“Greed is good,” crowed Gordon Gekko in the 1980s movie “Wall Street.” But greed hasn’t always proved to be a positive motivator for corporations and the individuals who run them. Though the names Bernie Madoff and Enron might be the freshest in the minds of most people, financial scandals are nothing new in the business world. Read on to discover the biggest money scams of the last 100 years.
Teapot Dome Scandal
Government corruption is nothing new, as shown by the Teapot Dome Scandal, which took place in the 1920s. As the U.S. Navy modernized to use oil instead of coal on all its ships, special oil reserves on federal government land were set aside to be controlled by the Navy and tapped only in the event of a national emergency.
One such reserve was on land in Wyoming with a rock formation that looked like a teapot. Albert Fall, the secretary of the interior under President Warren G. Harding, convinced Harding to put the land under the Department of the Interior’s control, and then subsequently granted leases to his oil-drilling buddies in exchange for several hundred thousand dollars of monetary bribes.
After the corruption was uncovered, Fall was found guilty of accepting bribes and sentenced to a year in prison. He became the first Cabinet-level officer to go to jail for crimes committed while in office. One of the oilmen was found guilty of contempt of court and of Congress, serving over six months in prison. But none were convicted of bribery.
The leases were initially upheld as valid when first brought to trial. But ultimately, the U.S. Supreme Court found them invalid.
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McKesson & Robbins Fraud
McKesson & Robbins was a legitimate company selling milk of magnesia, cough syrup and quinine when it was bought by Philip Musica (then operating under the alias F. Donald Coster to conceal his past fraud convictions) in 1925. Though the company was successful, Musica wasn’t satisfied and created a fake company to process fake inventory and sales contracts to skim even more money into his own pocket. Today, drug companies are hurting consumers by inflating prices on needed prescription drugs.
In 1938, the company’s treasurer became suspicious of the large payments and found that credit reports relating to the fake company had been forged. He notified the Securities and Exchange Commission.
The SEC investigated, arresting Musica, but releasing him on bond. Shortly thereafter, Musica committed suicide. The McKesson & Robbins fraud caused the American Institute of Certified Public Accountants to recommend significant changes to the way that audits are conducted, including observing inventory and confirming accounts receivable.
General Electric, Westinghouse and Others
One of the largest price-fixing schemes occurred in the late 1950s and was brought to light in the 1960s when General Electric, Westinghouse and 27 other companies were convicted of price fixing for transformers and other related products. The bid-rigging system was designed to be hard to discover. Using the phase of the moon as a signal to shuffle low bids among the companies, it gave the appearance of competition when there actually was none.
Prior to the scheme, violating antitrust laws had been viewed as a “gentleman’s misdemeanor” and no “gentleman” was sent to jail. However, 30 individuals were sentenced to jail for this crime, though only seven served time — the rest of the sentences were suspended. GE agreed to pay a $7.47 million fine ($60.3 million today), then a record-setting amount for an antitrust case, for its role in the scheme in 1962. GE has certainly recovered. Today, with a market cap of $256 billion, it’s one of the most valuable public companies in the country.
The Vegetable Oil Scandal
There’s money to be made — and financial scandals to be played — in every industry, including the vegetable oil industry. In 1955, Anthony De Angelis created the Allied Crude Vegetable Oil Refining Corporation, selling vegetable oil and eventually cotton and soybeans. De Angelis thought he could corner the market on soybean oil futures, which would drive up the price of vegetable oil futures as well.
To do so, he needed cash. So he used tanks full of water with just enough oil floating on top to fool auditors to verify the amount of oil he had in inventory. His claimed inventory of $150 million of vegetable oil exceeded all of the vegetable oil in the entire country, but he only actually had $6 million of inventory. By the time his financial scandal collapsed, he had obtained loans from 51 companies.
De Angelis did succeed in buying 90 percent of the futures contracts for soybean oil, but then the market collapsed, forcing Allied Crude into bankruptcy. Two large brokerage houses nearly ended up in bankruptcy because of the unpaid loans, and De Angelis spent seven years in prison for the fraud that ended up costing the lenders $175 million — $1.4 billion today.
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The Collapse of Herstatt Bank
When the U.S. took the dollar off the gold standard in the 1970s, it opened the door to currency speculation by investors with little regulatory oversight and, of course, schemes to get rich. Herstatt Bank, the 35th-largest bank in Germany, had been betting on the depreciation of the dollar. When the dollar appreciated, it left the bank with losses totaling more than four times its assets.
The problem was compounded by the time of day the German government revoked the bank’s license — money had already flowed into the bank from its European customers, but because of the time difference, the money expected from Chase Manhattan Bank in New York had not arrived. When Chase learned of the revoked license, it stopped all payments, leaving over 30 U.S. and European banks holding almost $500 million in combined losses.
The collapse resulted in more stringent oversight of currency trading and to limit the amount of risk that a bank could take on through foreign currency. The bank’s president and its chief currency officer were judged unfit to stand trial for health reasons, but several others received jail sentences up to 7 and a half years.
The Savings and Loan Debacle
The savings and loan industry collapsed in the late 1980s and early 1990s after the problem of insolvent organizations became simply too large to ignore. S&Ls operated by accepting deposit accounts and then using those proceeds to issue mortgages — something commercial banks generally didn’t do at the time.
However, in the late 1970s and early 1980s, high inflation caused the interest paid to new deposits to greatly exceed the income generated by the existing mortgages, which caused many S&Ls to become insolvent. By 1983, it was estimated that it would cost about $25 billion to cover the losses, but the insurance fund held only $6 billion. Regulators allowed the S&Ls to continue to operate, hoping that the losses would rectify themselves, but they only got worse.
Finally, in 1989, Congress acted to address the problems. Oversight of S&Ls was transferred to the Federal Deposit Insurance Corporation. A reserve fund was created to protect depositors at failed S&Ls, and over $160 billion was spent to close the insolvent S&Ls. The debacle also showed the importance of closing insolvent entities quickly rather than allowing them to make additional risky bets that only worsened the situation.
The Bre-X Mining Scandal
The Bre-X Mining Scandal is a cautionary tale of how a penny stock with an initial public offering of just 30 cents per share skyrocketed to over $250 per share on a web of lies. The small mining company, started by David Walsh, came to prominence when a geologist, Michael De Guzman, claimed to have soil samples from a site in Indonesia indicating the potential for more than 70 million ounces of gold — the largest gold deposit ever.
Investors and large mining companies partnered with Bre-X and the stock price soared. More than two years after the initial reports, one of the partners conducted its own study and found no gold, and further inquiries found De Guzman was shaving gold from his wedding ring into the samples.
De Guzman is said to have fallen from a helicopter in 1997 and, though a body eaten by wild boars was found, it is uncertain whether it was suicide, a murder or a clever escape. Thousands of investors lost everything they had invested when the company went bankrupt. No one went to jail and no money was ever recovered for investors. Bre-X is a cautionary tale — only invest in penny stocks if you love risk.
Bernie Madoff’s Ponzi Scheme
Bernie Madoff opened the doors to his own investing company with $5,000 in 1960, and by 1970 had already begun engaging in misconduct that would eventually become the largest pyramid scheme in history. As money flowed in, Madoff would use it to fund his lavish lifestyle and to pay any previous investors who needed withdrawals. In addition, he and his employees would doctor reports — or even create them from nothing — for customers and regulators who inquired.
Madoff’s scheme came crashing down in December 2008, when he told his sons about the scheme and asked for a week to tie up loose ends. His sons went straight to authorities, but not before Madoff had stolen $17.5 billion from 4,000 individual investors, plus more through all of the feeder funds.
Madoff was sentenced to 150 years in prison. Other companies associated with Madoff were fined for failing to report suspicions of fraud, including J.P. Morgan, which agreed to pay $2.6 billion in 2014.
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The Enron Fraud
Before becoming a one-word synonym for corporate greed and cooking the books, Enron was a natural gas company created during a merger in 1985. It began energy trading, and as deregulation became more widespread in the 1990s, became an industry leader. In 2000, it ranked No. 7 on the Fortune 500 list, and by 2001 it executed about $2.5 billion in daily trades. However, it had been shuffling its debts into offshore partnerships and inaccurately recording revenue.
In October 2001, Enron shocked investors when it announced a $618 million loss, and shortly thereafter, accounting firm Arthur Andersen began shredding documents related to the accounting work it had performed for Enron. Arthur Andersen would be found guilty of obstructing justice, though the conviction would later be overturned. Enron’s former CEO Ken Lay was found guilty, but he died prior to his appeal being heard.
Jeffrey Skilling, another former CEO, was found guilty and sentenced to over 24 years in prison and was prohibited from ever serving as an officer or director of a publicly traded company again. Investors lost everything — including thousands of employees whose retirement plans had owned Enron stock. The stock plunged from a market value of $66 billion to worthless, making investing in Enron a terrible investment decision.
Volkswagen’s Emissions Scandal
To avoid emissions regulations, Volkswagen created a complex computer program that could tell when a car was being tested and would minimize emissions accordingly. When not in testing mode, the cars would emit almost 40 times the emissions limit. VW had been cheating the system as early as 2009, but it wasn’t until researchers at West Virginia University tested emissions on the open road in May 2014 that the discrepancies were discovered.
VW was forced to admit that about 11 million of its cars worldwide — one of the largest recalls ever — were equipped with the cheating software to fake low emissions. To rectify the situation, VW will be repurchasing some of its cars from customers and installing modifications on others to bring them into compliance with emissions regulations. In addition, VW agreed to pay $4.3 billion in civil and criminal fines, and six VW employees were charged for their roles in the conspiracy, according to the U.S. Department of Justice.
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