The Biggest Stock Scams of Recent Time

31 January 2022

What Are Biggest Stock Scams of Recent Time?

Understanding how disasters happened to investors in the past can help current investors avoid them in the future.

Here are some of the all-time most significant cases of companies betraying their investors. Some of these cases are truly amazing. Try to look at them from a shareholder's perspective. Unfortunately, the shareholders involved had no way of knowing what was really happening as they were being tricked into investing.

ZZZZ Best (1986)

Barry Minkow, the owner of this business, claimed that this carpet cleaning company of the 1980s would become the "General Motors of carpet cleaning." Minkow appeared to be building a multi-million dollar corporation, but he did so through forgery and theft. He created more than 20,000 phony documents and sales receipts without anybody suspecting anything.

Although his business was a fraud designed to deceive auditors and investors, Minkow shelled out more than $4 million to lease and renovate an office building in San Diego. ZZZZ Best went public in December of 1986, eventually reaching a market capitalization of more than $200 million. Amazingly, Barry Minkow was only a teenager at the time. He was sentenced to 25 years in prison.

Bre-X Minerals (1997)

This Canadian company was involved in one of the largest stock swindles in history. Its Indonesian gold property, which was reported to contain more than 200 million ounces, was said to be the richest gold mine, ever. The stock price for Bre-X skyrocketed to a high of $280 (split-adjusted), making millionaires out of ordinary people overnight. At its peak, Bre-X had a market capitalization of $4.4 billion.

The party ended on March 19, 1997, when the gold mine proved to be fraudulent, and the stock tumbled to pennies shortly after. The major losers were the Quebec public sector pension fund, which lost $70 million, the Ontario Teachers' Pension Plan Board, which lost $100 million, and the Ontario Municipal Employees' Retirement Board, which lost $45 million.

Enron (2001)

Prior to this debacle, Enron, a Houston-based energy trading company was, based on revenue, the seventh-largest company in the United States. Through some 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. This practice created the appearance of incredible earnings figures.

Eventually, the complex web of deceit unraveled, and the share price dove from over $90 to less than 30 cents. As Enron fell, it took down with it Arthur Andersen, the fifth leading accounting firm in the world at the time. Andersen, Enron's auditor, basically imploded after David Duncan, Enron's chief auditor, ordered the shredding of thousands of documents. The fiasco at Enron made the phrase "cook the books" a household term, once again.

HealthSouth (2003)

Accounting for large corporations can be a difficult task, particularly when executives want to falsify earnings reports. In the late 1990s, CEO and founder Richard Scrushy began instructing employees to inflate revenues and overstate HealthSouth's net income. At the time, the company was one of America's largest health care service providers, experiencing rapid growth and acquiring a number of other healthcare-related firms.

The first sign of trouble surfaced in late 2002 when Scrushy reportedly sold HealthSouth shares worth $75 million prior to releasing an earnings loss. An independent law firm concluded the sale was not directly related to the loss, and investors should have heeded the warning.

The scandal unfolded in March 2003, when the SEC announced that HealthSouth exaggerated revenues by $2.7 billion. The information came to light when CFO William Owens, working with the FBI, taped Scrushy discussing the fraud. The repercussions were swift as the stock fell 97% to a close of 11 cents in a single day. Amazingly, the CEO was acquitted of 36 counts of fraud but was later convicted on charges of bribery. Apparently, Scrushy arranged political contributions of $500,000, allowing him to ensure a seat on the hospital regulatory board.

Bernard Madoff (2008)

Bernard Madoff, the former chair 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 running a widespread Ponzi scheme. The then 70-year-old kept his hedge fund losses hidden by paying early investors with money raised from others. This fund consistently recorded an 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. He was sentenced to 150 years behind bars. Madoff died in prison on April 14, 2021, at the age of 82.

The Bottom Line

The worst thing about these scams is that investors were blindsided. Those convicted of fraud might serve several years in prison, which costs investors/taxpayers even more money. The SEC works to prevent such scams. However, with thousands of public companies in North America, it is nearly impossible to ensure that disaster will not strike again.

Is there a moral to this story? Yes. Always invest with care, and diversify, diversify, diversify. Maintaining a well-diversified portfolio will ensure that occurrences like these do not run you off the road, but instead remain mere speed bumps on your path to financial independence.

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