Unfortunately, the reality of investing and business is ending in financial fraud and scandals. As a result, the big investments become worthless so quickly. Investors should be aware that there are companies and even individuals around who are scams and fraudsters.
So, what are the biggest financial frauds everyone will never forget? Check these out.
3. Enron Scandal
This scandal is probably the most famous financial scandal of all time. It perpetrated the biggest fraud in accounting history. So, what was Enron? What happened?
Well, Enron was a utility and energy-trading company that was based in Texas. It started when the Executives of Enron Company integrated accounting practices that falsely increased revenues.
For a time, Enron made it to the 7th largest company in the U.S., And when the fraud came to light, the company immediately unravelled and later filed bankruptcy in 2001.
The company provides energy and utility services worldwide, and the company divided its operations into most major departments such as:
- Enron Online
- Enron Energy Services
- Enron Broadband Services
- Enron Transportation Services
Through leveraging special purpose entities and vehicles, loopholes in financial reporting, and market-to-market accounting, Enron became among the most successful companies in the world.
Let’s Understand more About Enron.
The company was established in 1986 which followed the merger between Omaha-based InterNorth Inc. and Houston Natural Gas. When the merger occurred, Kenneth Lay, became the chair and CEO.
He immediately rebranded the Enron into an energy supplier and trader. With that, the deregulation of energy markets has permittedF companies to put their bets on the prices in the future.
The Scandal
Even though Enron achieved operational success in the 90s, the company’s misdeeds were revealed in 2001. Before the emerge, Enron was fabricating its financial records and falsifying the company’s success. Just imagine that they have a good reputation in the eyes of the people, yet they are all lies.
In February 2001, Kenneth Lay stepped down as Enron’s CEO, and Jeffrey Skilling took over. About six months later, Jeffrey Skilling stepped down, and Lay took over the role once again.
In total, it was found out that Lay sold more than 350,000 shares of Enron and proceeds of more than $20 million. With that, the former Vice President of Enron expressed her concerns about Enron’s accounting practices. She discussed her concerns with Lay, where she showed a 6-page report of the matters.
The concerns were actually raised to law firms outside other than Enron’s accounting firm. Both Watkins and Lay agreed that there were no issues that need to be discussed.
But then, in October 2001, Enron reported a 3rd quarter loss of about $618 million. According to Enron, they will restate the financial statements and correct accounting violations from the year 1997 to 2000.
The Bankruptcy
It was November of 2001 when credit rating agencies decreased the credit rating of Enron to junk. This was the company’s path towards bankruptcy. Enron in Europe was the first to file for bankruptcy, and the rest of the people involved followed suit before 2001 ended.
In 2004, new BODs sued about 11 financial institutions engaged in covering up the fraudulent practices of the executives of Enron. Kenneth Lay claimed to be not guilty to 11 criminal charges but was still convicted of 6 counts of wire fraud and securities.
Jeff Skilling was convicted on 19 of the 28 counts of the securities fraud, other than insider trading charges. Andy Fastow and Lea, his wife, also pleaded guilty to insider trading, money laundering, conspiracy and fraud.
With that, Enron went to great lengths to improve its financial statements and cover its fraudulent activities. As a result, it became one of the world’s biggest financial frauds that people will never forget.
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2. Ponzi Scheme
You probably heard recently about the “Ponzi Schemes” circulating the internet.
Well, it started with Charles Ponzi’s scheme, which was, by no means, the biggest financial scandal in history. It was not even the first, and Ponzi was known as a con artist right before the scheme made him popular.
However, it’s worth mentioning because this scandal was a big issue when other similar schemes were known as Ponzi schemes.
It was in 1919 when Charles Ponzi came up with a plan to trade reply coupons internationally. These coupons can be exchanged for postage stamps. Ponzi believed that he could buy discounted IRCs in Europe and exchange them at face value in just 90 days.
The Ponzi Scheme immediately became popular, and there Charles was able to raise more and more capital. He attracted many people to invest millions of dollars a day. But in reality, the scheme quickly became too good to be true.
A big amount of money flowed into the scheme for his extravagant lifestyle. He made people believe that most money was re-invested in the scheme. Even Ponzi believed he could easily pay investors for their returns, which came from new investors.
However, the scheme collapsed within a year when a series of articles in the Boston Post caused investors to demand to get back their money.
How did Ponzi Scheme End?
Found guilty, Ponzi ended up serving his time in prison. Yet, again, he launched another scam when he was released. There, the Ponzi scheme became known and became a term for those financial scams.
The Ponzi and pyramiding schemes are illegal in most countries. These schemes both pay returns to the investors using new investors’ capital. Unfortunately, both of these schemes are not sustainable.
The only difference is that the Ponzi scheme only comes with one central operator, who recruits investors. On the other hand, the pyramid scheme is when investors are encouraged to recruit new investors. Still, one of the biggest scams in history.
1. 2008 Global Financial Crisis
The Global Financial Crisis in 2008 was regarded as the biggest economic crisis. However, though it’s not counted as a financial scandal, the cause of the crisis is a very long list of unethical behaviour, corporate fraud, and conflicts of interest.
It started when the issuers paid agencies to give risky securities investment and grade credit ratings. It presented a massive conflict of interest as agencies had the financial incentive to look at the security risk being carried out.
Mortgage originators encouraged home buyers to exaggerate their income and assets to guarantee that mortgage applications were approved. They even used aggressive sales strategies to sell mortgages.
The banks were later found to be illegally foreclosing the properties. Banks even sold securities to investors that they knew to be risky. Also, in some cases, banks were even selling short the same securities they promoted to the fund managers.
The banks even came up with synthetic products to assist hedge funds in betting against the mortgage market. And then the Lehman Brothers were the big catalysts for the crisis. They filed for bankruptcy when it could not be bailed out.
And among the most factors that contributed to the bank’s demise was the process of valuing repurchase agreements on the balance sheet.
There was a loophole in the accounting standard which allowed them to use the repurchase agreements and hide the real extent of debt and leverage. All companies with ethical issues contributed to the scandal – later known as the biggest recession and stock market crash.
Most people considered this crisis as the black swan event in history. However, for those who watch closely, there will be plenty of warning signs and red flags.
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Wrapping Up
No matter how big or small the amount involved in a financial scandal, still, it’s a fraud. These top 3 biggest financial frauds may serve as a lesson to all people to be meticulous in investing in a company. Beware of red flags, as business and financial scandals usually come out of the blue.
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