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Oh My Fraud

Stock Options Weren’t Lucky Timing—They Were Backdated Fraud

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In 2005, a Norwegian professor at the University of Iowa discovered something that would shake corporate America: CEOs weren’t getting lucky with their stock option timing; they were cheating. By looking backward and cherry-picking dates when their company’s stock hit rock bottom, executives at more than 130 major corporations were guaranteeing themselves millions in profits.

That professor, Erik Lie, shared his story with Caleb Newquist in a recent episode of the Oh My Fraud podcast.

The Accidental Fraud Fighter

Erik never set out to expose corporate fraud. Growing up in Norway, spending time skiing in the mountains and playing by the water, he was just a kid who was good at math. His path to becoming one of TIME magazine’s 100 Most Influential People in 2007 started with simple curiosity.

Erik’s work at the University of Iowa’s Tippie College of Business didn’t involve trying to catch cheaters. He was studying how stock options affected executive behavior. But what he found in the data was too strange to ignore.

Stock options give executives the right to buy company stock at a fixed price in the future, usually set at the market price on the grant date. Thanks to a 1993 tax law, they’d become hugely popular as “performance-based” compensation that companies could still deduct from their taxes. By the early 2000s, tech companies were handing them out like candy.

When Lucky Timing Becomes Mathematically Impossible

Erik was looking at what happened to stock prices around option grant dates, following up on earlier work by NYU professor David Yermack. But where Yermack found a modest pattern in early 1990s data, Erik discovered something explosive in more recent numbers.

“You see the stock price during the month beforehand, on average, go down by about 4%. And then right on the grant date, it turns and it goes up 4% afterward,” Erik explained. “This is crazy to find something like this.”

The pattern wasn’t just in individual stocks; it showed up in the entire market. As Erik put it, “The whole market is moving in that same direction. And you ask yourself, how could these guys predict the market? And how come they’re not working for a hedge fund in that case, instead of for a company out there in the Midwest?”

Some companies hit stock price lows for their option grants five years in a row. The odds of this happening by chance were astronomical. While defense lawyers would later claim their clients just “got lucky,” the concentration of perfect timing across hundreds of companies told a different story.

Breaking Academic Boundaries

When Erik read a Wall Street Journal article about the SEC investigating companies for “spring loading”—granting options before releasing good news—he did something unusual for an academic: he reached out to regulators.

“I contacted SEC, and this is not normal for me either,” Erik recalled. “Usually I stay in my bubble. But something compelled me to contact SEC and say, ‘Hey, I think you’re on the wrong path here.'”

His theory was simple. Companies didn’t have to disclose option grants until months later in their proxy statements. This meant executives could look backward and pick the most favorable dates. “They can essentially stand in March of a year and say, ‘Hey, we’ve got some grants last year, didn’t we? Let’s just pick a date to make that official date. And look at that—June 7th had a very low price.'”

Unlike Harry Markopolos, who was desperately trying to get the SEC to investigate Bernie Madoff during the same period, Erik found a receptive audience. One SEC staff member called him, asked for data, and appeared to take his findings seriously.

The Story Goes Public

To strengthen his case, Erik teamed up with colleague Randall Heron to study what happened after Sarbanes-Oxley required option grants to be reported within two days. Their findings were damning: companies that complied with the new rule showed no suspicious timing patterns. The magical ability to pick perfect grant dates vanished the moment executives had to report in real-time.

But academic papers rarely make waves. “People will not read these academic journals for the most part,” Erik admitted. “No one cares about these things.”

Enter Mark Maremont, a senior Wall Street Journal reporter who immediately grasped the story’s explosive potential. His team spent months analyzing data and contacting companies. The resulting March 2006 article, “The Perfect Payday,” featured colorful graphics showing company after company somehow granting options at exact stock price bottoms.

“One executive fled the country very quickly,” Erik noted about the aftermath. “I think it’s pretty clear that something is going on.”

The Journal won a Pulitzer Prize for its coverage. More than 130 companies faced investigations. Seventy executives lost their jobs.

Why Proving Fraud Is Harder Than Finding It

Despite overwhelming statistical evidence, criminal prosecutions produced mixed results. The challenge was, while Erik’s data showed undeniable patterns across hundreds of companies, prosecutors had to prove criminal intent for specific individuals.

“With enough data, you can see these patterns, but if you narrow it down to one data point, you can’t see what’s happening in that context,” Erik explained.

Smart executives had even built in deniability. “Some of them would intentionally not pick the lowest because it would seem so obvious,” Erik revealed. By choosing the second or third-lowest price, they created enough ambiguity to defeat prosecution while still enriching themselves.

The harm was real. Shareholders were deceived about compensation costs. Companies illegally claimed tax deductions. And as Erik pointed out: “If this is all harmless, then why not just do it out in the open?”

Lessons for Today’s Fraud Fighters

Erik’s story demonstrates what Caleb calls the “privatization of enforcement,” where academics, journalists, and others help catch fraud that overwhelmed government agencies might miss. But unlike traditional whistleblowers who face retaliation, Erik experienced little pushback.

“I wasn’t scared at all. I just thought it was a whole lot of fun,” he said, attributing his lack of fear partly to Norwegian culture where “any celebrity can go around in the street or take the bus.”

His new book, “Catching Cheats: Everyday Forensics to Unmask Business Fraud,” shares these and other stories about using data to spot deception. For accounting professionals dealing with an era of sophisticated financial manipulation, his work offers an important lesson: patterns in aggregate data can reveal frauds invisible at the individual level.

The backdating scandal largely ended once transparency was required. When executives could no longer manipulate timing in secret, the practice stopped. As Caleb observes in the episode, “These are rich and powerful people, executives at public companies. And we should want those people to be accountable for their actions.”

Sometimes catching cheats doesn’t require being a traditional whistleblower risking everything. Sometimes it just takes curiosity, rigorous analysis, and the courage to tell regulators when they’re looking in the wrong direction. In a world drowning in data, the ability to spot patterns others miss might be our best tool for keeping the powerful honest.

Listen to the full episode to hear Erik’s complete story, from his Norwegian childhood to becoming one of TIME’s most influential people, and learn how academic curiosity exposed one of the most widespread corporate frauds of our time.

The Shadow Economy of Stolen Points That Nobody Talks About

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While you carefully track every penny in your bank account, there’s $100 billion sitting unprotected in forgotten loyalty accounts worldwide. That eye-opening number comes from Kim Sutherland, global head of fraud and identity at LexisNexis Risk Solutions, who recently joined host Caleb Newquist on the Oh My Fraud podcast to discuss the growing threat of rewards and loyalty fraud.

This episode is a perfect companion to the show’s previous exploration of reward program fraud cases, with insights from someone whose team analyzes 120 billion transactions annually. Sutherland pulls back the curtain on how loyalty programs—those everyday rewards we collect at coffee shops and airlines—are a prime target for sophisticated fraud operations.

The $13 Billion Digital Currency You’re Ignoring

The global loyalty management market now exceeds $13 billion, and it’s everywhere you look. As Sutherland explains, “Almost every type of company you interact with has some type of a program to reward their existing customers.” From airlines and credit cards to restaurants, hair salons, auto mechanics, and even schools, businesses use these programs to strengthen customer relationships.

The average person belongs to anywhere from 16 to 20 loyalty programs, but they actively monitor only a fraction of them. This gap creates a perfect opportunity for fraudsters. “They understand the value of each of those rewards points, and they pay more attention to the ones you’re not paying attention to,” Sutherland warns.

These aren’t just marketing gimmicks anymore. “Loyalty points are a form of digital currency,” Sutherland says. People treat them like savings accounts, letting balances grow and planning vacations around accumulated miles. However, your bank account has federal protection and robust security. Your coffee shop points? Not so much.

When Newquist mentions his Starbucks app, calling it “a mini bank within that company,” he highlights a crucial point. These companies handle customer funds and issue digital currency but operate without the strict oversight required of traditional financial institutions.

The dark web has turned these points into a tradable commodity. Sutherland says stolen points have specific dollar values attached and are bought and sold alongside other illegal goods. It’s not just individual criminals either. Fraud has become a business with specialized roles, training programs, and sophisticated operations.

How Criminals Harvest Your Digital Rewards

Account takeover leads the fraud playbook, and it’s devastatingly simple. While you legitimately earn points through purchases, criminals break into your dormant accounts. They either transfer your points to accounts they control or drain them for purchases before you notice.

Because loyalty accounts lack the security of traditional financial accounts, “there is more opportunity for someone to do an account takeover,” Sutherland explains.

The numbers are alarming. Sutherland reports nearly 100% year-over-year growth in loyalty-based fraud across different industries and regions. On the dark web, these stolen points trade like currency. And fraudsters operate like niche service lines—some steal data, others monetize it, and still others provide technical infrastructure.

Synthetic identity fraud takes things to another level. Criminals combine pieces of real information, such as your name, someone else’s address, another person’s phone number, to create fake identities. These synthetic identities can operate for years, building credit and accumulating points across dozens of programs.

“The real problem with synthetic identity fraud is, even if your name had been used, you may never know you were part of the creation,” Sutherland warns. There’s no real victim to report the crime, making detection extremely difficult. These fake identities might start with a jewelry store loyalty program, build credibility, then work up to valuable airline or credit card rewards.

Insider threats add another layer of risk. Travel agents booking trips might divert clients’ points to personal accounts. Employees with system access could redistribute points. Third-party agents in real estate or auto sales can siphon off points customers never knew existed.

The technical sophistication is striking. Fraudsters use device farms—racks of phones running automated scripts—to manage thousands of fake accounts. They employ burner phones, throwaway email addresses, and test security responses by making small account changes before executing major thefts.

The Impossible Balance Between Security and Convenience

“The best form of authentication is one a consumer uses,” Sutherland observes, highlighting the core challenge facing businesses. Companies must balance three competing priorities: privacy, security, and convenience. For consumers, convenience almost always wins.

Unlike employees who follow whatever security protocols their employers require, consumers simply abandon programs that make redemption difficult. As a result, even if businesses implement bank-level security, doing so could destroy the convenience that makes these programs attractive.

The solution Sutherland recommends is passive security measures that work in the background. Companies embed sophisticated tools in mobile apps that analyze device behavior without disrupting user experience. Is the device jailbroken? Has it been associated with previous fraud? Is it moving naturally, or is it part of a static device farm?

Despite technological advances including biometric authentication, AI fraud models, and emerging digital credentials, Sutherland says, “The biggest challenge is still identity verification.” After 20 years of trying, verifying that someone is who they claim to be remains unsolved.

Fighting Back Through Collaboration

Forward-thinking companies now treat loyalty fraud as a brand reputation issue rather than a compliance checkbox. “It is truly trying to ensure that consumers can trust what they’re doing,” Sutherland explains, noting that customers immediately take to social media when something goes wrong.

The response has become increasingly collaborative. Organizations create “fusion centers” where fraud, cybersecurity, and anti-money laundering teams work together. Through LexisNexis’s proprietary network, businesses share fraud intelligence across industries and borders. For example, banks in Singapore share patterns with UK retailers and major financial institutions collaborate on emerging threats.

This cooperation is essential because, as Sutherland notes, “Fraud does not stay within any country. We see the same fraudsters transacting in the US and in France and in South Africa.”

Companies focus on key vulnerability points, particularly when customers change account details. Something as simple as updating an email address or phone number can trigger an account takeover if proper verification isn’t in place. Yet each additional security step risks losing customers to competitors.

What This Means for Accounting Professionals

With $100 billion in unused points, nearly 100% annual growth in loyalty fraud, and criminals operating sophisticated international networks, this is an emerging category of financial crime that could impact your clients.

For businesses, a major loyalty breach can lead to financial loss and potential brand devastation in an era of instant social media backlash. For individuals, compromised loyalty accounts often serve as gateways to broader identity theft, especially through synthetic identity techniques.

Most concerning is that companies can’t simply apply traditional banking security models to loyalty programs. The convenience consumers demand conflicts with the security these digital assets require. As programs expand into every corner of commerce and younger generations treat points as legitimate currency, the attacks will continue.

Accounting professionals should recognize loyalty programs for what they’ve become: an unregulated digital currency that criminals actively exploit. While we’ve been protecting traditional accounts, fraudsters have built infrastructure to harvest value from the rewards programs we ignore.

Listen to the full Oh My Fraud episode with Kim Sutherland to learn specific red flags for loyalty fraud, discover emerging authentication technologies that could protect clients, and understand why those forgotten rewards programs might be your clients’ biggest vulnerability. Because in a world where your morning coffee purchase contributes to a $13 billion shadow economy, treating digital rewards with the same seriousness as traditional currency is just professional prudence.

Your Airline Miles Are Worth $74 Billion and Hackers Know It

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Ever check your airline miles balance and think, “I should probably use those someday”? Well, fraudsters aren’t waiting. While you casually ignore those reward points, criminals are actively hunting for these digital treasures that have somehow become worth more than the companies that create them.

In this episode of Oh My Fraud, host Caleb Newquist explores the surprisingly vulnerable world of loyalty and rewards programs, revealing how the points flooding your inbox have become prime targets for fraud schemes that affect everyone from frequent fliers to wholesale club members.

The Accidental Billion-Dollar Asset Class

When United Airlines started tracking customers in the 1950s, it gave out plaques and promotional materials—basically corporate swag. Fast-forward to today, and rewards programs look entirely different. American Airlines generated $6.5 billion from its AAdvantage program in 2023 alone—not from selling tickets, but from selling miles.

The economics are almost absurd. As Newquist points out in the episode, airlines create miles for about half a cent each. They’re database entries. Then they turn around and sell these digital tokens to credit card partners for two to three cents per mile. That’s a 400% to 600% markup on something that costs virtually nothing.

“The hilarious thing is that these aren’t tangible,” Newquist observes. “They’re just made up. They’re just digital assets created out of thin air.”

The combined loyalty programs of United, American, and Delta are worth $73.8 billion. Think about that: these made-up points are sometimes worth more than the airlines themselves. And McKinsey estimates 30 trillion unredeemed miles sit in passenger accounts globally. That’s enough for every airline passenger on Earth to take a free one-way flight.

But here’s where things get dicey. Despite sitting on this massive pile of value, major airlines, including Southwest, American, Frontier, and Alaska, don’t offer two-factor authentication for account access. These companies spend millions on aircraft safety but can’t implement basic security that’s been standard in banking for over a decade.

When Your Miles Take an Unexpected Trip

The human cost of this security gap becomes painfully clear through recent victims’ stories. In July 2024, multiple Alaska Airlines customers woke up to drained accounts. One victim lost 150,000 miles, worth about $1,900. Another reported on Reddit that hackers stole over 200,000 miles. The points were being used to book luxury hotels in Abu Dhabi.

Gabrielle Bernardini, a writer for The Points Guy, discovered her Southwest account had been hacked when she received an email confirming a Hampton Inn reservation in Kalamazoo, Michigan—a booking she never made. The fraudster burned through 17,100 points, worth about $240.

Through persistence, Bernardini got her points back. But Southwest made it clear they were only doing it as a “gesture of goodwill” and a “one-time exception.” Their actual policy? “Southwest is not responsible for unauthorized access to a member’s account and will not replace stolen points.” Newquist confirmed that’s still the policy today.

Clint Henderson’s American Airlines nightmare went even further. Fraudsters drained hundreds of thousands of his AAdvantage miles for car rentals. Recovery meant jumping through incredible hoops. American required a new email address for his new account and demanded a PDF or screenshot of his police report. When Henderson went to file the police report, the NYPD’s online system was down. He had to visit a precinct physically, then was told that he couldn’t have a copy of his report until a detective intervened the next day.

Even with proof of fraud, the car rental company that accepted the stolen points simply refused to refund them. Henderson eventually got his miles back from American, but the whole ordeal revealed just how messy these situations can become.

From Sam’s Club to the Gas Pump

The problem isn’t limited to airlines. In May 2024, Sacramento County authorities arrested 38-year-old Inam Rasool after discovering he’d been systematically draining other customers’ Sam’s Club accounts. What started as an attempt to leave with $1,000 in unpaid merchandise turned into something bigger.

Store personnel began monitoring his return visits and uncovered a sophisticated operation. Rasool used stolen Sam’s Cash rewards to buy merchandise, resell it online. When police searched his home, they found over $25,000 worth of electronics, medications, pet food, hygiene products, supplements, and snacks. They also found shipping supplies, a computer, and a label printer for his online sales operation.

Meanwhile, in Peters Township, Pennsylvania, 18-year-old Paul Kostanich was hitting Giant Eagle fuel perks accounts. Video showed him visiting gas stations almost daily, holding his phone to barcode scanners to activate stolen points from different accounts. He admitted to hacking about 20 accounts and faced 58 charges, including identity theft.

One victim’s reaction captured the general disbelief, “I could never imagine someone hacking a Giant Eagle Perks card. I mean, really?”

Why This Keeps Happening

The problem is, rewards programs were never designed as financial assets—they’re marketing tools that accidentally became valuable. As Newquist explains, “They’re just a marketing gimmick developed by corporations that they hope will get us to spend more money with them. And it just so happens that they’re very, very good at doing that.”

From a corporate perspective, the math works out. If rewards fraud costs the industry $1 to $3 billion annually, but these programs generate over $70 billion for just the top airlines, that’s less than 5% lost to fraud. For many companies, it’s just a cost of doing business, especially when they can push losses onto consumers through terms of service that disclaim responsibility.

This creates what Newquist calls a perfect storm for fraudsters. You’ve got valuable assets with minimal protection, companies that won’t pursue prosecution, and victims left holding an empty bag while corporations point to fine print.

Protecting Your Points (Since No One Else Will)

So what can you do? Newquist offers practical advice with characteristic honesty.

First, change your passwords for rewards accounts. “I know you’d have to be a cerebral freak to generate a different password for virtually every account.” But at least make them different from your banking passwords.

Second, use two-factor authentication wherever it’s available. “Is it tedious? Yes. Does it save your bacon 99.9% of the time? Also, yes.”

Third, consider a password manager. Yes, the big ones have been hacked, but the benefits of managing unique passwords outweigh the risks.

Finally, actually check your accounts occasionally. Don’t be obsessive, but treat them with the same attention you’d give a bank balance.

The Bottom Line

Those rewards points you’ve accumulated aren’t just marketing fluff; they’re real value with real vulnerabilities. Companies have created a $74 billion economy from thin air, then washed their hands of responsibility when that value gets stolen.

For accounting professionals, this is a masterclass in risk transfer. For everyone else, it’s a wake-up call. In a world where teenagers systematically drain fuel perks and hackers book Abu Dhabi hotels with your miles, ignorance is an invitation.
Listen to the full episode above for Newquist’s complete investigation, including more cases and why he thinks these programs are essentially “legal money laundering” schemes. And maybe check your rewards balances while you’re at it. Just in case someone in Abu Dhabi isn’t already enjoying them.

Faith, Fraud, and False Promises: The “Doc” Gallagher Story

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“Why are you asking this? Gallagher’s a good man. Gallagher’s a man of God.”

Texas Department of Insurance investigator Steve Richardson had heard a lot in his career, but never this — victims defending the man who had stolen their life savings. Some even warned Gallagher he was under investigation. 

These weren’t just clients. They were believers — in Christianity, yes, but also in the gospel of steady returns and risk-free investing. Gallagher preached with the conviction of a Sunday sermon and the polish of a seasoned salesman.

It worked. Over decades, this self-anointed “Money Doctor” convinced hundreds of Christian seniors to hand over more than $20 million. They weren’t chasing Bitcoin jackpots or penny-stock moonshots — just a steady 5–8% a year, “guaranteed,” wrapped in scripture and trust.

In this episode of the Oh My Fraud podcast, Caleb Newquist unpacks how Gallagher used faith, modest promises, and a carefully crafted persona to pull off one of the largest religious affinity frauds in recent memory.

Building the “Money Doctor” Persona

William Neil Gallagher’s life story read like a trust-building checklist. Born in 1941, he graduated from Rhode Island College, served in the Peace Corps, and taught English in Thailand. That’s where he found his faith — a conversion story he would retell endlessly to clients.

Back in the States, he studied to become a preacher, earned master’s degrees in religion and philosophy, and capped it off with a PhD in philosophy from Brown University. The title of his dissertation? The Concept of Blame. (Insert your own punchline here.)

After academia didn’t pan out, Gallagher pivoted to finance, working for Dean Witter Reynolds and A.G. Edwards before striking out on his own in 1993 with Gallagher Financial Group. He positioned himself as a reformed Wall Street insider now serving “regular people.”

His marketing machine ran on Christian radio. As “The Money Doctor,” Gallagher dispensed a mix of vanilla financial advice, market doom warnings, and heavy religious language. He wrote books like Jesus Christ, Money Master and posed for photos with Nolan Ryan, Joel Osteen, and former Texas Governor Rick Perry — props in his carefully curated image.

The Perfect Ponzi: Modest Promises, Maximum Trust

Gallagher’s pitch wasn’t flashy — and that was the genius. His Diversified Growth and Income Strategy Account promised 5–8% annual returns “without risk to principal.” Modest enough to sound realistic, safe enough to lull suspicion.

He told clients their money was in U.S. Treasuries, mutual funds, annuities, and other familiar investments. His sales copy reassured: “When the markets get smashed, our clients lost nothing.”

And he sold himself as more than a money manager — he was their captain. “It’s your ship, but don’t touch anything. My job is to get you safely through the storms.”

Gallagher made house calls, prayed with clients, and sent flowers or fruit baskets when they asked too many questions. One recalled him offering a trip to the Holy Land instead of an account statement.

🚩 Red Flags of Ponzi Schemes

  • Outdated or missing licenses
  • Regulatory reprimands on record
  • Overly personal behavior with clients
  • Messy office, messy finances
  • Self-appointed titles (“The Money Doctor”) – often used to create false authority when credentials are lacking

The Red Flags Nobody Wanted to See

Gallagher hadn’t been licensed as a broker since 2001 or as an investment advisor since 2009. Regulators had already reprimanded him in 1999 for falsifying records and misrepresenting his status.

Some clients noticed troubling behavior. One didn’t like how he touched her shoulders. Another saw his Cadillac crammed with loose papers and thought, “That’s not how someone should handle other people’s money.”

When investigators eventually walked into his office, they found unopened mail dating back a decade — and no accounting system.

The Slow-Motion Takedown

The first break came in 2015 when Allianz Life flagged suspicious withdrawals. Texas Department of Insurance investigator Steve Richardson followed the money and found the classic Ponzi pattern: new deposits funding old payouts.

But the case stalled. Victims defended Gallagher, sometimes even warning him about the investigation.

In 2018, James and Carol Herman grew suspicious after Gallagher balked at their $100,000 withdrawal request. Instead of cash, they got gifts — and a push to take out a reverse mortgage. That was the crack investigators needed.

📜 What is Religious Affinity Fraud?
 A scam that exploits shared religious beliefs to build trust and credibility. Bernie Madoff used golf clubs; Gallagher used church pews. Fraudsters often pose as devout community members, using scripture, prayer, and church networks to recruit victims. The Gallagher case is one of the largest recent examples in the U.S.

The Affair, the Safe, and the Coins

As the investigation deepened, authorities uncovered Gallagher’s secret office and a 2,400-pound safe — empty except for a list of gold and silver items. They also uncovered a long-running affair between Gallagher and Debra Mae Carter.

Carter had received at least $1.5 million from Gallagher, laundered through her daughter’s accounts, and spent it on rural properties. When police arrested her, she led them to a stash of gold and silver worth $300,000 — including South African Krugerrands and “President Trump coins.”

Prison Sentences and Lingering Losses

In 2020, Gallagher pleaded guilty to securities fraud and money laundering, earning 25 years and $10.3 million in restitution. In 2021, he pleaded guilty to more charges and got three life sentences. Carter was convicted in 2024 and also got life.

Gallagher tried to rationalize his crimes, claiming he was “borrowing” for good causes or investing in miracle businesses. One of them, Hover Link, supposedly went from hovercrafts to cancer cures to body armor. In reality, it was another Carter-fronted shell.

Recovery has been slow. As of early 2025, victims have gotten back only 20% of what was stolen. And new scams target them still — fake FBI agents asking for bank details.

💡 Fraud Prevention Quick Check

  1. Verify licenses on FINRA BrokerCheck and SEC IAPD.
  2. Be wary of any “guaranteed” returns.
  3. Don’t ignore small inconsistencies — they often hide big lies.

Timeline: The Rise and Fall of “Doc” Gallagher

YearEvent
1941Born in New York City.
1960sPeace Corps service in Thailand; religious conversion.
1993Launches Gallagher Financial Group in Texas.
1999Reprimanded by Texas regulators for fraudulent practices.
2001–2009Drops all active broker/advisor registrations.
2015Allianz Life flags suspicious withdrawals; investigation begins.
2018James & Carol Herman push for $100k withdrawal; case gains momentum.
2020Pleads guilty; sentenced to 25 years + $10.2018
James & Carol Herman push for $100k withdrawal; case gains momentum.
2021Pleads guilty to more charges; gets three life sentences.
2024Debra Mae Carter convicted, sentenced to life.
2025Victims have recovered ~20% of stolen funds.

One Last Word

The Gallagher saga proves it: trust should be earned by verification, not granted by shared faith.

🎧 Listen to the full Oh My Fraud episode for every twist and absurd detail, told with the wit only Caleb can bring.

From the Courtroom to the Classroom: How a Former Prosecutor Views White-Collar Crime

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When Bernie Madoff received his 150-year prison sentence for a massive Ponzi scheme, it seemed like justice had been served. Yet after the 2008 financial crisis, which devastated millions of Americans, virtually no high-level Wall Street executives faced criminal charges. Why not?

In this episode of the “Oh My Fraud” podcast, Miriam Baer—a former prosecutor with the prestigious Southern District of New York, corporate compliance professional, and former Vice Dean at Brooklyn Law School and currently Dean and President of California Western School of Law—shares insights from her unique career journey that help explain this paradox.

From Princeton to the Prosecutor’s Office

Baer’s journey through the world of white-collar crime began far from where she expected. After attending Princeton (where, yes, she knew Ted Cruz) and Harvard Law School, she initially had no intention of becoming a prosecutor.

Her path changed after working at a law firm on securities fraud cases, which gave her a crash course in understanding how companies manipulate their books. From there, she joined the prestigious U.S. Attorney’s Office for the Southern District of New York under then-U.S. Attorney Mary Jo White.

At the prosecutor’s office, Baer handled everything from mail and wire fraud to bank fraud and money laundering, learning the intricacies of federal criminal prosecution. This experience gave her first-hand knowledge of how prosecutors decide which cases to pursue—knowledge that helps explain why some financial criminals face justice while others seem to escape it.

Why Some Cases Get Prosecuted While Others Don’t

When massive financial scandals don’t result in criminal charges, public frustration often follows. “Why aren’t these people in jail?” becomes a common refrain. But Baer identifies a more nuanced reality than simple theories about wealthy people being above the law.

“There’s a tendency to look at the scope of the harm,” Baer explains. “Someone says, ‘Well, he caused all that horrible harm. Why aren’t you prosecuting him?’ The answer is, well, I’m bound by the statute.”

Baer identifies two distinct thresholds prosecutors consider:

  1. The “threshold of liability” – Whether a crime technically occurred under statute
  2. The “threshold of viability” – Whether prosecutors believe they can win the case

This second threshold is crucial but often overlooked in public discussions. Based on past wins, prosecutors develop mental “prototypes” of successful cases that shape how they evaluate new evidence.

“When someone says, ‘Is this a fraud case? Is it a viable fraud case?’ [prosecutors] think in their minds about what most recently was viable,” Baer notes.

During the 2008 financial crisis, prosecutors’ mental prototype of fraud was based on early 2000s accounting scandals that featured whistleblowers, clear paper trails, and cooperating witnesses—elements largely absent in the financial crisis cases.

“My whole theory is that especially what happened with the financial crisis is, yeah, there were folks who had passed the threshold of liability, but the prosecutors weren’t sure they were over the threshold of viability,” Baer explains.

This framework helps explain why more recent cases like Elizabeth Holmes and Sam Bankman-Fried resulted in prosecution. Both featured the crucial elements prosecutors recognize from successful cases: cooperating witnesses and defendants who “constantly talk all the time” and eventually contradict themselves.

The Problems with White-Collar Criminal Statutes

Beyond prosecutorial decision-making, Baer identifies fundamental flaws in the design of white-collar criminal statutes. Her book, “Myths and Misunderstandings in White Collar Crime,” explores these issues in depth.

“The statutes themselves are confusing us,” Baer explains. She identifies three primary problems:

1. “Flat” statutes that lack gradation

Unlike homicide laws that distinguish between first-degree murder, second-degree murder, and manslaughter, fraud statutes don’t meaningfully differentiate between degrees of severity.

“If I look up fraud, it’s just all falling under the fraud umbrella of mail fraud or wire fraud. And it really doesn’t matter that you were charged with mail fraud and I was charged with wire fraud from a moral valence,” Baer notes. “It just means you use the mails and I use the wires.”

2. “Bundled” statutes that combine vastly different crimes

Baer points to the Hobbs Act as a prime example—a single statute that criminalizes both robbery affecting interstate commerce and bribery by public officials.

“That’s very different from robbery…it’s all under the same statute,” she explains.

3. Statutes that fail to generate useful information

Perhaps most importantly, these flaws create a system that doesn’t effectively track patterns or provide clear information about white-collar crime.

“The system itself should produce information because we are the ones in charge,” Baer argues. “We can’t do that job if the system doesn’t give us information or information that we could get at.”

These structural issues create an “insider/outsider” divide in criminal justice. Those working within the system understand its peculiarities, while the public is left confused and suspicious.

“It leads to this level of people feeling estranged from the system and feeling like this system is rigged,” Baer says.

Case Studies: Timing, Complexity, and Expertise Gaps

Several practical challenges further complicate white-collar crime prosecution. One is simple timing—evidence of sophisticated fraud often emerges years after the fact, sometimes through academic research long after the statute of limitations has expired.

Baer references a paper published in 2015 that uncovered significant misrepresentations in mortgage-backed securities markets from the 2008 crisis. “Little late,” she observes wryly.

Another challenge involves proving intent at the highest corporate levels, where decisions flow through layers of management.

“The public hungers for the very top person to fall,” Baer explains. “They don’t want to hear that you got Mister mid-level dude.” Yet proving that a CEO directed fraudulent activities is often nearly impossible without direct evidence.

A third challenge stems from expertise gaps. As Baer candidly acknowledges: “I think people don’t realize the degree to which lawyers in particular are generalists… after three years of law school, I absolutely did not have forensic accounting skills.”

This knowledge gap means prosecutors must learn sophisticated financial concepts while simultaneously building cases against defendants represented by specialists in these areas.

To illustrate how criminal law sometimes misses the mark, Baer points to the “Varsity Blues” college admissions scandal. While the fraudulent behavior was clear, she questions whether criminal prosecution addressed the deeper issues.

“Whatever way you should deal with this type of behavior, which of course is terrible…it wasn’t clear to me that criminal law was doing anything to really fix it,” Baer reflects.

Implications for Accounting Professionals

For accounting professionals, Baer’s insights offer a valuable perspective. Understanding the gap between technical violations and “viable” criminal cases is crucial for effective compliance work.

“Being a world-class jerk is not the same thing as violating the mail fraud statute,” Baer points out, highlighting the gap between unethical behavior and criminal conduct.

The expertise gap between legal and financial professionals creates both challenges and opportunities. Accounting professionals who can effectively translate complex transactions for non-specialists provide immense value in both preventing and addressing potential misconduct.

Baer’s solutions include creating gradations within fraud statutes, unbundling combined statutes, and designing systems that generate better information about financial misconduct patterns. These changes would not only improve enforcement but potentially rebuild public trust.

Moving Beyond Simple Narratives

The paradox of white-collar crime enforcement shapes how our financial system operates and who faces consequences when it fails. As Baer’s analysis reveals, the seemingly contradictory patterns of prosecution stem not primarily from corruption, but from structural challenges built into our legal framework.

“If you want to have a better understanding of where the problems are and how you fix them, you need better information,” Baer emphasizes.

Baer’s book “Myths and Misunderstandings in White Collar Crime” explores these themes in greater depth. For those interested in hearing more of her insights, the whole conversation on the Oh My Fraud podcast offers a fascinating look into the world of financial crime prosecution from someone who’s seen it from multiple perspectives.