Accused Fraudster Spent His Money on Other Frauds
You can't cheat an honest man, but here's how often you could apparently cheat James Louks and his company FiberPoP Solutions:
22. In 2004, Defendants pursued funding through a transaction in which, in exchange for an advance fee of $200,000, FiberPoP was to receive at least $20 million. Defendants never received this funding.
23. In 2012, Defendants provided an advanced fee of $10,000 to “Vital Funds, Inc.,” ostensibly toward a two-year lease of a $33 million stand by letter of credit. The individuals involved with Vital Funds, Inc. were found guilty of prime bank scheme-related criminal charges in April 2015 in U.S. v. Holland et al., 3:14-cr-73 (M.D. Fla 2014).
24. In June 2013, Defendants deposited $500,000 into an escrow account as a deposit for a $35 Million stand by letter of credit. The individual with whom they deposited the funds emptied the escrow and was indicted for conducting a prime bank scheme.
25. In 2013, Defendants entered into an agreement with Worldwide Funding III wherein they deposited an advanced fee of $90,000 into an escrow account, purportedly in exchange for a €10 million financial instrument. This instrument was then supposed to be placed into a trading account for FiberPoP’s benefit. The escrow account was emptied in September 2013, and Defendants never received the €10 million financial instrument.
That's according to the Securities and Exchange Commission, which yesterday "announced fraud charges and an emergency order to halt" Louks and his company from doing more of this. The SEC's complaint against Louks and FiberPoP is a real high-water-mark of late-summer SEC fraud enforcement, and it is tempting to quote all of it here. The four scams above are just the beginning. "Over the years, FiberPoP has pursued a number of other financing schemes that were actually fraudulent advanced fee or prime bank schemes," and there's allegedly some ongoing "prime bank" nonsense involving multiple 500-million-euro FiberPoP bonds that are supposed to be purchased by another guy, Mark Neuhaus, who has also been in trouble with the SEC. "The most recent version of this plan involves FiberPoP, through Neuhaus, providing three €500 million bonds to New York Securities Bank (which is located in an autonomous island nation in the Indian Ocean called Anjouan )."
Most delightfully of all, even if one of these scams turns out to be real, and FiberPoP does get any money, it allegedly already has plans to waste it. On more scams:
34. In the event that one of these financing schemes does generate funds for FiberPoP, Defendants do not intend to place that money directly into FiberPoP’s operations. Instead, Defendants plan to use those funds for second tier financing efforts.
35. For example, Defendants claim to have an agreement with a company called ARC Financial, a private company based in California, to provide second tier financing. Specifically, Defendants plan to give ARC Financial an advanced fee of $55 million as a “cash security deposit.” Then, they claim that ARC has agreed to provide them $12 to $14 million per month, for approximately 48 months, for a total of nearly $600 million.
They've pre-arranged to be scammed! Presumably if that scam worked out they'd put the $600 million into more scams. It's scams all the way down.
You'll notice that Louks and FiberPoP are called "Defendants" here, even though in all of the anecdotes so far they look more like "victims." The problem is that they were allegedly doing all of this with other people's money: "Since at least 2003," says the SEC, "Louks and FiberPoP have raised over $4.3 million from at least 90 investors." They have told those investors a story about fiber-optics :
16. FiberPoP was founded in 2003 to build, own, and operate fiber optic networks and data centers for communities and businesses.
17. To date, FiberPoP has no data centers, no employees, and no operations. It has never earned any revenue. It has no contracts with either content providers or customers.
18. FiberPoP’s business plan involves building-out 17 distinct service areas, called “footprints,” across the upper Midwestern United States. Defendants project that each area will require approximately $576 million to roll out, for a total funding requirement of approximately $10 billion.
Pretty much everything the SEC says about FiberPoP makes it sound shady. It promises investors their money back with a 100 percent return within a few weeks. It claims to have business prospects and service contracts that don't exist, covers up the fact that all of its financing arrangements have gone poof and keeps reassuring investors that everything is fine:
For years, Defendants have represented to investors that the transactions they have engaged in are legitimate and profits imminent. For example, in March of 2013, Louks told investors that, with transactions involving SBLCs and bank guarantees, “it is very difficult for anything to go wrong … No one will ever be able to execute a fraud and get away with it.” In April of 2015, Louks wrote, "my confidence level is very high. All of the way through the process I have felt that we have being [sic] working with people of good intentions and integrity…."
But FiberPoP, as the SEC describes it, seems like a strange scam in one respect, which is that Louks wasn't keeping the money : "Defendants have used all or most of the FiberPoP investors’ $4.3 million to fund their financing projects, i.e., they have given it to the perpetrators of various advanced fee and prime bank schemes." As the SEC tells it, Louks was putting in the time and effort to find investors for his fake company, getting their money and then giving it away to other people who scammed him, over and over again.
Wh ... y? I mean, I have no idea, I'm just working from the SEC complaint here. Certainly it's possible that Louks was in on the downstream scams somehow, working as a marketer and bundler who lured in investors to fund the advance-fee and prime-bank scams. But the SEC doesn't allege that he got any kickbacks from putting FiberPoP's money into any of its fake investments, and he seems on the SEC's math to have kept only about $78,000 of the $4.3 million that he raised over more than a decade. If that's his commission, it's less than 2 percent, which seems pretty low. Even non-fraudulent investment bankers charge more than that. And "Louks never even met many of the individuals" he gave the money to, which makes it seem unlikely that he was their agent.
The SEC said that Louks "knew or had reason to know that the financing schemes were fraudulent," but that's a big "or." There's lots of reason to know that FiberPoP kept investing in frauds. You or I, if we were the chief financial officer of FiberPoP, would have spotted the frauds. They just sound like nonsense, for one thing; what could "a two-year lease of a $33 million stand by letter of credit" even mean? Louks never "conducted any meaningful due diligence." And he was occasionally warned against getting involved in these transactions, but kept doing it anyway.
But all of that is just logic. I prefer to think that there's a more romantic explanation for how Louks kept getting fooled, which is: Maybe he believed it? Did Louks know that he was being scammed, over and over again? Or each time, did he think he was getting a little closer to the truth, to finally understanding how the complex world of multi-million-dollar finance worked and how he could use it to his advantage?
A few weeks ago I said that the financial industry is "built on the dream of making money for nothing, of arbitrage, of perpetual motion machines, of converting intellect into cash without the annoying interventions of hard work and risk." That is not because financiers are lazy jerks. It's because that really is what finance looks like from the outside (and, once in a while, if you're lucky, from the inside). It is an abstraction, moving around digits that represent real economic activity without actually doing any of that activity. Bankers and hedge fund managers sit at computers and push buttons and money comes out. James Louks has a computer. Why shouldn't he be able to make money come out of it?
The people selling Louks "advanced fee" and "prime bank" schemes weren't just selling him ways to get rich. They were selling him perceived mastery of an alienating system, a way to make the complexities of modern finance tractable and turn them to his own benefit.
If modern finance is astrophysics, these scams are like astrology: They look superficially like the real thing, but instead of a cold indifferent universe, they proclaim a faith in a universe centered around the individual listener. It seems to me that Louks didn't want to hear about Fama-French factors and the tradeoffs between risk and return. He wanted to hear about a financial system that lets a fortunate few initiates create money easily and risklessly, and he wanted to be one of them.
To me the most poignant part of the case is the thing about the 17 service areas each costing $576 million to roll out. If you are building out fiber-optic networks in 17 service areas, they won't each cost $576 million. Some will have mountains or whatever. Planning to have all of your segments cost the same amount of money is just tidy-minded magical thinking, driven by the belief that the arrangement of numbers in patterns can have magic efficacy in the world, that writing cool numbers in a spreadsheet will cause those numbers to appear in your bank account. It is finance as astrology or numerology or kabbalah, a re-enchantment of a world that has been reduced to science.
Of course the world doesn't work that way. But lots of otherwise sensible people think it gets pretty close: that bankers or hedge funds or high-frequency traders can create money without effort or risk, and that the system is designed to shelter and enrich those favored insiders. Why wouldn't some of them want that for themselves?
Which exists! And "is the world's primary exporter of ylang-ylang oil, an ingredient in almost all perfumes."
What is "The Advantage of Light?" The advantage of light speaks to much more than the speed and capacity of optical fiber as a communications medium, although that is key. The true advantage FiberPoP offers to the market is the synergy created by combining and upgrading existing market offerings to produce the NEXT GENERATION of services.
Ooh, good words, nice use of "synergy."
Oh fine, he seems to have kept a little of it:
In addition, Louks diverted at least $78,000 to personal items in the past four years. Specifically, bank records show that he withdrew $59,000 from FiberPoP’s bank account since 2011, and he made $19,800 in payments on a loan to a company that he owns.
37. Defendants have had access to information suggesting that the type of financing transactions they have pursued, and still are pursuing, are fraudulent. For example, around 2011, Louks was advised against engaging in transactions involving “monetizing” stand by letters of credit, because they are fraudulent.
38. Louks is generally aware of public information indicating that the types of transactions that he has pursued are not legitimate.
39. Louks is aware that at least some of the individuals and entities through whom he has attempted to procure financing for FiberPoP have been investigated, prosecuted, and/ or sued for violations of the securities laws. For example, Louks is aware that Neuhaus was sued by the Commission and had a multi-million dollar judgment against him.
I cannot emphasize enough how weird "prime bank" scams are. Here is the SEC's fact sheet on them, but it is fairly bland. The best source on prime bank scams is Guy Lawson's book "Octopus," about how hedge fund manager and Ponzi schemer Sam Israel was himself seduced by prime bank scams. It is completely nuts and one of my favorite books about finance.
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