Oh My Fraud

[00:00:00] Thank you to our sponsor, Avalara

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[00:00:16] Introductions

Caleb: Hi everyone. This is Oh My Fraud. I'm Caleb Newquist.

Greg: And I'm Greg Kyte. Welcome to our inaugural episode. We're super excited to be launching this thing off. This is the realization of a dream.

Caleb: Uh, yeah, I think that's right. I mean, if to-

Greg: Yeah, maybe your dream, not so much my dream.

Caleb: To be recording a podcast late on a weekday evening, when my kids are screaming upstairs, for no money whatsoever, yeah, that's the dream.

Greg: Come on.

Caleb: That is the dream.

Greg: Come on.

Caleb: No, but seriously folks- but seriously folks, it is a great pleasure to be doing a podcast with my good friend, Greg Kyte. We've been collaborating for years now, Greg. And this is our first podcast.

Greg: Decades.

Caleb: Yeah, yeah, you're right. It's- I forget my life is, my life is definitely measured in decades now. But yeah, I mean, this is our first podcast and it's exciting. I am genuinely thrilled to be doing this with you.

Greg: As am I. You approached me a few months ago, said, “Hey, I think it'd be very cool if we did a fraud podcast together,” because we've had just great times doing fraud webinars together, but we've also felt a little constrained the medium of webcasting, webinars, in the webinar land. And I was like, “That sounds wonderful, but I'm really busy. So, come back when you think you have an idea of how our podcast could change the world.” And then you came back to me with an idea of how you thought our podcast could change the world. And here we are.

Caleb: And I mean, to be fair, in full disclosure, it wasn't my idea. It was our producer, Blake Oliver's idea. He was an easy sell, I have to say. It was roughly a 50-word email, and he's like, “Yes, you're hired. I'm willing to put up with all of your bullshit, you, and Greg's bullshit, to do this podcast.” And we're like, “Great. Great.”

Greg: Well, and it kinda- it feels like we're taking advantage of him. But then I think when I stepped back, I realized that he's the puppet master. And we’re-

Caleb: Yes.

Greg: We're merely pawns in his chess game.

Caleb: So, here's a question for you, Greg. You believe that this podcast has the power to change the world. I don't know what the fuck that means. So, why don't you elaborate on that a little bit?

Greg: Well, first off, we're the world's only true crime podcast that’s hosted by CPAs, or former- or erstwhile CPAs. And so, we're going to be able to bring a whole new perspective to the true crime genre, just simply from the backgrounds and the experiences that we both have. But then also, again, thanks to our producer, Blake, he's been able to figure out the code, in terms of how to get continuing education credits from listening to a damn podcast, which makes sense.

We've all thought that for years; he's figured it out. And that right there, that alters the course of the human history, right there, at least for the 400,000 humans on earth who have a CPA license and want to maintain it. So, that's how we're changing the world. And, Caleb, tell them about what we're even talking about on this episode.

Caleb: This first episode was a lot of fun; it's a very unusual story. The whole fraud had been perpetrated for more than my entire life. The perpetrator or the mastermind, I should say, has been sentenced. And it was such a fascinating story. I don't have a sense of how well-known this story is. And so, it felt like the perfect first episode.

Greg: And in this episode, we're going to open your mind and your experience to the world of printer toner piracy. So, buckle up for that, and as soon as we get back, we're going to get into the godfather of toner pirates. So, stick around.

[00:04:27] Is it "controller" or "comptroller"?

Caleb: Greg, so here's what I'm thinking about, man. You work in an office, right? But like, I forget, you're the comptroller and it's the stupidest title. I don't even know how you landed on that, or did someone give it to you?

Greg: Because it's the stupide- no, no, no. I'm able to come up with my own title, and I specifically chose comptroller because it's ridiculous. And I want to-.

Caleb: But it's not typical. A comptroller isn't typically a person for a business. It's usually a government position, right?

Greg: Right. But if you look up comptroller, it's just, it's like the German way to say "controller" or something like that. So, it's the same thing. It's just...

Caleb: In English, all you have to do is drop an "n" and add an "mp" and you've got the German version of the word.

Greg: Exactly. That's the basic formula, so.

Caleb: All right. So, but you also run the office, right?

Greg: Yeah.

[00:05:24] Do you buy a lot of office supplies?

Caleb: Okay. So, here's my question.

Greg: Yeah.

Caleb: Do you buy a lot of office supplies?

Greg: I do. I buy basically all of the office supplies that we use.

[00:05:35] Do you have a sense of what's the biggest rip off?

Caleb: Okay. Great. And so, of all the office supplies that you purchase on a regular basis, or even like, just an infrequent basis, do you have a good sense of what is the biggest rip-off in office supplies? Like, where you look at the price of what you're paying for something, and you look at it and you go, “Man, this is a total racket. Like, I can't believe this is what I pay.” Do you have an opinion about that? Or you're just like, you just pay or, do you just pay what you- pay what it is, and you're like, “Fuck it?”

Greg: Well, yeah, it's toner. It's printer toner, and to the point where- we're not a paperless office, but we use very, very little paper at my business. And we're at the point where every time we need to buy toner, we actually look at what it's going to cost us to buy a new printer, ‘cause it might be a better idea to just do that. But that being said, we had a contract with Les Olson Company for years, where it was kind of this all-in contract where they would come and service this gigantic copy-fax standalone machine.

Caleb: That felt like that was from another century, right?

Greg: It was at least from another decade, I can tell you that much. And part of the all-in, I dunno, we spent $500 or $600 a year for this contract, and it included our toner. And again, we don't use a whole lot of the toner.

Caleb: So, the toner-

Greg: So, it was kind of-

Caleb: Toner was included?

Greg: Yeah, it was buried in there.

Caleb: Yeah, yeah. And if I understand it right, because I'll be honest. I haven't had a real job in a very long time, and I don't think about any of these things. And so, I just want to make sure I understand how it really works. But my wife is very hardworking and she understands this stuff.

And if I understand it from you, and if I understand from her, that is a typical arrangement, where if you're leasing a copier, you don't have to buy toner. You just call your rep up, and you're like, “Hey, we're out of toner. Can you drop by and give us some?” And they’re like, “Yeah. Yeah. It's part of the deal.” And that's what they do.

Greg: Yeah. And we actually even own our copy machine, but it's still a thing where they're more than willing to sell us a service agreement that includes toner. They're like, “Hey, hey, this is going to cost a lot of money. How about you give it to us and just, don't worry about it?” And then it's like, “Can you break down the cost of how much this would have cost if we didn't go with it?” No. Nope, can't do that.

Caleb: So, oh man. Okay. So then, do you have a sense, if you don't mind sharing, for you guys, what does toner cost? Do you have it down, like per ounce or per cartridge, or like, do you have an idea of what it would work out to? Or is it just like baked into the price and you just, like, you don't think about it, but you just know it's a lot?

[00:08:12] Every year, we've renewed until 2021

Greg: Don't think about it. We just know it's a lot. And like I said, every year, we've renewed this contract until this year. I mean, honestly, this year, we looked at it, at what that would cost to renew that contract. This literally happened in 2021, where we were like, “Hey, this machine's old. Instead of renewing the contract, let's take that money and let's use 60% of that budget just to buy a new printer, and we'll see how that goes.

And if it only lasts us one year, like I said, it costs about 60% of what the service contract did, and we could throw it off a cliff and buy another printer next year. And they come with toner, dammit.

[00:08:56] Consumer Reports article

Caleb: Right. So, I came across an article from consumer reports. Did you happen to read this same article? Did you come across it?

Greg: I did not, uh-uh.

Caleb: So, I found a Consumer Reports article from 2018. I'll just read- I think this is the lead. I think this is the first paragraph, but I'll read it. It's enough that printer ink might be the most expensive liquid you buy. Even the cheapest ink and replacement cartridges at about $13 an ounce, cost more than twice as much as Dom Perignon champagne, while the priciest, closer to $95 an ounce makes gasoline seem like a bargain. It's still far less painful than $12,160 per gallon, right? That's like- it is. It must be the most valuable commodity on Earth.

Greg: So, toner, you just said that the-

Caleb: The priciest-

Greg: Price per gallon of toner is $12,000?

[00:09:52] The most valuable commodity on Earth

Caleb: I think so. Well, if you figure- so, if this is to be believed, the priciest toner that you can get is, they're saying is close to $95 an ounce. So, I'm not good at getting ounces to gallons. You're the former math teacher, so you should do that. But like-

Greg: It's uh- it'd be even more than- it's a lot.

Caleb: It’s a lot. So, like, it is the most- it has to be the most valuable commodity on Earth, I mean.

Greg: It's got to be pushing it, so.

Caleb: Okay. So then, I guess-

Greg: I mean, I like drinking scotch, but I found it- I found one that's accessible, that I can buy, what, a 750-milliliter bottle of it for 10 bucks, and I'm fine.

Caleb: That’s perfect.

Greg: It does the job.

Caleb: Right. So, okay. So, this is where I'm going with this, I think. Because this stuff is so valuable or maybe it's not valuable, it's just fucking expensive. It's just pricey shit. The fact that you can Google the term or the phrase, you can Google toner pirate and millions of results will come up.

[00:11:02] Today's Case: The Godfather of Toner Pirates

Greg: Well, in today's case, the guy that we'll be looking at it was called the Godfather of the California Toner Pirates, which means, that implies there's lots of them. And he's just the Godfather in Cali- he's not the Godfather of the Colorado Toner Pirates. He's not the godfather of the Utah Toner Pirates. He's just simply the Godfather of the California Toner Pirates. So, there's at least going to be 49 other Godfathers of State Toner Pirates.

Caleb: Right. I mean, I-

Greg: Just using logic.

Caleb: I mean, that's, I mean- so, first I should say, they're mixing some villainy here. So, like godfathers and pirates, like, eh. But it's, so, it's a little sloppy, but I do appreciate tonernews.com for their headline. As someone who wrote a lot of cheeky headlines for a living, for a long while, I appreciate it very much.

Greg: I think that what you said before we got on the hot mics, I think is amazing. There's certain industries that are ripe for a destructive innovation, and there's some industries that are ripe for fraud. And toner sales is ripe for fraud because people don't have any damn clue. They know it's expensive.

They know they're just going to have to clench up and take whatever price they need, ‘cause they got to print stuff, but it's so obscure, so opaque, in terms of how the pricing even happens, that people don't know that, but they know they need it and they're afraid because they know it could even get more expensive than it already is, as you've established, the current most expensive liquid on the face of Planet Earth.

Caleb: It's like, I feel like toner, this is the dystopia that we live in.

[00:12:57] The story of Gilbert Michaels is remarkable because it is so long

Caleb: But the story of this guy, Gilbert Michaels, this whole thing is remarkable on a number of fronts.

[00:13:07] Let's get into the case

Caleb: We are going to get into this case, the Godfather of the Toner Pirates. We're going to get into how it worked, who got ripped off, how much they got ripped off for. It's a fascinating case. So, we're going to take a break and then we'll come back and get into it. Right, Greg?

Greg: Absolutely.

Caleb: Alright, man.

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[00:14:40] 40 years of toner piracy

Greg: So, toner cartridge sales piracy. This is a massive thing. And one of the things that I find fascinating about this, is that the dude who did it, so Gilbert Michaels, I think when we looked at this, he was 79 when he was convicted, but that was in 2019.

So, he's- dude’s 81 years old now, but it says that his toner piracy began in the 1970s, which depending on- I mean, even if you peg that 1979, the end of the 70s, that's still 40 years of being a toner pirate. That's a long time; he started when he was in his 30s. He started-.

Caleb: He may be the most successful pirate of all time. He's not, you know, sailing the seven seas or anything, but in terms of like a long history, or a long fruitful career of fraud, he probably has Bernie Madoff beat, I don't know.

[00:15:48] What was the total take?

Greg: In terms of longevity, definitely, not in terms of top dollar, you know, what he did, ‘cause what was it? A hundred and- well, no, that's the thing. He might, who knows how much is said? Because did you- what was the total take?

Caleb: So, here's-

Greg: I saw something that said in a six-year period, he like got $126 million, or something like that.

Caleb: Yeah. So, I got a couple of things here. Department of Justice press release said over one, six years, just a six-year span, victims were induced to send more than $126 million to the telemarketing scammers. And so, we'll get into like how telemarketing worked in- fit into it all, but basically, this is from the DOJ press release too.

A West Los Angeles man, that's this guy, Gilbert Michaels, was sentenced today to 48 months in federal prison, plus additional 28 months home confinement for orchestrating a decades-long multi-million-dollar telemarketing scheme that defrauded more than 50,000 victims, including small businesses and charities, by posing it as a regular supplier of printer toner and selling them toner at greatly inflated prices. It was a little confusing to me because then they go, they talk about this period of time, like in 1988 where he was prohibited, he got in trouble in the late 80s.

But you're right. I read something else. I think it was the MarketWatch article that I found that said, it actually began in the 70s. So, like, long, long history. And it's the fact that he was able to keep it going for this amount of time is it's surprising and yet not.

I mean, I don't know how about- about you Greg, but like, when small businesses are the victims, it just feels like it's something that can easily be, I don't know. It's easy for authorities to ignore, until it reaches some kind of critical mass, which this obviously did, so.

[00:17:40] Over 50,000 victims - here are the highlights

Greg: Right. Over 50,000 victims over the four decades that he was doing this crime. I mean, some of the victims, the ones that really- that they listed, ‘cause obviously they didn't list even you know, 1% of the 50,000 plus victims, but of the shortlist that somebody else thought was interesting, the three that I thought were interesting is that this guy took money from a YMCA for toner cartridge. He took money from a Kentucky Steelworkers Union.

By the way, giant balls, Gilbert Michaels, because something tells me you kind of don't want to fuck around with the Steelworkers Union. That's the last that I- I don't want to be on the shit list of a Steelworkers Union. And then equally as ominous, is he also stole money from a Christian preschool in Alabama. I mean, Steelworkers is one thing, but pre-K Alabama, Alabamans, Alabamians, bad choice.

Caleb: Alabamans.

Greg: He's making some- and also, at least, you know, you gotta think it was a Christian preschool. So, he's also- I think we can say God's mad at Gilbert Michaels.

[00:18:57] Reminiscing on electric typewriters and Xerox machines

Greg: Okay, can I say one other thing that's interesting too?

Caleb: Yeah, sure.

Greg: If this did start in the 70s, they were selling- they were defrauding people out of toner for like the world's first printers. So, I was born in 1972. I graduated high school in 1990, and I was still using electric typewriters to like print- to type up papers in my senior year. And that was 19- did I graduate in 90? Yeah, I was the class of 1990, yeah.

Caleb: The math works.

Greg: That's what it was.

Caleb: So, when did you first see a Xerox machine?

Greg: That was, I mean, that was [CROSSTALK]- they had-

Caleb: It's similar to seeing your first Playboy, I realized, but like, I'm just trying to get you to remember.

Greg: Right. It’s really logged in.

Caleb: Okay, same level.

Greg: Well, okay, I'm so old that I remember in elementary school, they had mimeograph machines still, in my elementary school, which-.

Caleb: I have no idea what that is.

Greg: It was pre-copy machine. It was this weird thing where it was almost like, I don't know if I was making copies or like spinning wool. It was the same technology.

Caleb: Got it, yeah. That's a good visual; spinning wool to make copies.

Greg: ‘Cause- and spinning wool was actually how we- that was our major fundraiser at my school [INAUDIBLE]. So, that's how old I am. We spun wool to turn enough milk money.

Caleb: The fact that this scam is nearly as old as you are, is impressive enough, so.

Greg: It's true. True.

Caleb: In any case-.

Greg: But I’m just saying, they got in early. That’s-.

Caleb: They did. Yeah, well, and I-.

Greg: These guys were- they were ground floor toner pirates.

Caleb: [20:41] movers. First movers, whatever.

Greg: Yeah, early adopters. Yeah, they were on the front part of this whole thing.

Caleb: First fraud movers, something like that.

Greg: Right. Initially, the main thing I saw was that this guy got in trouble for selling toner for 10 times- up to 10 times the price that it should have been sold for. And I was going, “That's not illegal to do that,” but what is illegal- it's not. No, it's charging a high price, not illegal at all.

Caleb: Not illegal, no.

Greg: No. And so-.

Caleb: In fact, it's very good business practice, actually.

Greg: Yeah, it is. Which again is why, very legally, like I said, I had a contract with Les Olson company where they may well have been also charging me 10 times the price of what toner should be, as part of my contract.

[00:21:25] Let's get into how it worked. Or not.

Caleb: Let's talk a little bit about how it worked, shall we?

Greg: So, Caleb, just to make it crystal clear, and tell me if I'm wrong, this is how IDC and Gilbert Michaels, the Godfather of Toner Piracy did this scam, is they would call people up, they would pretend like they were that company's typical vendor. They would say, “Hey, toner prices are going up, but act now and we can lock in the old prices before they go up.”

The victim organization would say, “That sounds like the right business decision for us to make.” They'd sign an order agreement, that was a legally binding, or at least supposedly legally binding agreement, and then IDC would send them an invoice along with the toner and say, “Pay this invoice.” And then the company would go, “Holy crap. This does not seem like it's the old price. This is a ridiculous amount.”

And then they'd fight back, but IDC would say, “Hey, if you don't pay it, we're going to need to take legal action. We're going to send you to collections,” or in the off chance- and this did, apparently, this did happen from time to time, the IDC would cave and they'd say, “Okay, send the toner back, but we're going to charge you this ridiculously high restocking fee.” And that's the nutshell of how this scam worked, right?

Caleb: Yeah. They either got them on the inflated invoice. They either got them that way, or they got them on the restocking. If they said, “Nope, we're not doing it,” and they’d just send it back, then they'd say, “Great. So, you owe us further restocking.” So, they had basically, no matter what they did, they were going to be able to swindle them on one end or the other.

[00:23:01] It wasn't super complicated

Caleb: So, Greg. Do you got- do you think you got it?

Greg: Yeah, no, I [CROSSTALK].

Caleb: It's not super complicated, right?

Greg: No, it's not. It’s not at all.

Caleb: But it worked incredibly- but it was incredibly effective.

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[00:23:53] The reenactment

Greg: So, Caleb, this is an actor's reenactment of how this fraud went down. So, someone at IDC would make a call to a potential victim. And they- so, they’d make the call and be like, bring, bring, bring.

Caleb: “Good morning. This is Debbie at Jesus, Mary and Joseph Christian primary school. How may I help you?”

Greg: Well, God bless you today, Debbie. And the Lord is-

Caleb: Well, God bless you, thank you for calling. How can I help you?

Greg: Well, you know what, Debbie, I actually called to help you because I am with HP that- you guys have a HP printer, don't you?

Caleb: Yes, sir. We do.

Greg: Fantastic. Your typical representative, he asked me to give you a call because we are having- and this sucks because I'm already embarrassed at how expensive our toner is.

Caleb: Oh, don’t.

Greg: I don't set the prices.

Caleb: It's all right. Just tell- what's happening? Just tell Debbie, it's fine. It's fine. Just tell me what's going on. It's fine.

Greg: Well, the toner prices are going up, even from where they're already at, and I hate that. I feel like it's unconscionable, but here's the thing. And this is why I'm calling you today, because we can actually- we've got a limited amount of time where if you agree to buy five times what you usually do for your toner, I can lock in the old price. But like I said, the price is going up to double what it has been.

Caleb: Oh, my land.

Greg: And you guys use a lot of toner anyways. You guys are going to go through five toner packets, aren't you?

Caleb: I honestly don't know. I mean, we do print a lot of pro-life bulletins that we hand out to the little ones, you know, the little girls, especially. Like, we try to get them, you know, we try to start that conversation early, if we can. But anyhow, we do go through a fair amount of toner. So, I want to make sure I understand this. You're saying, you're telling me that the price of toner is going up 10 times what we currently pay, but you can lock us in to the price that we've been paying?

Greg: Exactly. And that's the nice thing too, even-.

Caleb: Oh, that is so sweet, that you can do that for us. That's so thoughtful. I really appreciate you calling.

Greg: And I'm glad- absolutely. And I'm glad to do it. And just so you know, then one of the great things about toner, it doesn't go bad. So, even if it takes you a while to work through it, you'll have it at the old price. You're really going to be able to stretch your donation dollars further, by doing this.

So, Debbie, here's what I'm going to do. I'm going to fax over a purchase agreement to you.

Caleb: All right.

Greg: All I need is your fax number, and I'll get this right over. You just have to sign it, fax it back to me, and we'll lock in that old price, okay? Does that sound good, Debbie?

Caleb: That sounds wonderful. Bless your heart.

Greg: Wonderful. Awesome. I mean, I’ll have my assistant send it over. I've got like a hundred other people I got to call to try to help them out, just like I helped you out. So, I'm going to let you go. God bless you.

Caleb: Thank you so much.

Greg: All right. So, is that what we're-

Caleb: I think we got it.

[00:27:14] Debbie gets the invoice

Greg: So, let's say Debbie gets the invoice for this ridiculous amount that she does not- she is not expecting. So, she calls and complains. Then what they're going to say is they're going to say, “Hey, listen, you signed the contract. I was doing you a favor.

You can't- I used the contract and I ordered this stuff. I can't eat this, and I have a legal document saying that you wanted me to ship it to you. So, legally, you are responsible now for paying me for that. And people can be intimidated-.

Caleb: Oh, yeah.

Greg: Into doing things that they wouldn't do, when you just threaten legal action.

Caleb: Right.

[00:27:55] Greg's true story: People can easily be bullied by legal action

Greg: True story from me, from my business, we had a tenant who did- because it's a medical office building, he did imaging. He had an MRI machine in our building, and he left because he- and he was kind of a jackass. So, people like paid him a lot of money actually, to leave our building and to get out of our- the LLC that owns the building. He built a new building, like a half a mile away from our building.

And then he had his lawyer send us a letter saying we could no longer have the word imaging on our building. It's kind of like, if you're a laundromat, and you move your laundromat, and another laundromat moves in, they can say, “Hey, we're still a laundromat.”

So, I go to my attorney and I go, “This guy's just full of crap, right?” And my attorney says, “Yeah, he's totally full of crap. He can't sue you for that.” But then, the guy from the old imaging center, he starts taking official legal action. He wanted us to change the sign. He took official legal action against us.

We had to engage our attorney to go through- to jump through the legal hoops. And eventually, we had paid my attorney more money than it would have cost to just change the damn sign to begin with, just to do the legal dance. And at that point, I started sending emails to this guy that- just going, “Hey, we'll change the damn sign. Just drop everything.”

Because if at the beginning, changing the sign was going to cost us like 3,500 bucks, I didn't want to spend that. We paid 4,500 to my accountant- to my attorney. And I go back to this guy and say, “Just drop everything. We'll change it.” ‘Cause I know that if we continue down this road of us saying, “We don't have to change the damn sign,” it would have been at least twice what we already paid.

So, people can easily get bullied into doing what you want when you threaten legal action, because they go, “Well, I could pay this $500 for this toner or what am I going to do? Go get an attorney who charges $250 an hour, and I'm going to spend $500 just in the initial consultation to see if I don't have to pay this damn toner pirate godfather.”

Caleb: Yeah. And then if- in the New York times article, and this is in other places too, they said, even if you manage to withstand the threats of like, what do they say, turning them over to collections or taking legal action, then what they would do is they would say, “Well, we're going to- if you send it back to us, we're going to charge you a restocking fees.” And so, like, they were getting it on both ends. It was kind of an impressive- some impressive methods.

Greg: It's sophisticated. They knew what they were doing. It's as if they'd been doing this for decades, and it really had a chance to refine this, the process.

[00:30:40] Caleb's wife and the scam calls at her company

Caleb: Well, and let's- like, I was telling my wife about this story and she says to me, “It hasn't happened recently,” but she's like, “Oh yeah, I can remember getting calls at my office, and somebody saying, “Hello, I'm calling from, you know, so-and-so. You know, your printer, your copy machine, whatever, supplier person, place, and you have- our records show that you have the Darth Vader model.

And like my wife would be like, “That's not our model. No, fuck off.” And like, it was just- it was so brazenly a scam. The telemarketing portion of this scam was basically, just boiler rooms, where they had people just work in the phones. And at the time, they indicted like 30 people or something.

Like, I don't remember the exact number, but they indicted like a couple dozen people. And yeah, and they must've just burning up the phones, day after day after day, just like probably just going through the phone book, you know, and just calling every [CROSSTALK].

Greg: Absolutely. Absolutely.

Caleb: And so.

[00:31:40] Greg rewatched the 2000 film "Boiler Room"

Greg: Well, and that's- and it's so funny. ‘Cause getting into this case, like digging into some of the dirt on this case, I saw multiple times, they were going, it was your classic boiler room situation, you know, operation. And so, because of that, I went back and I watched the 2000 film Boiler Room starring Vin Diesel.

Did you remember Vin Diesel was in that? He was a child. He was like 14 in this movie, but it was pretty impressive.

Caleb: The movie wasn't impressive, was it?

Greg: I liked it. I think it ended a little too abruptly. And honestly, I will say, that was probably Vin Diesel's finest work. You watch him in that and you go, “His acting was a hundred times better than any Fast and Furious movie ever.” And this was like one of his breakout roles.

‘Cause he actually like- he actually speaks in full sentences, and his voice will fluctuate. It's amazing what he had back then.

Caleb: Wow.

Greg: But it was the same thing; it was all like Boiler Room, ‘cause it's pressure. You've got pressure probably starting with Gilbert Michaels going, “Hey, we got to sell this toner, and you're going to be rich if you do it, and I'm going to be rich and I'm going to beat you down if you're not making all these calls all day long. if you have a conscience, you have a problem that we're selling toner for way more than it's worth to the YMCA, well then, get the hell out of here. There's somebody else who wants to make money, if it's not you.”

They have scripts in the boiler room; the new guys were given scripts saying, “Here's what you say when they say this.” And I'm sure over 40 years, these guys had scripts as well for how to overcome objections.

Caleb: Oh, they had it down cold.

[00:33:23] Small businesses are easier to intimidate and they don't have time

Caleb: If your marks are small businesses, then you know it's going to be easier to intimidate them. It's going to be easier to just hoodwink them into, as you were pointing out earlier, making decisions that they probably wouldn't- under ordinary circumstances, probably wouldn't do.

They'd be like, “This just doesn't even pass the smell test,” right? The one thing that I think is probably part of the reason that people weren’t aware if they had an agreement, you know, whether they leased it or whether they bought it, they probably didn't know that they, in fact, could just call their rep at any time and say, “We need more toner,” and they just bring it over, and it would cost them nothing.

But obviously, if you're talking about a small business, like it's not somebody's job to pour over the fucking lease agreement with your- the company leasing you the photocopier. I mean, people don't have time to do that stuff. They're just running a small business. And so, like it's unfortunate that small businesses are easy marks; that makes them easy marks.

[00:34:22] IDC got caught because they invoiced a company that only used typewriters

Greg: One of the things that I thought was very interesting was the part of the reporting that they had that said that, authorities caught on to the scheme in part, because one of the IDC’s victims was a Southern California storage company that only used typewriters.

And I guess they got an invoice for toner cartridge, and they were like, “Well, this isn't right.” And again, good on them, deep into the 2000s, still using a typewriter. That's either you are the ultimate of laggards in the adoption of innovation curve, or it was like the hipster storage facility.

Caleb: It was totally the hipster storage facility, where it's like, “Oh, well, you know, we just type everything up and…”

Greg: They're busy muddling a mint for an artisanal mint Julep, while they type out their storage invoices on a typewriter to send by carrier pigeon to their customers. It was a very, very cool, very cool storage facility.

Caleb: Very, very- I mean, it's about as perfect ending- well, I think there were other factors, but like this was one of the key things that helped them catch onto it. But it is kind of like cosmic justice in a way, where you're just like, “Somebody in that boiler room called somebody up who was still using typewriters. And then that was the beginning of the end.”

I mean, the whole nature of this story, it just doesn't quite seem possible. It's one of the most interesting cases I've read about in quite some time.

[00:36:08] The court orders in the 1980s that didn't stop IDC

Greg: It absolutely is. And you know, the typewriter storage company was one of the key factors in terms of ending this whole scam. But like you said, even in the 1980s, there was some court orders against them. And that was a little confusing. Did you understand that?

Caleb: Yeah.

Greg: It was like, the court order was like, “Hey, we're ordering you to not lie to your customers anymore.” And it’s like, so that-.

Caleb: Yeah. No, they’re like, in the DOJ press release, it said- I'm just reading, in a series of court orders dating back to November, 1988, Michaels and his companies were prohibited from making false statements, and they were required to provide oversight, to quote, independent sales companies, end quote. Michaels violated these court orders by working with, and providing financing to the supposedly independent boiler rooms that were engaged in deceptive and fraudulent practices. Even though IDC received hundreds of thousands of complaints.

Greg: Hundreds of thousands of complaints. That’s amazing.

Caleb: From victims claiming they had been defrauded. So essentially, what you said is exactly right. They said, “You can't lie anymore,” is basically, what they did.

Greg: Knock it off. That was kinda- that was the quarter of, “Hey, hey, Michaels, knock it off.” And apparently, that didn't do the [CROSSTALK]

Caleb: He wasn't swayed one bit.

[00:37:32] The official list of crimes and the sentence for Gilbert Michaels

Greg: No, apparently not. And then, there was a whole lot of people who were indicted with this whole thing. Obviously, Gilbert Michael's, he was the big dog at the company. So, he went down- I want to say there was about a half a dozen other people who also were charged with crimes, and the official crimes that came through for Gilbert Michaels was one count of conspiracy to commit mail fraud, 10 counts of mail fraud, and five counts of money laundering.

And as a result, he was sentenced to four years in prison, plus an additional two years of house arrest, plus a $200,000 fine, which is crazy. Because they said the guy took 120, $126 million in six years. And his penalty is $200,000. That's ridiculous.

Caleb: That didn't make a lot of-.

Greg: That makes me want to become a toner pirate.

Caleb: Yeah. It seems like pretty decent ROI on something like that. I mean, account- you know, aside from maybe the four years in prison- I don't know about that, but yeah, the $200,000 fine caught my eye too. I'm just like, I mean he was a multimillionaire, so it seems kind of like chump change, but anyway.

Greg: Come on. The guy's 81, 4 years in jail. He needs to slow down anyway, so.

Caleb: Yeah, I mean, you know.

Greg: He's probably ready for a change.

Caleb: Yeah. I mean, you could get one of those nice minimum security, you know, cuts.

[00:38:54] Lessons learned

Caleb: Greg, I don't know if we're ready to like transition to the lessons learned portion of this show. But one of the things that is coming to mind for me is that, small businesses are- it's so hard to run a small business, already. But the fact that you have limited resources and a limited capacity, and you're looking to save wherever you can.

A scam like this could befall virtually, any small business. And so, that's a lot of what I've been thinking about, and I just wondered what thoughts you had on that, and any suggestions for what they can do to keep themselves sharp, I guess, suppose, when looking out for this kind of stuff.

Greg: I do. I have all sorts of stuff in terms of even what the Association of Certified Fraud Examiners, what they say about the increased vulnerability that small businesses have to occupational fraud. But obviously, those same vulnerabilities extend to fraud that arises from outside the company; occupational fraud is defined as someone inside the company who's ripping off the company, but the same constraints that small businesses have [INAUDIBLE].

But I think that's one of my lessons learned. I don't want to talk about it. So, after the break- and you can't make me.

Caleb: I won't. You're absolutely right. Thank you for reminding me that we are going to talk about that right after this.

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[00:41:10] How did they get away with the scam for so long?

Caleb: So, Greg, did you get a sense of how they were able to get away with this scam for as long as they did? Because I mean, most frauds as you well know, citing ACFE data points or factoids or whatever it is, most frauds do not- they don't come even close to lasting multi-decades. So, what's the sense that you got? How did they keep it going for so long?

Greg: It was- I mean, just in a nutshell, it was just plain intimidation. These guys came in with all the confidence saying, “No, legally, you need to do this. You agreed to this.” And again, it's what you were talking about with small businesses. Small businesses are not equipped to deal with anything that's sophisticated.

If anything, what they are trained to do, is to avoid these kinds of conflicts. It lasted for 40 years because they would intimidate these small businesses into just taking it, and they were so on the cusp of not being illegal, that they didn't get shut down earlier, although they had, like you said, hundreds of complaints, and they had- they were clearly on the authority.

Caleb: Hundreds of thousands.

Greg: Thousands of complaints.

Caleb: Hundreds of thousands, I guess.

Greg: Hundreds of- I got all of it combined, hundreds of thousands of complaints, and they were already on the police's radar because of all that. But like I said, they were over the edge in terms of the fraud, but not so far that people were going to take it down.

[00:42:49] What was the illegal activity in this scheme?

Caleb: One thing that I want to make sure everyone understands, we talked about this a little bit, but you're going to do a good job of explaining it is, maybe it got lost, so let's just clarify for everybody what exactly- what was the fraud that was happening? Like what was the illegal activity that was happening in this particular scheme?

Greg: And I think one of the ways to attack that question and to clarify that, is to start by saying exactly what they did that was not illegal. Because like I said before, one of the things that stuck out to me when I first read this case was that they were like, “Oh, these people were jackasses because they were charging these non-profits 10 times what toner was really, you know, what they could have bought toner for elsewhere.”

And the first thing that came to my mind is, “That's not illegal. You can sell stuff for as much as a willing buyer’s willing to spend for it. So, that's not illegal. So, I looked into some specific crimes related to pricing.

[00:43:50] Things they did not do wrong: Price gouging

Greg: And the two that I looked at, they did not violate. One of them's price gouging. And price gouging is when something bad happens, you know, like there's a hurricane. And so, you start charging, you know, $50 for a bottle of water. That's price gouging. I don't think any- I don't think there's any natural disaster or any kind of emergency situation.

There's no wildfires in California that are going to make people rush to get more toner cartridges. So, price gouging is not it. An interesting little side fact about price gouging is that there are 10 states- because it's a state-by-state thing for price gouging- 10 states where it is not illegal, including Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Washington state, and Wyoming.

Those guys, they don't care that you can gouge the prices as much as you want. These guys were located-.

Caleb: Yeah. It's a little- well, just one thing that I'd like to add is, if I'm not mistaken, there's kind of a school of economic thought that says price gouging is fine. It's kind of weird, but like, basic economics, right? Demand, supply willing buyer, willing seller. Like, there's some school of economic thought that basically is of the opinion that price gouging, there's nothing wrong with it at all.

Greg: Right. And those people are horrible people.

Caleb: Yes, no doubt.

Greg: And they typically live in Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, South Dakota, Washington state, and Wyoming. I grew up in Washington state.

Caleb: I grew up in Nebraska.

Greg: I know this for a fact.

Caleb: I grew up in Nebraska.

Greg: So, there we go. So, nobody question us; we know what we're talking about.

[00:45:27] Things they did not do wrong: Price fixing

Greg: The second thing that they did not do wrong is price fixing. Price fixing is also illegal. Price fixing is where two or more people, two or more people, and it's typically competitors, they collude to keep prices artificially high. That is a federal crime, and is prohibited under the Sherman Antitrust Act of 1890.

But again, that's not how these prices were artificially high.

[00:45:53] Things they did not do wrong: Illegal selling practices

Greg: There's also illegal selling practices. I want- I looked up to see is, our aggressive selling practices illegal, and there are certain practices that are. A bait and switch is illegal, but that's not what they were doing.

A bait and switch is where you say, “Hey, come on into the dealership. We've got a Camaro that we're selling for $150.” Then you show up, and they go, “Yeah, there's no Camaro. But here, I've got this Subaru Outback that's for 25,000, that I can sell you instead.” That's a bait and switch. They weren't doing that.

Fraudulent misrepresentation of your product. That's where you say, “Hey, you buy our toner cartridges, these things, they’ll last you easily, five years,” when you know they're really only going to last you five months; they weren't doing that.

Misrepresenting customers. That's where you call up and say, “Hey. Hey Alabama Christian preschool, we just sold a bunch of toner cartridges to the Alabama Jewish preschool down the street. Don't you want to keep up with the Jewish preschool? And the Muslim preschool also bought a bunch of our toner cartridges. You don't want to be left out, do you?” When in fact, they didn't sell to the Jewish preschool, or the Muslim preschool. That's misrepresenting your customers; they didn't do that.

[00:47:09] Something they did do wrong: Inertia selling

Greg: One thing that I do believe that they did, at least in part, is something called inertia selling, which is a very interesting practice. That's where you have a customer that didn't ask for a product, but you send it to him anyways, and you send them a bill and then you call them and say, “Hey, pay us our money. We sent you the toner.”

And they say, “We didn't ask for the toner.” And they say, “Well, if you send it back, we're going to have to charge you a restocking fee, so send us your stocking fee.” All that's totally illegal. And the funny thing is, if you are the person who receives the merchandise that you did not order, it's a hundred percent legal for you to just say, “Hey, we didn't order this.”

Caleb: “So, we’re keeping it.”

Greg: “Screw you. We’re not returning it. Thanks for the toner, suckers. Who's the toner pirate now, bitch?” That's really the response that you’re supposed to make in that situation.

Caleb: Make note of that, folks. Make note of that.

Greg: So, like I said, those are the things that were not- well, other than inertia selling, I believe that they did some of that. That's what I took away from this case.

[00:48:08] What they did do that is illegal: The lying (mail fraud)

Greg: But what they did do that was illegal- and Caleb, I think you've got a little more detail than I do about this, was just the lying. They lied about who they were.

Caleb: Right. So, the New York times, at least for Gilbert Michaels, the Godfather of Toner Pirates, here's from The Times: a federal jury found Mr. Michaels guilty of one count of conspiracy to commit mail fraud, 10 counts of mail fraud, and five counts of money laundering after a six-week trial.

So, mostly, mail fraud and money laundering, which we're not really getting into that, but the mail fraud seems to be like the main thing. And you're right. It seems as though if they were- if there was a boiler room. The one thing that occurred to me, it's like, “Well, there's got to be wire fraud, because if people are on the phones, like if you're basically committing fraud over the phone, that's basically wire fraud.

If you're committing fraud over email, that's basically wire fraud. But they got them on the mail fraud. And if I understand the mail fraud correctly, that is the misrepresentation of fact based on the business dealings, right? Like the phony invoices, misrepresenting the reps, like all of that stuff, right?

Greg: Yeah. And my guess with that, Caleb, is that it probably was- it came down to what's the easier conviction? Is it wire fraud or is it mail fraud? And if somebody can say, “Look, here's an invoice that they sent me through the United States postal service,” that's tangible evidence that you can't get away from.

Whereas, probably, the victims did not have tape recordings of the phone conversations that they had with the boiler room workers. Boiler room-.

Caleb: Right. And probably, no email- maybe, probably no emails and yeah, right.

Greg: Exactly. So, likely, it was just the easier conviction. I think you have a very strong case for saying that they committed wire fraud, but you know, everybody's a little bit lazy. So, let's go for the layup, which is the mail fraud.

Caleb: The mail fraud.

Greg: That's my guess. I wasn’t part of the prosecuting team, so I can't tell you firsthand if that was it. Here's some of the other interesting things that I thought about this case, Caleb. Back to the whole small business and nonprofit, and that they're more- they are more vulnerable to frauds than larger organizations.

[00:50:21] ACFE stats: Median fraud loss for small businesses is greater

Greg: And one of the things that we see from the ACFE- and I think this is very interesting data that they produce every two years in the ACFE’s Report to the Nation. This comes from the 2020 Report to the Nation; it’s the most recent one. As of this recording, was the small businesses, the median loss for occupational fraud for small businesses, the median loss was $150,000, but the median loss, overall, for all effected organizations was only $125,000.

So, small businesses, even though they have less money than your gigantic companies, the actual dollar amount of damage done to them is significantly more. And that comes back to what we're talking about. They don't have the staff or the sophistication to have the internal controls that they need, to be able to evade this type of fraudulent activity.

[00:51:17] Amount of the fraud is more devastating for small businesses

Caleb: Right. And I think the other thing, and you kind of touched on this, but maybe you didn't say it quite as explicitly. The amount of the fraud is just that much more devastating for the small business. Even if it's a small amount, it's a lot to each of those individual businesses. In a lot of cases, it's probably enough to turn out their lights.

[00:51:36] This is an old school, analog fraud

Caleb: There's just far more sophisticated frauds out there these days, but this goes to show you just even something that-.

Greg: Right. Analog versus digital. This is a pretty- this is old school. They were going old school with this fraud.

Caleb: Yeah. Absolutely.

Greg: And so, small businesses are just- they've got it coming from all sides.

[00:51:56] What can accountants do to protect their clients?

Caleb: And so, if we bring it back home to our friends in the accounting world, Greg, you've talked to a lot of firms over the years, in your work. What can accountants do for small businesses that are strapped for resources, strapped for controls, strapped for protecting themselves? Like, as somebody who could advise them, what can they do?

What kind of help can they provide? Or what kind of advice can they bestow, so that firms don't fall prey to stuff like this?

[00:52:29] Internal control: Approved vendor list

Greg: Well, one of the main internal controls that firms can help their clients implement, that would have made them immune to this fraud is just that- I mean, it’s a pretty basic control, but at the same time, you typically don't have it in smaller businesses. You have it in larger ones, where you have an approved vendor list, where-. And it's not just- because again, these guys were lying. They were saying, “Hey, we're so and so. We're the ones who usually help you with your toner.”

What an approved vendor list is, isn't just the name of the company, but it's also the address of the company. It's also the account number that you have with the company, so that when you get an invoice from them, you got to match all that stuff up before you send out a check. But again, what's difficult is that it's a pretty simple control to put in place, but it's not without effort to implement it.

And that's the resource that we've even said already in this podcast, that small businesses often don't have, is they just don't have the man- even if they know what they're supposed to do, they're like, “Well, I've got a hundred other things that I got to do today.”

I know at my job, that every invoice that comes in, I should double check the math on the invoice. That actually just happened today. I got an invoice at work for something that was $14,000, that's usually, at most- and like, it's a monthly bill we get, and at most, it's like a quarter of that.

And so, that was why I was like, “Wait a second, let me see. How did they get $14,000 on this bill?” And I went back and checked the math; it was just a fat finger error where it was $1,400, and they just put an extra digit in it. And I don't think that it was a nefarious act, I think it was an honest mistake.

But I don't check the math on the invoices, unless something's glaring like that. But best practices would say every single invoice that I pay, I redo their math to make sure that the bill was right. And I don't have the time to do that, and I'm not going to take the time to do that. And I'm sure that I've overpaid certain vendors because of it.

So, it's the same thing here, where it's like, it might be a great thing to do, but can you actually implement it? The other thing, Caleb, that sucks about this is kind of the same thing we got into with attorneys where you go, “These guys are threatening legal action, so I've got two options. I can go hire an attorney for a crap ton of money to fight this toner charge that's a lot. But I don't have- if I don't have enough money to pay the toner bill, I don't have enough money to pay the attorney.”

Same thing with this. If I don't have enough money to pay for this toner, I probably don't have enough money to go to a CPA to say, “Hey, will you please help me implement an effective set of internal controls to protect myself against toner fraud?” That's not going to happen. So, it's really- it sucks, and it's kind of a catch 22. But to your question, that is the internal control that would have eradicated this fraud from the potential victims.

[00:55:36] Gilbert Michaels looks like David Bowie's realtor brother

Greg: And one last- I got one last thing about this, that's mostly just, it's almost trivia, and it might even be very obvious to people anyways. But we've got a picture here. I printed it out on Canary paper. We've got a picture- and you can Google it if you find a picture of him, he looks like he's David Bowie's realtor brother.

I think he looks like if VH1 did a Where Are They Now? about Rick Astley, that could- you could put him in there, and that could be it. He looks like Anthony Bourdain, if Anthony Bourdain were a cocaine drug Lord. Basically, I'm just saying, he looks kind of like Anthony Bourdain.

[00:56:18] Masculinity of appearance correlates to likelihood to commit fraud

Greg: But one of the studies that people have done is, they've looked at people's faces. They've like had computers analyze the faces of fraudsters and determine- have robots determine, based on objective facts, how masculine someone's face is. And the masculinity of the face like correlates to the likelihood of that person committing fraud.

And so, what you see here is, you see a guy that I don't know, I don't know how masculine his face is, but I'm going to say based on his fraud, it's more masculine than it appears in this picture.

Caleb: I mean, nobody's saying that Rick Astley is not a manly man. I'll just say that.

Greg: I'll tell you what; he's not.

[00:57:13] Final Segment: View To A Fraud

Caleb: Our final segment is a view to a fraud. This is where we relish in our hindsight and thank our lucky stars that we've never bought printer toner from someone who looks like Margot Robbie's character in Focus. Greg, what was the big takeaway from this story for you?

Greg: I think for me, the biggest takeaway from this fraud is the vulnerability small businesses and nonprofits. And really, it's almost just like this intractable problem where you've got these small businesses that don't have the resources, whether that's time, or money, or know-how, to really protect themselves from these people that want to prey on them, like Gilbert Michaels, our printer toner pirate king.

And really, a lot of what they need to do is just have some basic skills, and some basic policies and procedures in place make sure that they don't get taken advantage of. The easiest one is to have an approved vendor list. Go, “Nobody buys anything from any vendors, unless we've already got them on this approved vendor list.”

But it can even be simpler than that, of just trying to ask more questions before you sign a legal document and send it back to somebody. That's pretty basic of just going, “Hey, maybe check with someone else at the company, or at our non-profit before you legally bind us to pay our hard-earned money for anything, whether that's toner or paper clips, or a new facility.”

What about you, Caleb? What's your big takeaway from this one?

Caleb: Yeah. I mean, I agree with everything you said. I think small businesses are very, very vulnerable to these types of scams, and by the sheer number of the businesses who fell victim to it, there’s your proof right there. I think what accountants should think about is, what role do you play for- especially if you serve small businesses, to what extent can you act as more of a guardian for these types of vulnerable businesses?

And I know people- like historically, people, accountants are- they eschew- is that the right word, eschew? Eschew.

Greg: Eschew. Eschew.

Caleb: Eschew.

Greg: Like what goes over you're a sock? You're a shoe.

Caleb: They avoid having to deal with fraud, historically, because there's this huge- they feel like there's this huge liability risk. I understand that vulnerability that firms have, but by the same token, I think firms owe it to their clients to take on the role to be kind of a guardian, to be kind of a big brother or big sister or whatever it is; pick your metaphor, I don't know.

But what I'm saying is, small businesses need as much help as they can get. And I think accountants are well-equipped to educate them and guide them or just build awareness and educate them. I think accountants can really take a bigger role in preventing fraud, or at least, mitigating it in an effective way, just by the examples that you gave, Greg.

And so, I'd really like to see more accountants take a more proactive approach to this, because right now, I just think your profession is just kind of saying, “That's not for me; too risky.” It's just like, do you want to help people or do you not want to help people? You know? It's-.

Greg: Right. There's the disclaimer, in our opinion, that says that our job is not to discover fraud. So, you're on your own, sucker. We did what we're supposed to do. There's one other big takeaway that I want to touch on really quick, ‘cause Gilbert Michaels was fined $200,000 for his crime, but he also built in a six-year period, like $126 million from people. He had over 50,000 victims of his fraud.

So, the other takeaway is, if you're committing fraud, you really need to diversify. The more victims that you have, the more- really, the more return on investments you have. It's like diversifying your stock portfolio. You just got to have lots and lots of victims, not just occupational fraud, you're just stealing from your employer. That's the dummies way. You got to go like the ballers, like Gilbert Michaels; have as many victims as possible, ‘cause they're not all going to come forward. It's just a numbers game.

Caleb: That's it for this week’s show. Oh My Fraud is a production of all my New-Kytes. I just made that up. It's a amalgamation of our names, I don't know. This episode was written by Caleb Newquist and Greg Kyte. Sound design, editing, and mixing by Blake Oliver.

Be sure to subscribe to the show on Apple podcasts, Google Play, or wherever you get your podcasts. Join us next time for more stories of average swindlers and scams that will make you say, Oh My Fraud!