Fraudulent conduct is as old as humanity itself. And it’s not going away.
A Distinction: Bad Fraud v. Desperate Fraud
Not all fraud is alike.
My first experiences with fraud [or what might have been fraud – I’m not really sure] are in early high school days. Growing up on a livestock farm in middle Nebraska, I want to start a cow herd and raise some sheep. So, I buy a heifer, a half-dozen ewes and a ram. Turns out the heifer is barren and the ram shoots blanks: not a single baby calf or lamb to show for my entrepreneurial efforts. [So I’m now a lawyer instead of a rancher.]
–I’ve often wondered if the merchants who sold this young kid those defective-as-breeding-stock animals back then actually knew . . .
And my professional career, as a bankruptcy lawyer and commercial litigator, has often centered around the fraudulent conduct of others. My first professional experience with fraud comes in 1980 or 1981 [during my first year as a lawyer]. I’m in my office one Saturday morning when the phone rings. It’s a bank client of our law firm. He says they are inspecting collateral [a bunch of hogs] at the customer’s farm. As they are leaving, other bankers [from a competitor bank] drive in.
–They ask their competitors, “What’s up?”
–The response is, “We’re inspecting our collateral,” pointing to the hogs.
–“Those are our collateral,” retorts our client!
And everything goes downhill from there . . .
The two stories above reveal two types of fraudulent conduct.
The first might be characterized by the phrase, “Bad people do bad things.” A person who embarks upon an intentional plan to take value from others by lies, cheating and deception is a bad person . . . period. An ancient example is the Thomas Pitkin / Thomas Brerewood affair discussed below.
The second is characterized by the phrase, “Desperate people do desperate things.” An entrepreneur in difficult straights will often begin to do desperate—and deceptive—things to keep the enterprise afloat. This is not a bad person . . . merely a desperate one. A heart-strings example might be someone who steals bread to keep the family from starving.
These two types of fraudulent conduct are deserving of differing treatments under the law and should be viewed differently by society. But the reality is that bad people often get away with bad conduct while desperate people often pay a heavy price. And sometimes its difficult to distinguish one from the other.
An Ancient Example of “Bad” Fraud: The Pitkin / Brerewood Affair
The following is the story of an ancient fraud in the category of “bad people do bad things” — and get away with it. Their creditors aren’t so lucky.
The story is told by Professor Emily Kadens in “The Pitkin Affair: A Study of Fraud in Early English Bankruptcy” (84 American Bankruptcy Law Journal 483 (2011)). All information and quotes below are from this article.
“In 1705, two London merchants, Thomas Brerewood and Thomas Pitkin, attempted to pull off a massive bankruptcy fraud. Although the conspirators were quickly caught, unraveling the scam required three large insolvencies and four acts of Parliament over the course of more than forty years.”
“On Saturday, February 10, 1705, Thomas Pitkin” met with “Thomas Brerewood, in the Swan Tavern in Cornhill, in the heart of the mercantile district of London.” They met “to pull the trigger on a fraud that had been at least nine months in the making.” Then Pitkin left London, “absconding first to Scotland and later to Holland, and setting in motion an economic panic, an international manhunt, and a reform of English bankruptcy law.”
At the beginning, Pitkin “was successful enough to have contracted a marriage with the daughter of a wealthy merchant,” while Brerewood served “as the procurement agent for army regiments” and was a “man of means.” Though Pitkin “was the face of the scandal, contemporaries believed” that Brerewood “masterminded the scheme” and made Pitkin “an effective, but perhaps not particularly enthusiastic, dupe.”
For the fraud itself, Pitkin used Brerewood’s money to pay off early “some of his existing creditors” to give the impression “that he was flush with cash in the wake of his profitable marriage.” Pitkin then amassed “a huge quantity of merchandise on credit” and “secretly passed them on to Brerewood.” Pitkin also “transferred his entire estate to Brerewood” so his creditors “would find nothing left to go after.” They “envisioned that Brerewood, who actually held all the goods, would step forward and graciously offer to buy the debts of Pitkin’s creditors for about forty cents on the dollar.” They “assumed that the creditors would be anxious to get something and would agree to the deal.” Then they “would split the remainder,” and Pitkin “would be able to return to England free of liability or risk of bankruptcy.”
“The plan did not work out quite as intended” once Pitkin’s creditors learned he had absconded.
Getting Away With It v. Paying a Heavy Price
At the conclusion of the forty years of insolvency proceedings and four acts of Parliament that ensued, here are results for the parties involved.
–The Fraudsters / Conspirators (Bad Fraud)
Brerewood received a bankruptcy discharge and “walked away freed of the debts and penalties incurred by his fraud.” He moved to Maryland in the New World, to spend the rest of his life. There, he is believed to become “an innovative and successful land manager.” He gained control of a 10,000 acres tract of land through his spendthrift son’s financial problems [this sounds a tad familiar] and divided the tract “into lots, obtaining tenants, (whom he insisted pay their debts), and founding a short-lived town called Charlotte Town on the site of the present Monckton, Maryland.” Then, “in 1741, Brerewood became clerk of Baltimore County, a well-remunerated position he held until his death on December 22, 1746.”
Pitkin survived everything and continued residing in London. “By 1718, he was living in the small East Anglian village of Belchamp Otten with his fourth (or possibly fifth) wife.” Pitkin’s ability to create strife and animosity is revealed in the will of one of his former brothers-in-law: Elias Rich left to “the children of my Sister Pitkin deceased one shilling each and no more.” Pitkin “died at age seventy-five in Belchamp Otten in 1740.”
Luce is one of Pitkin’s co-conspirators. He “faced prosecution by the Crown in May 1710 for his role” in the scam, “but the trial was postponed and no further record of it has been found.” At his death in July 1712, Luce “owned a substantial estate,” and Luce’s estate inventory listed a debt of “£327 owed by one Thomas Pitkin.”
–Their Creditors (Desperate Fraud)
John Coggs and John Dann
Coggs and Dann were Brerewood’s bankers. They fared poorly from the entire affair, becoming insolvent and bankrupt. They did some deceptive things along the way–out of desperation. And, of course, they paid a heavy price.
“John Coggs died in 1710, an old man whose long career as a trusted banker had ended in ruins, though he did have the wherewithal to have a monument in his memory erected in a Buckinghamshire church.”
“John Dann spent a number of years assisting the trustees in liquidating his assets. Although it seems unlikely that the trustees left him completely penniless, when he died in 1722 his will requested only that his funeral expenses and debts be paid as soon as possible, and he left no specific bequests and named no property, merely leaving his entire estate to his wife.”
Merchants and others who lost money in the scam received a limited return from the bankruptcies of Brerewood, Pitkin, Coggs and Dann. But creditors did some desperate things to protect their interests. And their reputations were sullied from reports of their own injustices in the process. For example:
1) When one creditor is asked about “the justice of their prosecuting Brerewood so violently, after [the creditors breached] so solemn an agreement between him and them, and of the hardships and injustice they had done Mr. Coggs and Dann,” he “made this or the like answer: Justice! (he said) they did not mind justice, the Parliament designed them money, and money they would have right or wrong.”
2) Daniel Defoe wrote of creditor misdeeds in this case: “no Bankrupt will ever compound with Creditors again; but when they fail, make the best of their way for Turkey or Barbary, where they may expect more Justice and Humanity.”
Try as we will, it’s difficult to deal with fraudulent actions by those intending from the beginning to defraud others. And when such people do their dastardly deeds, they often survive handsomely, while those with whom they deal are injured, if not ruined entirely. It’s a problem.