Bob Silbernagel Column December 21, 2008
Investors can’t help falling for liars, mine hucksters and stock frauds
Among several books I’m reading now is one titled, “A Hole in the Ground with a Liar at the Top.” It was written by Dan Plazak, a graduate of the Colorado School of Mines and a consulting geologist and engineer in Denver. Published by the University of Utah Press in 2006, it is subtitled, “Fraud and Deceit in the Golden Age of American Mining.”
Colorado receives prominent mention in the book, with stories of the great diamond hoax in Brown’s Park, attempts to paint South Park as a new gold-mining mecca, and the efforts of people like Horace Tabor, David Moffat and Jerome Chaffee to seriously overstate the amount of ore available in Leadville mines in order to fleece New York investors.
California and Nevada are also well represented, particularly with respect to the Comstock Lode in Nevada and efforts in California to hype the value of various mines in Nevada. Often that meant lying outright about them or salting with ore from other locations to make them appear better than they actually were.
What’s fascinating throughout the book is how often a similar story repeats itself. A charming swindler with little money of his own but a great story about potential riches convinces wealthy, knowledgeable financiers to invest in his scheme.
Consider the following statements, for example:
• “Leadville, Colorado, became the first great mining district controlled in New York, whose shareholders were in for an education in the ways of mine swindlers.”
• “Potential shareholders were awed by the display of conspicuous consumption by the newly minted millionaires from the hinterland.”
• The scheme was “exceptional, mainly for its size, the length of time he was able to run his con, and the affluent and sophisticated circles in which he operated. There is something especially shocking when a man held in high esteem turns out to be a thief.”
Whoops! I got a little confused. That last quote wasn’t from Dan Plazak’s book about mining fraud in the 19th century. It was from The Wall Street Journal’s editorial last week about securities broker-dealer Bernard Madoff, who has been running a Ponzi scheme for years.
Madoff managed to con wealthy Wall Street investors into joining his scheme, along with Hollywood celebrities and a number of charitable organizations. His alleged fraud runs in tens of billions of dollars.
Last week it was revealed that Madoff didn’t actually have any money in his investment setup.
He paid dividends to older investors with funds received from newcomers — the very definition of a Ponzi scheme.
All of it, of course, was too good to be true, which is why investors kept flocking to Madoff’s scheme. The fact he was a charming man who appeared to be doing well himself no doubt helped.
According to Plazak’s book, Moffat and Chaffee paid for an expensive private train car to take them from Colorado to the East Coast in 1879 to persuade wealthy New Yorkers to invest in their Little Pittsburg Mine. And the New Yorkers were awestruck. The mine must be doing well, they thought, if the owners could afford to travel in such luxury. Investors rushed to join up and stock prices soared.
In fact, the mine was nearing the end of its productive life by that time. But Moffatt and Chaffee even brought potential investors out to Leadville to visit the mine, and hired mining engineers to vouch for the future potential of the mine. Investments continued to soar and the two men made a killing by selling most of their stock when prices were peaking. Tabor, an original partner, sold his stock earlier for a cool $1 million.
By the time the New Yorkers learned there was little money to be made with the mine, all three men had moved on to other endeavors.
Funny how wealthy investors today seem just as impressed with charm and displays of wealth — albeit without the gold nuggets — as they did 100-plus years ago. And it’s not just in the United States.
The Wall Street Journal carried another story of stock fraud last week, this one about a Danish software entrepreneur who simply fabricated most of his contracts to hype his stock. The 41-year-old business wunderkind disappeared from Denmark on the very day he was named that country’s entrepreneur of the year. He was later arrested in Los Angeles, and charged with bilking stockholders out of hundreds of millions of dollars.
Is it any wonder that bundled mortgage securities and other financial instruments that few people really understand found eager investors, who believed the market would continue rising indefinitely? Falling for risky investments seems to be in our DNA.
Is it any wonder that no one seems to really have a handle on what the stock market will do in coming months? Even the most astute business folks seem to be easy prey for the next promoter to arrive in his private train car, limousine or personal jet and convince us he has just the deal for us.
By the way, I have discovered a deposit of 99 percent pure titanium in my back yard, and I’m looking for investors.