Recent History’s Most Prominent Financial Fraud Schemes
These significant instances of financial fraud shook the business world.
The failure of the cryptocurrency exchange company FTX and the legal issues of its CEO, Sam Bankman-Fried, made news in 2022. This year also saw the ultimate sentence of officials at Theranos, the health technology firm probed by state and federal authorities in the United States for fraud. Investors lost a lot in both the FTX and Theranos scandals, illustrating the need to do due research on the firms that investors select for their portfolio investments. Despite this, the investing landscape is plagued with corporate fraud incidents that have caused investors to lose money. As a “lessons learned” exercise, let’s add FTX and Theranos to a list that no investor wants to see: the nine most significant corporate fraud instances over the last four decades.
In May 2019, FTX FTX was founded as a trading platform for crypto investors, with Bankman-Fried as its largest shareholder. Bankman-Fried, now commonly known as SBF, had co-founded Alameda Research LLC with a buddy, Gary Wang. Late in 2022, the U.S. Securities and Exchange Commission accused SBF of cheating his firms’ investors between 2019 and 2022 by diverting funds from FTX to Alameda Research. SBF and company executives reportedly used the funds to buy residences in the Bahamas, invest in other businesses, and finance political organizations of their choosing. As crypto assets fell precipitously in 2022, both FTX and Alameda ran out of funds, with Alameda owing FTX clients over $8 billion, according to the Commodities Futures Trading Commission, and federal prosecutors filed fraud charges. FTX and Alameda went bankrupt in November, and SBF was arrested on December 12 in the Bahamas. The transfer of SBF from the Bahamas to the United States to face fraud and money laundering allegations, among others, was allowed by a court on December 21. John Ray III, the new CEO of FTX and former head of Enron’s liquidation, said, “Never in my experience have I seen such a total collapse of corporate controls and lack of reliable financial information.”
Theranos launched for business in 2003, with 19-year-old founder Elizabeth Holmes at the helm and a mission to improve the routine blood test’s efficiency, accuracy, and speed. With $700 million in equity investments, Theranos had a 2014 valuation of $10 billion. Medical testing specialists revealed in 2015, however, that the company’s much-touted automated compact testing instrument was ineffective. Federal and state officials brought fraud accusations against the corporation shortly afterward. In 2018, Theranos disbanded under the crushing weight of litigation fees. Holmes and the company’s former president, Ramesh “Sunny” Balwani, were found guilty and sentenced to more than 11 and 12 years in jail in November and December 2022. Theranos’ investments caused significant investors such as Rupert Murdoch, Carlos Slim, and Betsy DeVos to lose millions of dollars without recovering the funds.
According to media agencies, the executives of Wirecard, a Munich, Germany-based electronic payments company, went on trial on December 8 in the most significant corporate fraud case in German history. If convicted, the former CEO Markus Braun and two senior executives, Oliver Bellenhaus and Stephan von Erffa, risk many years in jail. Jan Marsalek, another highly ranked Wirecard executive, has fled the country and is hiding in Russia after being on the run. Marsalek is now at the top of Germany’s “most sought” list. Wirecard was in the public eye when it filed bankruptcy in 2020 after authorities revealed that $1.9 billion was missing from the company’s records. German officials said that the money never existed. Hence, Braun was apprehended, and Marsalek left the country.
After three years mired in a legal quagmire from a 2020 phony revenue scam, Luckin Coffee of China seemed to be on the upswing in 2022. Early in 2020, the company’s financial analysts found that the company’s growth had been skewed by $310 million in bulk sales to businesses connected to the company’s chairman. This was after a massive initial public offering in 2019 that sent Luckin Coffee’s stock from $20 to $50 per share in a year. Authorities also found that Luckin’s management bought $140 million of raw materials from vendors without their permission. As these inquiries were made public, investors left, and the firm’s share price fell. With the firm delisted from the Nasdaq and the scandal-involved top executives gone, Luckin Coffee is now traded over the counter. As of December 20, its stock price increased to $24.24, its most recent quarterly revenue increased 65.7% year-over-year, and same-store sales in the third quarter increased 19.0%.
This megabank seems unable to avoid regulatory issues. Wells Fargo was forced to pay $3.7 billion on December 20 for “illegal behavior” related to the mishandling of 16 million customer accounts. Wells Fargo, according to the Consumer Financial Protection Bureau, “repeatedly misapplied loan payments, improperly foreclosed on houses and unlawfully confiscated automobiles, erroneously assessed penalties and interest, and levied unexpected overdraft costs.” In 2016, the CFPB fined Wells Fargo $100 million, and the SEC finally levied $3 billion in penalties after overworked employees were motivated to establish about 2 million fraudulent accounts in clients’ names. The action, ultimately attributed to top management, increased bank earnings in the near term but ultimately harmed the company’s reputation and alienated consumers.
As global economies enter a recession, this well-known automaker is finishing a challenging year. At least VW has escaped the emission standards debacle of 2015 unscathed. That year, business engineers put a specialized form of software in 11 million diesel-powered vehicles to identify when the cars were being tested for pollution and alter the findings. VW cars’ nitrogen oxide emissions were 40 times greater than the U.S. legal limit. Volkswagen was forced to recall around 480,000 vehicles and pay $30 billion in fines and penalties when U.S. officials revealed the “Diesel-gate” scheme. Volkswagen’s new Sustainability Council has guided the firm toward a decarbonization and e-vehicle plan that is starting to pay off, putting Dieselgate in the past.
Enron, voted “America’s Most Innovative Business” by Fortune magazine annually from 1996 to 2001, ranks high on the list of the significant corporate fraud scandals of the 21st century. The now-defunct dot-com darling, founded in 1985, amassed a fortune trading natural gas and other commodities and even launched its digital commodity trading platform in 1999. In August of 2000, Enron shares peaked at $90 a share. Still, less than a year later, vice president Sherron Watkins delivered an anonymous warning to CEO Ken Lay that an enormous accounting scandal was building and might bring the whole firm down. Enron quickly revealed that it had exaggerated earnings by $600 million, and the SEC promptly probed the company’s finances. Enron’s shares finally sank to a few cents per share, and the firm filed for bankruptcy on December 2, 2001. Before this statement, Enron had cut 4,000 jobs and emptied the pension plans of many former employees. The only positive aspect of the Enron scandal was the 2002 enactment of the Sarbanes-Oxley Act, which imposed more substantial accounting standards for public firms.
WorldCom combined with MCI Communications in 1997 to become the second-largest telecommunications corporation in the United States, but the business had even greater ambitions. It attempted to acquire Sprint in 1999 in what would have been the biggest merger in history. That was terrible news for WorldCom’s CEO Bernie Ebbers, who had supported his side enterprises with more than $365 million in loans guaranteed by WorldCom stock when regulators halted the merger. As WorldCom shares declined, Ebbers got increasingly desperate, and in 2001 he started to classify $3.8 billion in corporate spending as capital expenditures. His deception was revealed in June 2002, and the firm declared bankruptcy by July. Ebbers, who died in February 2020, was sentenced to 25 years in jail.
In the family garage in 1982, 15-year-old Barry Minkow launched the carpet cleaning firm ZZZZ Best. At the age of 21, Minkow took his nascent business public. But, there was a catch: Minkow made up more than 90% of the company’s clients, and in a typical Ponzi scheme, he had to extract money from new investors to pay off existing investors. He almost got away with it as well. ZZZZ Best was on the verge of acquiring its largest competitor, KeyServ – which would have meant no more scheme and no more fake customers – but he was exposed before the acquisition could be finalized. Forty years later, Minkow is finally released from prison, having served five more years for a separate short-selling investment scheme. In January 2022, the Discovery+ streaming docuseries “King of the Con,” based on Minkow’s story, was released.