Notre Dame football players are not the only people who can be part of massive, elaborate hoaxes. The business world has also seen its fair share of impossible-to-believe scams. What the biggest businesses hoaxes and the still-developing Manti Te’o story is that they are unbelievable stories the public wants to be true.
Who wouldn’t cheer a football player who spoke to his dying girlfriend for hours at a time as she lay dying? What person would not root for an investment banker whose fund consistently brought high returns or a company whose stock sailed on an ever-upward trajectory?
We all want to believe that stories that sound like movie plots can actually happen. Unfortunately, in the cases below of famous business hoaxes and scams, the stories may make for a good movie, but, the ending won’t leave anyone clapping in the aisles.
Since becoming CEO of American energy company Enron, Kenneth Lay led the company through a dizzying period of growth and supposed profit. The company’s stock went on a steady climb buying up competitors, diversifying into other fields and generally reporting tremendous profits.
While all was well to the public and in filings to the SEC, Lay and Enron President Jeffrey Skilling, along with CFO Andrew Fastow built an elaborate accounting scam that took advantage of reporting loopholes, questionable practices and other dubious financial recording methods to hide mountains of debt. Essentially, the scam involved Enron showing its assets and earnings, while keeping its debt and liabilities off the books.
The wheels began to fall off the scam in 2000 as increased pressure from Wall Street forced the company to restate its earnings statements for a number of years. This led to a declining stock price, executive resignations, and credit downgrades. As the perception of Enron as a high-flying successful company evaporated, so to did Enron’s cash flow and its ability to meet its obligations.
The end came swiftly as Enron filed for bankruptcy in November of 2001 leaving behind billions in debt along with countless employees robbed of both their retirement nest eggs and their jobs. Investors were also left with nothing as the company’s liabilities were significantly larger than its assets.
Lay and Skilling, along with a number of other executives were convicted of a number of charges including fraud, though Lay died before sentencing. Nearly 20 people, both from Enron’s executive ranks and from its partners that helped perpetuate the fraud were convicted. The company’s accounting firm, Arthur Andersen, surrendered its CPA license causing more than 80,000 employees to lose their jobs. Though the company was eventually exonerated by the Supreme Court, Andersen never reopened.
Anyone in the New York and New England region who watched television in the mid 1970s was familiar with electronic retailer Crazy Eddie. Owned by brothers Eddie and Sam Antar, the chain rose to prominence through a series of radio commercials starring New York DJ Eddie Carroll who delivered the soon-to-be-famous tagline, “Crazy Eddie, his prices are insane.” The low-budget, over-the-top ads brought chain high visibility and the appearance of success.
While the company seemed successful, however, the Antar brothers were working to hide revenue including falsifying their books to hide assets, paying employees off the books, and simply pocketing cash from the registers. The company also famously resorted to counting empty boxes as inventory assets in an attempt to build up assets for its 1984 IPO which soared from an offering price of $8 to over $75.
The downfall occurred when the company was acquired in a hostile takeover by businessmen Elias Zinn and Victor Palmieri. Once the two acquired the company, they learned that the Crazy Eddie inventory had been overstated by as much as $80 million. The company was ultimately liquidated through bankruptcy when it could not pay its creditors.
Eddie Antar, who fled the country using a fake passport, was ultimately arrested in Tel Aviv, returned to the United States, and found guilty of a number of charges including fraud. He was sentenced to 12½ years in jail. Sam Antar pleaded guilty of his own volition and avoided jail time.
Perhaps the biggest of all recent financial hoaxes, Bernie Madoff, through his hedge fund, Ascot Partners, led a $50 billion Ponzi scheme that likely stretched from the 1990s through late 2008. In many ways, the scam was simple. Madoff took in money from his clients and, as far as they knew, delivered strong returns consistently. Though the results were better than industry averages, they were not wildly implausible when the market was, in general, flying high.
Because Madoff’s investors were – at least as far as they knew – doing well, there was little need for them to redeem money from the funds. In addition, before the real estate market collapsed and while the job market was still strong, Madoff’s investors had little reason to tap their investment funds. This left Madoff free to spend their money while continuing to issue false reports showing double-digit returns.
Madoff survived SEC investigations and received very little skepticism for continually beating his peers. Ascot even received investments from several prominent people including the Wilpon family, which owns the New York Mets, and actors Kevin Bacon and Kyra Sedgwick, who were then married. In some cases, famous people had their funds invested in Ascot by their own brokers without their knowledge, but through the mid 2000s, Ascot flourished.
The end came abruptly when in late 2008 declining market conditions led to Ascot customers to redeem approximately $7 billion in funds. Madoff, lacking the money to pay his clients, made a number of moves as his fraud crumbled around him. First, he paid nearly $200 million bonuses to top executives and family members, later, he confessed the fraud to his wife and two sons.
Madoff was arrested in December 2008 and plead guilty in March of 2009. He was sentenced to over 100 years in prison.
Madoff’s son Mark, who was never charged in the fraud, killed himself in December 2010. Efforts continue now to recover Ascot assets from investors who cashed out profits from the fund, but investors will only receive a fraction of the capital they invested.Daniel B. Kline can be reached at email@example.com.