Financial fraud has a long and rich history spanning back to 300 B.C. when a Greek merchant called Hegestratos took out an insurance called a bottomry. He then borrowed money and promised to pay up when his cargo of corn was delivered. If the merchant refused to pay up the lender could seize the cargo and the boat that the is used to transport it. Hegestratos had planned to sink the boat carrying the corn, keep the loan and sell the corn. However, his plan failed and he drowned after he sunk the boat. These days we need to be more vigilant about scams than ever before as online scams have become increasingly convincing, making sure that you educate yourself about different scams out there can reduce your chances of falling for scams.
The First Insider Trading Scandal
In 1792 when America had just been founded the first example of fraud in the young country was recorded within a few years after conception. This involved an insider to President George Washington’s inner circle leaking insider information to his friends, who were able to make investment decisions that would benefit them. After this, the insider would leak pieces of select information to members of the public. This at times can cause a buying frenzy, meaning that the investments that the friends of the insider will rapidly appreciate in value.
The Pioneering Daniel Drew
Daniel Drew operated in the second half of the 19th century, he became a financial broker who worked with cattlemen whom he convinced to give him large sums of money so that he could buy shared transportation stocks. Around this time transportation networks serving both people and goods transportation were in their infancy and there was a lot of money to be made. Daniel would buy all of a company’s stocks, then spread negative information about the company causing the stock price to plummet. At the same time, he would encourage other investors to sell their investments within this company. At this time it was possible to sell short many times the actual stock outstanding. When investors tried to cover their short positions Daniel insisted on a high premium, leading to Daniel reaping the rewards and investors losing a part of the value of their investments. Back then there were limited things the investors could do after being scammed, but these days you can contact investment fraud lawyers who will be able to maximise your chances of getting your money back.
After World War 1 more Americans became aware of the stock market, this led to an increased amount of money flooding into the investment market. This surge of money was led by retail investors who are your everyday average people investing in the stock market, instead of wealthy investment bankers almost exclusively operated within the stock market before this time. Market manipulators took advantage of this by creating stock pools, which were very similar to bigger versions of the Daniel Drew investment scams. What tipped the edge is the fact that the profits made through this scam were enough to convince management within companies to make business decisions or create scenarios that would either affect the company’s performance for the better or negatively affect the company in the short term. Effectively managers in companies were sometimes making decisions that they knew would damage their company’s stock price because they were being paid themselves by the people profiting within the stock pool scams.
As long as there is still a benefit to financial fraud it is likely always going to happen to some extent, what we should take away from this is to be careful about our investments and understand that there are market forces in play that could affect market performance in strange ways. Even if you think that an investment is completely safe, it likely isn’t.