Corporate Scandals

- That made news

 Medici Bank
The House of Medici was a Italian banking family, political dynasty and
later royal house that first began to gather prominence under Cosimo
de Medici in the Republic of Florence during late 14 th century.
The family produced four popes for the catholic church between 1513
and 1610.
The Medici bank was one of the most prosperous and most respected
institutions in Europe.
They were one of the wealthiest families on Europe at that time.
A notable contribution to eh profession of accounting in terms of
general ledger and double entry system for tracking debits and credits.
18th century the family ran up large debts due to familys profligate
spending, extravagant lifestyle and failures to control the managers,
their bank went insolvent.
 Mississippi Company (1720)
John Lawwas aScottisheconomist who believed that money was only a means
ofexchangethat did not constitutewealthin itself and that national wealth depended
on trade.
He was appointed Controller General of Finances of France under theDuke of Orleans,
regent for the youthful king,Louis XV.
In 1716 Law established theBanque Gnralein France, a private bank, but three-
quarters of the capital consisted of government bills and government-accepted notes,
effectively the firstcentral bank
He was responsible for theMississippi Companybubble and a chaotic economic
collapse in France,
Law was agamblerand a brilliant mental calculator. He was known to win card games
by mentally calculating theodds. He originated economic ideas such as "The Scarcity
Theory of Value" and the "real bills doctrine". Laws views held that money creation will
stimulate the economy, that paper money is preferable to metallic money, and that
shares are a superior form of money since they pay dividends.
John Lawconvinced the French government to support a monopoly trade venture
 South Sea Company (1720)
After theWar of Spanish Succession, the UK signed theTreaty of Utrecht1713
with Spain, ostensibly allowing it to trade in the seas nearSouth America.
In fact, barely any trade took place as Spain renounced the Treaty, however
this was concealed on the UK stock market.
A speculative bubble saw the share price reach over 1000 in August 1720,
but then crash in September.
A Parliamentary inquiry revealed fraud among members of the government,
including theToryChancellor of the ExchequerJohn Aislabie, who was sent to
prison.
 Overend, Gurney & Co (1866)
Samuel Gurneywas anEnglishbankerandphilanthropistfrom theGurney family.
The wealth that came to Gurney from his father-in-law, as well as that bequeathed to him
by his father
Helped him to rapid progress as a partner in Richardson & Overend, with which firm he had
become connected in 1807.
This business had been founded in 1800 by Thomas Richardson, clerk to a London bill-
discounter, and John Overend, chief clerk in the bank of Smith, Payne & Company
atNottingham, the Gurneys supplying the capital.
On his father's death in 1809, Samuel Gurney assumed the control of theNorwich bank. At
the same time, he took control of Richardson & Overend.
Very soon after his entering the firm, it began to assume gigantic proportions, and it was
for about forty years the largestdiscounting housein the world.
At the time of Gurney's death in 1856, it was calculated that this house held deposits
amounting to eight million pounds sterling.
AfterSamuel Gurney's retirement, the bank invested heavily in railway stocks. It went
public in 1865, but was badly affected by a general fall in stock prices. TheBank of
Englandrefused to advance money, and it collapsed. The directors were sued, but
exonerated from fraud.
 Friedrick Krupp AG (1873)

Over exposure and unplanned expansion

Krupps business over expanded

Took a loan of 30m Mark from PreuBische Bank the bank
of Prussia.
Defaulted and collapsed
 Dana bank (1931)

At the start of theGreat Depression, after rumours

about the solvency of the Norddeutsche Wollkmmerei
& Kammgarnspinnerei, there was abank run, and
Danatbank was forced into insolvency.
Allied Crude Vegetable Oil Refining Corp
(1963)
Anthony "Tino" De Angelisis a New Jerseybased commodities
trader who bought and soldvegetable oilfuturesaround the world. In
1962 he started tocorner the marketforsoybean oil, used insalad
dressing.
In the aftermath, investors (51 banks) learned that he had bilked them
out of about $175 million in total ($1.2 billion in year 2000 dollars).
The scandal is named after De Angelis's company,Allied Crude
Vegetable Oil Refining Corporation.
Commodities tradeTino De Angelisdefrauded clients, including
theBank of Americainto thinking he was tradingvegetable oil. He got
loans and made money using the oil as collateral. He showed
inspectors tankers of water, with a bit of oil on the surface. When the
fraud was exposed, the business collapsed.
Herstatt Bank (1974)

Settlement risk. Counterparty banks did not receive

their USD payments, where Herstatt had received DEM
earlier, prior to government forced liquidation.
Texaco (1987)
After a legal battle withPennzoil, whereby it was found
to owe a debt of $10.5 bn, Texaco went into bankruptcy.
It was later resurrected and taken over byChevron.
Qintex (1989)
Qintex CEOChristopher Skasewas found to have
improperly used his position to obtain management fees
prior to the $1.5 billion collapse of Qintex including
$700m unpaid debts. Skase absconded to the Spanish
resort island of Majorca. Spain refused extradition for 10
years during which time Skase became a citizen of
Dominica.
 Polly Peck (1990)
After a raid by the UKSerious Fraud Officein September
1990, the share price collapsed. TheCEOAsil Nadirwas
convicted of stealing the company's money.
Asil Nadiris aTurkish Cypriotformer businessman, who
was chief executive ofPolly Peck, which he took over as a
small textile company, growing it during the 1980s to
become one of the United Kingdom's top 100FTSE-listed
companies, with interests in consumer electronics, fruit
distribution and packaging.
In 1990, the business collapsed following an investigation
by theSerious Fraud Officeand charges were brought
against Asil Nadir on 70 counts of false accounting and
theft, which he denied.
BCCI (1991)
Breach of US law, by owning another bank. Fraud,
money laundering and larceny.
Nordbanken (1991)
Following market deregulation, there was a housing
price bubble, and it burst. As part of a general rescue as
theSwedish banking crisisunfolded, Nordbanken was
nationalised for 64 billion kronor. It was later merged
withGtabanken, which itself had to write off 37.3% of
its creditors, and is now known asNordea.
 Carrian Group (1983)
Accounting fraud. An auditor was murdered, an adviser committed suicide. The largest collapse inHong
Konghistory.
TheCarrian Groupwas aHong Kongconglomeratefounded by George Tan, a Singaporean civil engineer working
in Hong Kong as a project manager for a land development company. [1]The Group's principal holding company,
Carrian Holdings, was founded in 1977.
In January 1980, the group, through a 75% owned subsidiary, purchased Gammon House (a commercial office
building, nowBank of America Tower) inCentral District, Hong Kong forHK$998 million. It grabbed the limelight in
April 1980 when it announced the sale of Gammon House forHK$1.68 billion, a high return on investment that
surprised Hong Kong's property and financial markets and developed public interest in Carrian.
In the same year, Carrian capitalized on its notoriety by acquiring a publicly listed Hong Kong company, renaming it
Carrian Investments Ltd., and using it as a vehicle to raise funds from the financial markets.
The group grew rapidly in the early 1980s to include properties inMalaysia,Thailand,Singapore,Philippines,Japan,
and theUnited States. At its peak, the Carrian Group owned businesses in real estate, finance, shipping, insurance
(China Insurance Underwriters), hotels, catering and transport, including the citys largest-ever taxi fleet.
Carrian Group became involved in a scandal withBank Bumiputra Malaysia BerhadofMalaysiaand Hong Kong-
basedBumiputra Malaysia Finance. Following allegations of accounting fraud, a murder of a bank auditor, and the
suicide of the firm's adviser, the Carrian Group collapsed in 1983, the largest bankruptcy in Hong Kong. [3]
Of the group's numerous businesses, only the Carriana Restaurant remains.
Barrings Bank (1995)
An employee inSingapore,Nick Leeson, tradedfutures,
signed off on his own accounts and became increasingly
indebted. The London directors were subsequently
disqualified, as being unfit to run a company in
Re Barings plc (No 5).
Bre X (1997)
After widespread reports that Bre-X had found a gold mine inIndonesia, the stories were found to be fraudulent.
Bre-Xwas a group of companies inCanada. A major part of the group,Bre-X Minerals Ltd.based inCalgary, was
involved in a majorgold miningscandal when it reported it was sitting on an enormousgolddeposit atBusang,
Indonesia(inBorneo). Bre-X bought the Busang site in March 1993 and in October 1995 announced significant amounts
of gold had been discovered, sending its stock price soaring.
Originally apenny stock, its stock price reached a peak atCAD$286.50 (split adjusted) in May 1996 on theToronto Stock
Exchange(TSE), with a total capitalization of over CAD $6 billion. Bre-X Minerals collapsed in 1997 after the gold samples
were found to be a fraud.[1][2]
Busang's gold resource was estimated by Bre-X's independent consulting company, Kilborn Engineering (a division of
SNC-Lavalinof Montreal), to be approximately 70,000,000troy ounces(2,400 short tons; 2,200t)]Reports of resource
estimates of up to 200,000,000troy ounces(6,900 short tons; 6,200t) were never made by Bre-X though the property
was described as having this potential by John Felderhof, Bre-X's Vice-President for Exploration, in an interview with
Richard Behar of Fortune Magazine.
Bre-X's gold resource at Busang was a massivefraud.]Encouraging gold values were intersected in many drill-holes and
the project received a positive technical assessment by Kilborn. Crushed core samples had been falsified bysaltingwith
gold that has a wide variety of characteristics that had been subjected to mineralogical examination by Bre-X's
consultants.[clarification needed]In fact in an old report, found in Bre-X files, a mineralogist had reported that gold particles in
Busang samples had the tell-tale darker yellow skin compared to the interior. This results from selective leaching of
silver from the surface of gold particle during river transport, an indication that it was alluvial gold, not consistent with
the drill core origin of the samples. The salting of crushed core samples with placer orsupergenegold constitutes the
most elaborate fraud in the history of mining. In 1997, Bre-X collapsed and its shares became worthless in one of the
biggest stock scandals in Canadian history, and the biggest mining scandal of all time
Lincoln Savings and Loan
Association (1989)
Financial institution that went bust following theKeating Fivescandal.
hrough the early 1980s, Lincoln was a conservatively-run enterprise, with almost half its assets inhome loans
and only a quarter of its assets considered at risk. [1]It had slow growth at best, and had shown a loss for several
years until it made a profit of a few million dollars in 1983. [1]
Lincoln then became headed byCharles Keating, who as chairman of a housing construction company,
American Continental Corporation, purchased Lincoln in February 1984 for $51 million.[2]Keating fired the existing
management.[1]Over the next four years, Lincoln's assets increased from $1.1 billion to $5.5 billion. [2]Such
savings and loan associationshad beenderegulatedin the early 1980s, allowing them to make highly risky
investments with their depositors' money, a change of which Keating took advantage. [2]
Alan Greenspansent a letter in February 1985 to officials of the Federal Home Loan Bank of San Francisco
supporting an application for an exemption for Lincoln to a bank board rule forbidding substantial amounts of
some investments, yet the exemption was not granted to Lincoln. [3]
When American Continental Corporation, the parent of Lincoln Savings, went bankrupt in 1989, more than 21,000
mostly elderly investors lost their life savings. This total came to about $285 million, largely because such
investors held securities backed by the parent company rather than deposits in the federally insured institution, a
distinction apparently lost on many if not most of them until it was too late. [4]The federal government covered
almost $3 billion of Lincoln's losses when it seized the institution. Many creditors were made whole, and the
government then attempted to liquidate the seized assets through itsResolution Trust Corporation, often at
pennies on the dollar compared to what the property had allegedly been worth and the valuation at which loans
against it had been made. Charles Keating would be sent to prison for fraud
Long term capital management
(1998)
After purporting to have discovered a scientific method
of calculating derivative prices, LTCM lost $4.6bn in the
first few months of 1998, and required state assistance
to remain afloat
Equitable life assurance society
(2000)
The insurance company's directors unlawfully used
money from people holding guaranteed annuity rate
policies to subsidise people with current annuity rate
policies. After a House of Lords judgment in
Equitable Life Assurance Society v Hyman, the Society
closed. Though never technically insolvent, the UK
government set up a compensation scheme for
policyholders under the
Equitable Life (Payments) Act 2010.
HiH Insurance (2001)
In early 2000, after increase in size of the business, it
was determined that the insurance company's solvency
was marginal, and a small asset price change could see
the insurance company become insolvent. It did.
DirectorRodney Adler, CEORay Williamsand others
were sentenced to prison for fraudulent activity.
Pacific Gas and Electric Company
(2001)
After a change in regulation inCalifornia, the company
determined it was unable to continue delivering power,
and despite theCalifornia Public Utility Commission's
efforts, it went into bankruptcy, leaving homes without
energy. It emerged again in 2004.
One. Tel (2001)
After becoming one of the largest Australian public
companies, losses of $290m were reported, the share
price crashed, and it entered administration. In
ASIC v Rich[1]the directors were found not to have been
guilty ofnegligence.
World Com (2001)
After falling share prices, and a failed share buy back
scheme, it was found that the directors had used
fraudulent accounting methods to push up the stock
price. Rebranded MCI Inc, it emerged from bankruptcy
in 2004 and the assets were bought byVerizon.
Enron (2001)
Directors and executives fraudulently concealed large
losses in Enron's projects. A number were sentenced to
prison.[2][3]
Chiquita Brands Intl (2001)
Accumulated debts, after a series of accusations
relating to breaches of labour and environmental
standards. It entered apre-packaged insolvency, and
emerged with similar management in 2002.
Kmart (2002)
After difficult competition, the store was put into
Chapter 11bankruptcy proceedings, but soon re-
emerged.
Adelphia Communications
Internal corruption. The Directors were sentenced to
prison
Arthur Andersen
A US court convicted Andersen ofobstruction of justice
by shredding documents relating toEnron scandal.
Parmalat (2003)
The companys finance directors concealed large debts
M G Rover Group
After diminishing demand, and getting a 6.5m loan
from the UK government in April 2005, the company
went intoadministration. After the loss of 30,000 jobs,
Nanjing Automobile Groupbought the company's
assets.
Bayou Hedge Fund group (2005)
After becoming a public company in August 2005, it was
revealed thatPhillip R. Bennett, the company CEO and
chair, had concealed $430m of bad debts. Its
underwriters wereCredit Suisse First Boston,
Goldman Sachs, andBank of America Corp. The
company enteredChapter 11and Bennett was
sentenced to 16 years prison
Bear Stearns (2008)
Bear Stearns invested in the sub-prime mortgage
market from 2003 after the US government had begun
to deregulate consumer protection and derivative
trading. The business collapsed as more people began
to be unable to meet mortgage obligations. After a
stock price high of $172 a share, it was bought by
JP Morganfor $2 a share on 16 March 2008, with a
$29bn loan facility guaranteed by the
US Federal Reserve.
Northern Rock
Northern Rock had invested in the international markets
forsub-prime mortgage debt, and as more and more
people defaulted on their home loans in the US, the
Rock's business collapsed. It triggered the firstbank run
in the UK since Overend, Gurney & Co in 1866, when it
asked the UK government for assistance. It was
nationalised, and then sold toVirgin Moneyin 2012.
Lehman Brothers
Lehman Brothers' financial strategy in from 2003 was to
invest heavily inmortgage debt, in markets which were
being deregulated fromconsumer protectionby the
US government. Losses mounted, and Lehman Brothers
was forced to file for Chapter 11 bankruptcy after the
US governmentrefused to extend a loan. The collapse
triggered a global financial market meltdown.Barclays,
NomuraandBain Capitalpurchased the assets which
were not indebted.
AIG
Out of $441 billion worth of securities originally rated
AAA, as the USsub-prime mortgage crisisunfolded, AIG
found it held $57.8 billion of these products. It was
forced to take a 24-month credit facility from the US
Federal Reserve Board.
Washington Mutual
Following thesub-prime mortgage crisis, there was a
bank runon WaMu, and pressure from the FDIC forced
closure.
Royal Bank of Scotland group
Following the takeover ofABN-Amro, and the collapse
ofLehman Bros, RBS found itself insolvent as the
international credit market seized up. 58% of the shares
were bought by the UK government
ABN _ AMRO
After a takeover battle betweenBarclaysandRBS,
which RBS won, ABN-Amro was found to be heavily
indebted due to thesub-prime mortgage crisis. It was
split and taken under government ownership by the UK
and Netherlands.
Anglo Irish bank
Followign the 2007- 08 crisis the bank was forced to be
nationalised by the Irish government
Nortel
Following the 2007-08 crisis and allegations over
excessive executive pay, demand for products dropped
Arcandor (2009)
After struggling to maintain business levels at its brand
namesKarstadtandKaDeWe, Arcandor sought help
from the German government, and then filed for
insolvency
Schlecker (2012)
After continual losses mounting from 2011 Schlecker,
with 52,000 employees, was forced into insolvency,
though continued to run.
Dynergy (2012)
After a series of attempted takeover bids, and a finding
of fraud in a subsidiary's purchase of another
subsidiary, it filed forChapter 11bankruptcy. It
emerged from bankruptcy on 2 October 2012.
Banco Espirito Santo (2014)
An audit performed in 2013, for a capital raise
performed in May 2014, uncovered severe financial
irregularities and a precarious financial situation of the
bank. The same year, its CEO,Ricardo Salgado,
revealed 95 billion of losses. In July 2014, Salgado was
replaced by economistVtor Bento, who saw BES in an
irrecoverable situation. Its good assets were bought by
Novo Banco, a vehicle founded by Portugal's financial
regulators for that purpose, on August 3, which hired
Bento as CEO, while its toxic assets stayed in the "old"
BES, which got its banking license revoked by Portugal's
regulators.
 Scandals without insolvency
BAE Systems- (bribery scandal related to theAl Yamamahcontracts with Saudi Arabia)
Bayer- (links toJosef Mengele'sAuschwitzhuman experiments, HIV-tainted blood products, anti-
Semitism, racism,Zyklon Bproduction throughIG Farben)
Bristol-Myers Squibb(accounting scandal)
Brown & Williamson (for chemically enhancing the addictiveness of cigarettes, becoming the leading
edge of the tobacco industry scandals of the 1990s, eventually resulting in theTobacco Master
Settlement Agreement)
Chevron-TexacoLago Agrio oil (fieldpollution scandal)
Compass Group (bribed theUnited Nationsin order to win business)
Deutsche Bank (spying scandal)
Duke Energy (Coal ash pollution)
El Paso Corp (test result falsifying scandal)
Fannie Mae (underreporting ofprofit)
FlowTex, (lowTex had only produced 181 machines that were sold multiple times, with the certificates
and identification plates manipulated according to the scam 2 million loan for non existent drilling
system)
Ford Pinto, (fuel tank scandal)
 Global Crossing (accounting and auditing fraud)
Guinness share-trading fraud (It involved an attempt to manipulate thestock marketon a massive scale to inflate the
price ofGuinnessshares and thereby assist a 4 trilliontakeoverbid for theScottish drinks companyDistillers)
Hafskip's collapse (The firm had fallen deep intodebtthrough its investment in new ships, intended to help the firm
compete withEimskipand American shipping firms in the transatlantic shipping trade. It was declared bankrupt on
December 6, 1985; this led in turn to the collapse of its main lending bank,tvegsbanki(the Fisheries Bank of Iceland))
Halliburton(overcharging government contracts)
Harken Energy Scandal (TheHarken Energy scandalrefers to a series of transactions entered into during 1990
involvingHarken Energy. These transactions are alleged to involve either issues relating toinsider trading, orinfluence
peddling. No wrongdoings were found by any investigating authorities although the matter generated political
controversy).
HealthSouth(reporting exaggerated earnings)
Hewlett-Packard (spying scandal)
Homestore.com
Lernout & Hauspie(accounting fraud)
Lockheed(bribery scandal)
Livedoorscandal (securities law violation)
Merck(Medicaid fraudinvestigation)
Olympus Scandal (CEO exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate
history)
 Peregrine Systems (Corporate executives convicted of accounting fraud)
Phar-Mor (Company lied to shareholders. CEO eventually sentenced to prison for fraud and
company eventually became bankrupt
Qwest Communications
RadioShackCEODavid Edmondsonlied about attaining a B.A. degree from Pacific Coast
Baptist College inCalifornia
Royal Dutch Shelloverstated itsoil reservestwice, it downgraded 3,900,000,000 barrels
(620,000,000m3), or about 20 percent of its total holdings.
Satyam Computers, India
Siemens - Greek bribery scandal, involving cases of bribery on behalf ofSiemenstowards
theGreek Government
Southwest Airlines, violations of safety regulations
Tyco International, executive theft and prison sentence [3][5]
ValuJet Airlines, loading live oxygen generators into cargo hold of passenger jet causing fatal
crash
Volkswagen emissions violations, fraud in diesel motors pollution measurements
Xerox (alleged accounting irregularities involving auditorKPMG, causing restatement of
financial results for the years 1997 through 2000 and fines for both companies)