You may have heard of Enron and WorldCom scandals, but you may be interested in learning about little-known large-scale frauds in history. Although all these scams have been surpassed in scale by recent corporate malfeasance, these early cases are still worth mentioning because some of them have led to major changes in the accounting industry and the introduction of new government laws.
- American equity financing companies falsified income and insurance policies for years; before it collapsed, a former employee alerted a market analyst who told institutional investors that the latter had dumped the company’s stock; this eventually led to the inside story New rules for trading.
- Crazy Eddie, an electronics retailer, seems to have achieved great success, but it turns out that the family business has been doing accounts for years. The fraud was revealed after a hostile takeover by the investment group; as a result, several family members were imprisoned.
- Drug and chemical manufacturer McKesson & Robbins was exposed in the 1930s for creating false purchase orders, exaggerating inventories, and stealing cash from sales; scandals led to changes in the accounting industry, including the establishment of an independent audit committee.
- In the 1800s, a British businessman invented a fake country, sold land to investors, and lured settlers to immigrate to the fictional Boyes Republic; while awaiting trial, he fled to France, where he conducted the same scam , And eventually fled to Venezuela, where he avoided prosecution.
American Equity Finance Corporation
The American Equity Finance Corporation (EFCA) began selling life insurance in the early 1960s. Its innovative approach combines the safety of traditional life insurance with the growth potential of equity mutual funds.The company will sell mutual funds to customers, and then customers will borrow the funds to buy life insurance. The premise of this strategy is to assume that the return of the mutual fund is sufficient to cover the premium of the policy.
The fraud began in 1964, when EFCA was completing and publishing its annual report before the deadline. The company’s new mainframe computer was unable to generate the required numbers in time, and the company’s chief executive officer Stanley Goldblum ordered the falsification of accounting entries in the company’s financial statements to meet the deadline.
Goldblum and other employees of EFCA continued this fraud by creating false life insurance policies to generate income to support these early false entries. Then, the company and some other insurance companies reinsured these false policies and even forged some of the deaths of non-existent individuals.
Fraud eventually reached a huge scale, with tens of thousands of false insurance policies and nearly $2 billion in revenue that did not exist for many years.One shocking component is the number of employees involved. The prosecutor successfully prosecuted 22 people,But dozens of other people in the company knew about the fraud.
In 1973, a dissatisfied former employee was fired and reported the plan to Ray Dirks, a Wall Street analyst in charge of the insurance industry.Dex conducted his own research and then discussed the company’s problems with institutional investors, many of whom sold stocks before the fraud became public.
This case set a new legal precedent for insider trading. After the fraud became public, the US Securities and Exchange Commission (SEC) condemned Deckers for aiding and abetting the violation of the Securities Exchange Act of 1934 and rule 10b-5 prohibiting insider trading. Deckers passed multiple appeals until he appealed to the Supreme Court in 1983. information.
EFCA’s fraud is considered by some to be the first computer-based fraud, because creating the false documents needed to support the false policy became so cumbersome that the company started using computers to automate the fraud.
Crazy Eddie is an electronics and electrical retail chain run by the Antar family, which started operating as a private company in the 1960s. It is known for its bargains: “Crazy Eddie-his prices are too crazy!” The once ubiquitous advertisement announced.But Eddie is not as crazy as computing. The fraud he committed is one of the longest lasting frauds in modern times, lasting from 1969 to 1987.
The fraud began almost immediately, and Crazy Eddie’s management underreported the company’s taxable income by skimming cash sales, paying employees cash to avoid payroll taxes, and reporting false insurance claims to the company’s carrier.
As the chain expanded, the Antar family began to plan Crazy Eddie’s initial public offering (IPO) and reduce fraud so that the company looks more profitable and obtains a higher valuation from the open market. This strategy was successful, and Crazy Eddie went public in 1984 at a price of $8 per share.
The final stage of the Crazy Eddie saga started after the IPO. The motivation was to increase profits so that the stock price could go higher and the Antar family could sell their shares over time. Management has now reversed the flow of skimmed cash, transferring funds from secret bank accounts and safes to company vaults, and recording the cash as income. The plan also involves exaggerating and creating false inventories on the books, and reducing accounts payable to increase profits.
In 1987, after a successful hostile takeover by an investment group, the Antar family was ousted by Crazy Eddie, and the fraud was exposed.The crazy Eddie limped for another year, then was liquidated to pay the creditors.
Eddie Antar, CEO of Crazy Eddie, was charged with securities fraud and other crimes, but fled before being tried.He went into hiding for three years before being captured by Israel and extradited back to the United StatesAnta and two other family members were convicted of participating in fraud.
Maxson and Robbins
McKesson & Robbins, a pharmaceutical and chemical company in the mid-1920s, caught the attention of Philip Musica, who had an annoying past that included criminal acts and multiple pseudonyms.
In the name of Frank D. Costa, Musica welcomed the advent of Prohibition in the United States in 1919 and founded a company that produces hair conditioners and other high-alcohol products. These products are sold to pirates, who use alcohol to produce liquor and sell them to customers.
Musica acquired McKesson & Robbins in 1926 under the name of F. Donald Coster, and planted seeds for the company with his family to help looting the company. Fraud involved false purchase orders, exaggerated inventory, and stealing cash from company sales, and it happened despite PwC’s presence as the company’s auditor. When the scam was finally discovered in 1937, the U.S. Securities and Exchange Commission determined that there was $19 million in fictitious inventory on the balance sheet—equivalent to about $285 million at the current price.
The McKesson & Robbins scandal had a profound impact on the accounting industry and led to the adoption of Generally Accepted Auditing Standards (GAAS), including the concept of an independent audit committee.Another change includes allowing auditors to personally inspect the inventory to verify its existence.
Some of the biggest accounting scandals in history are now little known, although these frauds have led to new accounting industry regulations and, in some cases, new laws.
Poyais fraud was a major scandal in the 1800s. This kind of fraud is undoubtedly the boldest and most imaginative, because the perpetrator Gregor McGregor created a completely fictitious country.
McGregor served in the British Army and participated in various operations in the Americas. During his travels, he visited the coastal areas of present-day Honduras and Belize. McGregor claimed to have received a land grant from a local indigenous leader and announced the new country of the Boas Republic after he returned to London.
McGregor created a flag, coat of arms, currency and other symbols of sovereign nations, and then began selling land to investors and settlers in the London market.He also issued sovereign debt backed by the promise of this new country, and attracted people to immigrate there with a passionate description of the capital and the fertility of the soil.
The first settlers arrived in Boias in 1823 and found nothing except dense jungle and abandoned wooden houses. Over the next few years, settlers from three other ships arrived and found a similar situation. Disease and hunger soon swept through the colonists, and nearly 200 of them died.
The news eventually reached London, where the authorities arrested McGregor. While awaiting trial, he fled to France and tried to carry out the same Poyais scam against French investors. McGregor eventually came to Venezuela, where he helped the country fight for independence and was awarded the pension and general title by the newly formed government for his efforts.
As you know, corporate fraud has a long and extensive history. Sometimes it uses the most advanced technology and current events. But motivation is as old as time: greed, cunning, and laziness.