The Enemy of the Perfect

Are we all familiar with the expression, “The enemy of the good is the perfect”? The saying speaks to our natural human tendency to ditch what we have because of some perceived flaw, in favor of something completely different which we will then assume to be perfect. It comes from our arrogance: the idea that we’re good enough, we’re smart enough, we’re resourceful enough to make everything better, all the time, until everything becomes perfect.

One example might be our very own White House. The current administration seems largely populated by people who see flaws in free markets and flaws in our republic, and would fundamentally transform all of it. The direction they’re heading has been proven destructive pretty much since the Russian Revolution, but that doesn’t deter them from trying. This time, they say, things will be different and it will all work.

I like to turn that expression inside out, however, because when we talk about Heaven, I like to say that the enemy of the perfect is the good.

You see, here’s a piece of bad news: Heaven isn’t for good people. It isn’t even for very good people. Heaven is for perfect people.

Here’s more bad news: None of us are perfect. None of us ever have been.

And finally, even more bad news: on our own, with our own dedication and our own good deeds and our own compassion for our fellow man, none of us will enter into the Kingdom of Heaven, ever.

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Here’s the good news, however: we don’t have to try. God’s not going to require us to work to get into Heaven because He knows it’s a fool’s errand. He knows we’re not perfect. That’s why He gave us the extraordinary gift of His Son.

I like to use the criminal justice system as an example when I preach. Most of you know that I have some experience with the system, and I know from that experience (and, of course, from hundreds of episodes of Law and Order and NYPD Blue) that in general, a criminal defendant typically has only two opportunities to get a break in sentencing.

The first way to do it, and the one to which prosecutors seem to respond best, is to rat your friends. Turn on the others involved in your crime in the hope of saving yourself. “It was me, yeah, but it wasn’t just me. Marv was standing over there turning the water on in the sink and Sally was waiting for us in the car. Harry brought the ski masks.” Well, for better or worse, I never involved others in the crimes I committed, so that avenue was not open to me.

The next way to do it is what’s called extraordinary acceptance of responsibility. For example, when the FBI came to my door one bright September afternoon, our conversation could be distilled as one agent asking, “Do you know who we are?” and me saying, “Yes.”

He said, “Do you know why we’re here?” and I said “Yes.”

He said, “Did you do it?” and I said, “Yes.”

Then he asked me the hard question. “We know from experience that when this happens, it doesn’t happen to only one client. Did you do this to anybody else?” It took a little longer for me to answer, but I said, “Yes, and here’s his name.”

You see, if you save the government the time and effort of going through a trial to prove to a jury beyond a reasonable doubt that you did what you know you did anyway, they’ll give you a break at sentencing because the prosecutor got to keep his numbers up without any real effort. In contrast, if you make the government go through a trial to prove you did what you know you did anyway, then any apology or acceptance of responsibility you offer the Court after your conviction is going to seem pretty lame.

You know what else judges don’t like? Judges really don’t like the “I’m not such a bad guy” defense.

In each of my criminal cases, I had to stand in front of a judge and say out loud what I had done. “Your honor, no sense denying it, you got me. I violated Title 18 Sec. 1341, Mail Fraud, felony.” And that’s where I stopped talking. Because what the judge didn’t want to hear was, “But hey, look at all the things I didn’t do, Judge. I didn’t commit Bank Fraud, Securities Fraud, Tax Fraud or Wire Fraud. I didn’t commit murder, arson, armed robbery or rape. I’ve never practiced dentistry without a license, never shot a bald eagle, and never once have I taken my hot air balloon into the restricted space over the White House. I’m not a bad guy.”

If the judge had any sense of humor, he’d respond with, “Mr. Hughes, in recognition of your extraordinary accomplishment of committing mail fraud but not committing murder, I’m only going to sentence you today for mail fraud – not murder. In this Court, you only get sentenced for what you did.”

Too often we look at the gates of Heaven like a courtroom, and we delude ourselves into thinking that “good enough” is “Good Enough.” We mentally compare ourselves to the people around us, the great unwashed masses whose sins are way worse than our own when we consult our personal Sin-O-Meters. Look at that guy, we say to ourselves, if he can get into Heaven I’m sure I’ll be able to. Wow, he’s there? After what he did? He shouldn’t have a chance. And we raise our hand and we say, “Hey God, what’s the deal, how come that guy’s going to Heaven, he doesn’t deserve it like I deserve it?”

God’s appropriate response, at that point, would be a lightning bolt to the forehead of the questioner. But in the event God felt the need to explain Himself, he could point, wordlessly, to the Man on the Cross. Our standard, you see, isn’t the people around us. Heaven doesn’t have a finite number of places and we’re not competing with others for a seat. We shouldn’t be running around with rubber bracelets on our wrists with WWTGD – What Would That Guy Do – emblazoned on them. The standard is a perfect, sinless life, obedient to the last breath. And once we understand that we can never measure up to that, that we will never be “good enough,” then it becomes crystal clear that we need Him. We’re not going to do it – any of it – on our own.

An Empty Apartment

“Jean, do you want me to lock this?”

She would stop and consider whether she was going to go downstairs to get her mail, or whether she expected a neighbor or the VNA or her cleaning person. She would carefully deliberate for a few seconds as we started to leave. We’d reach the door, call over to her, “Jean, do you want me to lock this?” – and leave her in her apartment.

As she entered her late 80s, our friend Jean took a little longer to consider every decision. How much of a contribution to give the homeless shelter or the Cancer Society (it was always the higher number). Whether to keep or toss a bag of cards from friends and relatives (always kept for another day). And whether we should lock the door to her apartment on our way out after putting away her groceries, taking out the trash and updating her checkbook.

Jean had been in the hospital since January 5, and had moved to a nursing facility three weeks later. It was now the end of March. The plan was for us to buy a bigger house in time for her to come live with us, but in any event, she wouldn’t be coming back to this apartment.

Now it was Monday morning. Over the weekend, with Jean moved from the hospital to a nursing facility, we had moved her furniture, her family photographs, and all those bags of cards and letters out of her apartment. My wife – one of Jean’s closest friends, and certainly her dearest friend younger than about 70 – had enlisted her three sons to help remove all evidence of the last 11 years from the small two-bedroom apartment.

Jean kept everything. Everything. Meticulously wrapped family photographs. Her father’s bookkeeping records from the musicians union. Her parents’ grade school records. Performance evaluations from her job at West Point and her long, glass ceiling-breaking career at IBM. Carbons of her Maryland individual tax returns from the 1960s. And, just in case, her American Express statements dating from 1961 until 2014, when she closed her account because American Express wouldn’t waive their annual fee for a kind old lady who had been their customer for half a century.

But Jean was no hoarder. Everything was in a box, or occasionally a shopping bag. Everything was in order; there were no piles. Every spring we’d look through the previous year’s bills and pack them up in carefully labeled boxes.

It was now Monday morning after the move-out (more like a load-out, from my music business days). We had finished the last run the night before, scarcely 14 hours ago, and now the place was worse than empty: it was sanitized. Maintenance had been there and gone. Jean’s name was no longer on the door. Picture hanger holes were already patched, and the place smelled like fresh paint. I had expected that it would look much bigger than it had the week before, cluttered as it had been with moving boxers and Jean’s furniture – but instead it just looked empty, as empty as it did before my wife helped her move in.

This one last time, it was immaterial whether I locked the door behind me on way out. It didn’t make a difference. It was as though neither she nor anyone else had ever lived there. I left Jean’s keys, my key, my wife’s key, the mailbox key on the kitchen counter and let the door close behind me.

One Perfect Day

A budding accountant, about 1968

October 31, 1981 was 40 years ago Sunday. I was in my first year in college at my father’s alma mater, and my parents had come from Connecticut to visit so we could spend the day in Boston.

What a beautiful day. Cool, breezy, in the 50s. I don’t recall where we ate, but if we were together more than a few hours then my mom would have made sure we ate at least twice. My parents let me cry on them about the breakup with my high school girlfriend a few weeks earlier. They bought me a blazer at Saks and a winter coat at EMS on Commonwealth Avenue, one that I wore well into my 40s. When my dad bought a couple of shirts for himself at Brooks Brothers, he was subjected to a level of rudeness on the part of the sales lady that I still remember it (She must have come from Boston Brahmin money, because Boston Brahmins don’t care for Fairfield County types).

By the time they delivered me back to my dorm early in the evening we had all had a wonderful day, one full of harmony and promise and possibility. My father, who had graduated from what was then the Bentley School of Accounting and Finance in 1950, was excited to see the changes in the school and proud to have me majoring in a field similar to his. By all appearances it was the opening scene in the story of a great life, of productive college years, then a great first job and a solid career in finance. I was truly on my way.

The way, of course, was not that clear. I allowed my immaturity and lack of discipline to interfere with the tasks at hand, and by the time I dropped out of that school 19 months later, I was just another drug-using dropout on the lookout for an easy buck. A Criminal Justice professor whose name continues to elude me coined the term “middle class losers” about a decade ago, and that description suited me perfectly.

After a year working for a shady character who offered corporate safety services by day and distributed cocaine by night, I talked my way into a job as a commercial lender in 1985. I lost that job three years later over my abysmal work ethic and my inability to manage a 40,000 square mile territory on my own. Now married, I started preparing tax returns and doing monthly writeup, but the quality of my work was awful. I wasn’t halfway through the CPA exam in 1993 when I realized I was never going to pass it; not long after I had the same realization about three pages into the EA exam.

The more my work suffered, the more I depended on a winning smile and a calm, reassuring demeanor to make up for my lack of actual credentials. Having started stealing from them in 1993, the more my clients liked and trusted me, the more I took. And each time I stole something from a client, the decision to steal the next time became easier.

Every decision to steal or not steal, to study or not study, to get up or sleep late, to use drugs or not use drugs, changes life’s path. The momentous ones – the choice of a college, the choice of a spouse, the choice of a career – are recalled at anniversary parties, new partner celebrations or retirement banquets. But our lives are governed more by the dozens of decisions we make every single day than the ones we will recall with our families or coworkers. One could say that bad decision making begets bad decision making until a pattern emerges, but each choice still stands on its own. So while choosing the wrong path on Tuesday makes it more likely that one will choose the wrong path on Thursday, it’s also true that – as Anne Shirley might have said – that Thursday will be a new day, fresh and clean of mistakes. It’s never too late to start making the right choices, and that’s something that gives me great comfort.

That day in October 40 years ago was truly the beginning of a story. It just wasn’t the story any of us had in mind that day.

What Will We Remember?

Looking back, my sister Eileen was the one who noticed our Dad’s decline before anyone else wanted to accept it. I think it took me the longest to see it, and then I only saw it because I was with them much of the last year they spent in their house.

When I was working in accounting, I knew a lot of experts (or SMEs, in MBA-speak). If I had a question about the Earned Income Credit, for example, I had a client who, as a young lawyer in Washington, had helped write the enabling legislation. If I had an obscure question about S Corporations, I was acquainted with a Big 8  7  6  5  4 partner who’d experienced every S Corp question, every S Corp emergency and every S Corp tax disaster known to man. If I had a question about a recording contract, there were a half dozen reasonably powerful music business lawyers in Los Angeles or Nashville who would take my call.

But there was only one guy on the planet that I could ask the most important question. There was only one number I could call and say, “Sure, I know what the issue looks like and I know what the book says, but Dad, what do I do?” There was much he taught me that I never could have looked up.

I knew before my parents moved out of the house that Dad’s business mind was declining. The experienced auditor, CPA and retired CFO had been sending checks to some questionable “charities” that showed obvious red flags in their direct-mail pitches. His bill paying was slipping; he’d missed enough important payments that my credit score was actually higher than his (People who knew Dad might be surprised by that, but people who know me would be astonished!). I learned that he’d deposited a couple of scam checks and caused some minor embarrassment at the bank. I learned that he had agreed to pay a fee to a Jamaican guy claiming to be the president of Publishers Clearing House to ensure delivery of his Grand Prize. I took to intercepting most of my parents’ junk mail and turning off the ringers on every phone in their house except the one I carried.

After they moved, Dad’s decline seemed to accelerate. They were in a locked unit because my Mom wandered at night, and Dad really didn’t have a lot of engaging adult conversation with the other residents. In the nearly three years they lived in assisted living, he lost track of things – some small, some significant. We had stopped talking about the markets by 2018. I knew at one point that, when I needed an answer on how to approach a question from a Revenue Agent or how to record a particularly complex transaction, Dad was no longer the guy I could call.

But it’s funny, the things we remember and the things we don’t; the places in our memory that stay secure as we decline and the things we let go. Dad’s military service from 1943-1946 and 1950-1952 was a source of pride to him for nearly 70 years after he separated from the Navy. And we four kids were a source of pride to him from November 1951 until the moment of his death. 

One day I showed Dad a book I’d bought about Sumner and Gearing-class Navy destroyers, and opened it to a photograph of the ship on which he’d served. The Witek was in dry dock in Boston with her non-propeller propellers exposed. Dad looked at the picture and as soon as the ship’s name registered with him, he started explaining her experimental “new” (for 1951) propulsion system as though he’d just attended a briefing on the subject below deck.

On another occasion I showed him the website of the company from which he’d retired in the 90s. I mentioned that the company was using a new process to draw copper into projectile shells – and he started telling me about the metallurgical challenges with drawing copper that weren’t present with brass. He may have been his company’s Chief Financial Officer, but he knew the products and he knew the processes. 

But nothing filled his heart, or his memory, like his love for Peachy, our Mom, who he first encountered in the summer of 1946 when he came home from the Pacific to finish his senior year of high school. He remembered the first time he’d seen her; he was absolutely devoted to her until the last moment of his life. Our parents often told us that marriage was hard work, but seeing them together made it look like a 70-year honeymoon. 

More than one philosopher has pointed out that – with the possible exceptions of Gordon Gecko and Larry “the Liquidator” Garfield – no man dies wishing he’d spent more time at the office. At the end of his life, Dad remembered the Navy. And he didn’t remember the covenants and balance requirements attached to his employer’s 8-figure lines of credit with banks in New York or Dusseldorf, but he sure remembered what his company made and what they did. He remembered the grandchildren and step-grandchildren, recognized them by sight most of the time, and asked about them by name. And he remembered his love for Mom.

Dad died a year ago today with Mom at his side. At his funeral, I mentioned that he had taken up photography as a hobby well into his 50s and, characteristically, took it seriously and bought really good gear. Some of the best photographs of any of us, or of Mom, or of the grandchildren were taken by him. But it wasn’t the quality pro-sumer gear that made the pictures good ones (I have good gear and I’ve taken some really crappy pictures). It was the heart of the photographer. Our family pictures all say “This is a family I’d like to get to know better” because they were taken by someone who cared passionately for his subject. 

At the end of his life, Dad’s memory retreated to the things he cared most about. And after a year, it seems my memory of him has concentrated on the same things. I haven’t thought about  his war story about a three-year running battle with IRS on the valuation of certain tools in a long time – but I think about his smile, his laugh and his love every single day.

Miss you, Dad.

Two Cases, One Critical Similarity

I’ve just just read this story again. And this story. 

The short version of the first story is that Mr. Luis Nobre (left, below), a snappy dresser with truly fabulous hair, convinced the professionals (all of them PWSHKB*) at a large company to invest with him, promising significantly-better-than-market returns on their money. They took the bait, and ended up briefly losing €100 million.

In our second story, Stuart Howatson  (on the right) scammed three English hotels out of £2,800.

Javier Casado/Central News

Mr. Nobre’s gang employed a great deal of effort to swindle Allseas, and briefly gained control of 32,500 times as much as Mr. Howatson gained swindling the hotels. But both were able to manipulate their targets into overcoming their misgivings. The secret, as any fraud artist will tell you, is to get your mark to want to hand it over. In the Nigerian Prince scam, for example, the prospect of pocketing 10% of $24.7 million is dangled as a way to help you get over your skepticism.

Mr. Nobre’s gang got his targets to believe he could offer outsized returns because, they clamed, their enterprise was connected in some way to both the Vatican and the US Federal Reserve. And when it comes to whispered rumors of “special” investments, nothing says “special” like two of the most opaque institutions on the planet. Mr. Nobre didn’t promise Allseas hedge fund-level returns, because Allseas could have easily gone to Westport or New Canaan and bumped into 50 hedge fund managers on the street without involving a middleman. He had to go bigger and promise something unique, something reserved for the “in” crowd. The hook, of course, is directed at the emotional side of us – not at the logical, analytical side.

Bernie Madoff’s feeders did the same thing. They presented Madoff Investment Securities as so exclusive that, for some rich people, their money really might not be good enough. After the fraud unraveled, part of the sting for investors was the memory of how they’d clamored to get involved with Mr. Madoff in the first place.

In our second story, that of Mr. Howatson, he pretended to be an important executive in order to obtain services from hotels. But, of course not just any executive.

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You know, even without a business card or a corporate American Express card I could probably convince the front desk clerk in any hotel that I was a VP or higher at General Mills or ADM or Goodyear. But so what? Would they care? Fortune 500 vice presidents are a dime a dozen at every Airport Hilton in the country. And face it, those companies are so, well, ordinary. To them I might as well be Shelley Levene or Willy Loman. Do you think that would get me any favors at the front desk? 

No, Stuart Howatson didn’t pretend to be an important manager at just any company. He said he was the Chief Operations Officer of the Mercedes Formula 1 racing team. Now, the head of international tax compliance at ADM probably makes more than the Operations Chief at Mercedes-AMG Petronas F1 (actually I have no clue how much either one makes), but saying you’re a really good tax lawyer doesn’t get you relaxed credit guidelines at the Westin. Claiming a connection with the glamour of Hollywood or pro sports, however, may hold a stranger’s interest and draw that stranger into wanting a connection with the glamour – through you.

Mr. Howartson had previously caught a 20-month sentence for claiming to be and playing the part of a Metropolitan Police officer, even to his wife. But even then, he didn’t claim to be just any policeman. He added the details that he was qualified as an armed officer (not all English policemen carry firearms), that he was a dog handler (another engaging detail) and, of course, his backstory would not be complete if he had not claimed to have occasionally protected Her Majesty the Queen herself.

In general, people don’t fall for investment schemes and online frauds for logical reasons. They fall for emotional reasons. Sometimes they just don’t want to sound stupid to the telemarketer who calls at dinner time with a script crafted to make people think they’re stupid. Sometimes they want “in” on an exclusive deal that other people can’t get, maybe a method that famous people might have used. Think of the endless radio commercials for the Bank On Yourself method. They suggest that James Cash Penney and Walt Disney used that very method to become wealthy. True or not (and it’s absurd to think it is), the emotional response is to get involved with the scheme because a household name is connected with it.

Fraud is about ovecoming red flags, and it’s easier to overcome a red flag with an appeal to emotion than an appeal to logic. The piker in England may have only scammed a few thousand pounds from the hotels compared to the criminal gang that scammed Allseas out of €100 million, but the method behind the crime was exactly the same.

* PWSHKB, People Who Should Have Known Better

Where’s Your Prison?

Even though I’d developed an impressive list of stupid, destructive behaviors by the time I was 42, I’d never spent a night in jail before my first night in a federal prison. But I knew to turn around to put my hands behind me through the slot in the door for the CO (I’d probably seen it on television). He uncuffed me, the slot slammed shut, he walked away, and I was alone.

For perhaps the first time in my life. Really, really alone.

My clothes had been boxed up to be mailed to my ex-wife’s house. The orange jumpsuit (yes, it really was an orange jumpsuit) fit me alright, as long as I rolled the legs up some. I had no belongings and nothing to read. I’d read that inmates were allowed a Bible or comparable book, but the Book of Common Prayer a former pastor had given me was sent back home with my street clothes because it had a hard cover. So I had nothing.

I took stock of my room (the word “cell” hadn’t yet occurred to me). I estimated it was 16 feet long, eight feet wide. Two steel bunks, a shower, a desk, an integrated sink/toilet/steel mirror. The ceiling was quite high, 10 feet or so. “So this is prison,” I thought to myself.

For some reason it startled me when I noticed that the door had no handle on it. I thought, “That’s funny, how am I supposed to get out of here if – -”  Ohhhh, right. I’m not supposed to.

But what disturbed me more, oddly enough, was that my room had no light switch. I was at the mercy of whatever schedule governed the unit. A lifetime of miserable behavior had finally landed me in a real live prison, and this is what I was anxious about. It was as though none of the experience was real to me until I realized I couldn’t turn my light on or off at will. Some time around 9:00, I think, the lights clicked off. It had been an exhausting day, and I went right to sleep.

I was awake when the lights clicked on again at 5:00 (Well, it felt like 5:00. It’s not like I had a watch on). And a moment later it struck me: Hadn’t God turned the lights off every evening and then back on in the morning for my whole life? Without any intervention from me? Had I ever worried about that before? It dawned on me that for all I lamented my lack of control in the hours since I’d been locked up, I had never truly been in control in the first place.

Of all the lessons learned in prison, this was perhaps the most important: The belief that I was in charge, that I was in control, that I was running my own life in a vacuum apart from everyone around me – was a delusion. A lie I told myself. The fact was, I had been more in prison every day I spent on the street than I was in SHU at FMC Devens that morning. And once I fully surrendered the past, allowed all the spinning plates to come crashing down and accepted the opportunity prison would afford me, the real progress could begin.

 

Elder Fraud is Everywhere

My Dad said, “Tom, I need to do something with this check.”

My wife Denise had suggested that I leave our home in Vermont and stay with my parents in Connecticut for a few days after my mom’s hip replacement and ensuing complications. A few days had turned into what was at that point four months. I was at my usual place at their dining room table.

Their phone rang easily 20 times a day. Sometimes we’d get a ton of calls from the Jamaican scammers, other days we’d hear from Rachel at Card Services. The fake tech-support callers had scammed my Mom out of $1,000 in the previous year. So shortly after “moving in” I disabled the ringers on the house phones. The only phone with an audible ring was the cordless on my hip.

Not 20 minutes earlier I had had a disagreeable conversation with a Jamaican scammer who claimed I had promised to wire him some fee or another a few days earlier. During our conversation I realized that my Dad had probably spoken with him the previous weekend when I was back home in Vermont and unable to keep them away from the phone.

“What check, Dad?”

My father handed me a check made payable to him, at his address, for almost $8,000. It was printed on quality checkstock, drawn on an actual bank, on the account of a small manufacturer in central Maine. Dad had a vague recollection that he’d won some sort of prize and had to deposit this check in the bank.

I now had the rest of the story. The Jamaican guy on the phone was angry that I (because he thought I was Dad) had failed to wire the money to guarantee payment of the prize from – who else? – Publishers Clearing House.

The letter Dad showed me did indeed have Publishers Clearing House’s logo crudely photocopied on top. Along the bottom of the letter, also in greyscale, were the logos of Best Buy, and Wal Mart, and a half dozen other retailers and grocers. The only genuinely official-looking document here was the check – and instead of being drawn on the account of Publishers Clearing House in Westchester, it was drawn on the account of that small manufacturer in central Maine.

I questioned the authenticity of the check. His response: “Well, it sure looks real.”

To be continued…

Telling Stories

For the most part my work consists of speaking. At the beginning I make a point of telling my audience that I didn’t bring a PowerPoint presentation, and I didn’t bring instructions on how to use Excel to detect fraud in accounting records. I don’t use technology in my presentation because the topic (fraud, embezzlement and abuse in small business and municipal government) relates to a human behavior problem, not a technological problem. After making that point, I spend most of my time telling stories.

We’re all affected differently by someone who says, “If you do A, then B might happen,” than we are by someone who says, “I did A, and B happened to me.” We want some connection to the principle being discussed, some way to picture its application in real life. That’s why the most sought-after speakers are the ones who have some compelling story to tell, not the ones who study their subject matter and repeat it.

Aesop knew the value of using two characters, the tortoise and the hare, in a discussion about “slow and steady.” How hard would it be to describe that principle without telling a story?

The stories in each Gospel get Jesus’ points across with remarkable clarity. The Lost Sheep, the Lost Coin, the Prodigal Son – each one humanizes the point and allows the listener to put him or herself in the story. The beauty of the parables is that we can usually imagine ourselves as any of the characters in them, and take a different lesson from each.

In Boy Scouting, a leader can close a meeting or gathering with what’s called a Scoutmaster’s Minute, a brief story relating some point of the Scout Oath or Law. It’s usually some variation on a fable or a parable, but it’s always a story. It allows a young mind to focus on and remember the elements of the story about the child or the axe or the monkey (monkeys are always awesome in stories) while the principle quietly slips in beneath.

In business, the credibility accrues to the managers or leaders with the best stories to tell. We’re much more willing to follow someone who’s been down a similar path before, and those managers that have lived to tell the stories are the ones we listen to.

Trust, But Verify.

 

 

It was either just after 3 a.m. count or just after, I don’t remember. In the federal prison camp where I lived in 2005, it was unusual but not uncommon for the officers to allow some of us to read quietly or work in the unit’s library after bedtime, provided we stayed quiet, didn’t wander, and stayed put for the midnight and 3 a.m. counts. I was in the library with Jack, a lawyer from Michigan, and Lex, who was trained and licensed as a lawyer but had decided on architecture instead, and we were trying to help Jamie. Jamie had misrepresented his earnings and received a mortgage on a beautiful piece of property from a prominent family. And every time Jamie needed more money after that, he did a cash-out refinance on the home. You can do that… in a prolonged, booming market.

Jamie had a court date the following day (actually it was later that day). He’d been convicted of five counts of bank fraud for the original mortgage and four subsequent refinances. Since in the aggregate the total was over $1 million, he was facing a sentencing enhancement – more time – on the bank fraud charges. His legal reasoning was that because the bank was no longer on the hook for the original mortgage and the first three refinances, he shouldn’t have to face the additional charges or the sentencing enhancement. It was a stretch, I know. In general, you don’t get to claim you didn’t fraudulently obtain money just because you paid it back before you were discovered. I have some experience with that one.

My clear impression had been that on his applications, Jamie had simply filled in an amount of income he thought was appropriate for the loans and that the bank had simply approved them. It’s still bank fraud of course, but hey, people do it – right? But at one point I asked Jamie to confirm a dollar amount and he said, “Well, my wife’s W-2 said $200,000.” (I could be off by a few thousand on that)

He now had my full attention. I asked him, “W-2?”

“Sure,” he said. “My corporation recognized a liability to her for the salary they couldn’t pay at the time, and that’s the number on the W-2.” (I’m fairly sure that the amount they couldn’t pay “at the time” was probably $199,900.)

“Did you file a tax return and recognize a tax liability on that $200,000 in gross income?” I asked.

“Of course, not. She didn’t get the money. Why should we pay tax on money we don’t have yet?”

I realized at that point that my buddy hadn’t done anything that could be explained away as a misunderstanding or a question of interpretation or even a question about the definition of “income.” He had fabricated a document and presented it as proof of his wife’s income.

Patiently I explained to him that a W-2 is a cash-basis reporting return. It’s a record of actual money paid by an actual company to an actual person. It says real assets have been transferred from one entity to another. An executive with a successful company might be able to show a bank an IOU from his employer as collateral for a loan, but then the bank has the right to investigate the employer’s background and creditworthiness. In this case, had the bank looked into the employer’s finances, they would have seen, well, tumbleweeds.

I went to bed shortly after that, realizing that there was little I could do to help Jamie’s case.

 

The Moral (Besides the whole “Don’t defraud banks” idea) is that maybe it isn’t enough to see a W-2, or even a few paystubs. As a lender, with a customer’s paystubs in hand, I’d be interested in seeing his bank statement to locate the direct deposits from those paystubs. If he gives me a W-2, I want to see the tax return; I might even have him bring in a statement from the local  IRS office showing his account information (they can print on the spot, and they’re free). Our mortgage lender asked for our tax returns and verification directly from IRS when my wife and I bought this house. But Jamie’s bank hadn’t.

Trust, but verify. доверяй, но проверяй. Your customer’s loan packet is composed of documents he or she can produce, and some documents he or she can’t (or shouldn’t) produce. For the same reason our kid’s college wanted his high school transcripts directly from the high school, you should gather information produced by third parties. And things might get interesting if you compare it to the information your customer gives you.

Wells Fargo’s behavior was miserable and unethical. But was it fraud?

Okay, so as far as I can tell, the retail sales culture at Well Fargo was more Glengarry Glen Ross than neighborhood bank. And there was clearly plenty of misbehavior from the top of Carrie Tolstedt’s organization down.

But was it fraud?

 

Maybe I’ll find out I was wrong, but it appears the overwhelming majority of “fake” accounts were opened for fake customers. That tells me that the sales quotas and incentives were for new accounts, not for revenue generated. There appear to be multiple accounts opened for actual customers and actual credit lines opened, but I still have to ask, how much revenue did the fake accounts create – and how much of an effect could any fake revenue have possibly had on WFC’s financial reporting? If I have a Wells Fargo VISA card sitting in a drawer in some branch somewhere that I know nothing about, I’m not paying interest, I’m not generating transaction fees and I’m not paying overlimit or late fees. Questions about identify theft on the part of the local staffer aside, that account is a draw on WFC’s earnings – not a bump.

 

Here’s another thought: to the extent that their customer base was artificially inflated, and to the extent that call center provisioning is based on the number of customers, wouldn’t that mean that Wells actually could have been over-provisioning their call center resources, leading to more responsive customer service than they might have had?

 

For Senator Warren to suggest that CEO John Stumpf give back his earnings and bonuses is pretty rich. Given that Harvard Law hired Ms. Warren largely because of her fraudulent claim to be part Cherokee, when will she be giving back the $300K per class taught that she was “earning” there? That’s a clear case where her revenue did indeed increase dramatically after her false statements.

If anyone should be looking at this, it might be the labor boards in the states Wells has branches, because the sales culture was so fierce and pressure to produce so great. But to the extent their earnings weren’t materially inflated due to the fake accounts, the only fraud here would be on that singular line in their annual report that says, “We have X million customers.” What was the dollar value of that?

It must have been a miserable place to work. And managers may very well have prospered for demanding unreasonable results from the ordinary workers. And Wells’ culture looks like it needs a serious adjustment, perhaps with the assistance of a little-known speaker on business ethics from northern Vermont.

Just don’t call it fraud.