How A Fraud Broke My Trust In Myself

Dear Reader,

It’s 1999, I’m 37, and I can see myself late at night, my wife and kids asleep, pacing around the kitchen with a glass––a big glass––of Johnnie Walker in my hand, trying to convince myself I haven’t been defrauded. I shake the glass, but there’s no clatter; the ice has long since melted. ­­­

Kate is supposed to call me tonight. I haven’t heard from her for days. Even if it’s another improbable excuse–––bank wire numbers transposed or yet one more layer of approval needed at Exxon –––I need to hear her voice, need to hear her say something, anything about the deal. Any slender thread will do. I need to hang on to the hope that the money will come.

Exxon was supposed to send money to our firm a year ago to buy the pollution credits we own. It’s the largest deal Kate’s arranged for us.

If Kate has lied to me, if the trade is a fake, then I, who am supposedly so careful and vigilant about investing, will be forever marked as a fool. I’ll have been in the right place at the right time and squandered an otherwise assured successful career. I’m not qualified to do anything else except invest, and now I won’t be qualified to do that. I’ll resign before they fire me.

Such is the groove of catastrophe, deeply marked from repetition, in which my thoughts travel every night.  

Kate is my age, a cheerful, ruddy faced blonde, a rocket scientist from Cal-Tech who’d invented the South Coast Air Quality pollution credit market. She has the can-do vibe of an Elizabeth Holmes. Kate and I have done a handful of pollution credit transactions together, all profitable. I’ve been to her offices in Pasadena many times. I consider her a friend.

Despite the long delay and all the improbable excuses, I had decided to refrain from doing what would be typical–––yell, threaten, bring in lawyers. Because all along I’ve believed Kate wanted to pay us. That whatever was going on behind the scenes she was working on our behalf. When we’ve spoken, my own stress and fear has been echoed back to me in her voice.

Months ago, Kate had faxed to me the signed Exxon contract. It’s on Exxon letterhead and signed by a real, google-searchable executive at Exxon. The contract states unequivocally that Exxon will buy the pollution credits from our firm. I’m bound by confidentiality not to contact Exxon directly. Only Kate can deal with them.

These faxed pages have been my bible, the sacrament of my faith. Did my brain register in its recesses the strange spacing of the fax numbers across the top of each contract page? If so, I’d hidden that knowledge from myself.

I’d told the founding partner of my firm that the money will come. I’d told him the excuses for each delay. He is a kind, quiet man, but he is a master of the grimace. The intensity of it registers the degree of his skepticism. That twist of his mouth scares us all, the more so because we all want to please him. Lately, when I’d given him an update on Kate, he’s looked away from me.

My days have been full enough to distract me. At the office, many other deals. At home, my wife and our three children. It’s the night that’s been the killer.

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So there I was at midnight, pacing with perfect right angles around the four corners of the kitchen island.

I poured another scotch, and I left yet another message for Kate. Each night, I required larger quantities of scotch to numb my fear of permanent disgrace and allow me some fitful sleep.

The final blow came in Rome on a family vacation. A Google Alert showed up on my email. Kate had been sued by another investor. The complaint described a fact pattern all too familiar. I can no longer deny that I’ve been defrauded.

A week later, I finally get Kate on the phone, while I’m at my ten year old son’s baseball game. Kate confesses to her lies, to her forgery of the Exxon contract. She apologizes with words and tears, and part of me feels sorry for her.

When I tell the founding partner, he smiles a bit and shakes his head at Kate’s audacity.  It helps­­––a lot–– that the investment is small relative to the size of our firm. He asks me about another investment in a company we’ve started. A deal that’s going well and is significant.

I call our firm’s lawyer and we report Kate to the authorities for wire fraud.

A few months later, I testify to a Los Angeles grand jury. One juror asks how I could have been fooled for so long. He questions why I didn’t just pick up the phone and ask Exxon if the transaction was real.  

I cloak my answer beneath the mantle of ethical behavior. “I signed a confidentiality agreement. I take any contract I sign seriously.”

It’s a bullshit answer. The real answer, of course, was that I had been scared to call Exxon, because I might have found out for certain that I’d been defrauded.

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While the fraud didn’t hurt my standing at the firm, the blow to my self-confidence and the associated stress remained. As has been the case throughout my life, when I’m stressed it’s my gut that takes the hit. But back then I didn’t understand that connection. I thought the culprit was the food I was eating or the scotch I was drinking. So for quite some time, I became obsessive about my diet and digestion.

From twenty years distance, I look back with wonder and dismay at the behavior of the person I was then. Why did I blame myself? Why was I unable to balance everything else that was good in my life against a relatively small investment loss? Why was I so terrified of being fooled? And why didn’t I hear what my gut was telling me?

It’s a terrible thing when a mind turns against itself. No mind can ever be more skilled than one’s own at inflicting mental anguish.

And that’s the thing about the first time someone breaks your trust, for I was a virgin back then, my faith in the honesty of others having never yet been abused. So, when it happened, I was fragile in the face of the truth and desperate to find a way not to acknowledge it.

Many years later, a friend of mine, an Assistant District Attorney who specialized in prosecuting White Collar Crimes, explained why people like Bernie Madoff can go on thinking that they won’t be caught. They have powerful imaginations that enable them to spin up a fantasy world consisting of increasingly improbable contingencies. Victims like me not only accept our fraudster’s fantasy world, sometimes we even help build it, because we don’t want to know the truth. We become co-conspirators in defrauding ourselves.

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In the investment world, we talk about “paying your tuition,” through seeing what happens when some of your deals crater, and it’s up to you to clean up the mess.

I learned that people will lie to your face, and that, in adversity, the business world is cruel, cold, and unforgiving. But that’s how I gained experience, judgment, and confidence. That’s how I became unfragile. I learned far more from the deals that didn’t work, than from the ones that did.

Question for the Comments

Share a time when your trust was broken and how it affected you.

A clip below from my favorite “fraud” movie, Boiler Room.

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