What drives financial fraud? It can come down to one emotion

CNN

2 days ago

Editor's note: Watch CNN Original Series 'Billionaire Boys Club,' detailing the greed-fueled landscape of 1980s Los Angeles where a group of young, ambitious men set out to make their fortune — but their lavish dreams quickly spiral into a web of deception, fraud and murder.
It's the 1980s, and a group of young men have dreams of making a fortune.
When Joe Hunt reconnects with his former high school classmates in Los Angeles, he has promises of a new business venture that will make them rich. With visions of wealth and success, the young men are lured into what becomes a web of fraud — and a cautionary tale that devolves into murder.
CNN Original Series' 'Billionaire Boys Club' recounts this tale of greed from Wall Street. It's a dark example of a kind of fraud that has reoccurred throughout modern financial history. It's also a reminder of how aspirations of wealth can be exploited.
Ahead of the series premiere this evening at 9 p.m. ET, CNN spoke with three experts in economics and finance to better understand why greed is persistent in markets, what hidden risks might linger and how to protect your finances from fraudulent schemes.
After Hunt reconnects with his former classmates, including Dean Karny and Ben Dosti, the group starts a new social and investment club. At its core, greed drives their pursuit of wealth and power.
Greed has driven people's actions throughout history, including in the world of finance, said Anat Admati, professor of finance and economics at Stanford Graduate School of Business.
'Greed is about wanting things to own, to consume,' Admati said. 'It's pervasive.'
Capitalism and markets are profit-driven by design. While that framework can produce remarkable wealth and growth, it can also be taken advantage of by bad actors. In the case of the Billionaire Boys Club, Hunt goes down a path that eventually spirals into deception.
Greed can be particularly pervasive in finance because promises of wealth can manipulate people's emotions, Admati said. This can sway them to believe in get-rich-quick opportunities — and fall for Ponzi schemes.
'Money is a source of power and admiration,' she said. 'The culture of wanting wealth and financial success is strong. Then it meets the human psychological feature of wanting to believe things, or wanting to trust people.'
While there are many cautionary tales of deceit, people often fall for fraud because they don't think they could be the one who is being duped, Admati said.
'People are more likely to be tricked into believing things when they don't understand the way claims that are being made to them can be manipulated at the backend,' she said.
The 1980s was an era known for greed on Wall Street, as detailed in the 'Billionaire Boys Club' series; books including 'Barbarians at the Gate,' by journalists Bryan Burrough and Joe Helyar and 'Liar's Poker' by Michael Lewis; and the 1987 movie 'Wall Street.'
In the 21st century, varying degrees of financial deceit — from the Enron accounting scandal to the devastating consequences of massive Ponzi schemes like the one run by Bernie Madoff — continue to impact people across the country. Just last week, the US Securities and Exchange Commission announced it had charged a Georgia-based company with running a $140 million Ponzi scheme.
David Smith, a professor of economics at Pepperdine Graziadio School of Business, said it's often the same, recurring themes of greed that take place in different frameworks.
'As an economist, one of the things we study very carefully is incentives and how they drive human behavior,' Smith said. 'Individuals are driven by different motives, but one of them is to acquire wealth.'
Pure greed and the desire to acquire more wealth or experiences of financial hardship are reasons why a person might commit fraud, Smith said.
And the rise of cryptocurrencies has opened investors to a plethora of new risks and potential scams, according to Hilary Allen, a law professor at American University.
While bitcoin and other crypto have proved profitable for some, there have been numerous instances of memecoins — a functionally worthless asset that trades on hype and often results in investors losing cash. Victims reported more than $5.6 billion in fraud related to cryptocurrency in 2023, a 45% increase from losses reported in 2022, according to an FBI report.
'There's no good reason for it to have value other than the fact that you think that someone else will buy it from you in the future for more than you paid for it,' Allen said. 'And that's pretty Ponzi-like.'
From Wall Street in the 1980s to memecoins in the 2020s, a lack of oversight and regulation can create opportunities for bad actors, Allen said.
'Greed is not new, and greed in financial services is particularly not new, because that's where the money is,' Allen said.
In April, the SEC announced it charged an individual for orchestrating a fraudulent crypto scheme that raised $198 million from investors. Ramil Palafox misappropriated $57 million of investor funds to purchase Lamborghini cars and items from 'luxury retailers,' the SEC said, in addition to engaging in a 'Ponzi-like scheme' until the fraudulent project collapsed.
'Financial markets are at least relatively transparent, whereas cryptocurrency, even though it claims it's built on the backbone of full verification and public display of the blockchain, there are still a lot of opportunities for bad actors to take advantage of the lack of information that exists,' Pepperdine's Smith said. 'There's also the lack of regulation.'
Greed can underpin wild stories of corruption and murder, including the Billionaires Boys Club. But greed and fraud can also arise daily, from phishing emails to online scams.
There are steps people can take to better protect themselves, Smith said. 'If it's too good to be true, it probably is.'
As for why people are drawn to learning about stories of greed and financial fraud, Smith said it gets to a core of human emotion that people can relate to. 'I think we can all empathize with the allure of an opportunity that sounds like a shortcut to something,' he said.
Individuals have to gauge their own risk tolerance for investing in anything, whether it is stocks or crypto, he said, but 'it's always good advice not to expose too much of your underlying financial wealth to a new opportunity.'
'Make sure that you seek good financial advice before you do anything,' he said. 'Talk with a financial advisor, your friends or family members. Oftentimes, the worst financial decisions are made in isolation, where people don't vet their ideas or what's being proposed to them with others.'