he writes, “I am only 99% convinced that Walter was a crook. It remains unimaginable to me.”
Jerry Bowerman scoffs at this. “Walter is 100% a crook.”
Jerry knows! Fyfe, near the end of the article, gets at a concept I find myself thinking about when I read stories of charismatic corporate con men:
It is not, to be fair, just Ken Williams who believed—still believes?—in the walking dream of Walter Forbes. Bob Davidson believed it was sensible for twenty people in an office selling coupons over the phone to acquire the world’s foremost educational software developer for a billion dollars. Henry Silverman, a micro-manager fixated on figures, believed it was an unmissable opportunity to merge his billion-dollar business with one whose accounts he wasn’t allowed to see.
All smart people who responded to the same thing in Walter Forbes: an offering of wealth and power by a man who had both. This beautiful man who said to trust him, and in spite of misgivings they did, because they were hungry. And why would it ever seem like a lie, when you think someone like Forbes—Wall Street, Harvard, C-suite—is exactly the kind of person who is supposed to have billions of dollars?
Intelligent people were taken in by Walter Forbes and his company that always outperformed markets. They never asked to see company financials before risking billions of dollars. Forbes and his cronies did end up paying for their crimes, but, like many businesses taken over and hollowed out by capital, employees lost their jobs and their savings, and the world was robbed of a fun, creative video game company. Ken Williams was right that Sierra was killed, but Walter Forbes held the knife.
Pokémans
In October, rapper Logic paid $226,000 for a Pokémon card. It seemed, at the time, like a lot of money for something from 1999.
Not to be outdone, a guy who hosts a YouTube channel called “Dumb Money” cut a deal to pay $375,000 for a sealed box of rare first-edition Pokéman cards. He brought a suitcase full of cash and some cameras and live streamed it, and it went great:
Instead, a $375,000 cash transaction ended in disaster on Tuesday, when the buyer opened a sealed box that was supposed to be full of rare first-edition Pokémon cards live on YouTube – and found that the contents had been faked.
Confused? So was Chris Camillo, a “social arbitrage investor” and one of the hosts of a YouTube channel…
I’m…not really confused? That seems like the most obvious possible outcome of this scenario. Also, do I want to know what a social arbitrage investor is? No, I do not. In fact, everyone involved in this deal seems like a knob:
The three sellers were led by Jake Greenbaum, a “blockchain entrepreneur” who uses the Twitter handle JBTheCryptoKing and was billed as Logan Paul’s “personal Pokémon consultant”. The group had themselves bought the box, which was meant to contain 36 unopened “booster” packs and a total of 396 cards, from an unnamed third party and flown to Dallas, Texas, to complete the deal.
O…kay? Whoever tried to pull the scam didn’t do a particularly good job covering their tracks:
But a mood of anticipation as the box was opened quickly turned to bewilderment: at some point, the hoped-for rarities had been removed and replaced with filler sets that were commonplace, damaged, or otherwise worthless.
“Ooh, the colour’s different on that one and that one,” someone said. “That one’s not a first edition pack,” said someone else. “Yeah look, they’re open.”
“That’s an issue,” said Greenbaum, before getting on the phone with the original seller to seek a refund. “Yeah, no, that’s a major fucking issue.”
I am not an expert in trading cards, but if you can’t be bothered to use cards that all look the same, I don’t think you should count on receiving hundreds of thousands of dollars in cash.
For whatever reason, collectible card sales have skyrocketed during the pandemic. Whether it’s financial distress, boredom, or some combination of factors leading so many people to list their Pokémon cards on eBay, it’s become a craze among potential, uh, social arbitrage investors, because of course it has:
“I would have said 80-20 in favour of collectors earlier this year,” he said. “But now the only calls I’m getting are from people who don’t know anything about Pokémon but they say, this is a better investment than property, ‘give me five of your best Charizards’. It’s pricing people out.”
No! Pokémon cards are not a better investment than property! Stop it! The Dumb Money people and the Crypto King(s) and Pokémon consultants are all claiming this was not a stunt and no money was actually exchanged for the fake box, which is good, I guess. I look forward to covering future stories about highly skilled Pokémon counterfeiters and trading card provenance.
Magazine Scams
Last week, federal authorities in Minnesota charged 60 people in a decades-long scam targeting seniors. They claim the people involved stole over $335 million dollars from more than 183,000 seniors by charging them for expensive, often fraudulent magazine subscriptions. They also called and bullied seniors into paying fake debts. The Star Tribune reports:
Prosecutors say the scheme consisted of creating "lead lists" of people already on the hook for expensive magazine subscriptions who could be signed up for additional payments under the guise of discounts or cancellations. Some of the victims came to be billed by as many as 10 phony companies at a time and paid as much as $1,000 in monthly credit card charges, according to the indictments.
The telemarketers in on the scheme followed scripts that told them to falsely claim the victims owed a large outstanding balance for magazine subscriptions, then tricked them by offering to pay off that balance in exchange for a lump-sum payment, according to indictments. The telemarketers frequently intimidated the victims, such as in the case with Betty, by getting angry and making threats of legal action, the charges say.
Lovely. There are laws on the books designed to protect seniors from these sorts of predatory fraudsters, but they can be difficult to enforce, because many seniors are to fearful or embarrassed to report being ripped off. The magazine scammers took advantage of this, buying stolen lists of credit card and contact information in order to rack up charges for phantom magazine subscriptions.
How does this happen? I’ve talked about how “lead generation” works, and how the vast seas of data in the world can be misused by people with evil intentions. In this case, financial data was involved. Who is supposed to prevent this?
In theory, the banks. Loosely speaking, VISA and MasterCard are “bank card associations” which means that while VISA itself is a company, it is fundamentally an association of banks - such as Chase, Capital One, etc - who provide credit cards to their customers. The banks print VISA logos on their credit and debit cards, and in exchange they agree to a set of rules governing how payments are handled.
When a customer uses a credit card at a store, the store - the “merchant” - sends a charge across VISA’s network, and receives a response from the card issuing bank. If the customer has sufficient credit to cover the charge, it is approved. Pretty simple, right?
So how did these magazine masterminds charge hundreds of thousands of seniors’ credit cards for fraudulent magazines? In order to do this, they had to have a number of merchant accounts, each attached to a merchant bank. The merchant bank had full transparency into what each account was doing, who was being charged, and for what. At any point in time, the merchant bank could have audited the charges, or asked the magazine scammers to prove their business was legitimate. They didn’t. Why?
The answer is: banks make money whether charges are legitimate or not. Without going too deep into how merchant processing works - banks charge fees on every transaction. If a consumer feels they were charged erroneously, they can do a “chargeback” if the merchant won’t issue a refund. You’d think this means the banks are out the money, but they aren’t! The bank charges the merchant a fee for every chargeback, typically between $15 and 30 dollars, which is far more than the bank incurs in fees for dealing with the customer. Also, they withdraw the funds from the merchant’s account to return to the consumer. If the merchant gets too many chargebacks, they’ll typically get their merchant account shut down.
The bank card association sets thresholds for chargebacks - and most merchants easily stay below them. In the US, they are typically between .5% and 1% of total transactions, on a monthly basis. Why do I say typically? Because banks can make exceptions. If you are a small store with only twenty charges a month, and one person disputes a charge, you are unlikely to lose your account. Which makes sense. Also, if you’re a gigantic company the banks will let you get away with it:
As of 2014, Children and their parents were still clawing back money from Facebook at extremely high rates. About 9 percent of the revenue Facebook made off kids was eventually charged back by the credit card companies as recently as March 2014.
Nice. So, back to our magazine scammers - how did they pull this off for twenty years? Banks, at some level, had to know. While the charging documents don’t detail how the defendants were able to process $350 million in payments, the answer is obvious - merchant banks!
You might be thinking - if a merchant is caught doing a bunch of fraud, does the bank then turn their information over to, say, the authorities? Nope. The worst penalty the banks impose on problem merchants is adding them to an industry-wide blacklist, so they can’t open new accounts if the other bank checks the list during the application process, which is not guaranteed. I don’t know whether the banks justify their failure to turn over evidence of criminal behavior to authorities under bank secrecy or what, but it is typically the responsibility of the victim of the crime - the cardholder - to report fraud to the police.
Credit card fraud schemes depend on the vast majority of consumers not catching fake charges quickly, or at all - after a few days or weeks, the merchant can withdraw the deposited funds from their scheme and make off with them. Unsurprisingly, the only time a bank will utilize the court system is if a merchant steals from them - because they are obligated as a part of the card association to return the funds to the cardholder’s bank, even if the merchant has taken them. Steal from consumers? Fine. Steal from a bank? Oh hell nah.
In a past life - before I was a lead generator - I ran a digital payment processing company. In my experience, merchant banks were primarily concerned with checking boxes and keeping their “fraud” numbers under the card association thresholds, and they did little auditing or oversight of accounts. Once a merchant had gone through a cursory application process and had their account approved, as long as they didn’t raise any red flags, banks would allow them to operate unmolested.
So, it’s likely these magazine thieves were allowed to operate for as long as they were because they targeted a group - vulnerable seniors - least likely to report their charges as fraudulent, and the banks turned a blind eye because they make money on the charges coming and going. Nice, isn’t it? One bank employee getting a little curious could have blown up the scheme twenty years ago, but instead 180,000 seniors were bilked out of a third of a billion dollars’ worth of their savings. Very cool.
Small Cons
Salon - “"I can handle being around assholes at work. All my life. But not this guy," said one person, who described Miller as pugnacious, especially when he'd been drinking: "Get a little liquor in him, and you get the sense he's not somebody totally in control."”
BBC - “Blockchain trackers Elliptic and Ciphertrace reported that about 69,370 bitcoins were moved from an account believed to originate from the Silk Road.”
ARS Technica - “T-Mobile has agreed to pay a $200 million fine to resolve an investigation into subsidiary Sprint, which was caught taking millions of dollars in government subsidies for "serving" 885,000 low-income Americans who weren't using Sprint service.”