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If It Seems Too Good To Be True, It Probably Is: The 7 Biggest Financial Scams in American History

From the Wild West to Wall Street, the tradition of fast-talking confidence men pulling a fast one on unwitting customers is American as apple pie. In the search for a great deal or a phenomenal return on their investments, it’s all too easy for even the savviest consumers to fall prey to fraud — and this holds even more true in this brave new world of anything-goes online content.

Besides a healthy dose of skepticism whenever you get an email about a “sweet new investment opportunity” from a “deposed Nigerian prince,” hearing the scoop on previous scams could help you avoid becoming a victim: the past repeats itself, after all, and some of these swindles aren’t quite so easy to detect.

Without further ado, we present the seven biggest financial scams in American history. A quick note on methodology: we define “biggest” as the total dollar value lost, adjusted for inflation when necessary. This effectively limits the scope of our list to the past one hundred years.

  1. WorldCom

Total losses to investors: ~$100 billion

Led by CEO Bernie Ebbers, by the late 1990s WorldCom was the second largest telecommunications company in the United States, employing an aggressive growth strategy to gobble up competitors. But the company began to show signs of trouble during the market downturn that began in 2000.

In 2002, a small team of internal auditors uncovered evidence that Ebbers and members of his executive team had employed fraudulent accounting methods beginning in the early 1990s, eventually inflating WorldCom’s assets by a whopping $11 billion in order to maintain the value of the firm’s stock. WorldCom filed for Chapter 11 bankruptcy protection in 2002, and its stock price plummeted from $64 to $1, costing its investors nearly $100 billion.

Lesson learned: This scam would have been tough for an average consumer to avoid; it’s always a shock when a company that seems like a “blue chip” goes under. One lesson is to avoid investing in individual stocks and instead buy index funds, which broaden your exposure so you’re less affected by unpredictable tail risk.

  1. Enron

Total losses to investors: ~$74 billion

Before the name Enron became synonymous with fraud, the Houston-based energy and services company was the darling of the financial press: in the late 1990s, Fortune magazine named it America’s Most Innovative company for six consecutive years.

But in the fall of 2001, skeptical reporters began to peel back the morass of corrupt practices underlying Enron’s soaring stock. The company’s CEO and COO, Ken Lay and Jeffrey Skilling, and other executives had cooked the books in countless ways, hiding billions of dollars in debt from business failures within opaque corporate entities that never showed up on the company’s balance sheet.

Once the extent of the scandal became clear, Enron’s stock plummeted from a high of $90 in mid-2000 to below $1 by the end of 2001, wiping out close to $75 billion in shareholder value. The Enron scandal was so unprecedented in size and audacity that it led to the creation of new legislation — the Sarbanes-Oxley Act — which increased penalties for defrauding shareholders.

Lesson learned: Again, it’s tough for everyday investors to dig deep enough to uncover this kind of fraud, so the best way to protect yourself is diversifying your investments.

  1. Madoff Securities

Total losses to investors: ~$64 billion

One of the most recent major swindles to grace the newspapers, Bernard Madoff ran an exclusive investment fund that produced unusually steady returns — about 10% — for decades, in good markets and bad. His statistically improbable consistency prompted many in the investment management industry to wonder about his investment strategy.

In one of the most dramatic revelations of 21st finance, Madoff’s own sons discovered that Madoff Securities was in fact a giant pyramid scheme. For decades, Madoff had used a constant stream of new investments to pay out his old investors, but his lie couldn’t sustain itself when the 2007-08 financial crisis incited his investors to ask for their money all at once.

Prosecutors estimated that Madoff’s liabilities to his investors were on the order of $64 billion; the damage was made worse by the fact that many of his investors were charitable organizations. Madoff is currently serving a jail sentence of 170 years.

Lesson learned: Most of Madoff’s investors went along when he refused to give them any details about his investment strategy. If someone tells you they can make you money but refuses to tell you how, run away as fast as you can.

  1. Bayou Hedge Fund Group

Total losses to investors: $350 million

One of the more dramatic scams on our list, Sam Israel promised his investors that the $300 million they invested with him would multiply more than twenty times into $7.1 billion over a ten year time horizon.

When the investments began to underperform in 1998, Israel lied to his investors and then made a break for it, only getting arrested when his mugshot appeared on America’s Most Wanted. Unfortunately, by this point his investors were out more than $300 million.

Lesson learned: If someone promises you an investment return that’s too good to be true, it probably is.

  1. Financial Advisory Consultants

Total losses to investors: $311 million

Over the course of two decades, James Paul Lewis Jr. collected hundreds of millions of dollars from investors, often elderly retirees. Relying on trust and word of mouth to build a reputation for his innocuously-named company, Financial Advisory Consultants, Lewis told clients he was investing their money. Instead, he used it to fund a high-flying lifestyle, blowing client money on luxury cars and fancy homes.

In 2003, investors raised the alarm when Lewis stopped paying dividends; soon after, he went on the lam, eluding authorities until 2004, when a FBI manhunt cornered him in Houston. In 2006, a judge judge imposed the maximum sentence of thirty years on Lewis; at the time of his sentencing he was sixty years old, around the age of many victims who lost everything.

Lesson learned: Diversify — never put all your investments in one basket! Try to insist that your investment managers have their funds audited by an independent third party.

  1. Charles Ponzi

Total losses to investors: $20 million (~$230 million today)

The original swindler, Ponzi was a habitual schemer who now has the unfortunate distinction of having a whole category of fraud named after him. Back in 1920, Mr. Ponzi promised investors a 50% return in 45 days by buying discounted postal coupons in other countries and reselling them — a promise he fulfilled, for the first few investors, by paying them with funds received from new investors.

News of Ponzi’s “strategy” spread fast, and soon even banks sought to get into the deal. But as is the case with all pyramid schemes, Ponzi’s endeavor reached an explosive end when his publicist found evidence that indicated Ponzi was simply “robbing Peter to pay Paul.” He went to jail.

Lesson learned: The more “exotic” a money-making scheme is, the more likely it is to fail or be totally made up — especially when pitched by an amateur with no real experience.

  1. Stratton Oakmont

Total losses to investors: $200 million

If this name sounds familiar, it’s because Stratton Oakmont was the brainchild of Jordan Belfort, the erstwhile “Wolf of Wall Street.” Operating as a classic “pump-and-dump” scheme, Belfort and his accomplices would cold call unsuspecting consumers and convince them to buy penny stocks, driving up the price until Belfort’s own firm could cash out and send the stock plummeting back to bottom.

After a wild ride through the 1990s, the firm and its principals were indicted for securities fraud by the SEC in 1999.

Lesson learned: Don’t buy stocks because someone told you so, especially not a random person on the other end of the phone; do your own research and draw your own conclusions. If that’s not a process that appeals to you, buy passive index funds instead.

 

These gargantuan frauds are the ultimate example of the cardinal rule of investing: “caveat emptor,” or buyer beware. It pays to do your diligence on big investment opportunities, but consumers also experience millions of minor instances of “fraud” every day, from overdraft charges and other hidden fees to getting overcharged by your cable company.

Trim can help you find dubious charges and get your money back — give us a whirl here.

 

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