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.
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.
On Nov. 2, a jury in Manhattan, New York, found Sam Bankman-Fried, founder of collapsed cryptocurrency trading platform FTX, 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. SBF faces sentencing on March 28, and he’s expected to appeal his conviction.
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.
Most recently, a federal appeals court ruled Jan. 19 that an independent bankruptcy examiner should look into the FTX collapse due to the sheer size of the case, which involved the misuse of up to $10 billion of customers’ money.
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.
After the 9th Circuit Court of Appeals denied her attorneys’ request that she remain free during the appeal of her conviction, Holmes reported to a federal prison in Bryan, Texas, on May 30, 2023, to begin her sentence. Holmes’ sentence has since been reduced by two years.
On Jan. 19, 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.
The 1980s were fraught with financial fraud, with Ivan Boesky among the first Wall Street traders to go to prison on insider trading charges. Boesky honed his craft as a trader in the early ’80s, specializing 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, accusing him of 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.”
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.
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 and two senior executives, Oliver Bellenhaus and Stephan von Erffa, all face multiple years in prison if convicted.
In December 2023, Munich prosecutors also brought fraud charges against Burkhard Ley, Wirecard’s former chief financial officer. Another Wirecard executive, Jan Marsalek, is reportedly hiding out in Russia. 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, according to news reports.
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 until at least summer of this year.
Investors can only watch as the fraud trial plays out, with little hope of ever recovering their money.
This mega-bank just can’t seem to stay out of regulatory trouble. Wells Fargo & Co. (WFC) agreed on May 16, 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 2016, the Consumer Financial Protection Bureau slapped a $100 million fine on Wells Fargo, and the SEC also issued $3 billion in fines against the bank, as officials stated 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.”
China-based Luckin Coffee Inc. (OTC: LKNCY) appeared to be a turnaround story in 2023 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 recently reported an 85% third-quarter revenue increase year over year. The company is the largest coffee retailer in China, well ahead of Starbucks. Though nothing is guaranteed, a re-listing on the Nasdaq is also reportedly in play for Luckin, although the company still has to convince regulators it’s back on track, ethically and legally.
This brand-name international auto manufacturer is coming off a tough year for global economies, but Volkswagen AG (OTC: VWAGY) 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 were 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 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 Diesel-gate fading in the rear-view mirror.
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.