Monday, November 26, 2012

Stealing Something From the Thief

Stealing is as old as the ages.  As early as Genesis, at his mother's urging, Jacob impersonated his brother Esau to obtain his birthright and fortune.  There's a slight wrinkle in that a hungry Esau may have agreed to the bargain in exchange for food (which did not make him any less angry when reality hit).  And, their father Isaac, tricked into bestowing on one son what he believed he gave to another, let bygones be bygones and never tried to right the wrong.  As it turns out, the birthright was Jacob's destiny and was never intended for Esau in the first place.  So, even though he used trickery, Jacob really did not steal anything.

As ancient as the concept of deception and identity theft is, Joseph Caramadre took the idea, one might say, on a ladder to exalted levels.  He realized that certain insurance annuity documents contained a drafting flaw which allowed the insured and the annuitant to be different parties - and parties who did not have any connection to each other.  By way of context: he realized this in an era of complex financial instruments and a world comprised of  derivative markets.  Indeed, he discovered this at a seminar by the insurance companies seeking sales of this particular product. 

Rather than selling policies to wealthy individuals in retirement, Mr. Caramadre realized that instead of an annuitant/investor and the beneficiary, the roles could be changed to annuitant and investor/beneficiary.  And so, Mr. Caramadre started finding and paying people who had terminal illnesses to become his annuitant.  He paid a fee to people who would be the "measuring life" and bet that the individual would die sooner rather than later.  So, he took his own money as the investment and put it into incredibly risky ventures; if they beat the market, he got the profits but if they fell short, there was a guaranteed death benefit.  It was genius.  And, unlike the sketchy books kept by "the smartest guys in the room" at Enron, this was all transparent, above-board and completely legal.

Nothing gets by these insurance companies and once they had paid him tens of millions of dollars over the course of several years, they caught on to Mr. Caramadre.  Instead of changing the contract terms to require the annuitant to be the investor or the relationship between the annuitant and beneficiary to be something other than "acquaintance", they sued.  And lost.  However, the federal government in its infinite wisdom, charged Mr. Caramadre and an associate with 66 criminal offenses including identity theft, wire fraud and conspiracy.  To be clear; the role of prosecutors is to protect the people.  No person was harmed by any of these contracts: people actually received money they never otherwise would have due to Caramadre's payment for their participation.  The "person" of the insurance companies did not lose money, they lost face.

Mr. Caramadre did not develop this plan in a vacuum.  He was introduced to these annuities by a company trying to make a lot of money from them in a world where people purchased and were encouraged to purchase financial instruments they did not understand.  Mr. Caramadre, despite the grim reaper aspect of all of this, did not do what banking institutions did to their fiduciaries when they sold worthless investments.  The people who signed the contracts were paid a sum of money, they did not forfeit anything that belonged to them.  No one lost anything: the individuals never could have afforded the annuities, the insurance companies wrote the contracts and assumed the risk: that is their business after all.

Not one banking institution or credit default swap salesman has ever been charged for tanking the world economy.  Instead of prosecuting bad guys who got rich while people lost their homes and retirement savings, the federal government chose to go after the one guy who beat the bankers at their own game.  Sadly, facing so many charges, Mr. Caramadre and his associate each pleaded guilty during their trial last week to one count of wire fraud and one of conspiracy

It's not the first time the federal government has been on the wrong side of history where theft was concerned.  Two hundred years ago, the United States were at war with England.  The English illegally boarded ships and forced impressment on men working on American vessels.  Indeed, the very idea that foreign powers could enter a ship sailing under a United States flag was one of the causes of the war.  At about that same time, the French were also at war with, well, everyone including themselves, but England was certainly one of their combatants and England ruled the seas.

In this context, French thieves stole a boat near Spain that belonged to American merchants; they transformed it into a warship.  If the newly configured ship were intended for war, it should have sailed up the Atlantic Coast toward Russia, the country France was then invading.  Yet, somehow, the ship docked in Philadelphia whereby its original owners became aware of its existence and sought to reclaim their stolen property.  Putting aside the fact that the economy was in trouble due to massive forfeiture of cargo to the United States Treasury under the Embargo Act of 1808 - and putting aside that this merchant ship fitted with guns was, in all likelihood running goods (Napoleon was in Smolensk, the boat was in Philadelphia; if this were really a warship, the crew was horribly lost).  It's almost the perfect case to assert American sovereignty: an American ship boarded and seized by a foreign powers.  One might think that the victims would be returned their ship.

One would be wrong.  The Supreme Court of the United States (no doubt with some prompting by the other two branches of government desperately professing neutrality in the Napoleonic wars) determined that even though the ship had been seized unlawfully, Napoleon was immune from prosecution. The enemy of my enemy is my friend theory of justice prevailed then as now.  The enemy then was England and her immense Navy.  The enemy today are fraudulent financial instruments that hurt investors.  But, both the Schooner Exchange and Mr. Caramadre's cases are the wrong vehicle to demonstrate their respective points.  Britain's Navy was not defeated: not by the United States in the War of 1812 and not by the French in the the Napoleonic Wars.  Eliminating or regulating unscrupulous derivatives has not even been attempted.  The United States government does not do well when it defies justice in an effort to curry favor with powerful forces.

Mr. Caramadre simply did what is done every day by bankers and insurance companies themselves because the government refuses to curtail the practice.  Instead of going after the parties that genuinely hurt innocent investors, the government has gone after the one guy who legally, transparently, and flamboyantly profited from a drafting flaw; unlike real identity thieves, no one's credit was ruined, no one's life was upended.  Supporting the insurance companies in the face of their own complicity out of disdain for complex financial instruments is like granting Napoleon sovereign immunity for a stealing a ship just because everyone despised England. 

After all, sometimes events only seem deceptive.  Even if Jacob put on the goatskin to trick his father, it could not have been to cheat Esau out of his birthright; God preordained that the elder (Esau) would serve the younger (Jacob).  Indeed, Rebekah, their pious and devoted mother, set the scheme in motion: she urged Jacob to feign his brother's identity to receive his father's blessing; she then aided and abetted him as he sought shelter from relatives while Esau cooled his heels from the power grab.  Even though it appeared to be devious, the outcome would have been no different. 

Like the story of Jacob and Esau, Mr. Caramadre's enterprise was not theft in the sense of taking something that rightfully belonged to another.  It was more of a morality play, but this time with an unwritten ending.  One has to ask: it is just a coincidence that translated from the Italian, "caramadre" means "beloved mother"?

No comments:

Post a Comment