9 Biggest Financial Fraud Cases in Recent History

These major financial fraud cases rocked the corporate world.

As if the past year wasn’t tough enough for investors, 2022 has been a cataclysmic year in global corporate finance, with the collapse of the cryptocurrency exchange firm FTX and the legal troubles of its CEO, Sam Bankman-Fried, making headlines. This year also brought the final court sentencing of executives at Theranos, the health technology company investigated for fraud by U.S. state and federal agencies. Investors lost a fortune in both the FTX and Theranos fallouts, and the cases illustrate the due diligence investors need to apply to the companies they favor with their portfolio investments. After all, the investment landscape is littered with corporate fraud scandals that have separated investors from their money. As a “lessons learned” exercise, let’s add FTX and Theranos to a list no investor wants to see in their portfolio: the nine biggest corporate fraud cases in the last 40 years.

FTX

FTX launched as a trading platform for crypto investors in May 2019, with Bankman-Fried as its majority owner. Known universally now as SBF, Bankman-Fried had previously opened a hedge fund with a friend, Gary Wang, called Alameda Research LLC. In late 2022, the U.S. Securities and Exchange Commission accused SBF of defrauding his companies’ investors by steering money from FTX into Alameda Research between 2019 and 2022. SBF and company executives allegedly used the cash to purchase homes in the Bahamas, invest in other companies and fund favored political causes. When crypto assets took a precipitous plunge in 2022, the cash spigot went dry at both FTX and Alameda — with the latter owing FTX customers about $8 billion, according to the Commodity Futures Trading Commission — and federal prosecutors stepped in to issue fraud charges. By November, FTX and Alameda went bankrupt, and SBF was arrested on Dec. 12 in the Bahamas. A judge on Dec. 21 approved the transfer of SBF from the Bahamas to the U.S. to face fraud and money laundering charges, among others. New FTX CEO John Ray III, who led the Enron liquidation, said, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

Theranos

Initially heralded as an innovative health care technology company, Theranos opened for business in 2003, with 19-year-old founder Elizabeth Holmes at the helm and a commitment to making the common blood test more efficient, more accurate and much faster. Flush with $700 million in equity investments, Theranos was valued at $10 billion by 2014. By 2015, however, the company’s highly touted automated compact testing device was exposed as unworkable by medical testing professionals. Soon after, federal and state regulators filed fraud charges against the company. Crushed under the weight of legal costs, Theranos dissolved in 2018. Court battles ensued, and in November and December 2022, Holmes and the company’s former president, Ramesh “Sunny” Balwani, were both found guilty and sentenced to more than 11 and 12 years in prison, respectively. Top-tier investors such as Rupert Murdoch, Carlos Slim and Betsy DeVos lost millions from Theranos investments, with little hope of getting the money back.

Wirecard

On Dec. 8, executives at Wirecard, a Munich, Germany-based electronic payments firm, went on trial in what media outlets called the biggest corporate fraud case in German history. Former CEO Markus Braun and two senior executives, Oliver Bellenhaus and Stephan von Erffa, all face multiple years in prison if convicted. Another highly placed Wirecard executive, Jan Marsalek, is on the run after leaving the country and is reportedly hiding out in Russia. Currently, Marsalek is atop Germany’s “most wanted” list. Wirecard found itself in the spotlight when it declared insolvency in 2020 after authorities discovered $1.9 billion was missing from the company’s accounts amid allegations from German regulators that the money never existed at all. Consequently, Braun was arrested and Marsalek fled the country.

Luckin Coffee

China-based Luckin Coffee seems to be on the rebound in 2022 after three years immersed in a legal quagmire stemming from a 2020 fake revenue scandal. Following a monster 2019 initial public offering that saw Luckin Coffee’s stock rise from $20 per share to $50 in a year’s time, in early 2020 internal financial analysts discovered the company’s growth was artificially inflated due to $310 million in bulk sales to businesses linked to the company’s chairman. Investigators also found that Luckin management had fraudulently engineered the purchase of $140 million in raw materials from suppliers. When those investigations became public, investors fled and the company share price slid. With the company delisted from Nasdaq and the senior executives involved in the scandal out of the picture, Luckin Coffee is trading over the counter. Its company stock price is up to $24.24 as of Dec. 20, its most recent quarterly revenue jumped 65.7% year over year, and same-store sales growth in the third quarter was 19.4%.

Wells Fargo

This mega-bank just can’t seem to stay out of regulatory trouble. On Dec. 20, Wells Fargo was ordered to pay $3.7 billion due to “illegal activity” involving the mismanagement of 16 million client accounts. According to the Consumer Financial Protection Bureau, Wells Fargo “repeatedly misapplied loan payments, wrongfully foreclosed on homes and illegally repossessed vehicles, incorrectly assessed fees and interest, charged surprise overdraft fees.” In 2016, the CFPB slapped a $100 million fine on Wells Fargo and the SEC eventually issued $3 billion in fines of its own, after overworked staffers were incentivized to open approximately 2 million fake accounts under customers’ names. The move, eventually blamed on senior management, boosted bank profits for the short term, but damaged the company’s brand and alienated customers over the long term.

Volkswagen

This brand-name global auto manufacturer is closing out a difficult year as global economies fall into recession. At least Volkswagen is well clear of its 2015 emission standards fiasco. That year, company engineers installed a special type of software in 11 million of its diesel-powered cars to detect when cars were being tested for emissions and change their results. The Volkswagen vehicles’ actual nitrogen oxide emissions stood 40 times higher than U.S. legal standards allowed. When U.S. regulators discovered the “Diesel-gate” plot, Volkswagen had to recall approximately 480,000 vehicles and fork over $30 billion in fines and penalties. In the past six years, Volkswagen’s new Sustainability Council has steered the company toward a decarbonization and e-vehicle strategy that is beginning to pay dividends, putting Dieselgate in the rearview mirror.

Enron

High on the list of the largest corporate fraud cases of the 21st century is Enron, dubbed “America’s Most Innovative Company” by Fortune magazine every year from 1996 to 2001. Formed in 1985, the now defunct dot-com darling made a fortune trading natural gas and other commodities and even rolled out its own digital commodity trading platform in 1999. In August 2000, Enron shares reached a high of $90, but only a year later, Sherron Watkins, an Enron vice president, sent an anonymous warning to CEO Ken Lay that a massive accounting scandal was brewing that could take down the entire company. In short order, Enron admitted that it overstated profits by $600 million and the SEC announced a full investigation into Enron’s finances. Enron’s stock eventually fell to a few cents per share, and on Dec. 2, 2001, the company declared bankruptcy. Before that announcement, Enron cut 4,000 jobs, and many ex-employees saw their pension plans get drained. The one upside to the Enron saga was the passage of the Sarbanes-Oxley Act in 2002, which established stricter accounting rules for public companies.

WorldCom

In 1997, WorldCom merged with MCI Communications to become the second-largest telecommunications company in America, but WorldCom had even more lofty plans in mind. In 1999, it tried to take over Sprint in what would have been the largest merger in history at the time. Regulators blocked the merger, 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. His ruse was discovered in June 2002, and the company entered bankruptcy by July. Ebbers — who died in February 2020 — received a 25-year prison sentence.

ZZZZ Best

In 1982, 15-year-old Barry Minkow founded the 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 a catch, though: 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 completed. Forty years later, Minkow is finally out of prison, which included five additional years after being convicted of a separate short-selling investment scheme. The streaming docuseries “King of the Con,” based on Minkow’s story, was released on Discovery+ in January 2022.

9 of the biggest corporate fraud cases in history:

— FTX

— Theranos

— Wirecard

— Luckin Coffee

— Wells Fargo

— Volkswagon

— Enron

— WorldCom

— ZZZZ Best

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9 Biggest Financial Fraud Cases in Recent History originally appeared on usnews.com

Update 12/21/22: This story was published at an earlier date and has been updated with new information.

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