Scandal

Period

Discussion

Smuggling and Bribery

From the beginning

Smuggling and bribery have been common practices since the earliest civilizations and from the start of the North American colonies. As restrictions became increasingly tight, smuggling and bribery became more sophisticated.

Counterfeiting

Shortly after the invention of money

Counterfeiting also has ancient origins. In colonial and early American periods, counterfeiting paper money became prevalent and boomed as state bank charters exploded in the 19th century.

American Constitution

Written in 1787

Unable to function adequately under the Articles of Confederation, a new constitution was debated, written, and passed; despite immense problems (especially slavery), the federal system proved effective.

Panic of 1792

1792

William Duer tried to use his insider information to corner the New York bank stock; he failed, went bankrupt, and the market panicked. As Treasury Secretary, Alexander Hamilton flooded the economy with cash and limited the economic damage.

Yazoo Land Scandal

1795

Georgia politicians and speculators sold raw land in what became Mississippi, despite lack of legal ownership.

Speculative Banking

From early 19th century

Each state established a banking experiment, from conservative and long-lasting to wildcat banking, resulting in massive speculation, fraud, and counterfeiting of bank notes.

Political Machines

From early 19th century

New York City’s Democratic machine, Tammany Hall, became a long-term source of power and corruption, and was emulated by American local and state governments throughout the nation.

Stock Market Manipulation

From early 19th century

Stock markets were established for their members benefit and these and other masters of manipulation made (and occasionally lost) fortunes to the detriment of investors (aka, dumb money).

Civil War Legislation

1861–1865

Union financing required substantial new tax laws and an updated banking system regulated by the Treasury Department.

Credit Mobilier

1862–1872

Federal legislation during the Civil War chartered and financed the first transcontinental railroad, constructed by the Union Pacific and Central Pacific railroads. Both railroads used separate construction companies to siphon off millions of dollars to the promoters. Congressional hearings discovered the massive fraud at Credit Mobilier, the construction company created to finance the Union Pacific construction.

Raiding the Erie

1868

Cornelius Vanderbilt went after the Erie Railroad to complete his dominance of New York transportation and end the corruption done by Daniel Drew and other Erie manipulators. Drew and confederates Jay Gould and Jim Fisk fought back, in part by issuing new shares of Erie and both sides used judges and the New York legislature to get their way “legally.” Vanderbilt eventually gave up.

Cornering Gold

1869

Jay Gould and Jim Fisk attempted to corner the New York gold market when most of the gold stock was shipped west to pay for harvested agricultural goods. President U.S. Grant stopped the scam by releasing gold from the federal stockpile.

William (“Boss”) Tweed

Post-Civil War

Tweed ran Tammany Hall; the level of corruption was so vast he and his “Ring” were prosecuted and Tween died in jail. His downfall can be attributed, in part, to famous Thomas Nast cartoons.

Corporate Conspiracy and Merger Movement

1860s to early 20th century

Corporations created by John D. Rockefeller in oil, Andrew Carnegie in steel, several railroad trusts, and hundreds more established huge national and multinational empires despite archaic government regulations, using newly invented trusts, various price conspiracies, and more flexible state incorporation laws. The New York “Money Trust” established massive corporate giants with monopoly power in dozens of industries, culminating in U.S. Steel in 1901, America’s first billion-dollar enterprise.

Sherman Antitrust Act

1890

The federal government regulated railroads with the Interstate Commerce Commission Act of 1887 and began antitrust enforcement with the Sherman Act. Government wins included the breakup of the Northern Pacific Railroad and Rockefeller’s Standard Oil.

CPA Licensing

From 1896

New York was the first state to license auditors as “certified public accountants,” based on experience and written exam results. All other states would eventually follow.

Panic of 1907

1907

Speculation to corner United Copper, the failure of trust companies and brokers led to the panic and depression. Investigations and Pujo Committee hearings followed.

Pujo Committee Hearings

1913

Congressional hearings on the “Money Trust” documented many of the illicit activities of Money Trust banks and Wall Street. Reform legislation followed.

Sixteenth Amendment. Federal Reserve, Federal Trade Commission, Clayton Act

1913–1914

Substantial federal reform legislation followed the Pujo Hearings, including new anti-trust and related legislation, the creation of the Federal Reserve System and Federal Trade Commission, and a permanent federal income tax.

Charles Ponzi

1920

Ponzi developed his eponymous scheme looking for greedy but gullible investors wanting to make a fortune in International Reply Coupons. He promised a 50% return in 45 days and paid off early “investors” to entice more. He was shut down within a few months after collecting millions and sent to prison before being deported back to Italy.

Teapot Dome

1920s

The presidency of Warren G. Harding was essentially “bought” by oil interests. During the Harding presidency, the Interior Department leased Teapot Dome and other oil properties to oilmen for bribes to Interior Secretary Albert Fall. When discovered, the leases were cancelled and Fall jailed for bribery.

Stock Maneuvering and Speculation

1920s

It was anything goes at the New York Stock Exchange, including insider trading, stock pools for price manipulation, and stock pyramiding. Stock prices fueled by speculation and margin buying created a bubble that collapsed at the end of 1929, ultimately resulting in the Great Depression of the 1930s.

Ultramares Case

1924

Auditor Touche Niven gave a company an unqualified opinion although substantial fraud was present. Ultramares, the lender, sued to auditor. The court found Touche negligent but not fraudulent and therefore not liable.

Krueger and Toll

1920s and 1930s

Ivar Krueger established a financial empire created on matches and fraud. The company did not disclose finances but paid consistent dividends from cash on new securities sold. After the complete collapse of his firm, he killed himself before the full extent of his fraud was uncovered.

Insull Utility Bankruptcy

1931

Samuel Insull built an electric utility empire based on leverage, a process called stock pyramiding. Much of the profits came from writing up utility assets to “fair value.” With little equity, the corporation collapsed early in the Great Depression.

Pecora Commission

1932–1934

Congressional hearings on the causes of the market crash and Great Depression, documenting the abusive practices of business and Wall Street. New Deal Legislation followed.

Securities Acts

1933-1934

Based on the findings of massive wrongdoing on Wall Street and at corporations, the Securities Acts under FDR’s New Deal created the SEC to regulate securities markets and provide adequate disclosures of public corporations’ finances.

McKesson & Robbins

1937

Massive fraud scheme by the president of this pharmaceutical company, including nonexistent inventory and receivables. Fraud continued for years because auditor Price Waterhouse did not audit either. Audit regulation was demanded. The Committee on Audit Procedures was established in 1939 to issue auditing standards, beginning with requirements to physically conduct inventory and confirm receivables.

Creation of Committee on Accounting Procedures

1938

CAP created to established generally accepted accounting principles (GAAP), using Accounting Research Bulletins. Fifty-one ARBs were issued over 20 years (1938–59). These represented many of the fundamental accounting standards still in use (although the particulars have changed over time).

Accounting Principles Board

1959

The ABP replaced the CAP, using new procedures but with many of problems of the previous organization.

Investor Overseas Services

1960s

IOS, headquartered in Switzerland, was a mutual fund fraud conducted by back-to-back CEOs Bernie Cornfeld and Robert Vesco, both spending time in jail.

Great Salad Oil Swindle

1963

Allied Crude Vegetable Oil filled tankers with water and topped off with salad oil. Inspectors for creditors confirmed shipments of salad oil. Creditors lost millions and CEO Tino De Angelis spent seven years in jail.

Continental Vending

1969

A criminal case against the auditors of Continental Vending where Lybrand Ross certified financial statement known to be false. Although Lybrand did not violate GAAS, three Lybrand auditors were found guilty of criminal fraud.

Equity Funding

1972

This small insurance company issued fraudulent financial statements to stay afloat; closed by SEC based on whistle-blower disclosures.

Financial Accounting Standards Board

1973

The FASB was established to replace the APB, with an improved process, governance, and public involvement.

National Student Marketing

1975

Provided jobs to college students and other services that proved to be bogus. Founder Cortes Randell convicted of stock fraud.

Foreign Corrupt Practices Act

1977

After several bribery scandals of foreign officials, this Act made bribery in foreign countries for business purposes illegal. It also mandated internal control requirements of public firms.

Advertising Ban Eliminated on Auditors

1979

Prompted by federal pressure, the ban on advertising by audit firms was lifted. An unintended consequence was “lowballing,” a very low bid to get a new client. During the 1980s and beyond, the audit was more and more priced as a commodity—possibly resulting in lower quality audits.

Deregulation of the Savings & Loan Industry

1982

Garn-St. Germain Act deregulated S&Ls because of the problems caused by rising interest rates. The deregulations helped avoid immediate bankruptcy of much of the industry, but created a soon-to-be corrupt industry that required a federal bailout. Much of the industry would fail and dozens of executives jailed.

Michael Milken

1980s

Milken specialized in making a market in junk bonds, but multiplied his wealth by manipulating price data, insider trading, illegal outside deals, tax fraud, and other elements of a vast criminal conspiracy. His downfall also forced Drexel Burnham into bankruptcy.

EMS Government Securities

1986

Securities firm hid speculative losses through fraud and bribed the outside auditor, a CPA, to cover up the fraud. Several of the perpetrators received long jail terms, although the CPA only got a modest sanction by the state board.

ZZZZ Best

1986

Small insurance restoration company becoming successful based on increasing levels of fraud by founder Barry Minkow, who was jailed in 1989.

BCCI Scandal

1988

This Middle Eastern bank had a criminal structure to launder money, facilitate the drug trade and arms trafficking, evade taxes, and use politicians to buy influence. Criminal indictments stated in 1988, which led to the bank’s failure in the early 1990s.

Savings & Loan (S&L) Bailout

1989 to early 1990s

S&L crisis with substantial fraud resulted in the failure of over 700 S&Ls, which were closed by the Regulation Trust Corporation (RTC). The RTC sold billions of dollars of S&L assets, resulting in a net loss to taxpayers of almost $100 billion.

Public Securities Litigation Reform Act

1995

This accountant-friendly legislation reduced the potential legal liabilities of external auditors, leading to the potential for more aggressive audits—which seemed to be the result in the late 1990s and beyond.

Waste Management

1997

This trash, waste, and landfill business was a good metaphor for the underlying accounting, which included overstated revenues and understated expenses—with a focus on fraudulent accounting for property, plant, and equipment. The firm failed after earnings restatements of over $1 billion for a five-year period.

Sunbeam

1998

A failing appliance manufacturer hired Al Dunlap to turn the company around; costs were cut, profits rose, but were maintained only by fraudulent revenue recognition and other illegal acts. Sunbeam was forced to write off over $1 billion from previous years before declaring bankruptcy.

Cendant

1998

The conglomerate HFS increased profits through acquisitions. However, the company acquired CUC International (and changed its name to Cendant). Unfortunately, CUC used fraudulent accounting for years, which was uncovered only after the acquisition was completed.

Long-term Capital Management

1998

This giant hedge fund, reputed to be run by the smarted financial experts, used overextended leverage and was on the wrong side of trillion dollar bets on the Russian rubble and other ill-advised hedging. It took a Federal Reserve- backed bailout to clear the exposed positions and protect the financial world.

Rite Aid

1999

This drugstore chain had several accounting issues, which led to earnings restatements, SEC, and other investigations and lawsuits. Executives were fired and jailed.

Regulation FD (Full Disclosure)

2001

SEC required increased public disclosure when companies talked to analysts and other investment insiders. Earnings announcements were required to be made public, usually through Internet simulcasts.

Enron

2001

Enron transformed from a stogy gas pipeline company to a gas trader that claimed to be a global high-tech company. This facade was maintained through fraud, including the wide–spread use of special purpose entities, derivatives, and deceptive use of trading profits. Possibly the biggest business scandal in American history, several executives were jailed.

WorldCom

2002

Large telecom company temporarily avoided failure when actual profits collapsed by simple fraud: recorded operating expenses as capital assets—some $11 billion. Several executives were jailed including CEO Bernie Ebbers.

Adelphia

2002

Cable TV empire used accounting fraud in part to compensate for corporate governance violations to benefit Regas family members. Adelphia went bankrupt and several Regas’s employees (all on the board) went to jail.

Tyco

2002

Large conglomerate using typical aggressive merger accounting practices to increase earnings plus other illicit practices. Company forced to restate earnings, and paid fines to settle SEC charges and class-action lawsuits. CEO Dennis kozlowski and others sent to prison.

Imclone

2002

Biopharmaceutical company whose executives were charged with insider trading for dumping stock before bad news disclosed to the public. CEO Samuel Waksal also notified Martha Stewart to sell. Both Waksal and Stewart ended up in prison.

Sarbanes-Oxley Act

2002

After the Enron and WorldCom scandals and all the rest, Congress passed financial reform, including new rules on corporate governance, internal control, auditing, and the creation of the Public Company Accounting Oversight Board.

HealthSouth

2003

Operating inpatient rehabilitation facilities and became the first post-Sarbanes-Oxley scandal. Profits were maintained by aggressive merger accounting, overcharging Medicare, and other fraud techniques. The company restated earnings for $2.5 billion in 2002 and declared bankruptcy in 2003.

Fannie Mae

2004

Fannie Mae and, to a lesser extent, Freddie Mac, were repeat violators of accounting and manipulators of other rules, including ignoring derivative losses. Fannie was forced to restate over $6 billion in earnings in 2004 by the SEC. Both Fannie and Freddie would be placed into federal conservatorship in 2008.

AIG

2005

Giant insurance company and part of the Dow Jones Industrial Average was cited for substantial internal control weaknesses and SEC fraud investigation led to a $1.6 billion fine and criminal charges filed against several executives.

Stock Option Backdating

2006

The SEC discovered that dozens of companies were backdating stock option awards to increase executive compensation. Several executives were prosecuted. A number of other stock options manipulations were uncovered including exercise backdating, spring-loading, and speed vesting.

Sub-prime Loan Scandal

2007–2008

Mortgage lending became a massive manipulation scheme involving predatory lending practices, structured finance of mortgages manipulated to appear high quality, and widespread speculation. The scandals started to unravel in 2007 as housing prices declined.

Bear Stearns Failure

2008

Fed and Treasury bailed out a failing Bear Stearns, which had no liquidity to meet its obligations in March 2008; Bear was acquired by J.P. Morgan after the feds agreed to be responsible for up to $30 billion in toxic assets.

Conservatorship of Fannie and Freddie

2008

In the summer of 2008, the feds took over the failing GSEs, which had lost billion, had negative equity, and maintained trillions of dollars of mortgage securities and guarantees.

Failure of Lehman Brothers

2008

Following Bear Stearns, Lehman Brothers was allowed to fail in October, the nation’s largest bankruptcy. The reaction was almost a complete paralysis of the global credit markets, requiring multitrillion dollar liquidity packages by the Federal Reserve and the creation of the Troubled Asset Relief Program (TARP).

Bailout of AIG

2008

After the Lehman failure, the feds bailed out AIG by providing $180 billion in equity to avoid the failure of the world’s largest insurance company.

TARP

2008

After Treasury and Fed prodding, Congress passed the Troubled Asset Relief Program (TARP) that provided billions of dollars of capital to failing banks. The bill was originally designed to bail out mortgage holders, which happened only to a limited extent.

Bernard Madoff

2008

Madoff was a NASDAQ innovator and trader who created a multibillion dollar Ponzi scheme that lasted for decades. When the investor cash ran out in 2008, he confessed to fraud and theft and was sentenced to 150 years in jail.

Goldman Sachs

2010

The SEC filed a fraud lawsuit against Goldman in the Abacus 2007-AC1 case, a collateralized debt obligation structured finance deal gone bad, losing millions of dollars of investor money. Goldman settled, paying a $550 million fine to the SEC and investors.

Dodd-Frank Act

2010

Congress eventually passed the massive Financial Reform bill in 2010 “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” The potential effectiveness has been debated ever since.

Raj Rajaratnam

2011

Rajaratnam, head of hedge fund Galleon Group, convicted of insider training, one of several financial insiders indicted and convicted.

LIBOR Scandal

2012

The London Interbank Offered Rate (LIBOR), a short-term interest rate (trillions of dollars of derivatives are priced based on LIBOR), was manipulated by major London banks for their own benefit. The story was broken by the Financial Times in July 2012.

London Whale

2012

Huge trading losses (over $6 billion) by Bruno Iksil (the “London Whale”) at J.P. Morgan’s London branch based on derivative transactions.

Internal Revenue Scandal

2013

IRS targeted conservative groups applying for tax-exempt status for extra scrutiny, resulting in investigations by the FBI and Attorney General.

SAC Capital Indictment

2013

Hedge fund SAC Capital charged by Justice Department with a “culture of insider trading” by encouraging traders to tap personal contacts about public companies; charges based in part on wire taps and e-mails.