Criminal Masterminds

by Anne Williams

  Final scandal

  De-Laurey began to serve her sentence, but the scandals were not over. It was later reported that while in prison, she had struck up a relationship with an elderly Sikh chaplain, asking him to bring her make-up, magazines, perfume and other luxuries to her cell in Send prison, Woking, Surrey. The chaplain, eighty-two year old Makhan Singh Roy, was humiliated by the incident and had to step down from various committees that he worked on, even though it was never confirmed that he had actually complied with De-Laurey’s demands. Afterwards, De-Laurey was transferred to another prison. Her husband Tony commented that she had done nothing wrong.

  The De-Laurey case remains memorable as an instance of a personal assistant stealing huge sums of money from her bosses, but attracting very little condemnation from the press and public, simply because her wealthy City employers were so unpopular.

  Martin Frankel

  Martin Frankel was a financier who pulled off frauds worth two million dollars all over the United States. He had no formal qualifications whatsoever, and had a record of abject failure in his business ventures, yet he seemed able to persuade people to give him money for his ‘investments’, and even to involve them in his underhand dealings. He was unconcerned about the morality of his behaviour, and showed no regrets that he had stripped so many people of their assets and livelihood. But as time went on, his life of crime began to take its toll, and he became paranoid to the point of madness. Eventually, the law caught up with him and he was arrested, brought to trial and convicted in 2002 of insurance fraud, racketeering and money laundering.

  Stealing and cheating

  Frankel was born in Toledo, Ohio, in 1954, the son of a Lucas County judge, Leon Frankel. Martin was the second child of the family, and he showed intelligence from a young age. At school, he did well in his studies, but was socially awkward.

  On leaving high school, he went on to attend the University of Toledo, but it was here that his personality problems began to become evident. He became frightened of taking tests, to the point that he developed a complete phobia about them. He also found it difficult to organise himself for studying. It became clear that, although Frankel had done well at school, his success had been achieved without a great deal of effort on his part; now that the work had become more difficult, he was terrified of failure, and had become completely phobic about any situation in which his inadequacies would be revealed.

  His problems grew more and more difficult to handle, until he eventually dropped out of college. Soon afterwards, he began to take an interest in finance and the securities market. He believed he could make a lot of money quickly by speculating on the market, and that this was an easy way to earn a living, especially now that he had few prospects of gaining formal qualifications. However, he appeared to pay little attention to the risks involved in financial gambles, particularly for a person like himself with limited funds to play with, and he also seemed entirely unconcerned about lying, stealing and cheating to get what he wanted.

  Bogus companies

  Frankel began to frequent brokerage houses, soaking up as much information as he could learning about the world of finance. He was especially fascinated by large frauds that had taken place within the financial world and avidly studied these cases. One of the cases that interested him was that of Robert Vesco, a US financier who had made a great deal of money taking over failing businesses and who had fled the country when his dealings came under government investigation.

  Frankel made it his business to meet as many people as possible in the finance world, forging a friendship with John and Sonia Schulte. The Schultes owned a securities business that was affiliated to a larger New York company, Dominick & Dominick. Frankel persuaded them that he had a sure-fire way of predicting the stock market, and impressed them with his knowledge of the way the financial markets operated. Frankel was particularly close to Sonia Schulte, who persuaded her husband to take him on as an employee in their firm.

  Fired for incompetence

  It was not long, however, before Frankel became something of a liability to the Schulte’s business interests. Frankel seemed unable to conform to the requirements of working in an office, and often came to work wearing jeans and a T-shirt rather than a suit. Schulte would have been prepared to overlook this had Frankel’s business acumen been impressive, but once he was working at the firm, it became clear that Frankel did not know what he was doing. Although he had a good theoretical knowledge of trading on the financial markets, he did not have the personal qualities to actually do the job. Being a trader requires an immense amount of confidence and the ability to make important decisions very quickly. As was the case in his high school and university days, Frankel could not stand to be tested on his performance. So great was his fear of failure, he avoided actually doing the work of trading on the markets.

  While conducting a business deal, Franklin had pretended to be an agent from Dominick & Dominick, the company’s parent firm. Schulte knew that this kind of behaviour from one of his employees could put him out of business for good. He duly fired Franklin. But this was not the last Schulte would hear of his former employee; for unbeknown to him, Franklin was now having an affair with his wife, Sonia.

  Vatican scam

  Franklin was now out of a job and had returned to live at his parents’ house while he tried to set up a new business. Working from their home, he set up an imaginary business, Winthrop Capital, advertising in the telephone book. Amazingly, he managed to wheedle a substantial sum of money from various clients who called for advice on investments. He then proceeded to place the money on the financial markets and lose almost all of it. Yet, still believing he was a financial genius, he went on to set up a series of other ventures. Sonia Schulte then left her husband and together, the pair followed the example of Franklin’s hero Robert Vesco and began to buy up failing companies specialising in the insurance sector.

  Their dealings became ever more questionable, but the couple began to enjoy a luxurious lifestyle. One of Franklin’s strangest scams was with the Vatican. In order to pull this off, he posed as a rich Jewish philanthropist, setting up an organisation called the St Francis of Assissi Foundation. He contacted two well-respected Catholic priests in New York, Emilio Colagiovanni and Peter Jacobs. He also made contact with Thomas Bolan, the founder of a body known as the Conservative Party of New York. From them, he managed to obtain large funds that apparently belonged to the Vatican, and promised to make investments that would yield large profits. With the money, he made a series of complex deals buying and selling insurance companies, and this time his business acumen – and his shady dealings – paid off: he, and his clients, made large profits. But that was by no means the end of the story.

  Diamonds and dames

  Frankel was now a rich man, with assets of over four million dollars. He and Sonia had also set up home together with her two daughters. Sonia had alleged that John Schulte, the girls’ father, had molested the daughters, and thus had gained custody of them. Thus Frankel, Sonia and her daughters now lived together in a large house in Greenwich, Connecticut. But family life with Frankel turned out to be far from blissful. Frankel’s mental illness, which had been an issue since his school days, came to the fore once again, this time in a more disturbing, aggressive form. He began to hold large parties, flaunting his wealth, and little by little these turned in to sadomasochistic orgies. Before long, Sonia had had enough, and removed herself and her two daughters from the home. Left on his own, Frankel continued his debauchery, inviting young women to live in the house, and engaging in more and more bizarre sexual practices. Eventually, in 1997, one of the women hanged herself in the house.

  Two years later, the law finally caught up with Frankel. His underhand business dealings were legion by now, and the authorities had more than enough evidence to assemble a case against him. All his companies were put under state supervision, and a thorough investigation began. At this point, Frankel realised that the game was up and fled to
Europe in a hired private jet. In a scenario worthy of James Bond, he took with him a fortune in diamonds, plus two of his lady friends as companions. But by now his mental condition was deteriorating, and he had become intensely anxious and paranoid.

  The final debacle

  It was not long before the two young women who had accompanied him from the United States decided to leave. Frankel then found a former employee of his, Cynthia Allison, who was willing to take their place, and holed up with her in a luxury hotel in Hamburg, Germany. But it was only a matter of time before he was tracked down, arrested and brought to trial.

  Frankel was charged by the US federal government with fraud, to the tune of two million dollars. But before he was extradited, he faced more charges from the German government, of using a false passport and of smuggling diamonds into Germany. He was put on trial for these crimes in a German court, and pleaded guilty, but asked for exonerating circumstances to be taken into account. Unfortunately, his excuse was rather feeble: he claimed that he had brought the diamonds in so that he could help with charity work in the future. As one might imagine, the courts were not convinced of this sudden change of personality on Frankel’s part, and convicted him of the crimes. He received a three-year sentence and was sent to jail in Germany. During this time, he made an escape attempt, but this was not successful.

  After serving his prison term, he returned to the United States where he was charged with twenty-four counts of fraud and racketeering. Once again, he was convicted and given a prison sentence of sixteen years. Monsignor Colagiovanni and Sonia Howe (formerly Schulte) also pleaded guilty to lesser charges and were convicted of their crimes.

  Nick Leeson

  Nick Leeson was a high-flying financial trader whose unorthodox, speculative and sometimes fraudulent deals caused the complete collapse of his employer, Barings Bank, in 1995. In a series of complicated and extremely risky deals, he began to lose more and more money, just as a gambler does in a casino – only this time, he was dealing in millions, not thousands, and using the bank’s money rather than his own.

  Meteoric rise

  Leeson was born on February 25, 1967. The son of a plasterer, he grew up in Watford, Hertfordshire, an area north of London. His father took little interest in his son, but his mother recognised his intelligence and drive, and she made sure that he received a good education. She even typed out the application for his first job, at the prestigious Coutts Bank in London, where he was employed as a school leaver at the age of eighteen.

  In his new job, Leeson showed himself to be remarkably adept at understanding the complex world of finance, and he was soon promoted, earning a high salary. At the same time, his friends from school were working as builders and mechanics.

  Leeson had a lot of money to spend, and was enjoying a life of ease, when, unfortunately, disaster struck. His mother who had been diagnosed with cancer, but was expected to live for another decade. However, she died suddenly. Leeson’s mother had been the centre of family life and still had young daughters that needed to be looked after. Leeson promised himself that he would take care of the family, and he was spurred on by the memory of her support to progress further in his career.

  Risky ventures

  By the early 1990s, Leeson had landed a job as manager of a new operation in futures markets on the Singapore International Monetary Exchange with Barings Bank. Barings was oldest investment bank in London, whose history went back to the time of the Napoleonic wars. Leeson was part of a new wave of quick-witted, young, working-class men who became stock market traders in the volatile financial climate of the 1980s, making – and his case, losing – fortunes for the banks and businesses that employed them.

  Leeson’s speciality was trading in derivatives, that is, speculating on assets rather than buying and selling assets themselves. Derivatives consist mainly of options, futures and swaps, all of them involving speculation on the prices of assets rising or falling in the future, and all of them risky ventures. Options or futures are contracts in which one party agrees to pay another an agreed fee for the right to buy or sell. So, for example, a person who owns stock in a company may pay a fee to another at an agreed, fixed rate, so that if the value of the stock goes down, the other party must buy the stock at that rate. The person selling may gain an advantage in that, if the value of the stock goes down, he can sell without losing too much money; the person buying may end up better off by getting a good price on the stock. Swaps are agreements based on cash flows, in which businesses agree loans with each other, balancing out interest rates to each other’s advantage.

  Gambling millions

  These complex business deals are essentially a form of gambling on assets: however, the assets themselves are not necessarily based on solid material goods or commodities, but may be in the form of changeable financial arrangements such as equities, bonds, interest or exchange rates, and indices (the stock market or consumer price index). Thus, the situation is one in which gamblers are gambling on the future behaviour of the financial markets, which is to a large extent unknown, with no back-up in the form of saleable goods. Moreover, the deals are so complicated and move so fast, that very few people on the boards of companies and banks understand exactly what is going on at any one time, and the traders are left very much to their own devices.

  To play this game, which involves enormous sums of money, traders need tremendous confidence, nerve and skill. Enter Nick Leeson. Although he was still only in his twenties, he impressed his superiors not only with his confidence, but with his knowledge of the financial markets.

  From 1992 on, Leeson began to make deals that were not authorised by his superiors, but because he was making so much money for the bank – his deals accounted for ten per cent of the bank’s income at one time – his employers failed to keep a track of what he was doing. He was both Chief Trader at the bank and also responsible for settling his accounts, jobs that are usually separate in most establishments. In this way, he was able to hide losses on bad trades: at first, these involved only a few thousand pounds here and there, but by the end of 1994, he had lost over two hundred million pounds.

  The bubble bursts

  To recoup the situation, Leeson placed what is called a ‘short straddle’ deal involving ‘call and put’ options on the Singapore and Tokyo stock exchanges. This complex deal was basically a bet that the Japanese stock market would not go up or down overnight. Unfortunately for him – and for Barings – an unforeseen disaster occurred, in the shape of the Kobe earthquake, which happened early on the morning of January 17, 1995. Undeterred, Leeson began to bet on the likelihood of the markets recovering, gambling on the possibility that the Nikkei Stock Average would go up rapidly. However, it did not. Leeson ran up a phenomenal bill of over 800 million pounds, which was twice the amount that the bank allocated for trading purposes. Realising that the game was up, Leeson decided not to confess, but instead ran away, leaving a note to say he was sorry.

  Now on the run, Leeson went first to Malaysia, then to Brunei, and then to Germany, where he was arrested. He was extradited and taken to Singapore, where he was charged with fraud. As it transpired, he had obtained authorisation for his ‘short straddle deal’ but had hidden his previous losses from his superiors, and he made deals that were far too speculative, involving sums that he, and the bank, did not have at their disposal. He was charged, brought to trial and convicted of fraud. The judge sentenced him to six and a half years in a Singaporean jail, in conditions that were far from civilised. While he was serving his term, he was diagnosed with colon cancer and was released in 1999.

  Back from the brink

  Although Leeson had undoubtedly acted in a reckless manner as a trader, there were many who felt that Barings Bank was also to blame for the debacle. The bank had failed to keep any checks on their employee, allowing him all sorts of privileges because he had initially earned them so much money, including being allowed to settle his accounts himself, rather than having involvement from audito
rs and others who would have noticed what was going on and put a stop to it.

  Not only the bank, but the whole financial systems of options, futures, swaps and so on was also criticised, since it encouraged gambling on extremely volatile markets in a way that was far too risky and could lead – as it did in the case of Barings – to the complete collapse of financial institutions that employed hundreds of people and dealt with thousands of investors’ savings. It was also pointed out that although Leeson earned a high salary, he did not personally profit from these financial dealings. Instead, he was only trying to make as much money as he could for the bank, albeit in a way that was extremely risky.

  The next phase of Leeson’s career began when he returned to Great Britain and published an autobiography, Rogue Trader. In it, he described his humble beginnings, his rise to become Chief Trader at Barings, his eventual fall from grace and the nightmare of his prison term in Singapore. He also recounted how, under the strain of all this, his marriage fell apart. During the time that he was in jail in Singapore his first wife, Lisa, had stood by him. She had even taken a job as an air hostess so that she could visit him regularly in jail. However, it then emerged that, unbeknown to her, Leeson had had a number of affairs with geisha girls while on visits to the far east. After these revelations, Lisa divorced him. Shortly afterwards, Leeson developed colon cancer, losing a great deal of weight, and undergoing chemotherapy, during which period most of his hair fell out.