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History of scams: nothing new under the sun

Jackson Burke
Participants at a hacking conference.
Getty Images

Ever received an e-mail from displaced royalty, desperate to get great sums of money out of their country of origin? How about a message from an enterprising stock broker, letting you know that you're on their list as a discerning investor looking for a hot tip on a company that's about to explode? Maybe an investment club that promises amazing returns– as long as you keep signing up new members.

The reality of the internet is, we've all received these "amazing offers." If you check the spam filter on your e-mail, you've probably received five of them while you've been reading this article, along with the free iPad giveaways and promises of male enhancement. Since a lot of us were first exposed to these scams when e-mail became ubiquitous and easy to use, you might think that they were invented around the time of the Internet.

You'd only be off by a few hundred years.

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The truth is that as long as people have desired things they don't have, and don't want to wait for, scam artists and confidence men have been around to relieve them of their hard-earned capital. Here are a few modern day scams with long and storied histories:

#3: The Nigerian Prince e-mail scam is over 300 years old.

So, you've received a message from a "fairly well-educated foreigner… with a word misspelled here and there, and an occasional foreign idiom." Sounds like the Nigerian Prince e-mail scam we're all so familiar with, right?

That quote is from a New York Times article from 1898, and the scam was being referred to as "old" even back then.

Nigerian Prince, or "419" scams – so named because 419 is the fraud designation in the Nigerian criminal code - is the latest reinvention of a much older scheme called The Spanish Prisoner. Law enforcement has a different name for it – the advance fee scam.

The structure is always the same. A stranger,desperate for aid, has the legal right to a huge sum of money but does not have the capital to access it. If you could send a few hundred dollars as afee to have this money transferred to a bank in your home country, the stranger will cut you in for a sizable percentage. You send the money – the "advance fee" – but problems arise. More money is needed for fees, or bribes, or travel expenses. If you send more money, more problems arise, but the promise of the payoff is always just around the corner. This continues until you stop sending money, or are bled completely dry.

Some of the earliest advance fee letters (snail mail, of course) date back to the French revolution. It acquired the name of the Spanish Prisoner in the United States during the Spanish American War. A letter would be sent to prospective marks in the United States, purportedly from a soldier who was imprisoned in Spain. The soldier would have access to a large amount of money or gold, and desperately needs the mark's help to access it to pay their way out of the Spanish jails. Money would be sent– and you know the rest.

#2: The Ponzi scheme may have been invented by Charles Dickens.

Anyone familiar with the exploits of Bernie Madoff is familiar with the Ponzi scheme. The scam is incredibly simple, although the methods used by operators to cover their tracks can be labyrinthian.

In essence, a Ponzi scheme is any business or individual who pays investors with capital from newer investors, rather than from profits earned. The Ponzi schemes take their name from Charles Ponzi, an Italian immigrant to the United States who bilked investors out of $20 million in the early 1900s by claiming that he could make a guaranteed profit through the sale of postal reply coupons.

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However, historians note that one of the first recorded mentions of a Ponzi scheme occurred nearly 40 years before Charles Ponzi was born, in the work of one of Britain's greatest writers.

In the 1844 novel The Life and Adventures of Martin Chuzzlewit, Charles Dickens recounts the scheming of Montague Tigg (or Tigg Montague, occasionally), a skid-row thief and criminal who becomes prosperous by setting up The Anglo-Bengalee Disinterested Loan and Life Assurance Company – a life insurance company started with no capital that pays off policyholders' claims using the premiums of recent buyers.

Everyone is willing to give something for whatever it is they desire the most.
Henry Oberlander, forger and confidence man

As great as those names are, even Dickens never created a thief with a name that sounded like "made off." Who would believe it?

#1: A pump-and-dump scam once rivaled the size of the Bank of England.

Pump-and-dump scams involve inflating the price of a stock through artificial means, usually the aggressive sale of the stock itself. As more shares are sold, the price of the stock rises – until the primary shareholders sell huge chunks of the stock, and the price collapses, leaving the new buyers holding the bag. Jordan Belfort, whose story was told the recent film "The Wolf of Wall Street," was a major practitioner of the pump-and-dump, or microcap stock fraud.

However, his scam was a drop in the bucket compared to the South Sea Company of London.

In the early 1700s, the government of England found itself severely in debt – over 9 million pounds. Two enterprising businessmen with connections in Parliament, Edward Harley and John Blunt, concocted the idea of creating the South Sea Company. This new company would consolidate that debt, as well as hold a monopoly on trade with South America.

One problem: trade with South America was controlled by Spain, a country Britain happened to be at war with at the time. Although the hope was that the charter of the South Sea Company would encourage negotiations with Spain on the part of the British government, a second war in 1718 meant the company lost all assets in South America.

The owners of the company decided to raise capital using stock sales, and they were wildly successful. Using the names of the illustrious stock owners in Parliament and high society as a sales tactic, shares of the company were sold to the public. In 1720, over the course of a single year, the price of the stock rose from 100 pounds to almost 1000, before collapsing in September of the same year.

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For anyone who has ever lost money in the stock market, you can be comforted by the words of no less an intellectual light than Sir Issac Newton, who according to his niece lost 20,000 pounds in the South Sea Company. He reportedly said of the venture, "I can calculate the movement of stars, but not the madness of men."