What is the Salad Oil Scandal
The Salad Oil Scandal of the early 1960's was one of the worst corporate scandals of its time. It occurred when executives at New Jersey-based Allied Crude Vegetable Oil Company discovered that banks would make loans secured by the company’s soybean oil, or salad-oil inventory. When inspectors would test Allied’s holding tanks to confirm they were full, the company consistently passed the test. However, management didn't remind anyone that oil floats on water. The containers, filled with water, had just a few feet of oil on top, fooling everyone. In 1963, the scam came to light, and over $175 million-worth of salad oil was missing, causing several notable market reverberations.
BREAKING DOWN Salad Oil Scandal
The Salad Oil Scandal’s mastermind was Anthony De Angelis, a commodities trader, and Allied founder. He eventually served seven years in prison for fraud and conspiracy.
In the early days, Allied profited mainly by exporting U.S. soybean oil, shortening and other related products. Seeking to increase Allied’s profits, De Angelis devised a plan in the early '60s to collateralize the company’s substantial soybean-products inventory and use the loan proceeds to purchase oil futures. He hoped to virtually corner the soybean-oil market, driving up the price, thus raising the value for both his futures and underlying commodity positions. At the time, American Express was among the largest providers of such loans to Allied.
At some point, Allied began to falsify records to attain more loans, claiming far more soybean oil than it maintained in storage. American Express had sent inspectors to check the inventory levels, but none had detected water at the bottom of the company’s tanks. The fraud was exposed when an anonymous whistleblower contacted American Express and recommended its inspectors look closely at one of Allied’s most massive soybean-oil tanks. Upon giving it a closer look, the inspectors discovered the deception.
Market Implications of the Salad Oil Scandal
On November 19, 1963, Allied Crude Vegetable Oil Refining Corporation filed for bankruptcy, setting off several events in rapid succession, including a more than 20% decline in soybean-oil futures. De Angelis filed for personal bankruptcy as well, leaving American Express to foot the bill on the bad loans, and a significant decrease in its market value. In addition to American Express, the scandal weakened other Wall Street firms, which contributed to the financial chaos that followed the Kennedy assassination a few days later. These events included the liquidation of Ira Haupt & Co., a result of customer margin calls in the wake of the Allied scandal, as well as the forced merger of brokerage J. R. Williston & Beane with a rival firm.
Also of note, investor Warren Buffett purchased a 5% stake in American Express amid the scandal fallout, resulting in one of his early investment successes.