Motley Fool Hidden Gems Investing - Scams, Secrets, and the Future of Fraud

Episode Date: March 26, 2023

Even if there are not many obvious warning signs, a gut feeling can tell you when something seems amiss.  Kelly Richmond Pope is the Dr. Barry Jay Epstein Endowed Professor of Forensic Accounting at DePaul University and the author of the book “Fool Me Once: Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry.” Pope joined Ricky Mulvey to discuss: - How to talk to aging relatives about fraud - What your “gut feeling” can tell you about potential scams  - What generative AI means for the future of fraud Company discussed: WFC Host: Ricky Mulvey  Guest: Kelly Richmond Pope Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. I'm sure that there were layers above her that were also responsible that that tone at the top is so important and so I would like to see other people one two or three jobs ahead of of her that are also charged because I don't believe she was the mastermind and I don't believe that we have found the mastermind behind the Wells Fargo scandal I'm Chris Hill, and that's Kelly Richmond Pope, a professor of forensic accounting at DePaul University. She's also author of the brand-new book, Fool Me Once, Scams, Stories, and Secrets from the Trillion-Dollar Fraud Industry. Ricky Mulvey caught up with Pope

to talk about takeaways from the Wells Fargo account scandal, how to talk to older people your family about potential scams, AI's role in the future of fraud, and what happens when college students try to cheat a forensic accounting professor? I'm sure you interact with folks who say that I'm not going to get caught in a scam, that's for people who aren't as smart as me. Well, ironically, I don't hear that a ton Because I think so many people realize now that it can happen to them, that they are, I think, more fearful and more likely to want to know how to protect themselves than to think I can outsmart somebody who is spending 24 hours a day trying to think about how to take money from me or how to impersonate me. or, you know, it's, there's somebody that's working to defraud us all the time. So to think that you can outsmart that person is, is a, is a hard, I don't meet a lot of people who think that

or say that. I hope there are not a lot of listeners who think that. In your book, you mentioned that the AARP estimates that people over the age of 65 lose about $5 billion a year to fraud. A lot of that goes unreported because when someone is victimized by a fraud, they feel ashamed. They're, they're embarrassed, they don't want to talk to anyone. What's your advice to someone who has an aging parent or grandparent, and they want to have the talk with them about how to avoid frauds and scams? My advice is really to set up a family business meeting where you are reviewing your bank statements. That's something that we don't do a lot anymore, especially as everything has become electronic. But the bank, you can

request that statement, you can download the PDF, sit down with your parent and review that monthly to just see what are the transactions. Not to say that someone has hacked into their account, but you want to pay attention to what your parent or loved one is paying into. Because sometimes they could have gotten into a scam and they are giving $5,000, $10,000 a month to something. And so you can notice that behavior because there's no one else that's going to notice those anomalies if it's not you. So spend the time to review that bank statement with them is my first piece of advice. Secondly, just making sure you have an open line of communication because a lot of times as our parents get older, they do become defensive and they can become embarrassed by sharing that

financial information. So hopefully if you've established a culture of talking about money matters in your household, by the time your parent gets to the age that they need some assistance, those conversations are much easier. Unfortunately, many of the conversations happen after the fact. One of the common scams is that a grandparent gets a text, hey, this is your grandchild, I'm in a lot of trouble and I need you to wire me $3,000 to $10,000, let's say. After that happens, the grandparent can be defensive, ashamed, embarrassed. What about the post-fraud discussion? How do you open the door to have those conversations in an honest and open way? When that situation happens,

coming to the table with maybe your own personal fraud story or the fact that you could be vulnerable too, I think the embarrassing part is sometimes when we are quote-unquote reprimanding something, we make it seem as though we would never fall for that. But I think if we can empathize a little bit better to show our loved one how it could also happen to me. Something almost similar did. I think it helps to have that conversation and put those controls in place post fraud so that it doesn't happen again. And then just saying, if something ever comes to you that just seems odd, stop, pause, and call me. Because a long lost grandchild, this shouldn't be the first time that you've heard of it. Do some fact-checking. Ask two people in your family

or in your community, does this make sense and how can I follow up? I think that failing to ask for help is the first mistake that the elderly can make. One of the ways that many get caught in frauds and scams that you mentioned in your book is that we don't listen to our gut. What's the evidence that our gut is good at detecting frauds and scams? Well, there's a lot of neuroscience research that talks about the gut being your second brain. And if you think about it, we can all go back to a situation where we say it's our intuition or something told me not to do this and I didn't listen to it. So our gut is giving us cues, often nonverbal cues, but these cues that are telling us danger, danger, danger. So when that heart is elevated, when you start sweating,

when your thoughts are a little foggy, when you feel uncomfortable, you need to pay attention to all of those things because your body is telling you something. And so I think that a lot of the fraud interviews that I've done, whether it's been whistleblowers, whether it's been victims, whether it's been perpetrators, they all talk about this second brain, this second sense that's telling them or the seventh sense that's telling them I shouldn't have done it or I should whistle blow sooner, or something told me not to pick up the phone and write that check. So we all have it. We just tend to suppress it for whatever reason. It could be culturally, it could be age, it could be gender reasons. Who knows why we suppress that voice? But there's a lot of

neuroscience research that talks about we do it often and we shouldn't. Sometimes that voice is awfully quiet. You highlight Bill Bailey. He was a financial advisor who's running a Ponzi scheme with client money. And from the outside, it's easy to say, oh, well, couldn't you see the statements and know that this guy was running a scam or a fraud? But in this case, why is it so difficult to tell that a financial advisor is actually running a fraud with your money? You know, the Bailey case was a tough one for me. I flew out to Asheville, North Carolina to meet Mrs. West. And she was, oh gosh, when I met her, she must have been late 70s, early 80s at the time. And when I tell you, she did everything right. She did all of her

due diligence that she could possibly do. She checked out this financial advisor and the only red flag was the fact that the statements were on paper that seemed like a wedding invitation. That was it. And so she thought that was odd, but didn't feel that she had the financial savviness to really question, why does this statement seem very different than any other financial document that I've ever received. That was that gut feeling that something was wrong, but she suppressed it because you sometimes feel like when you hire an expert, they know more than you. And so you, you give all of your power to that person. And that's exactly what the West family did. And that was a tough case because there was so little that they could have done. And that second

voice, that second brain, that gut feeling told her that something doesn't seem right, but it's not that big of a deal. I'm just going to let it go. I normally don't receive financial information on anything that looks like heavy card stock like this, but maybe he does his business a little bit different. She, she assumed the good in him and you see what happened. You read the story in the book, but I think that, um, that was a tough case for me because with that one, I even did some expert witness testimony in that case, trying to help the victims. But in the end, um, they, lost. And there was not much they could do. But that one little thing, that one little red flag that is waving, that's waving, and maybe just waving really softly, you got to pay attention

to it. And had Mrs. West done that, if she started asking just a few more questions, it would have started unraveling that Bailey was running this massive Ponzi scheme. But so sometimes those red flags can be small and minor, but we still got to pay attention to them. What are the questions that Ms. West should have been asking? Well, I think when she received that first statement, I think she should have gone to Mr. Bailey and said, this seems odd. And I don't understand why this looks different than other financial matters that I've been involved in. This is not my first. This isn't my first rodeo. So she had been running her farm. She had been in financial transactions in the past.

And so she could have approached him, or she could have asked someone else in the financial investment community, hey, take a look at this. I know I'm not your client, but I could really use your help. She could have got an AARP and put them on alert. She could have asked some people outside of the circle, but I think that she could have just asked Mr. Bailey a question first, and that might have made him a little nervous. He might have then said, okay, she's going to start asking questions. Or she could have said, you know, Mr. Bailey, I'm a little concerned, so I'm going to bring

in my son or daughter. I'm going to have another financial investment professional look at this, or I had another financial professional look at this. I want to ask you, why does this seem so different? Can you explain this to me? And I think that initial question could have put him on his heels. So I think the common red flags of a financial advisor kind of fraud scam is writing checks directly to the advisor and not a custodian.

and then also advisors not explaining explicitly how they are paid to give investment advice. Were any of those present or were those unchecked? Those weren't present in her case. That's why this one was a hard one. That was the only red flag that came out when I was doing the research for the case, when I was preparing for the expert witness testimony. None of those things that you just said were present in this case, which is, again, why it was so scary. Because a lot of times, there's another story in the book that talks about a gentleman named Tom Hughes. And Tom Hughes was almost like a stand-in CFO for entrepreneurs and bands, people in the music industry. And what Tom would do is he would tell his clients,

hey, don't worry about writing the check to the IRS. Just write it to me and I'll handle it for you. Don't worry about all these things, just give me the money and I will distribute it as needed." What did he do? He stole the money. You do see that happen, but in the Bailey case, in West's case, that didn't happen, which is scary. With the Tom Hughes case, that also seemed to be one where the fraud started at an extremely small scale, a couple of $100 an account here, a couple of $1,000, and then he ends up taking advantage of folks who are far too busy to pay attention to their finances. Absolutely. And when you think about how fraud happens, especially when you think about it from the perpetrator's side, and using Tom Hughes as

an example, what he said in his interview to me was, although the amount was small, what it showed me was I can get away with things and people trust me. And so that was like a power that he realized that he had, and he knew that he can manipulate others this way. So there are lessons to be learned, of course, from on the victim side, but there's also lessons that perpetrators learn along the way about their own behaviors and about their own privilege and their own powers in their business circle. And that's what Tom used when he realized, hey, I can actually get away with things. It opened the door for him to take his trusting presence to other clients and still then defraud them. It's a scary area because we all trust somebody. I bet if we all

closed our eyes right now, we can name five people that we unconditionally trust. We don't ask them any of the top three questions we always need to ask, because once they've gotten over certain hurdles, we trust those people. Tom got over certain hurdles with his clients. Bailey got over his hurdles with his clients. Then we give them everything. I can name people in my life that I trust unconditionally. I want to turn to large frauds at publicly traded companies, because it seems that a lot of the frauds and scams that happen are against the company in a non-institutional way, if you will, where it's overstating expenses, hiring no-show jobs for work that isn't completed by someone who's trusted there.

But you mentioned that financial statement fraud is extraordinarily difficult. As a forensic accountant, why is it so difficult for companies to lie on their financial statements? I love accounting. I think everybody needs it. And when you think of the one thing you learn the first or second day in an accounting class, it's the accounting equation. And that is assets equals liabilities plus stockholders equity. And that's an equation that has to balance. So when you think about when fraud happens, if you take something out, you've got to be putting something back in to make that equation balance. And so when fraud happens, something is out of balance. So that means that there are some lies in those financial statements. And so it takes a lot of effort to lie

about a transaction. A lot of times, if you think about accounts on financial statements have to move in the same way. So if you are selling a lot of widgets, that means that your cash needs to be going up and your widgets need to be going down. Well, what if cash is staying steady and widgets aren't staying, or widgets are staying steady, but you're claiming that you're just killing it and making a ton of sales? Things have to make sense. There's this duality approach in accounting. And that's why I think financial statement fraud is so hard to execute for a very long time. Because when you take something out, you've got to be putting something into that equation to make a balance. I'm thinking back to the Crazy Eddie

scandal in New York when they were running a fraud with their financial statements. If you want to overstate inventory, it's extraordinarily difficult to do that for a long period of time to falsify receipts and to falsify sales. No matter what, it seems to create this treadmill that eventually runs out. Exactly. That's a really great analogy. You know, one of my claim to fames is doing my documentary, All the Queen's Horses, that talks about the largest municipal fraud in U.S. history. And one of the things that always comes up in sessions with people is, how is it that no one noticed it? Because when we talk to accountants, you think about this accounting equation. What did the financial statement show?

What did the income statement show? And you think about all of these statements talk to each other. The income statement talks to the balance sheet. The balance sheet talks to the statement of retained earnings, statement of retained earnings, and the balance sheet and the income statement talk to statement of cash flow. So all of those things are speaking the same language. So if one of them has a lie or an error, that lie just keeps, it's a snowball effect. So that's why I say it's hard to have it going on for a very long time. In the case of my documentary, that fraud lasted over 20 years.

and you have to just scratch your head about how. But when there's one person that has absolute control over everything, especially the financial statements and communicating financial matters to a large group of people that tend to not care or know a lot about financial matters, it makes it easy. That's why I think everybody needs an accounting class. I agree. For some background, this is the story of Rita Cronwell. She was a Citi employee and was living an extraordinarily lavish lifestyle that her colleagues didn't notice, where she had a horse farm and was using city funds to disperse into these private accounts that she was using, and nobody was scratching under the surface for more than a decade. Exactly right. And this is the thing,

going back to your earlier question and our comment about following your gut. People in the town thought it was odd, but they also felt like, you know what? It's not my business. I don't have the evidence to think that she's doing anything wrong, so why would I automatically assume that? In fact, she was, but no one really followed back up. Like you said, no one was scratching the surface. You've also written about Wells Fargo and the checking account scandal, where in many cases, lower-level employees and tellers were creating fake checking and investing accounts for customers. I think it was in the millions. Recently, Wells Fargo head of retail banking, or I should say, former head

of retail banking. Kerry Tolstead just pled guilty to a criminal charge of obstructing a bank examination. Someone in that scandal may be going to jail for up to 16 months. She's going to be fined $17 million. What was your take on this, the first high-ranking Wells Fargo executives to be criminally charged? Someone has to be held responsible. Someone has to be held accountable, more than someone, many someones. I think what concerns me is I'm sure that there were layers above her that were also responsible. That tone at the top is so important. And so I would like to see other people one, two, or three jobs ahead of her that are also charged because I don't believe she was the mastermind. And I don't believe that we have

found the mastermind behind the Wells Fargo scandal. And so when I wrote about Wells Fargo, I was getting prepared for my annual, if you see something, say something, whistleblower lecture with my graduate students. And the Wells Fargo scandal was going on. And I had this reflection. I was like, how can I tell my students to say something if they see something when the CEO and the C-suite are the people that are mandating, hey, by any means necessary, do what you need to do to make our numbers. How do I pass that message on while the Wells Fargo chorus was in the background? So that's really what inspired me to look further at that case. And so I wrote this, I had a blog on Forbes and I wrote an article, you know, millennial whistleblowing, what do we

tell them? And so all these whistleblowers started to write to me and one of them was a Wells Fargo whistleblower. That's how that story came out. When I hear that this woman has to pay back, could pay back millions in restitution and face a prison term, again, I'm sure she played a role in the fraud, but I don't believe she's the only one. Where's everybody else? She is not the mastermind. Where are they and how are they going to be held accountable? What did that whistleblower tell you about the culture they encountered at work? What she said was it was a culture of we need to make the numbers. And when she noticed things that didn't add up, like she noticed that there were addresses that had the same address as some of the bank branches. She noticed that

some of the accounts had dummy numbers, like things that just didn't make sense. And so she ran a report and when she reported this no one wanted to listen and then days weeks later she was investigated and so so she started to receive harassment and bullying and her regional manager said i didn't hire you to come here and make trouble so it wasn't a culture that supported or encouraged whistleblowing and so what we have to learn from this is a lot of our cultures might be that way. We don't even realize it. Do we really encourage people to come forward and tell us really bad news? Probably not. So she talked about a very stressful environment and she didn't feel supported when she was coming in to say something seems wrong here. She thought she

would be celebrated, but instead she was ostracized and that surprised her. And that's the case for for many whistleblowers. I've heard you advocate for them. It's extremely difficult to be one in the case of Wells Fargo. Perhaps you're fired for tardiness. You're going to be harangued and harassed by your colleagues. You're going to be unheard. There's a lot of reasons to continue to go along with the system. Well, this is the thing. And so what I did in the book is I talk about that all whistleblowers aren't the same. So there are different types of whistleblowers. And the reason I started talking this way is because in my documentary, Kathy Swanson was the whistleblower in the Rita Cronwell case. She was a city clerk that reported to Rita that noticed the anomalies

and reported it to the mayor. Kathy was never ostracized, never bullied. Kathy was an accidental whistleblower. She didn't set out to really look for something. She just stumbled upon it. Now, So the tough road that whistleblowers tend to have, that tough journey, I argue are the vigilante whistleblowers. Those are the people that just fight for justice. If it has something, it doesn't even really have to have anything to do with them at all. They are blowing the whistle. If they see it's wrong, they're saying it.

They are who we think of as snitches, rats, tattletales, but we need them. And so the whistleblower experience, I believe, is not always the same. The noble whistleblower and the vigilante whistleblower, two terms that I talk about in the book, those have that negative whistleblower experience. Accidental whistleblowers, however, not so much because they tend to be fixing a problem that no one else knew about and it does a public good. So they tend to be celebrated. I noticed that with Kathy Swanson and her story and the fraud case in Dixon.

One question I have about noble whistleblowers is a story you tell in the book about stepping away from your class when there's a final going on, and many of them start cheating. A student texts you after the class to say, hey, people were sharing answers during the time you were away, and I was pressured to share answers as well, although I didn't. What happens when you cheat in a class when a forensic accounting professional is your professor? Well, this is what happens. What I did, so of course, I always believed that I created this environment where my students would come and tell me anything if something were happening. And so when this student came forward and said that to me, what shocked me was, why didn't I have 39 other students saying the same thing? Why did I only have one? So what I did is I sent out an email and I said, listen, hypothetically speaking,

What if I told you there was a camera recording your actions when I left the room? Is there anything you want me to know before I look at the footage? Now, I started it by saying, hypothetically speaking, and in rolls the emails and the text messages. I didn't see anything. I didn't say anything. I kept my head down. I didn't do anything.

And I'm thinking to myself, oh, my goodness, where were all of these people? They all should have said something. And so my student noble whistleblower stepped outside of the group to let me know, hey, Professor Pope, this isn't right. And I know that you're trying to create this environment here. So I'm going to tell you what really happened. And the students attacked her. They were mad that she actually said something to me. She was attacked.

She was bullied on LinkedIn for coming forward. That's the experience of a noble whistleblower, very similar to a vigilante whistleblower. But that's what happened in that case. I was shocked, though. did she expose herself as the whistleblower? No, this is the thing. So somehow the student, the perpetrator, the student cheater was able to figure out who it was because apparently that student must've only talked verbally to five people and he must've gone back to every other person except this one student and determined it was her. So no, she was not,

I kept her anonymous. I never said, Jane Doe said that John Doe was cheating. I never said that, but he was able to figure it out. The student was able to figure it out. I want to think about the future of fraud because I don't see this problem being stopped anytime soon and, in fact, growing. Generative AI is one space where I'm particularly concerned about the future of fraud, this idea that chatbots can create copywriting, marketing, coding. But one thing it may be able to do is create more personalized fraud messages. And in your book, you conclude with this idea that one thing to remember is that fraud schemes don't really change. I think generative AI might change that. This is the thing. The scheme won't change.

How the scheme is executed may change. So we could use deep fakes and we could execute a scheme by using that, but check fraud, mail fraud, wire fraud, financial statement fraud, those things, those schemes are going to stay the same. I think how they are executed are going to be very different because you think about identity theft. Identity theft is going to be made so much easier with the use of AI. I mean, I'm sure that someone could easily, based on every piece of information that has ever existed about Kelly Pope, create a profile that looks and sounds and talks and writes exactly like me and go and execute transactions. Well, I'm a professor, so it's a little bit different, but you understand what I'm saying. I think it's going to allow

others to execute fraud in a different way. Similar to what you saw in the pandemic. As I watched the pandemic fraud just rise over time, what I was most interested in was who engaged in it. You know, so many professional people engaged in the PPP loan fraud that you would never suspect, You would never think that an entrepreneur who would lie about the number of employees he or she has and receive millions and millions of dollars and then go buy cars and go on vacations, you would never think that. But I think that the schemes were the same. It's how the schemes were executed and who was executing them is what changed. So I think that AI is going to change the execution of the fraud. Especially for, my mind didn't go to identity theft, and I appreciate you pointing that out.

My thought was romance scams, where people are now paying for AI partners to be their girlfriend and boyfriend, and in some cases, swearing off human relationships. If someone can build a profile on you, they can call you, they can text you, and it's completely done with these chatbots. But this is the interesting thing, Ricky. When you think about that, how authentic is a relationship that you never can actually physically see a person. You know, at some point we can go to dinner. At some point we should be able to go to the movies. Even if we are on another continent,

we should be able to meet and see each other at some point. So I hear you. At some point though, there has to be an end. And so the romance scams are, they're pretty much all the same if you think about it. Like they all follow the same profile. And you ask yourself, at what point does the perpetrator stop manipulating this person? Because you have to see them. There's a physical component

of romance that should make that stop sooner, but it doesn't. And I don't understand it. You would think so. And you point out one, and forgive me for forgetting the name, about a victim who engaged in a romance scam for years, often traveling outside of the country to go to go see this partner who never shows up and continues to make trips how right shouldn't that be one two three four five red flags over and over and over again what is it about our psychology that allows us to just say no it's not a big deal is it just our ongoing desire to want to trust and believe in something that is completely false so the romance scam has always been uh the scams I probably least understand because at some point you have to meet, like, can you get

married and never meet a person? I mean, can you, can you have a family and never meet these people? Like, so, so there are red flags from outsider looking in, cause I've never been inside of a romance scam, but outsider looking in, there are so many red flags there that you have to pay attention to. And it's funny, just yesterday, I got an email from a woman who her ex-husband was manipulated by a, he was involved in a romance scam, but was manipulated by a woman, a psychic who was able to take a million dollars from him. And it was this romance. And I'm just like, how does that happen where you are giving a million dollars to a person that you've never met? And then when you try to meet them, they're like, oh, sorry, we couldn't meet today. How many

times does that have to happen? And how many checks do you have to write before you start paying attention to the red flags? I just don't understand it. I don't understand the psychology behind it on both sides, but more on the victim side. I don't get it. Victim side is harder to understand. The perpetrator side may be a little bit easier. Joining us was Kelly Richmond Pope. She's the Barry J. Epstein Endowed Professor of Forensic Accounting at DePaul University. Her book is Fool Me Once, Scams, Stories, and Secrets from the Trillion Dollar Fraud Industry. Thank you so much for spending time with us fools and appreciate the conversation.

I love that you're called fools. That might make you even like the book more since the word fool is in the title. I love it. As always, people in the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.