Great Finance and Accounting Scandals
Accounting and finance scandals are hardly a recent phenomenon. Some of the most notorious occurred decades or even centuries ago.
The first decade of the 21st century has thrown up an impressive string of accounting and financial scandals from Enron, HealthSouth, Tyco and WorldCom, to AIG, Lehman Bros., Bernie Madoff and Satyam. But it doesnt have a lock on financial shenanigans. As evidence, we offer the following list of our favorite scandals of all time.
Our first great financial scandal was more or less perpetrated by the government of England, officials of which established the South Sea Company in 1711, ostensibly to monopolize trade with South America, but really to help the government handle its debt. Holders of government debt were persuaded to exchange it for shares in the company, helping lower the rate at which the government borrowed and making its debt more easily tradable. Over time, the company bought up more and more government debt, but since it engaged in almost no actual trade with South America, its only real value lay in its shares. The company pumped them up with boldfaced lies about enormous potential profits, and the share price rose almost 1,000 percent in a year. It couldnt last, though, and as more people began selling, the price collapsed, causing bankruptcies across the country. The government effectively nationalized the company, and confiscated the estates of the directors to help the victims.
France had its own bubble in 1720the Mississippi Bubble, brought on by Scottish economist John Law, who had been granted vast trade monopolies by Louis XV, as well as the right to issue paper bank notes through what became Frances first central bank. Many of Laws ideas on paper money are now commonplace, but at the time they were radicaland he supported them by wildly exaggerating his Mississippi Companys prospects in Louisiana, rewarding investors by printing even more paper money. A giant bubble in company shares blew up, followed by massive inflation. When it became clear that the government didnt have enough metal coinage to support Laws vast overprinting of notes, the shares collapsed, as did Frances economy. Law fled the country disguised as a woman, and died penniless in 1729.
Italian immigrant Charles Ponzi just wanted to exploit an odd but perfectly legal loophole in international postage regulations that would allow him to buy cheap postage in Italy and resell it at higher prices in the U.S. When that proved too complicated, he turned his Securities Exchange Company into the archetypical Ponzi scheme. Two years, five crashed banks and $7 million in wiped-out investments later, Ponzi was left with nothing but the most famous name in fraud.
With a global empire of 200 companies and over 70 percent of the world match market, Ivar Kreuger was a brilliant innovator and a master of accounting fraud, creating off-balance-sheet vehicles, making up $250 million in imaginary assets, and playing banks and governments off against each other to cover up his losses in the Great Depression. Summoned to explain his accounts, he shot himself in 1932. In part as a result of the scandal, Congress created the SEC and a host of other financial reforms.
Bootlegger Philip Musica scammed Price Waterhouse into giving his front company a clean audit, then leveraged that to buy respected drugmaker McKesson & Robbins, which he spent a decade looting through a fictitious subsidiary. By 1938, though, a board revolt and an investigation by the then-new SEC uncovered his long-running fraud, and he shot himself. In the aftermath, the SEC instituted requirements for independent audit committees, and the AICPA strengthened its audit standards.
Almost from its inception in 1971, the Crazy Eddie chain of electronics discounters was riddled with fraud. Owners Eddie Antar and his family skimmed millions off the books right from the start. Then, when they wanted to take the company public, they started skimming less, manipulating their earnings to report improbably strong growth. Even as the retailers offbeat commercials grew famous, Eddie and a cousin with an accounting degree cooked up even more schemes, including massive inventory fraud and a money laundering scheme involving Israeli and Panamanian banks, to keep the stock price up. By 1987, rifts with the Antar family and the complexity of the fraud made it harder to conceal, and a successful hostile takeover ousted Eddie and uncovered the shenanigans, including $80 million of fictional inventory. After a period of hiding in Israel, Antar eventually served eight years for securities fraud. Pictured here is Crazy Eddie pitchman Jerry Carroll, who appeared in a series of antic commercials where he reminded shoppers, "His prices are insane!"