10. Qwest Communications
In 2003, Qwest was accused of falsifying financial documents by swapping pieces of equipment with other telecommunication providers and recording the transactions as revenue. Qwest would sell fiber optic cables to another telecommunications provider and then buy the same types of cables from the provider at the same cost. This “swapping” of equipment resulted in a net zero balance between Qwest and the other companies, but Qwest “booked” these swaps as revenue.
Qwest's stock traded as high as $64 in 2000 and went down in 2002 to less than $1 when the fraud revealed. CEO Joseph Nacchio forfeited $44 million for insider trading and went to jail. A class action settlement added $400 million to the pot but investors got back pennies on the dollar.
On July 13, 2005, former CFO, Robin Szeliga, pled guilty to one count of insider trading. Szeliga admitted that she had improperly sold 10,000 shares of Qwest stock in which she received a profit of $125,000. She sold the shares based on having access to information that was not available to the public.
9. Tyco International
Tyco International has operations in over 100 countries. According to the Tyco Fraud Information Center, an internal investigation concluded that there were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did happen? Tyco's former CEO Dennis Koslowski, former CFO Mark Swartz, and former General Counsel Mark Belnick were accused of giving themselves interest-free or very low interest loans (sometimes disguised as bonuses) that were never approved by the Tyco board or repaid. Some of these "loans" were part of a "Key Employee Loan" program the company offered. They were also accused of selling their company stock without telling investors, which is a requirement under SEC rules. Koslowski, Swartz, and Belnick stole $600 million dollars from Tyco International through their unapproved bonuses, loans, and extravagant "company" spending. Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million dollar birthday party for Koslowski's wife in Italy are just a few examples of the misuse of company funds. As many as 40 Tyco executives took loans that were later "forgiven" as part of Tyco's loan-forgiveness program, although it was said that many did not know they were doing anything wrong. Hush money was also paid to those the company feared would "rat out" Kozlowski. Both are still in jail, although Swartz enjoys long weekend furloughs. Class action lawsuits cost the company another $3.2 billion.
Founded in 1984 by Beam and Richard Scrushy, the company’s former chairman and CEO, HealthSouth went public two years later after Scrushy dazzled a group of Wall Street investors with a presentation on the company’s potential. By 1990 it ballooned to a $1 billion dollar corporation of hospitals and health care centers offering diagnostic services and rehabilitation therapy. As CFO with a large chunk of shares in the company, Beam became a millionaire. He remembers people asking how a company on such a steep upward trajectory was handling the start up costs. “From the beginning, we were putting things on the balance sheet that probably should have stayed on the profit and loss statement.”
By 1995 the company had health centers in all 50 states, plus 40,000 employees, 10 to 12 jets and a spot on the Fortune 500 list. Beam spent his millions on cars, condos and a collection of French neckties that equaled an entry-level salary.
In March of 2003, the SEC accused CEO Richard M. Scrushy of overstating earnings by at least $1.4 billion over four years. Scrushy was acquitted of all charges but later went to jail on a separate charge of bribing Alabama's governor. Fifteen former executives, including all five of its recent CFOs, pleaded guilty to accounting fraud
7. Fannie Mae
Some traders are conspiring together to rig the rates offered on large orders submitted by Fannie Mae/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), or “front running” them in the interest rate swaps market.
Front running means someone with advance knowledge of another player’s plan to undertake a sizable transaction puts an order in first, so they can profit from the market move that results when the large transaction goes through.
The FBI report also said the informants claimed that senior management at the two banks “planned and encouraged this behavior because it led to higher revenue for their respective parent banks.”
Fannie Mae paid the SEC $400 million in 2006 to settle charges of misstating financial statements from 1998 through 2004. In December 2011, the SEC brought a civil suit charging three former top executives with securities fraud for misleading investors about the extent of the mortgage giant's holdings of higher-risk mortgage loans during the financial crisis. The government took over Fannie Mae in 2008
Another billion-dollar accounting scandal. Telecommunications giant WorldCom came under intense scrutiny after yet another instance of some serious "book cooking." WorldCom recorded operating expenses as investments. Apparently, the company felt that office pens, pencils and paper were an investment in the future of the company and, therefore, expensed (or capitalized) the cost of these items over a number of years.
In total, $3.8 billion worth of normal operating expenses, which should all be recorded as expenses for the fiscal year in which they were incurred, were treated as investments and were recorded over a number of years. This little accounting trick grossly exaggerated profits for the year the expenses were incurred; in 2001, WorldCom reported profits of around $1.3 billion. In fact, its business was becoming increasingly unprofitable. Who suffered the most in this deal? The employees; tens of thousands of them lost their jobs. The next ones to feel the betrayal were the investors who had to watch the gut-wrenching downfall of WorldCom's stock price, as it plummeted from more than $60 to less than 20 cents. Former CEO Bernard Ebbers was convicted of fraud and is doing 25 years in federal prison
5. MF Global
Jon Corzine was the CEO of MF Global, a commodities dealer that stole customer funds to cover its own losing bets, then went bankrupt immediately after giving out bonuses.
The brokerage firm, led by former Goldman Sachs Chairman and former New Jersey Senator then Governor Jon Corzine, had $41 billion in assets before failing in October 2011. That put MF Global at on the list of ten largest bankruptcies. A year later, $1.6 billion in customer assets were still missing and no SEC or DOJ charges had been filed. A predecessor firm with $33 billion in assets, Refco, failed in 2005.
Executives at the former CUC International, now a part of Cendant Corp., "deliberately and fictitiously" manufactured about $500 million in fake revenue over a three-year period in an attempt to ensure CUC's earnings matched analysts' expectations. It was estimated to have cost investors at least $19 billion, and was the largest fraud prosecuted by the SEC to that date. Securities class action lawsuits settled later for more than $3 billion. A judge sentenced former chairman Walter Forbes to 12 years and seven months in federal prison and ordered him to pay $3.275 billion in restitution.
3. Lehman Brothers
On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Investment bank Lehman, with $600 billion in assets, failed in late 2008. It was the largest bankruptcy in history and a spark to the worldwide financial crisis. A bankruptcy examiner's report concluded there were "colorable" claims against its top executives and its auditor, Ernst & Young, for fraud, but neither the SEC nor the DOJ have so far filed charges.
2. Bernard Madoff
Making for what could be an awkward Christmas, Bernard Madoff, the former chairman of the Nasdaq and founder of the market-making firm Bernard L. Madoff Investment Securities, was turned in by his two sons and arrested on Dec.11, 2008, for allegedly running a Ponzi scheme. The 70-year-old kept his hedge fund losses hidden, by paying early investors with money raised from others. This fund consistently recorded a 11% gain every year for 15 years. The fund's supposed strategy, which was provided as the reason for these consistent returns, was to use proprietary option collars that are meant to minimize volatility. This scheme duped investors out of approximately $50 billion. New York money manager Bernard Madoff's $65 billion Ponzi scheme, the largest fraud ever by an individual, was exposed in December 2008 when Madoff, now doing 150 years in prison, confessed to his sons. The case led the SEC, which missed several opportunities to stop the fraud, to focus on Ponzis and investment advisor fraud.
Prior to this debacle, Enron, a Houston-based energy trading company was, based on revenue, the seventh largest company in the U.S. Through some fairly complicated accounting practices that involved the use of shell companies, Enron was able to keep hundreds of millions worth of debt off its books. Doing so fooled investors and analysts into thinking this company was more fundamentally stable, than it actually was. Additionally, the shell companies, run by Enron executives, recorded fictitious revenues, essentially recording one dollar of revenue, multiple times, thus creating the appearance of incredible earnings figures. Eventually, the complex web of deceit unraveled and the share price dove from over $90 to less than 70 cents. This fraud wiped out $78 billion in stock market value and led to the collapse of Arthur Andersen, the fifth leading accounting firm in the world at the time. and the passage of the Sarbanes-Oxley Act of 2002. A class action settlement of $7.185 billion was the largest of all time. Former President Jeff Skilling is serving a 24 year sentence