Crazy Eddie Financial Fraud

This is an old article -- from 2000 -- but the sidebar (at the end) describing how the electronics store Crazy Eddie committed massive financial fraud is fascinating.

There are numerous ways to classify financial statement frauds. Our research divided them into five principal, but related, types. One of the most outrageous aspects of the Crazy Eddie's fraud is that he used all five methods. This is how he did it.

Posted on March 30, 2007 at 6:33 AM • 20 Comments

Comments

supersnailMarch 30, 2007 7:52 AM

The article was not very clear on how the Antars actually made any money out of the scam. Initially it was just a straightforward skimming of profits, so only the IRS lost out. After the company IPOed it became an Enron-ish share price inflation scam, so the unlucky shareholders lost out.

The US tax system makes collecting dividends extremely unattractive, therefore shareholders have got used to seeing companies post massive profits and growth pay no dividends whatsoever c.f. Microsoft.

Because no "real" money changes hands the companies claims are hard to verify.

A change in the tax system to make dividends less unattractive, combined with a requirement to pay some fixed percentage of declared profits (say 10%) as dividends would put an end to this type of fraud.

This type of company valuation fraud is extremely rare in Europe in spite of a probably less honest collection of owners. (This does not include Berlosconi who is definitely honest -- he had the law changed just to be sure).

These share price scams would not be possable if companies were forced to pay a minimum percentage of thier declared profits as dividends. The US tax system makes collecting dividends extemely unattractive

NJMarch 30, 2007 7:55 AM

Crazy Eddie... his accounting is INNNSSAAAAANE. The chain is missed in NY-area for its amusing -- and ubiquitous -- radio and TV ads. I often wonder if the actor in those commercials ever got hassled after fraud came out.

JayMarch 30, 2007 8:12 AM

'... in Europe ... probably less honest collection of owners.' : Come on supersnail, on what planet are you!? If ever a country had least honest owners, the US of A comes very close. Look it up in any statistic, e.g. re fraud or corruption (which are just examples). CSO.com shouldn't let such improper and ill-guided slander around...

crackMarch 30, 2007 9:13 AM

Sam Antar, the CFO of Crazy Eddie's at the time of the fraud and cousin of Ed 'Crazy Eddie' Antar, now runs http://www.whitecollarfraud.com/. He has become an outspoken anti-fraudster.

He also has a good rundown on his side of the Crazy Eddie story.

Peter PearsonMarch 30, 2007 10:07 AM

Note that the article coyly refuses to name Crazy Eddie's auditing firm, while implicitly excusing it with such rhetorical curiosities as, "it would have been difficult—if not impossible—for the auditors to easily uncover such a scheme." Interestingly, it turns out that Crazy Eddie's auditor was KPMG, a public-accountancy firm with a remarkable history of involvement in such cases going back (in my memory) to the Penn Square scandal of the early 1980's.

Auditors are the security mechanism by which stockholders keep management honest; but the auditor is nominated by management, and the auditor's paycheck is written by management, so there's always a failure ready to happen.

supersnailMarch 30, 2007 10:11 AM

@jay.
"on what planet are you!? "
Planet earth thanks! There was that weasel word "probably" in the sentense.

I base my probably on:-
One -- no european country has an Elliot Spitzer equivalent routing out this stuff.

Two -- the track record Robert Maxwell, Conrad Black, Lernout & Hauspie , Parmalat etc. etc.

Three -- (dons flameproof clothing) the level of petty corruption in some european countries would indicate a corresponding amount of grand corruption.

Clive RobinsonMarch 30, 2007 10:19 AM

@Peter Pearson,

"the auditor is nominated by management, and the auditor's paycheck is written by management, so there's always a failure ready to happen"

In the U.K. (if you belive what the press write) we go one better, the major accounting groups all have representatives at the Tax Office and sit on other Government advisory pannels. As well as having Gov Ministers who are effectivly "jobbing out" from these companies.

So the accountants get to set the rules and the penalties as well as advising which of their customers should (not) be investigated...

Colossal SquidMarch 30, 2007 11:03 AM

"Three -- (dons flameproof clothing) the level of petty corruption in some european countries would indicate a corresponding amount of grand corruption."

(i) Fallacious assumption.
(ii) Which European countries?

Bryan FeirMarch 30, 2007 11:14 AM

@supersnail

Well, Conrad Black is Canadian, even if he officially gave up citizenship so he could purchase a peerage in England. Not that he's all that popular here. After all, the man was sufficiently arrogant that he took boxes of 'personal items' out the back door of the company he had previously run, in direct defiance of a court order prohibiting him from removing any documents from the building.

AnonymousMarch 30, 2007 1:21 PM

@Clive Robinson

"Have you seen the TKmaxx loss of 46.5Million Credit card holder details"

Sorry for being off topic. When I read the TKMaxx story I just asked myself *why* did they want to keep that data? I can understand hanging on to credit card transactions for a month as an anti-fraud measure (and even that's a risk) but years? It seems totally insane.

quincunxMarch 30, 2007 5:36 PM

Oh please, every national banking system is built on fraud.

But I guess to most people, if fraud is sponsored by the law, it doesn't matter

Matt from CTMarch 30, 2007 6:10 PM

@jay.
"on what planet are you!? "

Earth.

I used to work for a very large European firm (about 25 places from making Global 100).

We talked about industrial espionage in the U.S. Prior to my time, my office had it's top guy arrested by the FBI for espionage. HOWEVER...the managers who would come over from France would tell war stories of living it every day -- of finding delivery truck drivers who went to use the men's room, roaming the plant with cameras. Senior managers who refused to use e-mail for any sensitive communications out of concern the systems were insecure.

Right down the row, they all had a lot more confidence in the U.S. legal system to protect intellectual property, as well as there simply being no where near the scale of corporate misdeeds as in Europe. Even if it fustrated them sometimes when told U.S. accounting rules say...

=================
To add to the TJX, it's reported $8M was charged on the stolen cards.

http://www.securityfocus.com/brief/465

Anyone wanna bet that TJX has spent way more than that since December in the investigation and security improvements!!!

Sam E. AntarMarch 30, 2007 6:53 PM

Re:

"Interestingly, it turns out that Crazy Eddie's auditor was KPMG, a public-accountancy firm with a remarkable history of involvement in such cases going back (in my memory) to the Penn Square scandal of the early 1980's."

My response:
Crazy Eddie basically had two audit firms:

Penn & Horowitz (around 1971 -1983)
Main Hurdman (1984 - 1987)

During 1987, Main Hurdman (#9) merged with Peat Marwick (Big 8 firm).

About the same year Peat Marwick Main merged with two Euroapean firms to form KPMG.

Most auditing firms are basically the same in qualifications. The problem is the lack of education, training, skills, and experience of auditors.

In addition as Joe Wells basically referred to a cultural problem in the profession in that auditors do not want to believe that their clients may be crooks.

As criminals, we took advantage of their trust and respect in us.

For more information about white collar criminal behavior see my blog www.whitecollarfraud.blogspot.com.

Thank you Bruce Schneier for posting about the Crazy Eddie fraud.

To all have a great week end.

Sam E. Antar (Former Crazy Eddie CFO & convicted felon)


Peter PearsonMarch 31, 2007 1:07 PM

Sam E. Antar wrote:

> Re:
>
> "Interestingly, it turns out that Crazy Eddie's auditor
> was KPMG..."
>
> Crazy Eddie basically had two audit firms:
>
> Penn & Horowitz (around 1971 -1983)
> Main Hurdman (1984 - 1987)
>
> During 1987, Main Hurdman (#9) merged with Peat
> Marwick (Big 8 firm).

It's not clear whether this was intended as a contradiction, but my original statement was based in part on this statement posted to Herb Greenberg's Market Blog on 2006.12.15 by someone claiming to be Sam E. Antar:

"KPMG was in effect the auditor of Crazy Eddie."

Sam E. Antar (former Crazy Eddie CFO & convicted felon)March 31, 2007 4:20 PM

Peter:

My statement was not meant to contradict your statement but adds additional information. My point is that all major audit firms are facing the same issues. I agree that some audit firms seem to have more problems than others.

My comments to Herb Greenberg:

Herb:

KPMG is one of the major "big four" accounting firms that supposedly represent the first line of defense against criminals of my former caliber.

It just seems that certain major accounting firms never learn from their mistakes.
Two predecessors of KPMG was Main Hurdman which merged with Peat Marwick to eventually become part of the “M��? and “P��? of KPMG. The “K��? and “G��? comes from their foreign partners.

KPMG was in effect the auditor of Crazy Eddie. Since that time they have experienced some now infamous audit melt downs and narrowly avoided indictment in a tax fraud case under investigation. Now these firms want liability caps?

Judging from the actions of KPMG and certain other major accounting firms there seems to be a culture of either arrogance, incompetence, or down right stupidity as they continue to conduct too many ineffective audits and get some clients involved in questionable tax avoidance transactions.

I am beginning to think that the term “window dressing��? now applies to audits too.
Addressing your comments:

While most accounting students never take a specific fraud course they do learn a little bit about “independence.��?

If you are concerned about “lack of monitoring systems��? you would be livid if I were to tell you that supervision of these relatively inexperienced and inadequately skilled staff auditors on the ground is much worse.

A frequent complaint I have heard and actually experienced is that audits are over-used as training grounds for staff members.

Therefore, I can say that the criminals of the world are ecstatic as some of these major accounting firms (I am being kind by saying “some��?) continually bumble their responsibilities.

If I could advise college students about the next great profession it would be forensics or a white collar crime law practice.

Respectfully,

Sam E. Antar

PS:
I forgot one message to the management KMPG and other major accounting firms:

Keep it up guys. I may have long left the scene. However, there are plenty of wannabes out there who know more about audits than you. Those wannabes are criminals like I was.

Link here:
http://blogs.marketwatch.com/greenberg/2006/12/the_duh_of_the_.html#comments

Sam E. Antar (former Crazy Eddie CFO & convicted felon)March 31, 2007 4:29 PM

Re:

"Auditors are the security mechanism by which stockholders keep management honest; but the auditor is nominated by management, and the auditor's paycheck is written by management, so there's always a failure ready to happen."

Response:
I agree. We have an additional problem with so called "independent" audit committees whose job is to supervise the auditors and monitor financial reporting and internal controls.

They are less qualified than the auditors and less independent. In general they are not required to have formal educational backgrounds in accounting or fraud and can own stock in the company.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

sysadmnApril 3, 2007 12:17 PM

Index of Public Corruption, the US tied for 20th place:
http://www.infoplease.com/ipa/A0781359.html
Of course, the study was done by Europeans, those cheaters. The study looks at public corruption, which might be an indicator of corruption in the business world.

"The index defines corruption as the abuse of public office for private gain and measures the degree to which corruption is perceived to exist among a country's public officials and politicians. It is a composite index, drawing on 12 polls and surveys from 9 independent institutions, which gathered the opinions of businesspeople and country analysts."

Another interesting take is http://www.gfk.hr/press1_en/corruption2.htm, which concludes "Corruption climate in Europe is relatively heavy; however, most of the population asked in 21 selected European countries do not believe bribes are a natural or everyday present part of social life.".

anon232April 15, 2007 9:58 AM

Inventory fraud is child's play compared to contractor percent complete billings. You have the contractor deciding for himself how much of the project is complete. "Don't worry, we would have made it next month anyway" does not set too well with the bonding company forced to pick up the pieces after a bankruptsy occurs. Many months I was almost forced to bill the government 95% complete for projects received the previous day.

Wake up people, financial fraud is financial fraud. Don't help your employer defraud the government, stockholders or anyone else. If you do, you become a member of the conspiracy. Everything is conspiracy or wire fraud.

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