It's unfortunate, but money and greed often go hand in hand. As such, it's no surprise that fraud and scams happen in the investing world, despite regulatory supervision aimed to prevent them. Public companies are supposed to act in the best interests of shareholders - but it doesn't always work out that way. Here we take a look at some of the biggest financial frauds. These companies betrayed their investors and in many cases, the financial fallout wasn't pretty. Would you have seen it coming?
1985: EF Hutton
This American stock brokerage fell from one of the most respected in its field, to total ruin. In 1980, the company began writing checks for more than what it had on hand, a strategy known as check kiting. Hutton used this strategy to obtain the use of $250 million of interest-free money a day. In 1985, the company pleaded guilty to 2,000 counts of mail and wire fraud. In exchange for the guilty plea, no Hutton executives were prosecuted and the company was allowed to stay in business.
1986: ZZZZ Best Inc.
Owner Barry Minkow posited that the carpet cleaning company would become the "General Motors of carpet cleaning". He appeared to be building a multimillion dollar corporation, but he was actually churning out thousands of phony documents and sales receipts. In the end, the company turned out to be little more than a front designed to lure investors into a Ponzi scheme, which, according to Minkow's 1988 indictment, defrauded ZZZZ Best's Investors and lenders out of $50 million.
1996: Centennial Technologies Inc.
This company was hailed as a winner on Wall Street when, in 1996, its stock price rose 451% to $55.50 per share to become the best performing NYSE stock that year. But rather than raking in revenue on PC memory cards, Centennial was actually orchestrating sales of nonexistent products to executives' friends, who received fruit baskets from the company and falsely acknowledged that they had received Centennial products. According to the SEC, Centennial overstated its earnings by about $40 million over a two-year period. In the fallout, more than 20,000 investors lost almost all of their investment in this former Wall Street darling.
1997: Bre-X Minerals
This Canadian company's Indonesian gold property was reported to contain more than 200 million ounces, making it the richest gold mine ever. The stock skyrocketed, making millionaires out of ordinary people overnight, but the party ended on March 19, 1997: the gold mine proved to be fraudulent, and the stock became nearly worthless. Major pension funds in Quebec and Ontario, which had invested heavily in the stock, lost millions.
This Houston-based energy trading company was, based on revenue, the seventh largest company in the U.S. But through some fairly complicated accounting practices that involved the use of shell companies, it was able to keep hundreds of millions worth of debt off its books and create incredible earnings figures. When the SEC launched and investigation in 2001, it revealed a complex scam that had brought the company the verge of collapse. When it finally fell, the stock price plummeted from more than $90 to less than $0.70; thousands of Enron employees lost savings, college funds and pensions and investors lost billions.
This telecommunications giant came under intense scrutiny after it engaged in some serious book cooking, and began recording operating expenses as investments. In total, $3.8 billion worth of normal operating expenses were recorded as investments, grossly exaggerating profits. Tens of thousands of employees lost their jobs in the fallout and investors suffered as the stock dropped from $60 to less than $0.20.
2002: Tyco International
Tyco was considered a safe blue chip investment, manufacturing electronic components, healthcare and safety equipment until CEO, Dennis Kozlowski began siphoning money from Tyco in the form of unapproved loans and fraudulent stock sales. Along with CFO Mark Swartz and CLO Mark Belnick, Kozlowski received $170 million in low- and no-interest loans - without shareholder approval. Kozlowski and Belnick arranged to sell 7.5 million shares of unauthorized Tyco stock for a reported $450 million. As the scandal began to unravel, Tyco's share price plummeted nearly 80% in a six-week period.
This cable company, once the fifth-largest in the U.S., fell from grace when the company's three founders and two other executives were charged with securities and other violations, including theft, conspiracy and wire fraud. The SEC also charged that the company fraudulently excluded billions of dollars of liabilities from its consolidated financial statements. The company collapsed into bankruptcy, leaving investors holding the bag.
2003: HealthSouth Corporation
By 1996, Healthsouth had become one of America's largest healthcare service providers, thanks to rapid growth and several acquisitions through the 1990s. But around this time, company CEO and founder Richard Scrushy began instructing senior officers and accountants to inflate revenues and overstate HealthSouth's net income. The scandal unfolded in March 2003, when the SEC announced that HealthSouth had exaggerated revenues by $1.4 billion; the stock fell from a high of $20 to a close of $0.45 in a single day.
2008: Bernard Madoff
Making for what could be an awkward Christmas, Bernard Madoff, the former chairman of the Nasdaq and founder of the market-making firm Bernard L. Madoff Investment Securities, was turned in by his two sons and arrested on December 11, 2008, for allegedly running a Ponzi scheme. The 70-year-old kept his hedge fund losses hidden by paying early investors with money raised from others. This fund consistently recorded a 11% gain every year for 15 years. The fund's supposed strategy, which was provided as the reason for these consistent returns, was to use proprietary option collars that are meant to minimize volatility. This scheme duped investors out of approximately US$50 billion.
TechCEO email scams cost a pretty packet, according to the FBI.
InvestingHere are some of the more common scams aimed at seniors and tips on how to avoid these frauds.
InsightsFind out how to spot internet fraud and protect your hard-earned money.
Financial AdvisorUnfortunately, many scam artists try to prey on people whom they perceive as particularly vulnerable, especially seniors.
InsightsThe Internet had make it easier than ever for scammers to trick people into giving away their money and personal information. These are the scams to avoid.
InsightsPonzi schemes are just one example of this type of scam; learn how to avoid becoming a victim.
InsightsFrom pyramid schemes to envelope stuffing, there are a lot of scams masquerading as legitimate part-time work.
InsightsUnfortunately, you can never retire from being the target of financial scams.
Financial AdvisorSome of the most sophisticated investors on Wall Street have been taken in and if it can happen to them, it could happen to you.