My Favorite Fraud
We were doing that thing we do at the weekly Permanent Equity lunch where we talk about crazy hypotheticals when the topic of Enron came up (both Ken Lay and Richard Kinder happen to be Mizzou grads). And while Enron definitely did some fraud, our CEO Brent made the point that Enron had been a successful company and had some very real and valuable assets up until the time it overreached.
As I got up to get seconds (shoutout Chef Alane), I remarked offhandedly, “See, it used to be that you had to have some success before you could perpetrate a fraud. Nowadays, you can just be a fraudster from the start.”
When I got back from the kitchen, everyone was talking about all kinds of fraud and so I asked if I had told the story of Nonko Trading already, because it is my all-time favorite fraud. I guess I hadn’t, so I did, and even though I wrote about Nonko a long time ago, I haven’t written about it here, and everyone should know the story.
Nonko Trading got started when two guys, Naris Chamroonrat (in Bangkok) and Adam Plumer (in Las Vegas), made the observation that day trading was becoming really popular. Thinking up a business plan around that, they conceived of a brokerage that would capture this growing volume by offering free trades and lots of cheap leverage. Instead, the way this brokerage would make money would be by profit sharing in the clients’ trades.
Since the model would only work if the day traders were profitable, Nonko invited prospects to demonstrate their mettle ahead of time on a simulator. It was then that Chamroonrat and Plumer saw just how bad these prospects actually were at day trading.
But rather than give up, Chamroonrat and Plumer invited even the very worst traders to fund live accounts with free trades and lots of cheap leverage. And instead of going down in flames, Nonko ended up banking more than $1M in less than a year.
If you’ve never seen the end of The Usual Suspects, you should watch it. It’s an absolute master class in everything you thought you knew being turned on its head.
Same thing here.
Because those live accounts were still simulation accounts. Nonko never bothered to connect its trading software to the exchanges.
So the clients watched their balances dwindle to zero with losing trade after losing trade. Meanwhile, the actual cash sat untouched in a bank account in Belize. And when the client finally gave up, some after funding the account more than once, Nonko would wire out the pittance the client thought he or she had left – and keep the rest.
“The greatest trick the devil ever pulled was convincing the world he didn’t exist” indeed.
Have a great weekend.
– Tim
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