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Mon August 19, 2013
How a Few Barbershop Clippings Conned America Out of Millions
While you probably never give a second thought to the clippings scattered about when you get a haircut, Philip Musica turned this trash into cash. Millions of dollars of cash.
We talked about the life of Musica on today's The Colin McEnroe Show. In 1938, Musica was busted for executing one of the biggest financial swindles in American history, sluicing a total of $135 million in cash and checks from McKesson & Robbins, a pharmaceutical giant with an operations plant right here in Fairfield, Conn.
So how did a few hair clippings con an entire nation? Well, the answer lies in shoddy auditing procedures. In the 1920s, it was a real hassle to check inventories. In the Internet age, this seems absurd, but back then inventory checks were expensive, required time and travel, and when auditors got on site they could find themselves lacking the specialized knowledge to verify certain chemicals or raw materials actually were what the company said they were. It was a lot easier just to trust the paperwork a company put out.
So Musica put out a lot of paperwork. The U.S. Hair scheme worked like this: Musica imported worthless hair clippings from the floor of an Italian barbershop, labeled them as "exotic" Asian weaves, and used this "collateral" to borrow money from 22 banks all over the world.
Before he was busted by port authorities, who actually did check the contents of one of Musica's imports and discovered a box filled with Italian clippings and tissue paper, Musica stole about $600,000. Remarkably, he only went to jail for three years. And guess what? Auditing regulations weren't tightened at all. It was seen as still too much of a hassle.
It was with this in mind that Philip Musica, who reappeared on the financial scene as the shadowy "Dr. F. Donald Coster," took his hair scheme to an even higher level. Having acquired significant capital through bootlegging, "Coster," who was legendary for his skills of persuasion, convinced investors throughout Connecticut to back his purchase of McKesson & Robbins - an outfit akin to today's Pfizer and Johnson & Johnson combined. Coster dropped $1.5 million on the purchase and became president of the company.
As president, Coster appoints himself head of the department responsible for purchasing crude drugs. He would "trade and speculate" in raw pharmaceutical ingredients like Spanish saffron and balsam of Peru, telling members of the board of directors he was storing the drugs in Canadian warehouses until he could find buyers. There was only one catch, like the phony hair, the drug inventories didn't exist.
But the paperwork did. And Coster established a whole network of phony addresses throughout Canada, where secretaries would receive and forward along fake inventory notes drafted by Coster and his accomplices in their Fairfield, Conn. office. The scheme went on for years, until the treasurer of McKesson & Robbins got suspicious, discovered Coster was actually the renowned con man Philip Musica, and shared his information with authorities. Musica, realizing his scheme was up, killed himself in December of 1938.
So how much did Musica steal? According to a great series of articles in the New Yorker, about $135 million in falsified cash and checks were claimed, but "this staggering figure is more indicative of the man’s genius at juggling figures than of the extent of his larceny." In actuality, the money Musica withdrew from the company’s treasury to support his fictitious purchases of drugs was only $25 million and of this sum he returned $21.8 million, which was entered on the books as profits.
Do the math and you'll see the the difference between these two figures - $3.2 million - was the amount, the accountants decided, that Coster must have stolen to support purchases like his lavish Fairfield mansion and yacht. But nobody really knows exactly how much he took. The $3.2 million was just money that couldn’t be accounted for and where it all went remains, to this day, a mystery.