Masterpieces of corporate fraud
The history of American business is a history of business scandals. In a number of cases, crooks posing as businessmen have demonstrated incredible imagination and talent.
Many experts believe that scandals and fraud in the financial sector are inevitable, as unscrupulous people will always try to circumvent the existing rules. However, such failures ultimately benefit the economy. Once breaches in this area are identified, governmental, public and commercial structures start to use new control mechanisms, ensuring honesty and transparency in business. We offer a brief history of corporate America’s most high-profile and extraordinary scams.
In 1795, there was a scam involving the purchase and sale of land in the area known as Yazoo
US Congress, which refused to make any concessions to the companies. Nevertheless, in 1810 the US Supreme Court ruled in favour of the merchants, arguing that although the contract was fraudulent, it did not exempt the contractors from its terms because it was signed. As a result, the companies received gigantic compensation that exceeded their purchase costs by a factor of 8. Crdit Mobilier scam
In 1867 the Union Pacific Railroad, a major railroad company, created a front firm, Crdit Mobilier of America, and gave it contracts to build railroads. At that time, the U.S. Congress was eager to support the development of communications and gave road builders substantial incentives and subsidies. As a result, Crdit Mobilier shares were offered to some helpful congressmen at nominal rather than market price. In return, the people’s elected officials, who became shareholders in the company, hammered out government subsidies to cover the company’s seriously inflated expenses.
The scam came to light in 1872, during the presidential election, thanks to journalists from the New York Sun. An assistant manager of Crdit Mobilier acted as an informant. From the documents he produced, it was clear that out of the $47 million provided by the government to Crdit Mobilier, Union Pacific had embezzled $21 million. This scandal resulted in the resignation of many influential congressmen and officials. However, one of Crdit Mobilier’s alleged clients, then-Congressman James GarfieldJames Garfield was later elected President of the United States.
The heroes of this scandal were the legends of the golden era of American business, financiers Jay Gould and Jim Fisk. Both had very controversial reputations. However, Fisk is now considered one of the founders of Broadway, and Gould once owned the now-existing Western Union company. The gist of the scam was as follows. President Ulysses Grant Ulysses S. Grant pursued a vigorous monetary policy, the point of which was to reduce the amount of cash in the economy: the government sought
to buy up dollars in exchange for gold. Gould and Fisk planned to buy up as much gold as possible and, after waiting for prices to rise substantially, sell it. To convince Grant to change his policy, the scammers hired a financier, Abel Corbin, who, by happy coincidence, was the son-in-law of the President. Versions of further events differ. One of the hypotheses says that Grant suspected something wrong (he allegedly came across Corbin’s frank letter) and decided to punish the conspirators. He waited until the moment, when Gould and Frisk began to play on the rise (for this Frisk spread appropriate rumors). At the moment when the price of gold reached a record high, Grant gave the order to sell part of the state gold reserve. As a result, the price of gold plummeted. Many stockbrokers went bankrupt. That day went down in Wall Street history as Black Friday. Corbin and Frisk lost almost all their fortune. Gould managed to sell his gold almost at the peak price and almost no losses. Curiously enough, the investigation into the case was inconclusive.
After the end of the Civil War, the federal government increased alcohol tax rates several times. This was done primarily to balance the state budget. In some major U.S. cities (St. Louis, Milwaukee and Chicago), whiskey distillers began corrupting officials who were willing to turn a blind eye to the actual size of production, allowing distillers to minimize the tax base over time. This scheme was rumored to have been used to fund local branches of the Republican Party, but no confirmation could be found.
However, information about the fraud reached Washington, and the Treasury Department launched a secret investigation. In 1875, quite unexpectedly for local officials and whiskey producers, a team of auditors arrived in St. Louis, Milwaukee and Chicago, arrested the businessmen and sealed up the distilleries. 238 people went to trial, 110 of whom were convicted. The federal budget received $3 million.
In the 1920s, Boston businessman Charles Ponzi created a cheating scheme, later called a Ponzi scheme. With some variations, the scheme was repeated many times in many countries around the world. Ponzi offered the buyers of his coupons a payment of 500% of the deposit within 45 days. Old depositors received money at the expense of contributions of new ones. More than 10 thousand people became victims of Ponzi. In some days Ponzi received up to $250 thousand, cash dollars had nowhere to dispose of he dumped them even in the trash bin. In total, he raised $9.5 million. After the collapse of the financial pyramid he built and serving a prison sentence, he was exiled to Italy, where he was able to use a Ponzi scheme again. Towards the end of his life, he moved to Brazil, where he died in poverty.
Smell of oil
In 1921, the first Tipot House oil political scandal in U.S. history erupted. Oversight of the oil reserves intended to supply the Navy was entrusted to Albert Fall, head of the Department of the Interior. Fall, in particular, was required to oversee the state of affairs at the Tipot DomeThearot Dome strategic oil storage facility. On Fall, in particular, depended the selection of Navy suppliers. The oil companies, which were interested in government contracts, tried to win the official over, and Fall could not resist the bribe. The corrupt official and the oil barons were killed by greed. Fall tried to gain control of the army’s oil reserves and the military resisted and demanded to see how well he was fulfilling his duties. The inspection revealed that Fall was not only receiving bribes, but was also purchasing petroleum products of inferior quality at higher prices. Fall was imprisoned, the oil barons who had bribed him were acquitted by the court.
Richard Whitney, president of the New York Stock Exchange, the world’s largest stock exchange, and one of the best-known financial specialists in the United States, was caught cheating. Through dummy companies he used his tools at his disposal to influence the stock market and artificially raised or lowered its price. However, all his skills did not allow him to avoid losses. Whitney was not confused: he started to steal money. Specifically, he stole money from a public fund that provided assistance to widows and orphans. By the time of his arrest in 1938, Whitney had managed to steal approximately $800,000.
Businessman Anthony (Tino) De Angelis was nicknamed the American salad oil king. He owned the largest firm supplying vegetable oil in the United States. After two decades of success, De Angelis (after his business faltered) received $175 million in loans from banks and investment firms, using millions of liters of vegetable oil that did not exist in nature as collateral for the loans. De Angelis used his knowledge of high school physics course: in his warehouse he demonstrated huge cisterns filled with oil. In fact, the cisterns contained water, and the oil only covered it with a thin film. After the scam was uncovered (1968), two financial companies that had invested in De Angelis’ stock went bankrupt. At the same time, another American businessman, Billy Estes, also received bank loans against non-existent farm implements, tools and machinery. He acted more simply: he simply forged the relevant papers.
Equity Funding, which operated in the 1960s and 1970s, combined features of an investment and insurance company. Shareholders received dividends in the form of insurance premiums, and Equity Funding sold insurance policies to reinsurance companies. It was a profitable mechanism, but Equity Funding’s managers went even further. They filled bogus insurance policies and also sold them to reinsurers. The proceeds went into the pockets of the enterprising managers. After this scam was exposed, Equity Funding customers lost $300 million, and several dozen employees of the fund went to jail. June 03, 2005 Washington ProFile
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