Greatest Financial Scandals Ever

Bernard Madoff

Year made public: 2008
Estimated Losses: $65 billion

Madoff was sentenced on June 29 to 150 years in prison, after pleading guilty on March 12 to federal charges that include fraud and money laundering. He lured many high-profile investors by promising to beat the market through a slow and steady investment strategy. But Madoff actually engaged in an elaborate Ponzi scheme. As the markets tumbled late last year, alarmed investors asked to pull their money out. Madoff couldn’t come close to providing the $7 billion requested and was turned in by his sons.

R. Allen Stanford

Year made public: 2009
Estimated Losses: $8 billion

Stanford, founder of Stanford Financial Group and the Antigua-based Stanford International Bank, was a trusted figure among elite investors. The SEC, FBI, and IRS had inquired for years about his company, which promised high-yielding returns on certificates of deposit. In mid-February, the SEC filed a civil case against Stanford and two associates, accusing the Houston-based company of “orchestrating” a massive fraud.

Jerome Kerviel

Year made public: 2008
Estimated Losses: $8 billion

Société Générale trader Kerviel is said to have made tens of millions worth of futures trades without the knowledge of his superiors. Once the French bank discovered his actions, it realized that his trades had already generated tremendous losses. Kerviel is awaiting trial and if convicted, faces up to three years in prison.

Ralph Cioffi and Matthew Tannin

Year made public: 2008
Estimated Losses: $1.6 billion

Bear Stearns hedge fund managers Cioffi and Tannin allegedly lied to investors about the health of their funds, which were heavily backed by subprime mortgages. The funds were struggling, but their alleged falsehoods lured further investment, according to the federal indictment. The funds buckled in June 2008, costing investors $1.6 billion. Cioffi and Tannin were both charged with conspiracy and fraud; both pleaded not guilty and are awaiting trial.

Kazutsugi Nami

Year made public: 2009
Estimated Losses: $1.4 billion

According to authorities in Japan, Nami, chairman of Japanese bedding linen company L&G, claimed he could get a 36% annual return on investments in a fictional currency he created and dubbed Enten, meaning “divine yen.” Nami allegedly took $1.4 billion from roughly 37,000 investors by convincing them that after the world’s economies collapsed, his digital Enten currency would make them wealthy. Investors grew frustrated when Nami allegedly began repaying them in Enten. In February he and 21 former executives of the company were arrested and charged with fraud in Tokyo.

Nick Leeson

Year made public: 1995
Estimated Losses: $1.4 billion

In the early 1990s, Leeson, a trader who worked for British investment bank Barings, made numerous risky moves on the Singapore International Money Exchange (SIMEX), hiding his losses from the firm in a secret account. By the time Barings discovered the ruse, it was too late: The bank was $1.3 billion in debt and had to shut its doors. Leeson, who served more than six years in prison, publicly owned up to his wrongdoing in two books about the scandal and its fallout.

Tom Petters

Year made public: 2008
Estimated Losses: At least $1 billion

Petters, a money manager who ran Petters Group Worldwide in Minnesota, was indicted in December by a federal grand jury on 20 counts of money laundering, conspiracy, and wire and mail fraud. He is alleged to have duped investors from 1995 to 2008. According to court documents, Petters allegedly received over $1 billion from investors and subsequently provided them with false reports claiming that his firm was using their money to buy and resell wholesale consumer goods for profit. The complaint alleges that these transactions never took place. Petters, who pleaded not guilty, is awaiting trial.

Paul Greenwood and Stephen Walsh

Year made public: 2009
Estimated Losses: $554 million

According to SEC documents, New Yorkers Greenwood and Walsh ran a fraudulent commodities trading company, WG Trading Investors. Instead of pursuing a “stock index arbitrage strategy,” Greenwood and Walsh allegedly used the funds as their own “piggy bank,” starting in 1996. The firm’s assets have been frozen and the SEC has filed a civil complaint in federal court in Manhattan charging the men with fraud. They also face criminal charges.

Michael W. Berger

Year made public: 2000
Estimated Losses: $393 million

Manhattan Capital Management, started in 1996 by Michael W. Berger, lost $400 million. But according to SEC documents, Berger failed to report the losses to investors. Instead he masked them by doctoring financial data in clients’ accounts. Berger pleaded guilty to securities fraud in federal court but fled before his sentencing in 2002. He was caught in Austria in 2007.

Nicholas Cosmo

Year made public: 2009
Estimated Losses: $380 million

In January, federal prosecutors charged Cosmo, who ran the Long Island, N.Y., firm Agape World, with mail fraud. According to court documents, Cosmo told investors they were putting money into bridge loans and merchant advances. The firm provided statements to that effect, but the funds were allegedly diverted for commodity futures trading, losing much of the investors’ stake, and paying off prior investors. Cosmo, who has pleaded not guilty, is awaiting trial.

Samuel Israel III

Year made public : 2005
Estimated Losses: $350 Million

Bayou Group, a Stamford (Conn.)-based hedge fund, drew $450 million from investors after its launch in 1996, according to federal prosecutors. Instead of investing the money, company founder Israel and his cohorts took it for personal use and created false reports that the fund was performing well. Last year, Israel was sentenced to 20 years in prison on conspiracy and fraud charges but fled in June before reporting to prison. His SUV was found on a bridge overlooking the Hudson River, bearing the words, “Suicide is Painless.” Israel surrendered a month later.

Edward Strafaci

Year made public: 2002
Estimated Losses: $350 million

According to court documents, Strafaci, executive vice-president of New York-based Lipper Holdings, told investors in reports that their investments into two Lipper hedge funds were growing at up to 15% annually. In reality the funds were losing money. In 2004, Strafaci pleaded guilty in federal court to securities fraud and was sentenced to six years in prison.

Beacon Hill Asset Management

Year made public: 2002
Estimated Losses: $300 million

John D. Barry, Thomas P. Daniels, John M. Irwin, and Mark P. Miszkiewicz, four executives of the New Jersey-based hedge fund, were accused by the SEC of misleading clients by inflating the value of securities in Beacon Hill Master Fund, even as the fund’s value decreased. In a civil suit, the SEC charged that Beacon Hill also purportedly hid from investors that it had unsuccessfully wagered that interest rates would rise. In all, the four were alleged to have cost investors more than $300 million. In the end, they reached a settlement with the SEC, neither admitting nor denying guilt. They were ordered to pay $4.4 million in interest and penalties.

Michael Lauer

Year made public: 2003
Estimated Losses: $200 million

Connecticut-based Lancer Management Group and its head, Michael Lauer, were charged with overinflating the values of three of the firm’s funds. Most of the funds’ money was devoted to small cap stocks that performed poorly, which Lauer hid from clients by lying. He was found guilty in 2008 of civil fraud charges brought by the SEC. He is awaiting trial on related criminal charges, of which he has maintained his innocence.

Charles Ponzi

Year made public: 1920
Estimated Losses: About $20 million

In 1920, Charles Ponzi duped thousands of investors, promising massive returns on international reply coupons, which could be purchased in one country and redeemed for postage stamps in another. The profit was to be made on the difference in prices between countries. Ponzi became a millionaire in a few months, but the scam’s scope brought him down. Curious parties began examining the accounts because there weren’t sufficient international reply coupons for his investment plan to function. In fact, Ponzi was repaying investors with newer investors’ money, pocketing much of it himself. He took in $20 million in a few months, equal to $222 million in current dollar values, and six banks crumbled.

[SOURCE: Bloomberg Businessweek]