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Comment by lxm | Hacker News Reader

I interpreted it somewhat differently. The money paragraph seems to be

> claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters and that the company would generate more than $100 million in revenue in 2014. In truth, Theranos’ technology was never deployed by the U.S. Department of Defense and generated a little more than $100,000 in revenue from operations in 2014.

This was not even a forward-looking statement, it was an outright lie in the legal document.

One can do pretty much whatever they wish with accredited investors' money, but it has to be disclosed in the PPM.

Even if you have a line item where all the money will be spend on CEO's dog's private jet travel, accredited investors who have reviewed and signed the PPM have no legal recourse.

In Theranos case it looks like a straightforward misrepresentation of facts, which is a red flag for SEC.

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I had to go through a bunch of SEC cases for an accounting project a while back. One thing stood out to me more than anything: the SEC goes after cases that are easy more than anything else. Multiple crimes committed with lots of evidence and easy-to-spot damages. It actually gave me the impression that avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

>It actually gave me the impression that avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

I assure you, it is only possible to avoid risk if you're a small fish and extremely careful. For instance, you have a good chance of getting away with skimming a neighborhood stock fund you setup. If you are managing or receiving millions of dollars in investment, you can bet anything fishy will show up on the SECs radar at some point. Most people with large sums of money don't get where they are by being stupid with it, and if they are the victims of fraud, they know where to go. While the SEC can't bring criminal charges, they have top notch investigators. Once they smell the fish, they won't stop until the entire scheme is unraveled.

I can't speak directly to the observation you made, but I personally know a high up SEC investigator, and he obsesses about the most minute details of the cases he works on and lives to take on the toughest cases possible. My guess is distribution of cases the SEC prosecutes are very heavy tailed. There are many dumb cases that are very easy to find and prosecute that involve 10s to 100s of thousands of dollars. Think skimming, ponzi schemes etc. The more sophisticated and larger cases are also more risky (for the fraudster), harder to execute, and much more rare. That might explain your observations.

What about Madoff though?

In 1999, financial analyst Harry Markopolos had informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. According to Markopolos, it took him four minutes to conclude that Madoff's numbers did not add up, and another minute to suspect they were likely fraudulent.[73] After four hours of failed attempts to replicate Madoff's numbers, Markopolos believed he had mathematically proved Madoff was a fraud.[74] He was ignored by the SEC's Boston office in 2000 and 2001, as well as by Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he presented further evidence. He has since co-authored a book with Gaytri Kachroo (the leader of his legal team) titled No One Would Listen. The book details the frustrating efforts he and his legal team made over a ten-year period to alert the government, the industry, and the press about Madoff's fraud.

https://en.wikipedia.org/wiki/Bernard_Madoff#Investment_scan...

1. A sufficiently large distribution will contain outliers. 2. Where is Madoff now?

1. Enron? WorldCom? The entire real estate bubble collapse that blindsided the country, including the SEC and other regulators?

2. Madoff was caught because his scheme fell apart, not due to any SEC or other government action.

Maybe you didn't carefully read my original post. I'm not claiming the SEC has a perfect record in finding frauds before the hurt anyone (that would be nearly impossible). I am pointing out that getting away with fraud is extremely difficult. Eventually, you'll get caught, the SEC will uncover everything, and you'll be broke forever. From op:

>...avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

This statement is mostly what I was responding to. Here is a thought experiment. For the sake of this experiment lets say our economy is perfectly competitive. If all an entity had to do to get away with fraud was "set your mind to not getting caught," then every entity that participated in the economy would be committing fraud because it is in their best interest. That sounds wrong, probably because it is. White collar criminals don't plan on getting caught, they do everything they can to get away with their crimes. To me, that qualifies as setting their mind to not getting caught. Well, they get caught anyway.

The companies you bring up (enron, worldcom, madoff) are outliers in the world of securities fraud. they achieved unprecedented levels of success and then failure. Using these cases are counterpoints to an argument that financial crimes are hard to get away with seems silly to me. After all, none of these frauds were successful in the end, instead, people ended up in prison.

Even if it's relatively easy to not get caught, you can't be sure exactly how easy it is, and the downside is catastrophic. So no, I don't think every entity in your thought experiment would be committing fraud. Only ones that knew for sure exactly how easy it is and that they would not get caught for sure. And those ones, by definition, would never be caught so the public would never know ...

You can be sure exactly how easy it is because in a perfectly competitive economy everyone has perfect information, and the experiment's key assumption is getting away with fraud is a endogenous variable in the utility function. The fraudster can manipulate this variable to optimize their utility. This means that every actor knows exactly what they must do to avoid getting caught. It's a simplification so we can consider the implications of the notion that getting away with fraud is as easy as setting your mind to it. Another assumption is entities act solely in their own financial best interest. In this setup, everyone who will be better off by committing some form of fraud, which will be everyone who participates in the economy, will commit fraud.

Oh, okay ... but everyone having perfect information AND fraud being possible to get away with are fundamentally contradictory assumptions; fraud is based on exploiting some people not having perfect information.

They are not fundamentally contradictory, everyone would know they are victims, still if it is in their net benefit to participate, they will. Again, this is an experiment with unrealistic assumptions (getting caught is an endogenous variable), it is intended to bring to bear the the absurdity of the statement that one can control their own fate if they commit fraud.

This experiment just sounds like "what if fraud were not fraud"

From op:

>...avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught.

The experiment is a simple application of the economic theoretic framework to the statement above. Nothing more. There isn't all that much to argue about here, as long as you accept the framework upon which almost all of theoretical economics is based.

> 1. A sufficiently large distribution will contain outliers.

A sufficiently large enough example which failed to be stopped by investigators for a decade could easily outweigh thousands of outliers ultimately being a serious net-negative and outweighing such a dismissal of facts...

The fact such a blatantly wrong example proceed to scale up for a decade and encompass billions of dollars before being shutdown is quite a good example of how any one investigator's knack for detail in their own limited exposure to particular cases (as in your personal analogy) is hardly sufficient to dismiss the idea that all complex cases need not worry of SEC investigation. Quite the opposite.

If anything that means the SEC has smart people but only a limited capacity of attention as they tend to obsess over details in individual cases (as that is what is required in a significant percentage of them). So as long as you're not one of the easy cases (obvious ponzi schemes or involving large sums, significant amounts of people, or popular advertising) then it's not as worrying a threat as they'd like to make it appear.

Again, point is not just about SEC investigation. I'm pushing back against the notion that getting away with fraud is as simple as setting your mind to it.

The counterpoint to that is Bernie Madoff, who was a big fish and careless and by the time he was caught there was an orgy of evidence against him. I think it has more to do with low-hanging fruit than anything else. That doesn't mean SEC investigators aren't diligent and hardworking, but you need to leave behind evidence. Very few schemes struck me as particularly creative frauds, it's like the most obvious stuff you can think of: either just pocketing money or lying to investors like a dumbass, or simple schemes involving capitalizing expenses, or over-payment scams. No Repo 105 or any sophisticated Enron stuff like that. It's like if you studied cyber security in school, and all the big fish are falling because they set their password to hunter5 or got phished.

What I'm hearing is "avoiding the ire of the SEC is relatively easy" because "Bernie Madoff."

IMO that is naive. He is an outlier. Sort of like saying committing mass acts of terrorism is easy because 911.

Also, actual SEC filings. But fine, here's a paper: https://business.illinois.edu/accountancy/wp-content/uploads...

I can't find it now, but I do recall the SEC itself putting the number of frauds they uncovered in the low single digits. I might ask my SEC friend himself what percentage of the iceberg he thinks is uncovered.

I have asked him this. Paraphrasing his words: eventually, the SEC investigates virtually all securities frauds. Some cases are dropped if the act was criminal in nature and the FBI or law enforcement wants it, other cases are dropped if the suspect is deceased or fled, and of course there are cases where leads go cold and the case is back burnered.

The point is, fraud is risky, and it isn't easy. You basically have to be willing to give up your life as you know it. Sometimes I wonder whether fraudsters have an internal dialogue about whether it is worth the risk. And for the fraudsters who aren't psychopaths the guilt of defrauding friends and people who trust you must be enormous. Sounds like a stressful day job that I won't ever be entertaining.

How do you not go to jail for this? This isn't fake it until you make it. This is massive fraud. 100 mil vs 100,000 is off by a factor of 1000.

Well, parsing that statement:

> claimed that Theranos’ products were deployed by the U.S. Department of Defense on the battlefield in Afghanistan and on medevac helicopters

That is clearly a statement looking at past events, so if it was false it was clearly a lie

> the company would generate more than $100 million in revenue in 2014.

The important word there appears to be "would", in which case it was a forward-looking statement so easier to argue it was based on projections that just didn't pan out.

I agree, especially when you use the recent Shkreli case as a point of comparison. You have Shkreli who has been put away for 7 years for a hypothetical 10mil, yet Holmes commits "massive fraud", possibly losing 100's of millions of investors' money, and most likely gets away with a 600,000 fine and no jail time.

Also, regarding the Shrekli case, didn’t everyone end up financially better off than they started?

Umm, the money had to come from somewhere.

Nah they did. He lost their money on stocks, lied about the state of their investments then paid them all a healthy return from his drug ventures with them none the wiser.

It came from the pockets of insurers and individuals who couldn't afford insurance at all when he jacked up the prices of essential drugs.

That wasn't illegal at all though :)

Just that he lied to his investors about the source of the returns.

People who can't afford insurance can't afford retail price either, and get discounts.

My interpretation is that most startups don't deal with life-or-death lines of work, whereas Theranos does. There's no room for "creative" business practices there. The government will take note at some point and come chasing.

Yes, if you want to lie about some drone-based burrito delivery service you're probably not gonna draw the same ire as life-saving medical equipment. Although if you swindle investors for over $700 million in either case I imagine the SEC will be knocking at your door eventually.

> if you want to lie about some drone-based burrito delivery service

I wouldn't suggest lying about anything in the aviation sector either.

Yep, especially don’t lie about doing flights you are not doing, or not doing flights you are.

> drone-based burrito delivery service

Well, I'm sold!

> drone-based burrito delivery service

Not joking, I have heard this pitch.

A few years ago that would have been peak Silicon Valley but now it would have to be a drone-based burrito delivery service settled on the blockchain to be peak SV in 2018.

Maciej beat Elon to the idea of using tunnels instead: http://idlewords.com/2007/04/the_alameda_weehawken_burrito_t...

That's brilliant, I'm just trying to imagine how NYC will send Pizzas back via a tube to SF in return for the Burritos.

This feels like old news, given:

http://mobile.abc.net.au/news/2018-03-13/drone-delivery-syst...

More along the lines of pitching their startup to someone at the Wall Street Journal who signs up for a demo account but are thoroughly unimpressed and never login again. But in their pitch deck to investors they proudly claim that the Wall Street Journal is a customer.

What does "PPM" stand for?

Private Placement Memorandum - http://www.capitalfundlaw.com/blog/2015/04/05/whats-in-a-pri...

"Private Placement Memorandum" - first result on googling 'investor PPM'

probably private placement memorandum

Private Placement Memorandum

https://www.investopedia.com/terms/o/offeringmemorandum.asp

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