7 of the Biggest Corporate Frauds in History

Investors can learn something from these fraud cases.

Perhaps your company can’t cover the loans you took out in order to get things up and running. Maybe a competitor is undercutting you, or customers just aren’t as interested as they once were. You’re running out of options, but there’s still one on the table: fraud. Corporate fraud happens all the time. When it’s revealed, it can have severe consequences — and when it happens with the biggest companies on the market, the consequences can be catastrophic. The history of white-collar fraud didn’t begin with Charles Ponzi’s infamous scheming in the 1920s but can probably be traced back to the beginning of corporations themselves. Here are seven of the biggest corporate frauds of the last four decades, several of which contain lessons for the wary investor.

Wirecard

The latest addition to a long and storied history of corporate fraud is Wirecard, a German electronic payments company that appeared to grow steadily over the last 20 years. But all was not as it seemed at Wirecard, as auditors discovered a few weeks ago when they noticed a roughly $2 billion hole in Wirecard’s books. It turns out that money simply doesn’t exist, and Wirecard had likely been falsifying the financials it reported to shareholders for years. On June 23, CEO Markus Braun was arrested. The company declared insolvency two days later, and its chief operating officer is still missing. The only good thing about Wirecard’s spectacular fall from grace is the likelihood that the German government will take a hard look at corporate governance and strengthen financial regulations from here on out.

Luckin Coffee

Another recent scandal comes from China, where coffee company Luckin Coffee had rocketed from an initial public offering price of just more than $20 in May 2019 to highs of more than $50 a share by January 2020. Then it was revealed that the high-growth upstart wasn’t really growing at all — in fact, on April 2, an internal investigation revealed the company had fabricated approximately $310 million in sales during 2019 by selling vouchers for coffee in bulk to companies with ties to its chairman. At the same time, the company allegedly created a fictitious employee to purchase about $140 million in raw materials from suppliers. The one-two punch sent shares of Luckin plummeting to a low of $1.39 almost exactly a year to the day after the company went public, and shares remain depressed as executives struggle to right the ship.

Wells Fargo (ticker: WFC)

While most of the fraud on this list was committed by C-suite executives, the case of Wells Fargo is a bit different. To be fair, it’s clearly the fault of company higher-ups that employees at Wells Fargo were given impossibly high sales goals that rose like clockwork from 2002 to 2016. But to meet these quotas, employees at the bank were incentivized to open fake accounts under customers’ names — if a customer opened a savings account at the bank, employees might surreptitiously open a credit card under that customer’s name as well. Short-term profits soared thanks to more than 2 million of these fake accounts, but it wasn’t worth it in the long run. Wells Fargo will pay $3 billion in fines to the U.S. Securities and Exchange Commission and Department of Justice, and who knows when customers will be able to fully trust the bank again.

Volkswagen

Governments around the world test cars to make sure vehicles meet emissions standards. Adhering to these standards can be costly for automakers, so Volkswagen came up with a clever idea: The company put a special type of software in about 11 million of its diesel-powered cars to detect when those cars were being tested for emissions and change their results. But when this so-called “diesel dupe” was discovered in September 2015, it wound up being far more costly for the company than simply following the rules. In the U.S. alone, Volkswagen was forced to recall more than 480,000 vehicles and pay about $25 billion in fines. CEO Martin Winterkorn resigned as a result, and the company continues to face financial burdens and ongoing litigation risk for its actions to this day.

Enron

Named “America’s Most Innovative Company” by Fortune Magazine every year from 1996 to 2001 (the year it went bankrupt), Enron rode the dot-com wave to superstar status and became the seventh-largest company in the U.S. — at least on paper. In reality, the company used mark-to-market accounting to make itself appear more profitable than it actually was, while simultaneously hiding any losses in shell companies. When the truth was discovered, Enron’s stock plummeted from $90 per share to 65 cents in four months, before dropping to a few cents per share. Enron entered bankruptcy on Dec. 2, 2001. Several Enron executives were charged with varying financial crimes, and accounting firm Arthur Andersen (Enron’s auditor) imploded on itself. The upside was the passage of the Sarbanes-Oxley Act in 2002, which established stricter accounting rules for public companies and harsher penalties for those breaking them.

WorldCom

In 1997, WorldCom merged with MCI Communications to become the second-largest telecommunications company in America; but WorldCom’s appetite wasn’t yet diminished. In 1999, it tried to take over Sprint in what would have been the largest merger in history at the time. The merger was blocked by regulators, stalling out WorldCom’s shares — which was bad news for CEO Bernie Ebbers, who had been funding his side businesses with more than $365 million in loans backed by WorldCom stock. As WorldCom shares fell, Ebbers grew more desperate, and in 2001, he began to record company expenses as capital expenditures to the tune of $3.8 billion. This little trick was discovered in June 2002, and the company entered bankruptcy by July, while Ebbers — who died in February of this year — would head to jail on a 25-year sentence.

ZZZZ Best

In 1982, 15-year-old Barry Minkow founded carpet-cleaning company ZZZZ Best in his family’s garage. By the time he was 21, Minkow had taken his fledgling company public. There was just one problem: Minkow made up more than 90% of the company’s customers, and he had to take money from new investors to pay off older investors in a classic Ponzi scheme. He nearly got away with it, too. ZZZZ Best was poised to acquire its biggest rival, KeyServ — which would’ve meant no more scheme and no more fake customers — but he was exposed before the deal was sealed. ZZZZ Best, once valued at $300 million, had completely collapsed a mere seven months after going public.

Seven of the biggest corporate fraud cases in history:

— Wirecard

— Luckin Coffee

— Wells Fargo (WFC)

— Volkswagen

— Enron

— WorldCom

— ZZZZ Best

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