The famous ancient Greek dramatist Sophocles once said he’d rather “fail in honor rather than succeed by fraud.” Sophocles might be irked, if he were alive today, by the many criminal opportunists who fail to see fraud in that way — especially in tough economic times.
From stock swindling to cryptocurrency scams and a whole lot in between, the 2024 business environment is fraught with financial fraudsters who get up every morning plotting how to separate people’s money from their wallets.
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Certainly, there’s no shortage of historical blueprints to supply scam artists with inspiration. Fly-by-nighters and scammers might take a page or two from the playbook of these top financial fraud cases in recent history:
— FTX
— Theranos
— WorldCom
— Waste Management
— Enron
— Ivan Boesky
— Bernie Madoff
— HealthSouth
— Wirecard
FTX
The cryptocurrency trading platform FTX is the latest high-profile financial fraud case laid bare by U.S. regulators. The Nassau, Bahamas-based company was led by founder Sam Bankman-Fried, who now resides in a California prison after being found guilty of seven counts of fraud and conspiracy, including wire fraud, securities fraud and money laundering.
Bankman-Fried launched FTX in May 2019 and was also the driving force behind hedge fund Alameda Research, which he co-founded with business partner Gary Wang. Flush with billions in private financing, Bankman-Fried and other FTX senior executives were 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.
In March 2024, U.S. federal court judge Lewis Kaplan sentenced Bankman-Fried to 25 years in prison, citing the severity of the FTX founder’s actions.
“At the end of the day, the criminal justice system thrives only if it’s seen as fair,” Kaplan noted in sentencing Bankman-Fried. “People need to feel it is fair, or we’re back to trial by combat. The punishment must fit the seriousness of the crime. And this was a serious crime.”
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 during the past two years.
FTX estimated its existing debt to creditors to be about $11.2 billion and has started paying down debt to most FTX investors. The company is reportedly pushing for a liquidation plan to set the stage for cash payments to creditors.
Theranos
In March 2004, Stanford University sophomore Elizabeth Holmes dropped out of school to focus on her new startup, Theranos. The company set out to make blood tests more efficient, accurate and fast. 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, medical testing professionals exposed the company’s highly touted automated compact testing device as unworkable. 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 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 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 June 2024, both Holmes and Balwani appealed to a federal court to overturn their convictions, citing disallowed evidence that would have undermined U.S. government witnesses’ testimony in the original trial. As of Sept. 11, the appeals court has yet to issue a ruling on the matter.
WorldCom
In 2002, WorldCom, the former Clinton, Mississippi-based internet and telecommunications giant, made history for all the wrong reasons. The SEC announced that the company had overstated assets by $11 billion. The SEC investigation resulted in the largest corporate accounting fraud case in history up to that time, with WorldCom settling its case for $2.25 billion.
The company’s chief executive officer, Bernie Ebbers, was held primarily responsible for underreporting company operating costs and expanding revenues with bogus accounting documents. Eventually, Ebbers was sentenced to 25 years for fraud, conspiracy and issuing false documents to government regulators.
Eventually, WorldCom filed for Chapter 11 bankruptcy protection, and Verizon Communications Inc. (ticker: VZ) purchased its dwindling assets in 2006. The WorldCom fraud case and a similar case against Enron led to two big outcomes:
— In July 2002, Congress passed the Sarbanes-Oxley Act, which, among other features, held company executives liable for their company’s financial statements.
— The SOX Act also expanded the role of corporate whistleblowers in uncovering financial scandals, allowing employees to report financial foul play inside the company anonymously.
Waste Management
This Houston, Texas-based trash disposal and clean energy company now holds a sterling reputation as a well-managed, environmentally minded company with a whopping $82 billion market capitalization. (It’s a favorite stock of billionaire Bill Gates, comprising 15.8% of the Bill & Melinda Gates Foundation Trust’s portfolio at last report.)
But Waste Management Inc. (WM) wasn’t always looked on so favorably in the public eye. In 2002, the SEC charged the company with reporting $1.7 billion in false earnings and for falsely reporting plant, property and equipment depreciation figures. The company was charged with defrauding investors out of an estimated $6 billion. WM also settled a $457 million class-action lawsuit in 2001 related to its 1998 merger with USA Waste Services and financial statements in 1999.
In its 2002 filing, the SEC called the Waste Management case “one of the most egregious accounting frauds we have ever seen. For years, these defendants cooked the books, enriched themselves, preserved their jobs and duped unsuspecting shareholders. The defendants’ fraudulent conduct was driven by greed and a desire to retain their corporate positions and status in the business and social communities.”
The SEC also pointed a finger at senior company executives, who reportedly personally profited from the bogus earnings statements. “Our goal is to take the profit out of securities fraud and to prevent fraudsters from serving as officers or directors of public companies,” the agency stated.
Like the WorldCom fiasco, Waste Management’s entanglements led to financial fraud breakthroughs. An outside accounting firm (Arthur Andersen) working for WM was previously forced to pay the biggest fraud penalty levied against an accounting firm, at $7 million.
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. Still, 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 into Enron. Before announcing the bankruptcy, Enron cut 4,000 jobs, and many ex-employees saw their pension plans drained.
Sarbanes-Oxley, which was largely enacted due to the Enron scandal, got a high-profile airing in April 2024, 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.
In June 2024, the Supreme Court ruled that individuals liable for delaying the certification of presidential election results cannot be charged with election interference unless they are found to have tampered with physical records. The high court’s legal interpretation leaned heavily on Section 1512(c) of Sarbanes-Oxley, which laid out obstruction provisions limiting evidence used by government prosecutors in election interference cases.
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. 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 the film character Gordon Gekko, played by 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 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 invented stock trades, fabricated brokerage accounts, and pocketed 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. In June 2009, he was found guilty and sentenced to 150 years in prison.
HealthSouth
Inflated earnings seem to be at the heart of most corporate financial fraud cases, and HealthSouth is a good example.
From 1996 to 2003, the Birmingham, Alabama-based health care services company was accused by the SEC of inflating its earnings by $1.4 billion, primarily to satisfy stockholder expectations. In a March 2023 statement, the agency accused company CEO Richard Scrushy of leading a scheme to “systematically overstate earnings,” which led to false increases in assets totaling $800 million.
As in the WorldCom and Waste Management cases, HealthSouth senior executives were accused of personally profiting from the ill-gotten gains. Scrushy sold about 7.8 million shares of HRC stock while the company was issuing inflated earnings statements. Additionally, the CEO was garnering inflated salary and bonus cash, which the SEC said were based on the company’s fraudulent earnings statements.
Five HealthSouth executives pleaded guilty to fraud, even as Scrushy was cleared of 36 counts of financial fraud. He was ultimately sentenced to nearly seven years in prison for bribing government officials.
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. Marsalek is currently on Europe’s “most wanted” list as an international fugitive, but that didn’t stop him from sending a letter in support of Braun through 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 2024.
In early September, Braun and two additional company executives were ordered by a German court to pay 140 million euros (about $155 million) in legal damages to an Asian business associate tied to a Singapore company loan that a Munich court judge deemed illegitimate.
Meanwhile, Wirecard insolvency administrator Michael Jaffe remains, amid civil litigation against company executives, to claw back the lost billions on behalf of company creditors. In August, German regulators charged two additional Wirecard officials with multiple embezzlement counts, which also must be sorted out in court.
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9 of the Biggest Financial Fraud Cases in Recent History originally appeared on usnews.com
Update 09/11/24: This story was previously published at an earlier date and has been updated with new information.
