Financial fraud is as prevalent today as it was over 100 years ago, when the Italian con artist Charles Ponzi was swindling investors out of their fortunes in one of the earliest high-profile financial scams ever recorded.
With the next recession or economic downturn in the back of investors’ minds, law enforcement officials are on the lookout for financial fraud, as scammers tend to rise in influence during difficult market conditions.
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So, with scandals recently in the news — the FTX fraud case, for starters — let’s look at some of the most infamous financial frauds in recent history and use them as expensive examples of what can go wrong when bad actors get their hands on investors’ money.
— FTX
— Theranos
— Ivan Boesky
— Bernie Madoff
— Wirecard
— Wells Fargo
— Luckin Coffee
— Volkswagen
— Enron
FTX
Sam Bankman-Fried, founder of collapsed cryptocurrency trading platform FTX, was sentenced to 25 years in prison in March after a jury in Manhattan, New York, found him guilty of seven counts of fraud and conspiracy including wire fraud, securities fraud and money laundering. U.S. government prosecutors have called SBF’s downfall one of the biggest financial fraud cases in history. A few of his former collaborators, including business partner Gary Wang, pleaded guilty and cooperated with investigators.
Bankman-Fried launched FTX in May 2019 and was also the driving force behind hedge fund Alameda Research, which he co-founded with Wang. Flush with billions in private financing, Bankman-Fried, along with other FTX senior executives, was accused of using the money to buy plush beach homes in the Caribbean, invest in new ventures, and send money to local and national political causes.
In late 2022, the U.S. Securities and Exchange Commission said Bankman-Fried defrauded his companies’ investors by steering money from FTX into Alameda Research between 2019 and 2022. Both FTX and Alameda went bankrupt, and Bankman-Fried was arrested on fraud charges in the Bahamas.
On May 8, FTX reported in a bankruptcy court filing that most of its customers will get their money back, and some may get about 118% of their claim, though that may be cold comfort for investors who missed out on the surge in crypto prices over the past two years. FTX estimated its debt to creditors at about $11.2 billion.
Theranos
In March 2004, Stanford University sophomore Elizabeth Holmes dropped out of school to focus on her new startup Theranos, which set out to make blood tests more efficient, more accurate and much faster. Five years later, Holmes linked up with a new business partner, Ramesh “Sunny” Balwani, who guaranteed a $10 million loan to Theranos.
The company grew at lightning speed, with Theranos 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 wire fraud and conspiracy charges against the company.
Crushed under the weight of legal costs, Theranos dissolved in June 2018. In November and December 2022, Holmes and Balwani were both found guilty and sentenced to 11 and 12 years in prison, respectively. Holmes and Balwani were ordered in May 2023 to pay restitution of $452 million to fraud victims, with $125 million of that amount owed to media mogul Rupert Murdoch.
Holmes reported to a minimum-security prison in Bryan, Texas, in May 2023 to begin her sentence, which has since been reduced by two years as of May 6.
In January, the Department of Health and Human Services banned Holmes from participating in federal health programs for 90 years, a restriction also previously imposed on Balwani.
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Ivan Boesky
Notorious investor Ivan Boesky died in California on May 20 at age 87 after spending the latter part of his life mostly out of the public eye, a stark contrast to his earlier years. The 1980s were fraught with financial fraud, and Boesky was among the first Wall Street traders to go to prison on insider trading charges. Boesky honed his craft that decade in the lucrative arbitrage trading market.
Nicknamed “Ivan the Terrible,” Boesky made over $200 million investing in corporate takeovers and company mergers. In 1985, the SEC charged Boesky with illegally profiting from insider trading by acquiring stocks and futures in companies based on tips from company insiders.
A year later Boesky was found guilty and, based on a plea agreement that involved Boesky taping phone calls with other insider trading conspirators, including Drexel Burnham Lambert’s junk bond king Michael Milken, Ivan the Terrible was sentenced to three and a half years in prison. He was also slapped with a $100 million fine and ordered never to work in the securities industry again.
Boesky is said to have inspired aspects of film character Gordon Gekko, played by actor Michael Douglas in the 1987 movie “Wall Street.”
Bernie Madoff
Former New York City fund manager Bernie Madoff is long gone, having passed away in prison in April 2021 at the age of 82. But the Madoff story was revived in 2023 with the successful Netflix documentary “The Monster of Wall Street,” which retold the tale of the mastermind behind the biggest Ponzi scheme ever recorded.
Madoff, a former chair of the Nasdaq with close ties to government financial regulators, was already a Wall Street legend in the 1980s and 1990s. His company, Bernard L. Madoff Investment Securities LLC, was the sixth-largest market maker in S&P 500 stocks. Yet over the course of 17 years, Madoff, assisted by company managers and back office staff, ran a massive Ponzi scheme that promised investors eye-popping returns.
Instead, Madoff and his crew were inventing stock trades and fabricating brokerage accounts, and pocketing the investment money. By 2008, at the height of the Great Recession, Madoff’s luck ran out, and a run on deposits and the resulting investigation revealed that his firm stole over $19 billion from 40,000 investors.
Madoff was arrested and charged with 11 counts of fraud, and he was found guilty and sentenced to 150 years in prison in June 2009.
Wirecard
On Dec. 8, 2022, 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 faces multiple years in prison if convicted, though former manager and chief witness for the prosecution Oliver Bellenhaus was released from jail in February.
Another former Wirecard executive, Jan Marsalek, is reportedly hiding out in Russia and is suspected of working with Russian intelligence, according to the Financial Times. Currently, Marsalek is on Europe’s “most wanted” list as an international fugitive, but that didn’t stop him from sending a letter in support of Braun by way of his lawyer in July 2023.
Wirecard found itself in the fraud spotlight when it declared insolvency in 2020 and regulators found that 1.9 billion euros ($2.1 billion) was missing from the company’s accounts, amid allegations from German regulators that the money never existed. Braun was arrested and Marsalek fled the country, where trial proceedings are expected to run at least until the end of the year.
Investors can only watch as the fraud trial plays out, with little hope of ever recovering their money.
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Wells Fargo
This mega-bank just can’t seem to stay out of regulatory trouble. Wells Fargo & Co. (ticker: WFC) agreed in May 2023 to pay $1 billion to settle a class action lawsuit that accused it of defrauding investors about the progress it had made toward cleaning up its act after a 2016 fake-accounts scandal. In February of this year, the Biden administration relaxed some of the restrictions on Wells Fargo that were put in place after the fiasco. But just a couple of weeks later, another class action suit for $5 million was filed against the bank alleging that it has not taken enough action to help customers hurt by the case.
In 2016, the Consumer Financial Protection Bureau slapped a $100 million fine on Wells Fargo, on top of the SEC’s $3 billion in fines against the bank, as officials stated that overworked staffers were incentivized to open approximately 2 million fake accounts under customers’ names. The move was eventually blamed on senior management and boosted bank profits for the short term. Yet it damaged the company’s brand and alienated customers over the long term.
In March 2023, the former head of Wells Fargo’s retail bank and small business lending, Carrie Tolstedt, the only executive to face criminal charges in the scandal, pleaded guilty to an obstruction charge. On Sept. 15, she received three years of probation and a $100,000 fine, but no prison time.
Wells Fargo also was ordered to pay $3.7 billion in December 2022 due to “illegal activity” involving the mismanagement of 16 million client accounts. According to the CFPB, Wells Fargo “repeatedly misapplied loan payments, wrongfully foreclosed on homes and illegally repossessed vehicles, incorrectly assessed fees and interest, and charged surprise overdraft fees.”
Luckin Coffee
China-based Luckin Coffee Inc. (OTC: LKNCY) appears to be a turnaround story after years of being immersed in a legal quagmire stemming from a 2020 fake revenue scandal.
The coffee giant gained visibility with a 2019 initial public offering that saw Luckin’s stock rise from $17 per share to $50 in a year’s time. In early 2020, however, 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. On June 26, 2020, Luckin’s shares closed at $1.38.
Investigators also found that Luckin management had fraudulently engineered the purchase of $140 million in raw materials from suppliers. Shortly afterward, the company’s stock was delisted from the Nasdaq and the senior executives involved in the scandal were fired.
Now back in business, under new management and trading over the counter, Luckin is the largest coffee retailer in China, well ahead of Starbucks. Its first-quarter revenue increased 41.5% year over year, and it opened 2,342 new stores in Q1 alone. Luckin’s monthly customers also increased 103% over the same period in 2023. Though nothing is guaranteed, a re-listing on the Nasdaq is also reportedly in play for Luckin, after the company convinces regulators it’s back on track, ethically and legally.
Volkswagen
This brand-name international auto manufacturer is coming off a tough year for global economies, but Volkswagen AG (OTC: VWAGY) is pulling clear of its 2015 emission standards debacle. However, residual fumes from the scandal remain, as Volkswagen settled with Italian car owners for $54 million as recently as May 15 to put their “dieselgate” legal dispute to rest.
In 2015, 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 were 40 times higher than U.S. legal standards allowed. When U.S. regulators discovered the plot, Volkswagen had to recall approximately 480,000 vehicles and fork over $30 billion in fines and penalties.
In recent years, Volkswagen’s new sustainability council has steered the company toward a decarbonization and e-vehicle strategy that is beginning to pay dividends, with dieselgate fading in the rearview mirror.
Enron
One 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 former dot-com supernova 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 finance executive, warned CEO Ken Lay that a massive accounting scandal was brewing that could take down the entire company.
Amid SEC inquiries into its finances, in November 2001 Enron admitted it overstated profits by nearly $600 million. Within roughly two months, the company declared bankruptcy and the Justice Department launched a criminal investigation of Enron. Before announcing the bankruptcy, Enron cut 4,000 jobs, and many ex-employees saw their pension plans drained.
One outcome of the Enron saga was the passage of the Sarbanes-Oxley Act of 2002, which established stricter accounting rules for public companies. Sarbanes-Oxley got a high-profile airing in April, after federal prosecutors charged defendants in the Jan. 6 assault on the Capitol with violating the act by corruptly obstructing an “official proceeding,” according to Bloomberg Law. The Supreme Court is weighing whether that application of the law is an overreach, and its decision is expected in July.
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9 of the Biggest Financial Fraud Cases in History originally appeared on usnews.com
Update 05/21/24: This story was previously published at an earlier date and has been updated with new information.
