The top 5 biggest trading scandals

With all the really huge trading scandals from the late 1800s and on, the following are ones that are more relevant for the savvy investors today. With the following biggest trading scandals, the most savvy and discerning investor can learn from and take note to prevent any potential pitfall when trading:

1. Enron, 2001– this energy trading company based in Houston, Texas was the seventh biggest US company. The situation, however, is that Enron was conniving in keeping 100s of millions of dollars worth of debt off the books to fool analysts and investors. Even their Shell companies recorded false revenues that made them appear to be making amazing earning figures. As a result, this complicated web of lies unraveled causing the share price to plummet from more than $90 to lower than 70 cents. Also, the authorities made a plea deal with Andrew Fastow, Enron’s Chief Financial Officer, to testify against founder, Ken Lay, and the CEO Jeffrey Skilling. With this, the founder and CEO were convicted and sentence to prison for wire fraud and securities. Ken Lay, however, died before being sentenced.

2. Tyco International, 2002– another really big company that became a household name, Tyco was considered to be a reliable and trustworthy blue chip investment that manufactures health care equipment, safety equipment, and electronic computers. Even their CEO, Dennis Kozlowski, was reported by BusinessWeek to be one of the top 25 corporate managers.

However, he took tons of Tyco’s money in the form of fraudulent stock sales and unapproved loans. Kozlowski retrieved an $170 million in low-to-no interest loans along with CLO Mark Belnick and CFO Mark Swartz without the approval from shareholders. Also, Belnick and Kozlowski made arrangements to sell unauthorized stock from Tyco of 7.5 million shares amounting to $450 million. These funds were usually disguised as executive benefits or bonuses.

Richard Scrushy, the founder and CEO, told employees to overstate the net income of HealthSouth and inflate revenues. With all of these discrepancies, the first sign of trouble occurred in late 2002 when Scrushy was reported to have sold $75 million worth of shares from HealthSouth before releasing a loss of earnings. And eventually, the unfolding of a scandal erupted in March 2003 when the SEC announced HealthSouth’s exaggeration of revenues by $1.4 billion.

With this development, The FBI worked with CFO in wiretapping Scrushy discussing the fraud. Also, the stock swiftly plummeted from $20 to around 45 cents in a day, and the CEO, who was acquitted of 36 fraud counts, were later sentenced to 25 years of prison time for bribery.

3. Bernard Madoff, 2008– arrested on December 11, 2008, Bernard Madoff, the founder of Bernard L. Madoff Investment Securities and a former chairman of Nasdaq, held the longest Ponzi scheme in US history that started as reported from the early 1980s. In this twist, Madoff hid his hedge fund losses by paying earlier investors with money gained from others. For 15 years, the fund had a consisted report of a 11% gain. Madoff had claimed to utilize a strategy to purchase blue chip stocks, and hedge those stocks with options meant to minimize volatility. However, investors lost approximately $50 billion from this scheme. This was just an elaborated Ponzi scheme where Madoff lied about the numbers and stayed afloat for a long time with a continual stream of new investor’s money.

Problems came to head when investors asked for $7 billion in withdrawals in 2008 when the market was beginning to weaken in 2008 because of the financial crisis. He then confessed to his sons about his business being a big lie, and they turned him in. Madoff pled guilty to false statements, money laundering, false SEC filings, employee benefit plan theft, perjury, wire fraud, mail fraud, investment adviser fraud, and securities fraud. He then was sentenced to 150 years of prison.

4. Lehman Brothers Collapse, 2007– widely considered the main cause of the 2008 economic crisis, this company has the biggest reported bankruptcy in US history at $691 billion. In this story, Lehman Brothers were a major sub-prime loan buyer during the mid-2000s’ housing boom. They used an accounting trick where they sold a large portion of the debt to Cayman Island organizations, and they agreed to buy the debt back later on so they can make the balance sheet appear better than it actually was. However, when the housing values started dropping in 2007, Lehman was rendered fiscally unsound when forced to disclose their losses.

5. Bre-X Minerals, 1997– considered to being involved in history’s biggest stock swindles, this Canadian company had an Indonesian gold property in which proved to be a devastating loss especially experiencing a skyrocketing high of $280 stock price just to find out on March 19, 1997 that the gold mine was fraudulent. When it was at the skyrocketing high, ordinary people became millionaires overnight, Bre-X gained a $4.4 billion market capitalization. And as a result, the stock painfully reduced to pennies.

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