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.
supersnail • March 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