How Five Stock Market Scams Shook the Industry


Director Petraeus rings opening bell at NY Stock Exchange - Flickr - The Central Intelligence AgencyNew York Stock Exchange during opening bell (Wikimedia)

Investing in the stock market It is like a double-edged sword. You can earn high returns, but you also can sustain loses as well. It can prove to be a precipitous curve if brokers and investors are not careful. Smart investments can lead to significant boons, but audacious moves can result in the funds being erased. And this is just when you are investing in legitimate enterprises

Naturally, there are cases where investors have found remarkable success in the stock market but some let greed ruin their decisions and their livelihoods. Here we will highlight a handful of such individuals and how they caved into temptation and the consequences were dire.

Bernard Madoff

Our first case began in 1989 and lasted nearly two decades! It involved ex NASDAQ non-executive chairman Bernard Madoff, who orchestrated an elaborate Ponzi scheme that scammed investors and entrepreneurs out of a whopping 65 billion dollars. Even to this day, Madoff’s antics are considered the largest financial fraud case in history.

Apparently, the ex-chairman encouraged investors to make low-risk contributions which would lead to high rewards at a later stage. This was a classic, tried and tested method that Bernard Madoff used to his unfair and illegal advantage. His idea adhered to the too good to be true adage and it would take years before he was apprehended.

The next phase of his meticulous plan was to deliver intricate statements that would guise his fraudulent activity and when the mortgage crisis hit and the SEC started to investigate deeper into investment companies, suspicion began to materialize with Madoff’s investment strategy. Eventually, the investments began to yield negative results and more than 9,000 victims filed complaints citing losses they had suffered, which subsequently led to deeper investigations.

Madoff was eventually sentenced to 150 years in prison on a staggering 11 counts of fraud, theft and money laundering. The incident shocked the stock market and had grave consequences for Madoff and his family as well, as virtually all of their assets were confiscated by the federal government, including his elaborate condo in Manhattan. The assets were sold and many of the victims received compensation from this fund.

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Barry Minkow

The next case originated more than 30 years ago, in 1982 to be precise. At the helm was a 15-year-old boy named Barry Minkow. He devised a carpet cleaning endeavor called ZZZZ Best Inc from his parent’s garage in San Fernando.

His emphatic success shoved the unsuspecting and unassuming teenager into the limelight. A few years later, Minkow listed his enterprise on the stock market where it’s estimated worth rose to 280 million dollars on NASDAQ the following year.

However, the issue at the core of his company was that the financing was executed illegally. Minkow employed tactics such as fraudulent credit card charges and seeking loans from reputed crime syndicates to fund his labor of love.

Furthermore, Barry Minkow even stole from his family and falsified more than 10,000 sales receipts and counterfeit documents. These methods were unsustainable and untenable which is why ZZZZ Best began to unravel in 1987. The former superstar was on a steep downward trajectory that included being condemned for 57 distinct felonies and imprisonment for 25 years. To add insult to injury, Minkow was adjudicated to pay 26 million dollars as indemnity. Although there was no silver lining, Minkow’s scheme became an epitome of quintessential accounting fraud.

Bernard Ebbers

Another case that Wall Street took notice of was that of Bernard Ebbers. This particular case transpired in the 90’s when Ebbers rose to prominence as the architect of turning a small telephone business based in Mississippi into MCI, which is recognized as a global telecom giant.

Unfortunately, in a bid to keep his company’s share price high, the Canadian entrepreneur was facing extraordinary pressure. Eventually, stock prices of MCI fell at the turn of the century, which meant that Ebbers’ shares plummeted and were marked as collateral at 400 million dollars.

It was later determined that Ebbers had manipulated the book in order to achieve the company’s target. Once a Wall Street favorite, Ebbers was sentenced to 25 years behind bars as punishment for playing his part in the 11 billion dollar scam. CBS described the incident as the biggest corporate fraud in United States history.

Andrew Fastow

Yet another executive who got his hands dirty, much to the chagrin of Wall Street was Andrew Fastow. The former Chief Financial Officer (CFO) of Texan giant Enron was at the center of the company’s demise. Ultimately, Fastow was held culpable for the stunning failure of the company he was spearheading.

In 2001, Fastow and other high ranking officers of Enron were embroiled in a web of lies which involved oil companies and forged documents, in an effort to depict Enron as a successful, profit-making exercise. In reality, though, the opposite was true. Once Enron imploded, the firm’s share price fell more than 90 dollars to a bewildering 70 cents!

Furthermore, Enron’s auditors, an accounting firm named Arthur Andersen, also capitulated in the wake of the former’s downfall. Although it was once recognized as a top five accounting firm in the world, Arthur Andersen was responsible for destroying important documents, which led to a reputational and financial loss for the company. Fastow faced an indictment which included 78 charges such as fraud, money laundering, and conspiracy.

Dennis Kozlowski

Kozlowski, who was assigned the role of Chief Executive Officer at Tyco International in 1992, was at the center of a conspiracy. The perception of Tyco was that it was a financially stable venture. The stark reality was considerably different though. Kozlowski was involved in a skimming exercise which included unapproved stock sales and unauthorized loans, totaling 450 million and 170 million dollars respectively.

This resulted in Kozlowski developing an incomparable lifestyle, which included an apartment complex worth 30 million dollars and a 2 million dollar birthday party for his spouse. Tyco ended up footing the bill for these lavish purchases.

In early 2002, Kozlowski was ousted as a fraud. This meant Tyco felt the impact as well. Share price plummeted roughly 80% in a few weeks as more incriminating details emerged. Finally, Kozlowski and his associates were sent to jail for 25 years as recompense for their fraudulent activity.

Protect Yourself

Investing in the stock market can be a risky venture by itself, even without getting innocently caught in frauds and scams, as this industry is ripe for the picking by criminally minded individuals; however, the SEC and their strict regulations don't make it easier for them to accomplish their tasks successfully. A good rule of thumb is to research the company you are going to invest with thoroughly. In addition, don't put your money in just one company or fund. Diversify instead and balance your portfolio with other financial assets such as real estate and/or precious metals. This will help balance your portfolio should the stock market take a hit.


Posted On July 7, 2018