There is perhaps no truer and
more frequently proven adage than
“power corrupts and absolute
power corrupts absolutely”.
While this casual maxim is tossed
around in a variety of situations,
it has its roots in reality,
and they are continually
proven to this day.
We put a premium on power in modern
society, throughout the world,
and although many people
in positions of power
are there because they
rightfully deserve to be,
are the best people for the job,
and have respect for the laws
and policies in place for their
respective industries/countries,
there are also those that bend
the rules for their own gain.
This is a nearly unavoidable
symptom of human nature.
If we see an opportunity to get ahead
in the world, even if it is at the
expense of others’ well being, some
members of our species will take it.
In no way does that make it
acceptable, and using the “it’s
natural” excuse is certainly not
admissible in most courts of law;
however, bending the rules
is often allowed to slip
by unnoticed, and has done
so for thousands of years.
Scraping a bit off the top,
working the system, and operating
in the grey area of legality
are hardly new concepts,
and the endless examples make it
impossible to constantly police.
As soon as laws are made, loopholes
are found… and inevitably widened.
However, bending the rules and
breaking them entirely are two very
different things, and when greed
and self-assurance grow too strong
or when the fear of getting
caught disappears,
truly staggering crimes
can be perpetrated.
The word crime is certainly appropriate,
as the gross breach of any established
law constitutes a crime, but when these
things happen in the world of business,
they fall under the more front page-worthy
category of “corporate scandals”.
Scandals come in all shapes and
sizes, from sex and drugs to money
laundering and murder, and they
make for exceptional headlines.
Unfortunately, the longer
that a series of crimes takes
to be exposed, the larger the
eventual scandal will be.
The size and scope of any scandal depends
on the ambition of the criminal behind it
and the ability of appropriate authorities,
partners, employees, or institutions
to identify and prove that
criminal conduct has occurred.
The fact that certain corporate scandals
throughout history have been allowed
to get to such an extreme level is
evidence of much larger problems,
either oversight irresponsibility,
inherent vice within powerful
organizations, or a global culture
that allows a flexible moral standard.
Or perhaps all of them at once.
However, the underlying cultural problems
are far beyond the scope of this.
Some insight into the motives and the
madness behind these problems is a
given, as these stories would hardly
be worth telling without a backstory,
but analyzing the more intense and
comprehensive issues that result in
this type of scandal-chasing and
criminal behavior is simply impossible.
While any decent scandal is sure
to cause a buzz for a while, and
certainly make its rounds in the
Twittersphere and Facebook universe,
as well as international news networks
and late-night talk shows, but it takes
something particularly juicy to capture our
attention for more than a week or two.
We’re attracted to scandal in
the same way that scandalous
corporate stars are attracted
to money and power.
A more cynical writer might call into
question the delay in breaking a good
story in the hopes that it would become
even more entangled and impressive,
but I’ll keep my suspicions to
myself as much as possible.
What interests me more is how it happens?
When does the low-hanging fruit
become too hard to bear?
How is a much easier question than
why, and can usually be deduced by
finding the loopholes that allowed
such a gross oversight to occur.
There are plenty of front-page news
scandals every year, but this will focus
on some of the most exciting and unusual
scandals of the past half-century.
From keeping billions of dollars in
debt off the balance sheets to selling
millions of dollars of stock only days
before a company posts a devastating loss,
there is a wide selection of corporate
scandals that have truly shocked the world.
If you want to break down the
“worst” scandals in history,
it becomes a study of measuring
the severity of impact.
The sum total of money stolen or
lost is not the final deciding
factor, as that money is often
returned, or insured somehow.
However, when it comes to a
scandal’s effects on other people,
such as thousands of people losing
their jobs and livelihoods,
most people would argue that those scandals
are truly the most damaging and damning.
The bottom line is that scandalous
behavior is a double-edged sword;
it functions as entertainment
and newspaper fodder for
some, but economic ruin and
shattered dreams for others.
Corporate scandals are a symptom
of our age, and they will likely
continue to be a part of our collective
culture for generations to come.
As such, it’s important to
understand a bit more about these
blockbuster law-breakers, the
companies they worked for,
the loopholes they found, and, of
course, how they eventually got caught.
Let’s dig a little deeper
into some of the most
unbelievable and infamous
corporate scandals of all time.
Enron - Crash of the Titan
Forbes Magazine once crowned
Enron as “the most innovative
company in America”, not once,
but six years in a row,
and given its impressive
services, products, output,
and profits, there was
little room to argue.
In the late 1990s and very early 2000s,
Enron was one of the world’s most
important and respected energy,
services, and commodities companies.
They dealt in natural gas, electricity,
pulp and paper services, and
communications, and raked in more than
$100 billion in revenue in the year 2000.
The stockholders were happy,
the employees were well
compensated, and the company had
never been in higher demand.
In short, it looked like Enron
was going to be the poster-child
of the global energy sector
for many years to come.
Oil and natural gas companies have always
been associated with massive profits,
simply because the vast majority
of our global population demands
electricity, heating, automotive
transportation, and other luxuries
that can only be achieved through
some sort of energy provider.
When an energy company posts revenue
of $60 billion or $100 billion, the
numbers seem too astronomical to
fathom, but not criminal in nature.
The complex web of
companies and partners and
interchangeable revenue
streams make it extremely
challenging for analysts
and shareholders to
understand the full breadth
of the company’s holdings.
This is true for dozens of
multinationals and conglomerate
corporations that are
still in business today.
When Enron’s stock price rose
more than 300% from the early
1990s to 1998, the country
celebrated its energy titan,
which was trying to simplify energy,
broadband, natural gas, and
pipeline services to individuals
and companies across the country.
It had already become the most dominant
name in natural gas by 1992, but used
that foothold to expand into the entire
energy industry, from top to bottom.
Following those 8 years of
impressive stock growth, it exploded
in 1999 by more than 50% and then
again in 2000 by nearly 100%.
All told, from 1996-2000,
Enron’s value shifted from
approximately $13 billion
to over $100 billion,
a wildly unprecedented rate
of growth that made it one of
the wealthiest and most powerful
companies on the planet.
The stock market continued to pour praise
on Enron, valuing it at more than 70 times
its actual earnings, and causing the stock
to peak at $90.75 by the middle of 2000.
Those sorts of stock prices meant
billions of dollars in bonuses to top
executives and job security - or so
the leadership at Enron thought.
As it turned out, the projections
and figures that Enron had been
claiming for the better part of a
decade were not technically true.
They had been hiding billions of dollars
in losses, keeping them off the
accounting books, or falsifying profits
and grossly overestimating revenue.
This was far from an accidental
error in the +/- column;
the Enron Scandal, as it came to
be known, had occurred due to a
systematic and masterful manipulation
of not only Enron’s top leadership,
but also of a globally renowned audit
and accounting firm, Arthur Andersen.
Back in 1985, Kenneth Lay formed Enron
when two large energy firms were merged.
Jeff Skilling had worked as a
consultant for Enron in its early
years, and was hired in 1990 as
chairman and Chief Executive.
This is when the scheme began to play out.
Essentially, these two men designed
a financial reporting scam
that allowed them to take
advantage of reporting loopholes,
special purpose entities, and
weak financial reporting
oversight to hide billions
of dollars in losses.
The company was constantly trying
to expand into new industries,
which meant buying and
investing in many companies.
By implementing something
called mark-to-market
accounting, the company
leaders were able
to claim projected revenues
far into the future
for unproven companies
and product sales.
For example, Enron
bought several companies
and projected the potential
profits for these
partners into their revenue statements, even
if those companies failed or lost money.
These false revenue streams could
carry through the books for
months, or even years, which resulted
in higher declared earnings,
increased stock prices, and more money
in the pockets of the men at the top.
They also used clever revenue
reporting methods by adopting
a similar liability categorization
as trading companies,
where they could reporting the entire
value of each trade as revenue, without
including statements about the actual
products’ (purchases) cost of goods.
This meant that it heavily inflated revenue
and hid losses in the ether of accounting,
resulting, once again, in massively
overestimated value for the energy titan.
They further complicated the
situation by protecting
themselves against risk from
these illicit practices
by using tax shelters and
special purpose entities
to effectively hide or
protect their money.
Through a number of official
company sales and acquisitions,
Lay and Skilling were able
to hide billions of dollars
within other companies
technically owned or
partnered with Enron in
different industries.
The list of these sorts
of secret maneuverings
and deals is shockingly
long, and they were
largely the reason for Enron’s impressive
stock growth in the latter half of the 1990s.
The SEC became suspicious of
the huge growth, and began
an investigation into the
inner workings of Enron.
Although the soaring stock
prices drew the initial
attention, it was an
internal whistleblower named
Sherron Watkins that
eventually blew the whole
scam out of the water and
into the public eye.
When the massive overestimation of
wealth was revealed, the stock price
plummeted from an all-time high of over
$90 to an all-time low of less than $1.
This caused the almost immediate
collapse of the company, thousands of
employees not only lost their jobs,
but also their retirement funds.
All told, shareholders
took a $74 billion hit
from the previous king
of the energy industry.
The pair had been able to pull it off
for so long by putting pressure on
their audit and accounting firm
representatives from Arthur Andersen,
one of the largest and most respected
accounting firms in the world.
When those audit professionals willingly
turned a blind eye, they also broke the law,
and later investigations essentially took
away the company’s license to practice,
causing irreparable damage to
its reputation as a global
accounting, tax, and consultancy
leader of the “Big Five”.
Lay and Skilling were both
investigated and found guilty.
Kenneth Lay died before he
could ever serve time, but
Jeffrey Skilling is serving 14
years of a 24-year sentence.
Finding those loopholes put Enron
on top of the world for half a
decade, but it was only a matter
of time before the spotlight
(which they were probably providing the
energy for) began revealing that no one gets
that big, that fast, without something less
than legal going on behind the scenes.
Martha Stewart Living Outside the Law
When it comes to home furnishing
and do-it yourself homemaking,
Martha Stewart’s name is almost
inevitably on the tip of your tongue.
This American mogul has involved
herself in everything from reality
television shows and stock brokering to
magazine publications and e-commerce.
Her name has become
synonymous with a lifestyle,
and her magazine,
Martha Stewart Living,
was one of the most popular
and well-respected magazines
in mass publication
within the United States.
Her television show of
the same name was wildly
popular for the better
part of a decade,
allowing her to share her tips,
tricks, and secrets on everything
from gardening to cooking to
making decorations for the house.
However, even the elegant exemplar
of domestic bliss couldn’t escape
the clutches of corporate scandal,
and when all was said and done,
one of America’s true sweethearts had to
stand trial for insider trading charges
in one of the most controversial and
widely watched scandals in modern history.
But that’s getting ahead of the story;
let’s take a step back to
see what really happened.
ImClone was a
biopharmaceuticals company that
specialized in oncological
medicines and treatments.
One of its major drugs
in development at the
beginning of the 21st
century was Erbitux,
a monoclonal antibody
that would have been used
to seek out and neutralize
cancerous cell clones.
It was a promising new drug, and the
company expected large returns once it had
passed the approval phase from the United
States’ FDA (Food and Drug Administration).
Unfortunately, near the
end of 2001, the FDA
decided not to approve
the experimental drug.
Due to the large amount of
money that had been projected
from this new drug release,
the stock price had inflated,
but when news of the
drug’s rejection hit the
stock market, the stock
price dropped sharply.
This is the sort of risk that
stock markets are founded on;
sometimes you win and sometimes you lose.
However, there seemed to be a large
sell-off of ImClone stocks in the
days leading up to the announcement
that the drug hadn’t been approved.
An investigation by the US
Securities and Exchange Commission
revealed that a number of shareholders
and executives of the company
had sold off large portions of
their stock due to this insider
knowledge before the news
was released to the public.
More than $10 million dollars in
stock was sold on December 27th and
28th of 2001, and there is no such
thing as a coincidence that large.
Simply put, the company’s
executives and stockholders
were engaging in insider
trading, which is illegal.
The story became far more
exciting than the traditional
insider trading scandals that
so often crop up on Wall Street
when it was revealed
that Martha Stewart had
also held a fair amount
of ImClone stock and had
also sold her shares
(nearly $230,000 worth) on
December 27th, the day
before the announcement.
Martha Stewart’s daughter had
once dated Samuel D. Waksal, the
founder of ImClone who had begun
telling friends and family
to sell their shares once
he realized that the
company’s stock prices
were about to plummet.
Peter Bacanovic, Martha Stewart’s
broker at Merrill Lynch, had apparently
given her nonpublic information
that led her to sell her stocks,
and although she claimed innocence,
or at least no knowledge
of wrongdoing, the actions were
suspicious, to say the least.
The news came out very quickly, but
the legal process is a long one.
Martha Stewart, despite her
hands having literally
been caught in the
cookie jar, continued
her television show and remained at the head
of MSLO (Martha Stewart Living Omnimedia).
For nearly two years, scrutiny and tabloid
rumors and even on-air interviews
about her involvement in the ImClone
scandal swirled around Martha Stewart,
but she just continued
preparing salads and giving
out household tips to
millions of people each week.
It wasn’t until 2003 that she was
finally indicted by the government
on nine counts, including insider
trading and obstruction of justice.
During the proceedings, it did come
out that Stewart’s broker had told
his assistants to inform Stewart of
the events unfolding at ImClone,
including the details of the failed FDA
approval, at which point Stewart chose
to sell her stock and save tens of
thousands of dollars in potential losses.
She was fined approximately $200,000
and sentenced to five months in
prison, followed by five months of
house arrest, two years of probation,
and a five-year ban from
being the CEO, CFO,
Director, or any other
leading executive within her
own company that would
allow her to disclose,
report, audit, or control
financial statements.
The world watched as one of the most
celebrated names in domesticity and
homemaking head into the Big House,
and Martha Stewart didn’t disappoint.
She actually took a position
within the prison to act as a line
of communication between the
prison management and the inmates,
showing diplomacy, grace, and
intelligence even in an orange jumpsuit.
Five months later, having
“paid her debt to society”,
she dove right back into
building her empire.
Unlike many other scandal-makers, who never
recover from their illicit activities,
Martha Stewart’s career, or at least her
company, seemed boosted by her incarceration.
MSLO has expanded into
real estate, winemaking,
mass-produced craft items,
and home furnishings.
What had once been a media
empire has rapidly grown into a
sprawling inter-industry giant that
shows no sign of slowing down.
Martha Stewart has written numerous
books since being released in 2005,
and has talked candidly about her
behavior and subsequent time in jail.
As mentioned in the introduction, as a
global society, we love to see a scandal
unfold and the greedy top dogs at the
top finally get what’s coming to them.
However, in this particular case, we
enjoyed watching the scandal, but seeing a
beloved household name become embroiled in
the controversy changed the game entirely.
It fascinated the country, and
since our collective memory is
apparently short, we applauded the
criminal and showered her with love.
People don’t look at Martha Stewart
and see a criminal, they see a
reformed mogul who lost her way,
or at least took a wrong turn.
Samuel Waksal, the original distributor
of the insider information
regarding ImClone’s stock, served
more than seven years in prison.
I doubt there was a media empire to
come back to for Waksal, and that
is why the scandal at ImClone is
such an interesting point of study.
Most people know that Martha Stewart was
involved in insider trading, but very
few of them would even know the name
“ImClone”, let alone “Samuel Waksal”.
When the glitz and glamor of Hollywood
becomes mixed in with the dark underbelly
of illegal business, the world is
perfectly happy only digging far enough -
reading the headlines
and remembering the
highlights, without ever
seeing the whole picture.
Texaco - The Search for Black Gold
There are few industries
that have been around as
long and have remained
just as profitable as oil.
With a current global value of $3.2
trillion for gas and oil, there
is clearly a ridiculous amount of
money to be made in the industry.
As we’ve already seen so
far, when profit margins
can be that steep, people
can get a bit crazy.
Back in the mid-1980s, however,
companies were acting just
as wild as individuals, but
the stakes were just as high.
In 1984, the head of Getty
Oil, Gordon Getty, decided
to sell his oil empire
to the highest bidder.
He spoke to the biggest oil companies
he could find, and eventually
settled on Pennzoil, and they made
an informal, yet binding, contract.
The sale price was to be set
just over $10.53 billion.
Later that week, Gordon
Getty was approached by
representative from Texaco,
a major rival of Pennzoil.
He then agreed and confirmed the
formal sale of Getty Oil to Texaco,
in direct breach of the contract
he had entered into with Pennzoil.
This sort of last-minute, backhanded
deal-breaking happens more often than
we’re ever told, but on such a grand
scale, in such a lucrative industry
with huge amounts of money
at stake and interested
parties around the
world, this backdoor
dealing made front-page headlines from
coast to coast, and even around the world.
$10.5 billion is a lot of money in 2015,
but back in 1984, it was unfathomable.
Gordon Getty was the
wealthiest man in America in
1983, and that was only
for a $2 billion fortune.
In other words, Pennzoil was losing a massive
opportunity, and it had been snatched
away from them through double-dealing and
intentional malicious deal making by Texaco.
You may see this situation as a “too
bad for you” scenario, but the concept
of an informal, yet binding, contract,
made the entire affair a legal issue,
and Pennzoil had a
legitimate case to hold
against Texaco for the
loss to their company.
Breaking contracts, especially
on that scale, can be
very costly, and according
to Texas law, very illegal.
Throughout the lengthy legal
process, Pennzoil was calculating
all of its potential losses
due to the illegal sale,
and when the court
eventually ruled in favor
of Pennzoil, Texaco was
facing a massive fine.
They had just purchased the company for more
than 10.5 billion dollars, and their total
amount of damages and legal fees and punitive
charges amounted to nearly $13 billion.
This was the largest civil suit in
American history at that point.
Furthermore, to add salt into the
wound, the court would not allow
for the appeal process to begin
until the company paid its bond,
which was the full amount of the court’s
fines, in addition to interest.
At that point, Texaco had no other choice.
It couldn’t afford
to pay that type of
money, and was forced
to declare bankruptcy.
This was also the largest bankruptcy
filing in US history at that point,
and it caused tremors throughout the
financial system and the world.
Pennzoil eventually settled with
Texaco for $3 billion in damages.
Texaco was down, but not
out, and the following
year, they merged with
Saudi Aramco, thus
beginning a 25-year
period of merging and
absorptions, disbandings and
gradual disappearances.
Texaco stations have all but disappeared,
replaced by Shell and Esso and Conoco.
You might still find the
occasional Texaco station in the
Deep South of the United States,
but it is a dying brand.
However, watching an oil empire
slowly crumble after being
dealt a single knockout blow
more than two decades earlier,
goes to show that the more money
and resources there are in play,
the less a scandal actually has
to do with righting a wrong.
In the case of Texaco,
Pennzoil, and Getty Oil, this
scandal was more like a
hostile takeover gone wrong,
resulting in Pennzoil
bleeding Texaco dry until it
had no choice but to give
up and declare bankruptcy.
People often think about the
reputation of a company
following a scandal, but in
reality, for oil companies,
reputation is never going
to be the top priority, as
they will always have a
product that is in demand.
However, profits speak louder
that reputation in certain
industries, and that kind
of business can get bloody.
When it comes to an industry worth
over $3.2 billion, everyone
wants a piece, and they’ll do
anything they can to get it,
even if they have to step on someone
else’s billion-dollar toes.
Carrian Group - The Rise
of Corporate Sleaze
While the companies examined
so far have certainly
had their fair share of
dirty players and greed,
their crimes have almost
entirely been related to money -
whether through sneaky
deals, insider trading,
or clever manipulation
of the figures.
While there is plenty of that in
the scandalous story of Carrian
Group, one of Asia’s largest
conglomerates in the 1980s,
the company’s story has a
much darker side - murder.
It is a sad truth that bumping up that
level of intrigue always draws a crowd,
but the Carrian Group scandal
was one of the largest and most
sinister corporate schemes
that the world had ever seen.
Although the total amount of
money that was fraudulently
accounted may not seem like much
in terms of today’s scandals,
the exposed corruption rocked the global media
and financial sectors, and the collapse
of the Carrian Group in 1983 was the
biggest bankruptcy in Hong Kong’s history.
Before we get into all the details,
perhaps we need a bit of exposition.
In 1980, a relatively unknown civil
engineer named George Tan who had
begun working as a project manager
at a land development company
and began making risky property
acquisitions in Hong Kong.
The Carrian Group Ltd. had been
founded back in 1977, but it wasn’t
until 1980 that their scheme for
success was put into motion.
Via a 75% subsidiary, Carrian Group
purchased Gammon House, which was
a prime piece of real estate in the
Central District of Hong Kong.
The purchase was made for
nearly $1 billion HK dollars,
and while that figure was
staggering back then,
the company quickly flipped the
property for nearly $1.7 billion HK.
Obviously, this drew
significant attention from the
financial and commercial
markets of the country,
as that sort of profit margin
in such a short time for
a land developer was
impressive, to say the least.
In less than two years,
George Tan was the head one
of the biggest land
developers in the country,
and the company wasn’t satisfied with
one major property in Hong Kong.
Using the profits from their
first major undertaking,
Carrian Group found
Carrian Investments Ltd.,
which gave the company access
to the financial markets.
Based on this influx of capital, the
Carrian Group was able to expand its real
estate and financial empire to include
holdings in a wide variety of industries,
including Transport,
Catering, Hotels,
Shipping, and Real Estate,
just to name a few.
At one point, they even owned the largest
taxi company in Hong Kong’s history.
Those first few years of the 1980s were
hugely profitable for the Carrian Group and
George Tan, as well as for the supporting
banks of the company’s financial interests,
namely Bumiputra Malaysia Finance and Bank
Bumiputra Malaysia Berhad of Malaysia.
By engaging in fraudulent
reporting, deceit, and corruption,
Carrian Group was able to
manipulate financial markets
and essentially trick high-level bankers
and auditors into handling the dirty
work and providing the company with
access to massive amounts of capital.
It may be shocking that Carrian
Group and George Tan were able to
perpetrate this significant of a real
estate scam in such little time,
but by allying with two respected names
that had once worked at Price Waterhouse,
which remains one of the Big Four accounting
and auditing houses in the world.
This immediately gave Carrian
Group credibility, and
by promoting John Marshall
(one of the PW hires)
to a Managing Director position for all
major Carrian companies, it seemed
as though the huge land developer was
above suspicion and above board.
That was not the case, and
while George Tan and Carrian
Group’s coffers swelled,
debt continued to grow.
When an auditor for Bumiputra
Bank, Jalil Ibrahim,
was found dead in a banana
grove outside Hong Kong,
questions began to arise and more
people began looking into the
questionable business and accounting
practices of the Carrian Group.
It quickly became apparent that
Ibrahim had discovered something in
the books of Bumiputra Bank and was
going to expose the corruption.
A chairman of Bumiputra Malaysia
Finance, Lorrain Esme Osman, was
suspected of having a hand in
ordering the death of the auditor,
but nothing was ever proven,
despite him being held in
retention in London, fighting
extradition, for seven years.
The man arrested for the murder has
already served his sentence and
is now living out his days in
Penang, while Osman and George Tan,
perhaps two of the key figures in this
massive conspiracy, remained free.
This conspiracy took place
more than 30 years ago, and
remained in contention for the
better part of two decades,
but it is still the largest Asian
corporate collapse of that era.
By implicating major financial
institutions across the
region, Carrian perpetuated
billions of dollars in fraud,
and Bank Bumi required a $1
billion recapitalization
by the Malaysian government
to remain afloat.
Shocking enough, despite the blatant fraud
and corruption that had been exposed,
the Malaysian government didn’t pursue
criminal investigations into any of
government officials or bank leaders who
might have been involved in this fraud.
This remains a mysterious black
hole of the scandal, which is why
it remains one of the great shadowy
pieces of Hong Kong’s history.
As more of the key players
in this scandal begin
to pass away, like
Osman in 2011, it will
become more and more
difficult to determine
what really happened
back in the early 1980s.
Was Jalil Ibrahim supposed to be killed?
Were Osman and Tan involved in the
planning or ordering of the hit?
How much money was actually
fraudulently accessed and spent?
Who in the Malaysian
government was in on the scam?
All told, Carrian Group
collapsed following
the murder and subsequent
investigations, and
from a once-great empire of Hong Kong’s
economy, only a restaurant, Carriana, remains.
This scandal is evidence that
in certain parts of the world,
when international policies,
philosophies, legal codes,
and ethical foundations may differ
between involved players, corporate
scandals can be shockingly hard to
prove, fully understand, or prosecute.
Banco Espirito Santo -
Old Money, New Problems
For more than 150 years, the
name Espirito Santo has been
synonymous with the banking and
financial system of Portugal.
Banco Espirito Santo and the family
behind it, including the famous
patriarch nicknamed DDT (“Dono Disto
Tudo” - “Owner of all This”),
have had their fingers
and interests in every
industry from real estate
in North America to
diamond mines in Africa
and billions of dollars
in corporate and commercial
assets in Portugal.
The company had been through
controversy and tragedy in the
past, namely during the
nationalization of the country.
The Espirito Santo family was torn from power
and imprisoned, as they had been one of
the primary financial institutions under
the dictatorial regime of Antonio Salazar.
When that regime was
removed from power, the
banking family similarly
lost its power,
but was able to reclaim their
empire with international aid and
support from some very powerful
allies, including the White House.
However, this latest round
of trouble occurs while the
European market is still
in a very fragile state.
With numerous collapses and
recessions still raging around
the Eurozone, the revelation
that nearly $4 billion
in fraudulent debt was being
hidden by a titan of the
Portuguese banking system is
both dangerous and worrisome.
There are constant worries of a
complete collapse, and given
that Portugal was the poorest
western European country
that had been struggling with
recession and unemployment
issues for years, this blow
is particularly strong.
The question is, how was this
allowed to go on for so long?
How can one family hide $4 billion
in debt from organizations
like the IMF and the European
Securities and Market Authority?
The answer to that is why
this story is so interesting.
After more than a century
of prestige and respect,
in which the Espirito
Santo clan accumulated
a massive fortune that stretched across the
globe, they wanted to protect their assets.
To that end, they created an outside
organization to manage all of
the transactions and financial
issues the company needed to handle.
Eurofin was a privately
held Swiss company
that dealt with many
Espirito Santo entities.
In fact, 23% of Eurofin
was owned by another
family company, Espirito
Santo Resources.
Basically, this gave the Espirito
Santo family quite a bit
of control over the operations,
or at least influence.
That is why, when the rest of Europe was
struggling to stay above water during
the Global Financial Crisis and the
subsequent recessions across the Eurozone,
Banco Espirito Santo and
the rest of the family’s
empire was able to remain
in such good standing.
Eurofin was responsible for moving money
around the family, and often packaged large
amounts of debt from various companies and
then sold it back to the bank’s clients.
This was essentially hiding
huge amounts of debt from
suffering companies in clever,
covert, and illegal ways.
From the outside looking in, the
company was posting enough profits
to avoid much suspicion, particularly
in its more valuable holdings,
but in reality, debt was being
shifted around so quickly that
regulators and auditors were largely
unable to detect the movement.
This debt was handled and
traded by another Espirito
Santo-created entity, Tulipa, a
trading desk based in Lisbon.
This charade continued and at one point,
internal memos reported that the Espirito
Santo scam could potentially sell off 30-40
billion Euros annually, if necessary.
When suspicions began to rise about
the trading practices between
Banco Espirito Santo and some of its
other family-related companies,
following an “insider tip”, things
began to come to light that
the family had been hiding for
the better part of a decade.
When the truth came to light, and
it was found that Banco Espirito
Santo’s internal processes were
breaching a number of regulations,
more than 3.6 billion
Euros of debt had been
sold off, while the
companies continued to post
profits and deceive
investors, the Portugues
stock market, and the
entire European community.
The list of violations that the
Espirito Santo family and corporations
committed is impressive, including
insider trading and accounting fraud.
In total, the unraveling of Espirito
Santo’s scandal led to nearly a 4
billion Euro hit to the Portuguese
stock market, representing a 22% drop.
With the ongoing fragility
of the rest of the
European community, this
sort of major hit to one
country that had already
been struggling has sent
shockwaves throughout other
precarious countries.
What makes this scandal so serious
and devastating is that it was left
undiscovered for so long, and while the
regional economy appeared to be improving,
it has in fact been suffering
more than ever imagined.
Due to the recent nature of this
scandal and the ongoing recovery
efforts, the full effects of
this scandal are still unknown.
One thing is certain, however, the
old familiar ties of the Espirito
Santo family, which included kings
and presidents of the past,
are not going to be
able to save them from
financial ruin and
international embarrassment.
This is the end of a global dynasty,
but perhaps the Espirito Santo
empire should have ended with a
bit more grace many years ago.
Healthsouth Corporation - Fraud
is the Best Worst Medicine
Although Healthsouth Corporation
is meant to help people, and is
the largest inpatient rehabilitation
company in the United States,
the scandal that shocked
company investors,
shareholders, and the
broader medical community
of the US certainly didn’t have taking care
of people at the top of its priority list.
The company experienced huge success
leading up to 2003, when it expanded into
every state of the US, as well as
facilities in half a dozen other countries.
With more than 6,000 employees at more
than 2,000 locations across the world,
Healthsouth was a dominant and well-respected
name in the healthcare industry.
In fact, it was the most valuable
healthcare company in the country.
However, the company’s stock had
actually begun to drop more than 7
years earlier, when Richard M. Scrushy
took matters into his own hands.
He began directing a
series of fraudulent
activities that stretched
on for more than 7 years,
falsely inflating the price
of the stock by reporting up
to 4000% more in earnings than
they had in reality gained.
At times, the tax that they
were required to pay on their
inflated earnings was more than
the company’s true earnings.
By manipulating accounting records,
Healthsouth’s executive leadership
was able to maintain the stock price
and fulfill investor expectations.
When all the thousands of transactions
and accounting records were analyzed,
it turned out that more than $4.6 in
fraudulent earnings had been reported.
The tipping point came when SEC
investigations into Scrushy’s timely sale
of $100 million in stock preceded a
major stock loss for the company.
This would have been considered
insider trading, but
Scrushy managed to be
acquitted of those charges.
However, as the books
began to open, more and
more fraudulent earning
reports began to appear.
What was at one point $1.4 billion soon
grew to $2.9 billion and $3.5 billion,
eventually settling at a whopping $4.6
billion in total fraudulent reports,
which had been keeping
the company afloat for
those seven years, its
period of largest growth.
What made this scandal particularly
tabloid-worthy was the almost
insultingly lavish lifestyle that
Scrushy was living in those years,
which included a 92-foot yacht, millions
of dollars in art, and classic cars.
All the while, this
inpatient rehabilitation
center mogul was
bankrupting his company by
falsifying earnings, and
putting the welfare
of tens of thousands of
patients in jeopardy.
Scrushy was known as an
intimidating and even frightening
director, and many employees were
afraid to report indiscretions;
similar reports came from accounting directors
throughout the company, a culture of
threats and intimidation that belonged more
in a Mafia movie than a medical titan.
When Scrushy eventually
stood trial in 2005,
he was acquitted of all
36 counts of fraud,
and one of the greatest frauds in the
history of the country was nearly complete.
In the year following the
trial verdict, which shocked
the nation and the remaining
leadership of the company,
every effort was made to
eliminate all traces of
Scrushy’s influence and
connection to the company.
Four years after that fateful court
decision, Scrushy was sued by
the Healthsouth investors who had
lost millions due to his actions.
At the company’s peak in March in 1998, the
company’s stock was worth more than $30.
Following the revelations of the fraud and
scandal, the price plunged to $.11 in March
of 2004, before climbing back to the $6
range and slowly recovering to this day.
This massive drop,
however, represented a
complete collapse of the
financial structure of
the company, as the fraudulent accounts
represented nearly 20% of the company’s value.
The investors got some of
their revenge, although
not nearly as much as
many would have wished.
Scrushy was ordered to return $2.8
billion to company investors.
The company has had to sell off, close,
or drastically reduce hundreds of
its facilities across the world, and
is but a shadow of its older self.
What had once been the top earner
in an industry worth hundreds of
billions of dollars, despite those
earnings being largely falsified,
is now a serious warning to other companies
about the impact that accounting
inconsistencies can cause
major problems for
investors, shareholders,
and service users.
While the penalty to Scrushy in the $2.8
billion lawsuit was partially palliative
for those who had lost everything
(including faith in the medical industry),
the fact that no criminal charges
could be successfully leveled at him
has left a bad taste in the mouths
of many people for nearly a decade.
When money that finds loopholes can buy
innocence, then what’s to stop more
executives from manipulating the figures
and dodging charges in the future?
Reform is necessary, but
scandal-makers always
seem to be one step
ahead of the lawmakers.
Denny’s - The Racism Grand Slam
At more than 1,600 locations
around the world, patrons
from more than a dozen countries
are invited by Denny’s
to come in and enjoy the
comfort, convenience,
and affordability of
an American breakfast.
From its legendary Grand Slam
Breakfasts to its often 24-hour
services, it has been a major
restaurant chain since 1953,
although its franchising operations
didn’t begin until 1963,
when considerable growth and
expansion of the brand began.
However, in the 1990s, the popular
diner spot came under serious fire for
potentially discriminatory practices against
minorities at many of their locations.
The first incident that raised attention
occurred in 1991, when a large group
of black youths were asked to pay for
their bills before they could be served.
When the youth questioned the waitress
about this unusual policy that was
clearly only being instituted for them,
the waitress replied that earlier,
there had been a group of African
American youths who had caused
trouble in the restaurant and
left without paying their bill.
Therefore, the store
management was requiring that
black people had to pay
for their meals upfront.
This blatantly discriminatory
practice brought
national attention on
the small location in
San Jose, California,
and there was a public
outcry for this racist
behavior to be addressed.
Denny’s quickly covered their vulnerable
racial points and worked closely with
the NAACP to come up with tolerance
schemes and racial sensitivity programs
that could be disseminated to
Denny’s representatives, who
could then establish appropriate
practices in all locations.
For two years, Denny’s did its
best to improve its image, even
coming to an agreement with the
original youths in question.
However, less than a week after that agreement
was signed in an attempt to salvage
its public relations image, a second
incident incited a new wave of anger,
when six black Secret Service
agents were kept waiting and were
refused service by a waitress
in Annapolis, Maryland in 1993.
The white Secret Service agents present
at the restaurant were seated and served.
The timing of this second blatant case
of racial discrimination essentially
annulled the work that Denny’s had
been doing to save its image,
and all of the pledges and
commitments Denny’s leadership had
been making suddenly rang false
in the ears of the country.
Since the 1991 incident,
thousands of other claims
appeared, and as the
list of complaints grew,
it became clear that there had
been systemic racism perpetrated
and promoted in the higher
management levels of Denny’s.
More than 4,000 complaints were eventually
compiled against the breakfast chain giant.
These ranged from other
examples of black people being
made to pay for their meals
before they could be served,
being made to pay more than white
customers, suffering racial
slurs from patrons and staff, or
being entirely refused service.
With thousands of independently
proposed cases, this could
no longer be proposed as
individual or random events.
This was a company who had regularly
engaged in discriminatory
practices that had been disseminated
from company leadership.
The evidence was almost
irrefutable, and the eventual total
for that class-action lawsuit
was a whopping $54.4 million,
paid out to more than 200,000
individuals and lawyers.
It was the largest case and settlement
based on an issue of race since the
Civil Rights Act had made these sorts
of discriminatory practices illegal.
However, the story doesn’t stop there.
In 1994, despite the settlement, racial
complaints continued, with six black women in
Illinois claiming that
they had been forced to
wait for over an hour
before they were served.
Other diners, once again, had been seated,
spoken to, and served before them, and
when a waitress did approach them, she
allegedly threw the menus at the patron
In 1996, six Asian patrons of a Denny’s
in Syracuse New York were made to wait
and were refused service, even as other
white patrons were seated and served.
They were then made to leave by security
guards after complaining to the management.
At this point, a group of white
patrons of the restaurant
followed them out of the
establishment and beat them up.
While the actions of those
white patrons cannot be
controlled by Denny’s
management, the continued
reports of racist and
discriminatory behavior in
Denny’s across the country
could not be denied.
Denny’s underwent a second
rehabilitation process
that was even more intense
than their original one.
Every Denny’s employee must now pass
through racial sensitivity training.
Denny’s as a company also
underwent massive changes;
only one franchise in 1993
was owned by a minority.
Five years later, approximately 35%
of franchises had minority owners.
Denny’s never denied its discriminatory
practices had happened, only
that they were in no way sanctioned
or instructed by company management.
They continued their image
improvement strategy
by making sizeable donations
to minority groups,
and changed its hiring and
marketing strategies to represent
a more diverse and welcoming
atmosphere for minorities.
Not only did Denny’s
seek to make up for its
gross errors in judgment
and policy-making,
it sought to go above and
beyond the norm in America and
is now one of the most diverse
companies in the country.
The claim that the behavior of thousands
of employees wasn’t in some way inspired
by managerial or corporate policy still
seems farfetched, even impossible,
but the fact is, this
scandal has made
Denny’s turn over a new
leaf in a major way.
In fact, in 2006 and 2007, Denny’s
was at the top of the list
for Black Enterprises’ “Best
40 Companies for Diversity”.
Saying that there is a silver lining
to a shameful discrimination scandal
may be controversial, but the public
attention the issues attracted,
and the evolution of a major commercial
chain from discriminatory or neutral
on racial issues to a model of diversity
and equality is almost inspiring.
Perhaps that is the one good thing that
came out of this Grand Slam Scandal.
Madoff Investment Securities LLC
- Using Ponzi to Perfection
In what would become
the largest accounting
fraud and the largest
Ponzi scheme in history,
the story of Bernie
Madoff’s elaborate and
unbelievable fraud scandal
tops the charts in terms of
blatant disregard for ethical
behavior, accountability,
the welfare of others,
and simple decency.
There remains an air of
mystery and impossibility
surrounding this
particular scandal,
as the sums discussed and the
companies involved operate in some of
the most exclusive, secretive, and
elite levels of global society.
While some of our other examples have
been smaller companies and smaller sums,
the Madoff scandal was reported to
have involved more than $64 billion in
falsified sums and deceit spread out
across Madoff’s nearly 5,000 clients.
Given the complexity of this
case, and the shockingly
bold nature of the scam
used to pull it off,
a bit of context might be helpful.
Bernard Madoff was a
stockbroker and investment
advisor for nearly five
decades, from the founding
of Bernard L. Madoff
Investment Securities LLC in
1960 until his empire’s
eventual collapse in 2008.
The full extent of the fraud may never be
known, because Madoff implemented the most
extensive and convoluted Ponzi schemes in
history to achieve this massive fraud.
Essentially, a Ponzi scheme is a
pyramid scheme based on covering
losses from previous investors
with the money from new investors.
By promising modest and
consistent returns for
a select group of
investors, Bernid Madoff
was able to grow his modest investment firm
into the sixth-largest firm on Wall Street.
He was managing the wealth of some of the
wealthiest individuals and companies
in the world, ranging from transportation
industry holdings to global charities.
Interestingly enough, Madoff used seven
feeder fronts that would acquire
investors and funnel that money into
the larger parent organization,
leaving many people completely unaware that
Madoff was in fact managing their money.
As each successive group
of investors demand
the return on their
invested capital, Madoff
would move the money from his next tier of
investors up to cover his earlier debts.
By operating in a very exclusive echelon of
society in some of the most affluent areas
of New York State, and using his Jewish
heritage as a powerful too of coercion,
Madoff was able to
manipulate tens of billions
of dollars through his
recycling cash scheme.
Despite his ingenious plan, the Global
Financial Crisis hit Madoff just like
the rest of the world, and it became
nearly impossible to find new investors.
As he was unable to cover his prior
debts for the first time in decades,
investors began requesting their money
be withdrawn from the investment fund,
likely to wait out the financial
storm and keep their capital safe.
However, most of that money didn’t exist,
or had been spent to cover other debts.
European investors began
to pull out in huge
amounts, and the jig
was essentially up.
It wasn’t long until the rest of
the story came out, and the full
scope of the deception was
revealed - all $64 billion of it.
The SEC had actually investigated Madoff’s
operations back in 1999, but they had
failed to uncover the scheme, even though
that had been Madoff’s tactic for decades.
While most scandals of this nature
don’t have a chance to ever grow to
this size, purely based on
whistle-blowers and eventual suspicions,
Madoff had covered himself in that
department in a way that no one ever had.
He hired his brother as the
Senior Managing Director and
CCO, his niece as the compliance
officer, and his two sons.
Keeping this crime in the family
allowed them all to benefit
hugely from the fraud, and there
was a very low risk of exposure.
Madoff’s son admitted that they
had all been aware of the fraud
for years, and Madoff had
explained the scheme many times.
The revelations that came out in the
years that followed showed the true
face of greed and selfishness that
runs rampant in the Wall Street World.
The fact that a Ponzi
scheme had been able to
pervade the stock market
to such an extreme degree
shocked the world, and
it sent ripples through
global markets from
Tokyo to South Africa.
Due to the many companies
and charities that had
their money being handled
directly by Madoff or
through one of its feeder
companies, many had
to shut down across a
wide berth of industries.
Madoff set a new low for corruption and
greed in the corporate and financial sector
of America, and as such, he received a
landmark prison sentence for his offenses.
Madoff was sentenced to 150 years in
prison, which was the maximum allowable.
He had pleaded guilty to
11 federal crimes, mainly
through his actions in
creating, implementing,
and reaping the benefits of the largest Ponzi
scheme in history for nearly 50 years.
There are dozens of things that could
be learnt from the Madoff Investment
scandal, and this was only a very
superficial summary of what occurred,
but what this particular scheme revealed is
that the corrupt actions of a single man
can shake global markets and industries in
a way that hadn’t previously been seen.
When the accumulated wealth of such
an elite tier of investors and
individuals is threatened, the
ripples that can cause are enormous.
Following the Madoff
scandal, and as a direct
result of those crimes,
the SEC (Securities and
Exchange Commission) has
instituted dozens of policy
changes to keep this from
ever happening again.
The fragility of global markets has been
brought into the spotlight in recent years,
making cases of this scale and
severity a real danger to the
financial security of thousands,
or even millions, of people.
The Future of Corporate Scandal
We noted that trying to
explain the underlying
motivations behind such
unbelievable greed and
corruption is beyond
the scope, but perhaps
we have provided some
insight along the way.
From some of the most trusted
names in investing to real-estate
moguls and oil barons, scandals
don’t have any boundaries.
Throughout history, we have seen
that power begets little more than a
desire for more power, and when you
are at the top of an industry,
there can be billions of dollars in
low-hanging fruit to tempt executives.
Not all the scandals we covered
concerned massive amounts of
money, nor were they limited to the
investment or banking sectors.
We can clearly see that
corporate greed and corruption,
even in terms of philosophies,
are shockingly common.
Even a 150-year old dynasty can’t
be safe, nor is a company dedicated
to helping people rebuild their
lives after traumatic events.
The company’s function and
industry is obviously unimportant;
corruption, fraud, insider
trading, intimidation, bigotry,
and accounting malfeasance can
occur anywhere to anyone.
It only takes a few twisted
minds and some misplaced
numbers to begin the
slow avalanche of fraud.
Many of these scandals began small,
and some of the perpetrators
even admitted that when the
illicit activities began,
they were only intended to be a
temporary fix to an identified problem.
Despite those “honorable” intentions,
fraud, deception, and corruption
form a slippery slope, and just
like the Ponzi scheme of Madoff,
companies are continually
covering their problems with
more lies, using bigger shovels
to dig their own graves.
This was intended to be both
informative and cautionary.
Small infractions may seem harmless,
a “necessary evil” of the
business world, but most great
scandals begin with a single slip,
but there’s no telling how large and
damaging they may eventually become.
In terms of what we’ve
learned about human
nature, the only logical
way to conclude is to
reiterate what we said to
begin this little journey
through the dark side
of corporate culture.
Power and money corrupt, and absolute power
and unlimited money corrupt absolutely.
The problem is, as markets
continue to globalize and
overlap, the temptation of
billions will grow even further,
just as greed for millions
eventually swelled to billions.
Global economies are
powerful by themselves, but
as a cumulative engine
that drives our world,
they represent one of the most important
and essential elements of society.
The actions of a corrupt
few have nearly toppled
stock markets and
countries in the past;
the fear, and it must be present to
some degree, is that the next wave of
creative accounting frauds, investment
deceptions, and corporate corruption
will not only be more clever,
covert, and extensive, but far
more damaging to the stability
of entire nations and regions.
Ongoing regulation and adaptation of global
banking, financial, social, political,
and cultural policies is
essential if we are to
continue the arms race against
corruption and greed.
There will always be those who seek to
take advantage and get ahead in the world;
a similarly responsive and dynamic
response must always be at the ready.
The future depends on it.
