An Endless Stream of Lies (5 page)

Hundreds of years before Dr. Donald Cressey put forth his theory with regard to the fraud triangle, Bacon had addressed the pressure/motive element most succinctly. In the above quote, Bacon is telling us that circumstances (pressure/motive) “putteth a man out of his precepts”—meaning that circumstances, especially new circumstances (consistent losses in the stock market for example), can serve to reveal a dimension of the person that had heretofore not been made manifest. Pressure/motive does not create a fraudster but rather reveals the fraudster that has been within all along. It is interesting to note that, after falling into debt, Bacon himself was convicted of taking bribes. Apparently, for Bacon, debt did indeed “put him out of his precepts.” Oh well.

In Robert Louis Stevenson’s (1850–1894)
The Strange Case of Dr. Jekyll and Mr. Hyde
, Doctor Jekyll provides a telling account of his transformation and actions. Within the narrative, he reveals:

“The drug had no discriminating action; it was neither diabolical nor divine; it but shook the doors of the prisonhouse of my disposition; and like the captives of Philippi, that which stood within ran forth. At that time my virtue slumbered; my evil, kept awake by ambition, was alert and swift to seize the occasion; and the thing that was projected was Edward Hyde. Hence, although I had now two characters as well as two appearances, one was wholly evil, and the other was still the old Henry Jekyll, that incongruous compound of whose reformation and improvement I had already learned to despair. The movement was thus wholly toward the worse.”

The drug did not turn Doctor Jekyll into the evil being into which he transformed; rather, it released the being that was waiting patiently all along in the anteroom of his heart.

With my profound apologies to Mr. Stephenson, let’s take license to make a couple of wording modifications in his account, as if the character were Alex, and not Doctor Jekyll, to illustrate our point:

“The
losses (that) were being generated
had no discriminating action; it was neither diabolical nor divine; it but shook the doors of the prisonhouse of my disposition; and like the captives of Philippi, that which stood within ran forth. At that time my virtue slumbered; my evil, kept awake by ambition, was alert and swift to seize the
opportunity
; and the thing that was projected was
Alex Klosek the fraudster
. Hence, although I had now two characters as well as two appearances, one was wholly evil, and the other was still the old
Alex Klosek
, that incongruous compound of whose reformation and improvement I had already learned to despair. The movement was thus wholly toward the worse.”

At this point, opportunity was now added to pressure/motive. Two of the three requisites for fraud as presented by Dr. Cressey were now in place.

Pausing for a moment, we have more to explore regarding this pressure/motive dynamic before we travel further downstream, past Alex’s stock trading, financial evaporations of the investors’ resources, to his rationalization. First, it is necessary to go back up stream to find the source of Alex—who had no real life experience trading stocks—having become involved in such a financially perilous undertaking. How did Alex become involved in trading stocks? Once more we look to his testimony.

Q. Now, as of early and mid 2001 when you moved over to CEP from One-to-One Wireless, did Mr. Noel know anything about this trading program that you had developed in college?

A. Not at that time.

Q. Directing your attention to the fall of 2001, did that change?

A. Yes, it did.

Q. Can you tell the jury what happened in the fall of 2001?

A. In the fall of 2001 — we had the September 11th attacks in 2001. Bryan knew I had an interest in the markets, and his accounts had taken a substantial hit since the 2000 stock market decline, so at that point I took over the management of his personal account in terms of logging in and making stock trades.

Q. Well, what was it that caused Mr. Noel to have you start engaging in his trading in the fall of 2001? Did you tell him something?

A. Yes.

Q. What did you tell him?

A. I had told him about the system that — — — — and I had developed.

Q. So Mr. Noel gave you access to his personal trading accounts?

A. Yes, he did.

Q. And at that time, approximately how much money was in those personal trading accounts that you were managing?

A. I do not recall the exact figures, but it was somewhere in the 10 to 12,000 vicinity.

Q. 10 to $12,000?

A. Yes, 10 to $12,000.

Q. Did you trade those monies?

A. Yes, I did.

Q. Did you use that program you developed in college?

A. Yes, I did.

Q. Is this the first time you had ever used real money for that program?

A. Yes, it was.

Q. How did it go?

A. It went pretty well for 2001 and early 2002.

Q. When you say “pretty well,” what do you mean?

A. The returns that it produced were something on the order of 20 to 25 percent annualized.

Q. And this was from sometime after September 11th, 2001, you said, through 2002?

A. Yes, it was.

Q. And when in 2002? How long did you keep doing that?

A. 2002, probably about May.

Q. At some point you have a discussion with Mr. Noel about whether others could be offered these trading services.

A. Yes, we did.

Q. When was that?

A. That would have been sometime in early 2002.

Q. Tell the jury about that.

A. Bryan was impressed with the results that were generated in late 2001, Bryan Noel, and he said this could be something that could be offered to the existing CEP clients that we had.

Q. Only the existing clients?

A. It could be offered to new clients as well.

Q. And so was the decision made?

A. Yes, it was.

Q. And what was the decision?

A. The decision was made to make this available to new and existing clients.

Q. To make what available?

A. To make this trading system available.

Q. Were clients going to be told about this trading system?

A. Yes, they would be.

Q. What — was there a decision made about what type detail was going to be provided to them about the trading system?

A. That would be a system that does involve day-trading and invests all the funds in stocks.

Q. What — when you say “all the funds,” what funds were supposed to be invested in the stock market?

A. Any incoming client funds that were designated as such for that type of trading.

Q. And were funds that were designated as such put in a particular account?

A. Yes, they were.

Q. And what account was that?

A. They would have been put into Pinnacle’s bank account and, ultimately, broker’s account.

Q. So prior to early 2002, you said that Pinnacle was not involved in money management?

A. That is correct.

Q. But after early 2002, was Pinnacle involved in money management?

A. Yes, it was.

Q. And based on your discussion with Mr. Noel, what were clients told about how those Pinnacle funds were going to be managed after early 2002?

A. Those investors would have been told that they were being used for a relatively rapid day-trading system and that all of those funds would be invested in the stock market.

Q. Now, who was going to be out there promoting this program to clients?

A. That would have been Bryan Noel and the other sales staff.

Q. And was the other sales staff told about the trading program as well?

A. Yes, they were.

Now, we have discovered that the source for the stock trading tributary was Alex and not Bryan Noel. Alex was the one who “had an interest in the markets.” It was Alex who “told” Noel about the stock trading system that he had helped to developed in college. It was Alex that “took over the management of” Noel’s personal account. Verbs are telling in that they show action or state of being. Alex:

• Had an interest
  
• Told Noel
  
• Took over
  

Acting upon his market interest, Alex approached Noel and told him of his stock trading system.

As a result of that conversation, Alex took over. From Noel’s relatively small, personal investment, the trickle grew significantly into a raging river of investors’ money that ultimately evaporated, leaving over one hundred people high and dry.

ELEMENT THREE: RATIONALIZATION

“Rationalization” can be defined, “To ascribe one’s acts to causes that superficially seem reasonable and valid but that actually are unrelated to the true, possibly unconscious and often less creditable or agreeable causes” (Dictionary.com).

In Shakespeare’s tragedy
Othello
, there is a forceful example of rationalization. Othello had murdered his wife, Desdemona, as well as his loyal friend, Cassio. He committed these murders in an act of (unwarranted) jealousy. In the play, Lodovico asks the following:

“O thou Othello, thou wert once so good,
Fall’n in the practise of a damned slave,
What shall be said to thee?”

Othello replies:

“Why, any thing:
An honourable murderer, if you will;
For nought I did in hate, but all in honour”

The act of rationalization allowed Othello to attribute what he had done as an act of honor rather than a needless reaction of a jealous husband. Honor “seemed reasonable and valid,” whereas the more truthful “suspicion and distrust” lacked the nobility of the former.

While Alex was testifying, a question opened the door, allowing Alex to articulate his rationalization for his fraudulent behavior.

Q. What was going on in 2003 that would cause you to do something like this?

A. There were many circumstances in 2003, especially the latter part of the year where I had a bad breakup with an ex-girlfriend and I started drinking heavily, started smoking marijuana at some points from 2003 to 2004, and also even engaging in sexual activity at that time that I was hiding from my parents. Hiding many of those things from my parents.

As with Othello, our analysis of Alex’s words is most revealing. First, we have to put his response in context: Back to the question asked, “What was going on in 2003 that would cause you to do something like this?” We know “what was going on” as articulated by Alex, the pressure/motive of:

• Stock losses
  
• Fear of telling clients, lest they withdraw their money
  
• Fear of telling his partner
  
• Loss of position
  

Now, as to regarding the “cause,” i.e., rationalization for sending out false reports, Alex responded:

Bad breakup with a girlfriend resulting in:

• Drinking heavily
  
• Smoking marijuana
  
• Engaging in sexual activity hidden from his parents.
  

The juxtaposition of pressure/motive with rationalization forms an “If–Then” logic operation. Keep in mind that it is an idiosyncratic logic operation. Consequently, in Alex’s world, as he articulates it and we endeavor to understand it:

IF
someone is under pressure because of stock trading losses and fear of clients, partner and loss of position,

AND
subsequently there is a breakup in a relationship leading to drinking heavily, smoking marijuana and sexual activity unknown to parents,

THEN
the fraud becomes the optimal choice.

It is not necessary to agree with Alex’s articulation of his reality. It is only necessary to understand that it
is
Alex’s articulation of how things “operate” in his world.

Comparing Alex and the fraud triangle to the classic fire triangle (fuel, heat and oxygen), we find that the stock trading opportunity constituted the fuel, his articulated pressure/motive was the heat and his rationalization supplied the oxygen. Figuratively speaking, there was, at this point, fire on the water.

THOUGHTS, COMMENTS AND ANALYSIS

What are your impressions, to this point, with regard to this circumstance?

Exactly what do you know?

What is it that you
know
that you don’t know?

What questions would you ask in order to know?

What steps would you take in order to know?

POINTS TO PONDER

At another point in Alex’s testimony we read the following possible motivation for falsifying the account statements:

Q. And what were you going to do with regard to account statements after this meeting for clients?

A. There would be nothing different than what had previously been done.

Q. Which was what?

A. Which was showing them rates of return above two and a half percent per quarter.

Q. And the two and a half percent was a significant number why?

A. That was significant because that was the figure that was in the membership application that clients signed, when they came in to become clients, stating that no fees would be taken for any performance figure below that.

1. What does the sentence “There would be nothing different than what had previously been done” bring to mind?
   
2. What does the use of the word “
   taken
   ”
   found in “no fees would be taken for any performance figure below that” bring to mind?
   
3. Does falsifying the two and a half percent return to clients illustrate pressure/motive, opportunity, rationalization or something else?
   
4. What questions would you pose to Alex at this point?