Ever since the dawn of human civilization, people have found a way to exchange value for goods and services. From the primitive barter system to the complicated world of NASDAQ and the stock market, financial systems have come a long way.
However, just like every other system created by people, the financial market is also not infallible. Even though there are several safeguards and checks in place, many people have found loopholes in the system, embezzling money, stock and assets, leading to major scandals throughout history.
While the instances of financial and corporate fraud are nothing new, the ingenuity and brazenness of these people are so spectacular that it deserves a special mention here. Therefore, before investing in a hedge fund or a company, make sure you don’t come across cases like the ones stated below.
Here are the Top 5 Financial Frauds of All Time, Subjectively Speaking.
1. The Ponzi Scheme
Imagine being so notorious in the financial world that your name is synonymous with a type of scam, legitimizing its severity. The term ‘Ponzi Scheme’ came into existence thanks to one Charles Ponzi, a resident of the United States who engineered one of the biggest financial frauds in the early 20th century.
Ponzi used to purchase postal coupons at a discounted price, which he would eventually sell abroad for the actual market price. While this did bring in profits, it was very modest at best. To increase his cash flow, Ponzi claimed profits of up to 50 percent to attract more investors to his scheme.
He was very successful in this endeavour, for thousands of investors splurged their money on this scheme until it was finally discovered in the 1920s. Investors lost more than 10 million USD. Incredibly enough, Ponzi himself fled the country without facing justice for his crimes.
The fraudulent scheme was so successful because he would pay the promised profits to his early investors, except the money didn’t come from legitimate business activity but actually from other investors.
2. Enron Bankruptcy Scandal
One of the supposed early successes of the dot-com wave, Enron was considered a business giant up until the year 2000. Awarded ‘America’s Most Innovative Company’ for 6 consecutive years by the prestigious Forbes Magazine, this was one of the least expected financial scandals.
Turns out the massive profits shown by the company were just on paper, and the accounting department blew up the profits exponentially while downplaying or outright hiding the liabilities.
As soon as this news was brought to light, Enron’s shares dropped drastically from 90 USD to a mere 0.65 USD in a matter of months, before dropping even further. Thus, from being a tech giant with over 22,000 employees in 2000, Enron ended up being bankrupt by the end of 2001.
This scandal was so shocking that the Sarbanes-Oxley Act was passed in 2002, thereby making it much harder for public companies to feign accounts and also ensuring that the punishment for such crimes was much more severe.
To avoid losing money to such scams, be sure to refer to a good corporate lawyer while you are planning on investing. While it is nearly impossible for the Enron fiasco to repeat itself, it is always better to be safe.
3. ZZZZ Best
Possibly one of the most brazen financial frauds in history, the ZZZZ Best still amazes corporate lawyers and financial advisors. Barry Minkow, who was just 15 at the time, started a humble rug cleaning company by the name of ZZZZ Best in 1982. In a matter of a few years, the company went public, valued at somewhere between 200 to 300 million USD.
However, this amazing profit once again turned out to be a well-concealed Ponzi scheme. Minkow shared some of his profits to the early investors by paying the capital offered by other investors, apart from extensive credit card theft.
When the scandal broke out in 1987, the company’s stocks plummeted to zero pretty quickly and the young businessman was sentenced to 25 years in prison.
The most incredible fact of all is that ZZZZ Best almost succeeded in becoming a legitimate company as it was about to acquire KeyServ, a legitimate rival company. Had this merger happened, this financial fraud may have gone unnoticed.
Another tech giant from the 1990s, WorldCom also made it to this list thanks to the actions of its then CEO Bernie Ebbers. The trouble began far back in 1997 when WorldCom had a merger with MCI Communications.
The company tried to achieve this feat yet again in 1999 by trying a merger with Sprint. This ambition eventually led to the company’s downfall as it was blocked by business regulations and the shares of WorldCom started to fall.
A desperate Ebbers, who had already taken a loan of about 365 million USD from the company, tried to show regular company expenses as major capital expenditures. Displaying expenditures of up to 3.8 billion USD, the truth about his embezzlement came out in 2002, causing WorldCom to go bankrupt.
5. Wells Fargo Bank Scam
Wells Fargo deserves to be on this list as its employees committed one of the worst financial frauds in history, which is further expounded by their status as a legitimate financial institution.
Thanks to extreme targets set by the upper management of the bank, employees of Wells Fargo began to resort to unethical means to meet their targets. By creating fake accounts of customers who are already associated with the bank, the employees managed to meet the targets.
When the scandal came to the public eye, the bank had created more than 2 million fake accounts, and due to this unethical practice, Wells Fargo paid a hefty sum of 3 billion USD to the Department of Justice and the U.S. Securities and Exchange Commission. Despite the grave nature of their crimes, the bank is still operational to this day.
In the end, financial frauds remain an unfortunate part of our global market. Hence, it is prudent to have a corporate lawyer or a legal advisor at your service, whether you are an investor, or a small firm entering the market.