So how much did you lose on the Facebook IPO? Never mind; we don't want to know. The stock market is a great place to make money, but it’s an even better place to lose it. And of course, there are always people looking to game the system and cheat even more. In this article, we’ll share 10 insane scams that cost companies and investors millions, and sent some of the culprits to jail.
10. ZZZZ Best
One of the most popular stock scams is creating companies that look great on paper but don’t have any real assets, then cashing out before anybody notices. Young Barry Minkow thought he could pull this off with ZZZZ Best, a carpet-cleaning company he started in high school. Built on a classic pyramid scam formula, he took it public in 1986 and faked thousands of documents to pull off the IPO. Minkow planned to sell his shares and cash out in 1988, but the business collapsed in 1987, costing investors $100 million and sending Minkow to prison. When he got out in 1995, it looked like he’d learned his lesson, until he was recently busted for trying a stock scam with construction company Lennar.
9. Nick Leeson
One of the dirtiest little secrets of the banking industry is that nobody cares what you’re doing, as long as you’re making money. For Nick Leeson, a trader working at Barings, England’s oldest investment bank, this was a way of life. His unauthorized speculative trades had made the bank huge profits in the past (more than 10 percent of the bank’s income one year), but they can’t all be winners, and pretty soon Leeson’s trades started to tank. The trader hid his myriad losses in a special “Error Account” coded 88888, normally used to handle accounting mistakes. Unfortunately, that account grew to over $420 million, which is not an easy amount to hide. When an earthquake sent several of his positions into a tailspin, he left a note and fled the country. The total losses were enough to drive Barings into bankruptcy.
It’s sometimes scary to look at these scams from the outside and see how easy it is for a couple rich jerks to totally manipulate the world market. Four independent traders worked in concert with brewer Guinness to buy up as much of the company as they could, artificially bringing up its stock price. A higher stock price meant higher market capitalization, which the company would then use to buy out rival Distillers, Inc. They actually pulled it off, but then U.S. stock trader Ivan Boesky sold out the conspirators as part of his plea bargain.
7. Media Vision
Technology is a great playground for a stock fraudster. If you’re on the cutting edge, nobody can really prove whether your product works right or not. For California-based Media Vision, things started off on a good track. Founded in 1990, they had success producing sound cards and CD-ROM drives, and were the first company to release Microsoft Windows on CD. But things quickly grew sour for the firm as rising costs and failed products led to a $99 million loss in 1993. That didn’t deter CEO Paul Jain from issuing a fake financial report stating the company actually made $20 million that year. Needless to say, the truth came out and everything went south for Media Vision. The collapse of the company cost investors and lenders $200 million.
6. Anthony Elgindy
With all of the money that goes flying around in these stock scams, the real currency is actually information. If you know something that other people don’t, you can buy and sell ahead of the curve, minimizing risk and maximizing profits. For day trader Anthony Elgindy, that was the name of the game. The founder of Pacific Equity Investigations charged a legion of subscribers $600 a month to follow his trades and get inside advice on a wide range of stocks. Elgindy was exceptional at shorting, dumping stocks right before they took a huge dive. But how did he know that the dive was coming? Well, he had an FBI agent tipping him off on companies they were investigating. Agent Jeffrey Royer gave Elgindy confidential information and Elgindy not only cashed in by shorting but also got cred from his subscribers. Both men went to jail, obviously.
5. Centennial Technologies
If you were an owner of Centennial Technologies in 1996, you probably felt pretty good about your investment. The company’s CEO made an announcement that the company made several million dollars in revenue on their Flash 98 memory cards, and the stock price soared to more than $55 a share. Only one problem: Flash 98 didn’t exist. The company had no manufacturing base. They mocked up a couple thousand fake units to fool investors and kept employees busy by telling them to ship fruit baskets to Centennial customers and alter the invoices to make it look like they were getting product. When the truth came out, the stock dropped to $3 a share before being delisted and more than 20,000 investors lost a fortune.
The sad fact about this list is that it’s not just tiny companies run by con men that manage to defraud investors. At one point, Enron was the seventh-largest company in the entire United States. The Houston-based energy trader started building a house of cards early on, using fraudulent accounting methods and shell companies to record each dollar of income multiple times. With the backing of accounting firm Arthur Andersen, the scam continued until 2001, when creditors came calling and investor confidence began to decline. When the whole thing unraveled, Enron’s share price plummeted from 90 bucks a share to less than 70 cents, making them the poster child for stock market corruption. Kenneth Lay and Jeffrey Skilling, the men in charge at the time, were both found guilty on multiple counts of federal financial fraud.
3. Bre-X Minerals
The thing about investing in corporate stocks is that you really have to take a lot of people at their word. Sure, you can look at shareholder reports, but once those are out the ship has already sailed for the most part. So when Canadian company Bre-X announced that they were sitting on a gargantuan gold mine in the Indonesian region of Busang, their market capitalization rose and rose, peaking in 1997 at $4.4 billion. Only one problem: the mine was dry. When independent analysts proved the fraud, the stock plummeted and the company collapsed, causing huge losses all across the Canadian financial system.
Amazingly, some stock market scams can be pulled off by only one person. When journalist Mark Jakob saw an opportunity to short-sell a stock in 2000, he used his press credentials to do it. A former employee of Internet Wire, Jakob carefully forged a press release from network technology corporation Emulex stating that the SEC was investigating the company, the CEO was stepping down and revenue estimates were being downgraded. None of this was true, of course, but Jakob pulled in $250,000 from shorting Emulex while costing the company $2.2 billion before NASDAQ stopped trading. Jakob was caught and sent to jail for a few years, plus made to pay back his profits and more.
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1. Langbar International
Considered by some to be the biggest fraud in the history of the stock market, Langbar International was what’s called a “pump and dump.” It sounds like something out of weird porn but the scam is actually pretty simple. You make a company, fake assets for that company (in this case, a faked certificate of deposit for $275 million from a Brazilian bank), and then sell shares against those fake assets. After going public, Langbar pursued a number of business deals in Argentina, none of which went through, and collapsed in spectacular fashion with the arrest of most of the company’s principals.