The Digital Detective, Wall Street part 1

High Finance and Low Crimes
I learned a couple of curious things when I worked at IBM’s Wall Street Data Center. One was that my friend, Curtis Gadsen liked mayo sandwiches and fleecy-legged girls. The other was my friend Ray Parchen could be fooled because he was too good at his job as a mainframe computer operator.

IBM 360 computer room

Like an old-time stoker fed the fires of furnaces and steam engines, an IBM operator stuffed the huge machines with programs and data. Very good operators could act and react instantly without thought, confident in their experience and skills, mounting discs and responding to messages as they'd done ten thousand times before, giving them no more thought than donning their underwear in the morning. The keyword was efficiency.

Unintimidated by hulking computers the public suspected were semi-sentient, Ray worked quickly and accurately, and for that reason, he held down the first shift position. For him, I wrote a silly little psychological program that worked only with the best.

Amidst weighty programs queued for the giants of Wall Street, I slipped in the prank while a dozen employees gathered outside the computer room’s glass wall, waiting for the small program to do its thing: It made discs chatter, tapes whirr, lights blink, and the data center rumble as if Colossus was taking over the world.

We watched Ray bend over the console, reading the first mundane message:

05483A Press ENTER.

Ray pressed the ENTER key. The machine responded with another message:

05483A Press ENTER hard.

A few of us watched from outside the computer room as Ray hit ENTER again. The machine came back with:

05483A Press ENTER harder.

Ray punched the ENTER key, and a couple of the girls giggled. The computer responded with:

05483A Press ENTER even harder.

Ray smacked the key hard, very hard. The machine responded with one last message;

05483I Did it occur to you I can’t tell how hard you press ENTER?

Ray looked up with a red-faced grin and spotted us chuckling. Afterwards, he joined us for a drink where we argued why the program fooled some and not others.

Of course he knew pressure couldn't be detected, but he hadn't engaged his knowledge hidden behind the wall of his expertise. I would discover this common quirk could be exploited, as Simon Templar might say, “by the ungodly.” As noted in the article about kiting, confidence men take advantage of confidence.

Over the next few days, we tried our little joke on other operators and observed this interesting fact: Only the best fell for the stupid little prank. Novice operators stopped, studied the messages, and tried to look them up.

Ray and the other top operators reacted immediately and without thinking. Self-assured of their abilities, they acted instinctively by rote.

Less experienced operators questioned everything, including themselves. We caught more than one systems engineer trying to look up the bogus message number in the reference manuals and they sometimes called for help. That spoiled the little program.

Lesson: Sometimes it’s easiest to fool the most experienced.

There’s a reason I tell this story. It leads to how I became sort of a detective, a digital Dashiel of a Continental Op.

Over the next few weeks, I'll talk about an accidental career as a investigator in a field yet to be invented, that of computer forensics. I reveled in the chase, but my career often hung in the balance under threat of firing, even blackballing. Often the only reward was termination but hey, that happens to all the best private eyes.

Background Noise

An early case exploded with little of my own involvement, or, perhaps because of my lack of involvement. The players: Walston & Co, the nations third largest brokerage house, and Arthur Anderson, the biggest of the Big Eight accounting firms until participation in the Enron scandal brought about its demise. Anderson had dirtied its manicured fingers long before Enron arrived on the scene.

Wall Street and Financial District

Search the internet for Walston & Co and its Wikipedia entry merely reads "(Walston) was acquired by Ross Perot following pension account fraud and then merged it with Dupont, which had found itself in financial difficulties." Here's the story behind the story.

Despite the Wikipedia gloss-over, the wheels of merger with F.I. DuPont began turning before revelation of Walston’s fraud. Fifteen million in securities had vanished from DuPont’s accounts. The White House grew nervous. Wall Street threw up its collective hands, Oh woe, what to do, what to do?

A Texan rode into town, Ross Perot. He’d bulldozed through the insurance industry (an intriguing inside tale of its own) and encouraged by Felix G. Rohatyn, he made his move on Wall Street. For an initial $30 million, the impossibly old, impossibly young forty-year-old Napoleonic Perot acquired control of one of the Street’s most prestigious houses. (N.B: Regrettably, Time Magazine articles referenced herein require a subscription.)

At the time, that seemed background noise for me, a full-time employee and a full-time student, living paycheck to paycheck and barely sleeping. I couldn't guess how it would alter my career.

Trinity Church framed
by Wall Street

Crime on the Street

In the Financial District, denizens simply call Wall Street 'the Street'. Philosophical sorts read a moral into its long, narrow confines, noting it begins at a church and ends at a river: When times get tough, in depression or desperation, one may choose salvation or suicide.

The Street fosters its own culture. On the one hand, a man’s word is his bond– multimillion dollar transactions hinge on verbal promises. On the other hand, huge regulatory holes allow brokerage houses to commit the sleight-of-hand that brought the economy to its knees ten years ago. We can’t say we weren’t forewarned, but in the heady days of deregulation, greed and giddiness carried the day. We never seem to learn industries cannot police themselves.

One of the first observations of the Street is that the market's moody– it reacts, even overreacts to political news of the day. But I stumbled upon other emotions, which included surprisingly little hanky-panky. A few notes from the era:

Miss Francine Gottfried

• Wall Street can be a mad marketplace when the economy's in a lull. Late one summer, a sweet keypuncher named Francine Gottfried caused a sensation with the mostly male lunch crowd as her 43-23-37 figure bounced down the steps of Chemical Bank & Trust. For a few days, a sort of silly mating season reigned and then, as so often happens, her 15(0) minutes of fame were up.


• Once, as I strolled with my boss down the street, we encountered a beggerman squatting on his flattened cardboard. My boss stopped and chatted with this derelict before moving on. I didn't say anything but he confessed: The homeless man once worked as a broker, what Wall Street called an account executive or AE. When my boss and the man’s wife carried on an affair (and subsequently married), this man– the husband– collapsed in despair. He now lived– literally– on the Street.


• During the 'Hard Hat Riots' (then called the Wall Street Riots), I picked my way through roving construction workers from the rising World Trade Center left by police to run wild, bashing kids protesting the war in Vietnam. On my way to school as police idled, I helped a girl and her boyfriend bloodied by a musclebound thug. It was no contest: the canyon-like Street corralled the teens, leaving them easy pickings by hardhats with pipes and wrenches. That wasn’t one of Wall Street’s prouder moments. Hard-hats went on to attack the city's mayor's office, smashing the face of one of his aides.

The Young and Restless

A precocious if unaware teen, I worked as an IBM shift supervisor in their Wall Street Data Center, Number 11 Broadway. I had the greatest boss, a pretty blonde named Judy Kane. We boys loved her; the girls– not so much.

And I loved software, the machine-level bits and bytes and Boolean stuff. A teenage mad scientist, I found computers a giant puzzle, one I learned to solve and control. It was a battle of wills, me versus machine, immersive therapy for a broken heart (but that's another story). I'd come to know these Daedalus creatures like a mother knows her own children; better even, I'd learned their DNA.

A sales rep, Herb Whiteman, discovered I spent weekends camped in the computer room, teaching myself to program the huge monsters, then catnapping on the couch as the computers blinked and toiled, compiling my routines. Herb asked if I’d be interested in joining a three-man team that would change Wall Street and put video terminals on broker’s desks. Argus Research, the parent company, would double my IBM salary.

The company gave us secretaries and an entire floor of offices, no expense spared. Unfortunately Argus, in the business of prognostication, shortly deduced the economy teetered on the brink of recession and pulled the plug. Not long after Walston & Company hired me as their fancy-pants systems programmer offering tuition reimbursement as part of my hiring package. Me! I was just a kid from nowhere.

Thus began my introduction to low crimes and high finance.

Stay tuned for more next week, Wall Street's big boys and big crimes.

The Digital Detective, Banking part 2

Continued from last week, where we explained the basics of kiting and how banks work…

The Crumpled Kite

As mentioned earlier, kiting isn’t as common as it used to be, partly because of stiff penalties, but also because the time it takes to clear a check with another bank has shrunk from many days– sometimes a couple of weeks– to just a day or two. But when I consulted, I witnessed a kiting scheme that could have fooled financial institutions and their computers almost indefinitely.

A bank in Virginia’s Shenandoah Valley decided to invest its excess computer resources in software development and I contracted as their consultant. It was an odd relationship because they feared me as if they’d hired a gunslinger to guard the vault.

One evening I idled, waiting for computer time; in fact, I was waiting for a new guy to finish the night’s reconciliation run. As I sat tapping my fingers, he called the lead operator over and pointed out a worn, battered check. The lead glanced and dismissed it, saying “Just stick it in an envelope, imprint it, and run it through again.”

“But…” said the new guy hesitantly, aware the lead seemed annoyed he didn’t jump to it. “But, we can’t. I mean, it arrived in a carrier envelope and look, it’s not our routing number. And it's really old.”

Curious, I wandered over and the operations supervisor stepped in, obviously impatient at the delay. He read the check, stared at it, lips moving as he re-read the numbers. He ran his thumb under the date, several months old. Puzzled, he picked up the phone and beeped the operations manager.

It was still early evening when the manager strolled in. He looked at the check and made a phone call. When he hung up, he shrugged and turned to the supervisor, “No matter, we’ll find out in the morning what’s going on.”

But by now, the worn check had captured my curiosity and that of my colleagues. Three of us sat down to figure it out. We discovered a scam, and this is how it worked.

The Endless Kite

From a common check supply company, our schemer bought checks printed with Frugal Savings & Loan’s name, address, and logo, but with Penury Bank’s routing number. He waltzed into a bank other than Frugal Savings & Loan, cashed his check, and departed without a care in the world.

That evening during the check run, the machine sorted his check into a tray to be delivered to the clearing house. From there on out, the following cycle endlessly repeated:

1. The check arrives at the clearing house. Its routing number routes the check to Penury Bank & Trust.
2. During the check run at Penury, the computer accepts the routing number but doesn’t recognize the check’s bogus account number and kicks it into the rejects pocket.
3. A Penury operator plucks it out of the rejects pocket, notices it bears a Frugal Savings & Loan logo and address on it, and either manually packages it to send directly to Frugal S&L or bundles it to send back to the central clearing house for forwarding to Frugal. Either way, the check winds up at Frugal Savings & Loan.
4. At Frugal, the MICR reader sees another bank’s routing number, knows that’s wrong, and kicks the check into the rejects pocket. It goes back to the clearing house to repeat the cycle again.

Meanwhile, the bank that cashed the check hasn’t received their money, but neither has the check been denied.

The Kite that Crashed

The cycle eventually broke because constant transit nearly wore out the check and an inexperienced operator questioned why a draft on his bank contained an unfamiliar routing number.

We don’t know how many experienced operators routinely handled the check, seeing the bank name and logo and not the routing number, just as their computers saw the routing number and not the bank name.

Banks (at least at that time) did not have a standardized way of handling a check that forever floated but never cleared. In many cases, the bank software simply left the deposit unresolved with neither the funds transferred nor reserved– it simply stayed on the books, so to speak. In banks that impose holds, their programs might be written to release the hold after a number of days if the check isn’t returned, even if the funds aren’t actually received.

I speculate the scheme might have been harder to detect if non-magnetic digits had been printed over ‘invisible’ MICR ink. In other words, the pigment in MICR ink is for the convenience of people. The computer itself doesn’t use optical recognition (OCR) but senses the microscopic particles in the numbers.

No one’s immune to bunco, not even banks.

The Digital Detective, Banking part 1

Banking on Naïveté

Readers and writers may be aware of many internet ploys attributed to Nigerians and occasionally Russians. One of the first I saw came in an eMail and read something like:

Hello, my name is Renaldo. I’m a Ukraine artist and I sell my works all over the world. Some customers want to pay by cheque or money order, which is expensive and difficult to cash here. I will pay you 10% if you can cash cheques and wire me 90%. Please?

Consider three possibilities:

1. It’s barely possible although unlikely the request is legitimate.
2. It’s a money laundering scheme.
3. It’s an outright scam to grab your money.

In the third outcome, the schemers arrange to have a number of checks sent, which you cash and forward the proceeds. Eventually you receive a large money order or draft drawn on a major bank. Your bank likes it, cashes it, and gives you the money, whereupon you forward 90%.

Two or three weeks later, your now angry banker calls you, demanding restitution for a bad money order. The forgery was so good, it not only fooled you, it fooled them, but by now the money’s in Asia or Africa and you’re stuck, having to repay your bank several thousand dollars.

This works in a similar way to an eBay / Craig’s List scam. You advertise an item for sale and the bid closes at $150. To your surprise, you receive a money order for $1500 followed by a panicky eMail, wherein the buyer claims their bank or post office made a typo and added an extra zero. Instead of returning the check, they say they trust your honesty and since they need the item you’re selling, they suggest you cash the money order and return the excess along with the item you sold.

All goes well until your bank belatedly discovers the money order is fraudulent. Not only is your precious item long gone, but you must repay your bank.

During the next few weeks, I’m going to write about bank and brokerage fraud.

How to Fly a Kite

Kiting was once a commonplace fraud where the perpetrator opens accounts in at least two separate banks, neither of which places a hold on checks. Indeed, kiting exploits the hold greedy banks place on checks, holds where they use your money for free. High-speed electronic banking and stiff penalties have made the crime less common now because many checks can be instantaneously verified.

Here is how traditional kiting works: Our perpetrator, whom we'll call James Whitcomb Wiley III of Beaver Meadows, Indiana (no relation to the real James Whitcomb Wiley III of Beaver Meadows, Indiana) establishes accounts at Frugal Savings & Loan and Penury Bank & Trust, with no money to speak of in either account. Still, our man Wiley wants $1000.

He goes to Frugal S&L and withdraws $1000, covering it with a simultaneous deposit of a check for $1000 drawn upon his Penury Bank account. He’s just kited his first check. An honest person would scurry over to Penury and deposit funds there before the flaky check arrives, but not Wiley.

Wiley intends to live in Beaver Meadows for a while, but his prospects of earning $1000 to reimburse Penury Bank remain elusive. So he writes a check drawn on Frugal S&L to deposit in Penury Bank– whereupon he kites his second check, and now Penury is waiting for Frugal's check to clear. Before the empty account can be discovered, he deposits a fresh but worthless Penury check into Frugal, and continues the cycle.

Theoretically, a diligent fraudster could continue this a long time. In times past, people have pulled it off for weeks, even months. However, such schemes are subject to human error and unforeseen events that eventually expose the kite and bring the party to a halt. Meanwhile, Mr. Wiley has probably moved on to another state, possibly opening an account with a check drawn upon Penury Bank & Trust.

A Bank's Back Office

At the bottom of your checks is a row of numbers and hyphens printed in a distinctive 'MICR' type style using special magnetic ink.

You’ll notice at least two groups of numbers. One group you’ll recognize as your account number. The group before it contains nine digits, which represents the bank’s routing number, unique to each institution. You may also find the check number and, after it’s returned from the bank, possibly the amount of the check, which it’s wise to verify.

Banks don’t require customers to use checks they provide, indeed, as the story ‘Swamped’ pointed out, you can write out a check on anything, even a paper napkin. Many people buy checks from a paper supplier, like those that advertise in the local ad sheets.

At the end of a business day, banks gather checks and deposits made during the day and checks received from federal clearing houses, which they feed through a MICR device. MICR (pronounced my’cur) stands for magnetic ink character recognition and the machine, a magnetic ink character reader, reads those numbers from checks and deposits slips into the computer.

Occasionally checks jam or the machine fails to read the numbers. An operator may glue a strip at the bottom or place the check in a glassine envelope and manually key the numbers with a MICR imprinter. If the clearing house sends a check to the wrong bank, it will be kicked out and sent back to be routed to the correct one. Experienced operators are used to this and handle flaws and flubs as a matter of course.

Here I've built background for next week, where I'll reveal the Endless Kite.

The Digital Detective

by Leigh Lundin

Due to the possibility of a publishing contract, I pulled the original story within hours of posting it. My apologies to one and all.

Look for Louis Willis next Sunday. Next month I return with a series on computer crimes.