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Biggest Financial Scandals in History!

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Last Updated on 10 February, 2024 by Abrahamtolle

The financial world doesn’t always get a lot of attention from most of us. It can be, however, a thrilling industry to be part of. Many investors and traders are smart people with a good sense of numbers. They are not just trying to build a fortune, but also to keep the overall balance in the industry. However, once in a while, there are financial scandals that come to light and the whole world turns its attention to this industry, wondering if it’s all is what it seems.

What are the biggest financial scandals in history? To name a few financial scandals, we can remember Charles Ponzi, Bernard Madoff, or the people at Enron and Worldcom. These stories traveled all around the world, making people aware there are financial scams and scandals in this field as well.

If you are unaware of the financial scandals that have taken place around the world to date, it’s time you find out how some companies tried to play the game, inventing their own rules. here are some famous scandals in history:

Panic of 1792

One of the most famous examples of early financial scandals happened in 1792. Back then, bankers William Duer and Alexander Malcomb wanted to buy all debt securities from the United States bank, First Bank. The reason why they wanted to do this was the following

For the initial public offering for the bank of the United States, a so-called script was issued. A script cost $25, and those who bought a script obliged to make three additional payments down the road totaling at $375.
Of these $375, 75% should go into buying US debt securities.

Now, the plan of William Duer and Alexander Malcomb was to take control of the US debt securities since investors needed them to make payments on stocks to the bank of the United States. They applied for loans and endorsed one another’s applications. In March of 1792, Macomb and Duer defaulted on their loans, and the price of securities quickly fell in more than 20%

Alexander Hamilton prevented the young United States economy from crisis, by persuading banks to continue providing credit throughout the crisis. Still, this is a very good example of an early financial scandal.

Here you can read more about the panic of 1792!

Charles Ponzi

Charles Ponzi was just an immigrant from Italy in 1919 when he was living in Boston. The world did not know about him, but soon everybody found out how Ponzi wanted to play the game. He wanted to get rich fast and easy, so he invented a financial scheme that involved coupons.

He thought that by purchasing international coupons for a very low price and reselling them in the US he would make a good profit without much effort.

This was how it was done:

At the time, letters abroad often included an international reply coupon. A reply coupon was ” a voucher that could be exchanged for minimum postage back to the country from which the letter was sent”. In other words, if you sent a letter to someone in Spain, you could include a reply coupon, so that your friend could reply to the letter.

With the fluctuation of exchange and postal rates opportunities to make money arose. To make money, you only had to purchase replay coupons cheaply in a foreign country, and then send them back to the U.S. There you could turn them in for American stamps, and then sell them at a higher price. In other words, this was a form of arbitrage system, and it was perfectly legal.

So why was this a financial scandal? Well, even if the idea seemed sound, Ponzi’s business really did not exist. The trick of this financial scam was to use the money from new investors to pay himself and the existing backers. In fact, many times he did not even need to pay off the old investors, since they wanted to reinvest their returns in the business.

This type of financial scam is actually seen quite often in the investing world, but the case was so famous, that similar scams are now called “Ponzi schemes”.

Here you can read more about the Ponzi Scheme!

The Selling of the Eiffel Tower

This is a very famous example of one of the biggest financial scandals that has literally been followed around the world.

So, if you don’t know the story, here’s everything about it.

Back in the day, there was a man named Victor Lustig, a Hungarian immigrant in America who had a very steady job: financial schemes. The most famous one is, of course, selling the Eiffel tower.

How did he do this?

Well, in 1925, our man traveled to Paris. There, he found out that the beautiful Eiffel Tower has dilapidated, by some being considered just an expensive leftover from the Pairs Exposition in 1889. He thought this would be a good thing to capitalize on.

He presented himself as a government official that had been given the task to do bidding on government projects. He also went in intimate meetings with the scrap metal dealers. He told them that the city was going to secretly scrap the tower, and then sell it to the highest bidder. One dealer actually placed a big bid and was willing to buy the tower.

However, when he went to the city officials with his bill of sale, he realized he has been fooled. The man was very embarrassed, and did not have the courage to report this to the authorities.

Lustig, our Hungarian man, tried the scheme a second time, after he noticed nobody reported him. Unluckily for him, the second time he was reported to the authorities and he was forced to leave Paris.

However, this story remains one of the best in the financial world, showing the simplicity of a well-played financial scam.

Here you can read more about Victor Lustig and his other financial scams!

The Match King – Ivar Kreuger

Another older financial scandal, but very interesting for its time, is the Match king story. Back in the 1920s, Ivar Kreuger was probably the most famous financier and industrialist in the match industry. The man of the matches secured 75 percent of the match production in the world, which earned him the famous nickname, “The Match King”.

However, the financial scandal followed him after people realized he wasn’t all that big. After the crash of the market in 1929, the Match King was revealed to be way less than people thought. Kreuger had some very innovative practices to keep the illusion of his empire. The Match king succeeded in one thing: to make his business seem more profitable than it actually was. He ended up shooting himself in 1932 in Paris, after his financial schemes collapsed around him.

Still, it is important to mention that there is a still ongoing debate about Ivar Kreuger and his motives. Some people mean that Ivar Kreuger was an honest businessman who was trapped in his attempts to conquer the match industry by issuing massive loans to governments, among many things.

Here you can read more about Ivar Kreuger

American Insurance Group

From the list of the biggest financial scandals in history, the scam from American Insurance Group should not be left out. In 2005, the company suffered massive fraud, followed by the discovery of bid-rigging and the manipulation of the stock price.

The star of this financial scandal was Hank Greenberg, the CEO at the time. He was booking loans as revenue and also attempted to inflate stock prices. A SEC investigation discovered what he was doing in the company. Hank Greenberg was fired, but he wasn’t charged with time in prison. The company, however, had to pay large sums of money back.

Here you can read more about this financial scandal!

HealthSouth

You probably heard of HealthSouth. It was the largest healthcare company in America. The financial scandal that surrounded it in 2003 was because of the CEO at the time, Richard Scrushy.

HealthSouth’s earnings were inflated by up to 1.4 billion dollars between 1996 and 2003, allegedly to meet the expectations of the stockholders. However, when Scrushy sold 75 million dollars worth of stocks in a single day, the lights turned to him. This happened just before the company suffered a big loss due to the announcement that it was accused of the mentioned accounting scandal.

Richard Scrushy was acquitted of the accounting fraud, but he was still convicted because he bribed the governor of Alabama. He received a seven years sentence in prison. Afterward, he became a motivational speaker and plead that he was never guilty in this financial scandal.

Here you can read more about the HealthSouth Scandal.

Satyam

Satyam was another big financial scandal in recent history that received global attention. Satyam was an Indian IT company that also offered back-office services for accounting.

In 2009, one of the biggest scandals in history shed their image and destroyed their reputation. The founder of the company, Ramalinga Raju, boosted the company’s revenue falsely by no less than 1.5 billion dollars. He falsified margins, cash balances, and revenues!

Raju later admitted he did this by sending out a letter to the board of directors in the company. He was charged, along with his brother, with conspiracy, breach of trust, falsification of records and cheating. However, he was lucky to be released after the “Central Bureau of Investigation” did not succeed in filing charges on time.

Here you can read more about the Satyam Scandal.

Freddie Mac

Freddie Mac was a financial giant working in mortgage and was also federally backed at the time when the financial scam took place.

The financial scandal in 2003 revealed the fact that the company understated its earnings by 5 billion dollars. The COO, CEO, Chairman, former CFO, and former Vice President took part in this scheme. Their action was simple: they just took earnings of the company and misstated them intentionally. An SEC investigation discovered the malicious activities that were happening at the Freddie Mac company.

There were 125 million dollars given in fines. Also, the COO, CFO, and CEO were fired from their position at the company.

Here you can read more about this scandal.

Waste Management Company In Houston Faking Earnings

Another example of a great financial scandal is the story of this Houston-based company. The publicly-traded firm had a massive collapse in 1998, when they were involved in what has become a famous financial scheme.

They reported over 1.7 billion dollars in fake earnings. The top players that took part in this massive financial scandal were Dean L. Buntrock, the CEO and Arthur Andersen, a top executive in the firm. How did they manage to pull such a scheme? The waste management company led investors to believe that the depreciation time length of their property, equipment, and plant is increasing. However, they did so falsely on the balance sheets, which helped them increase their fake earnings.

They got caught by a new management and CEO team that found there was something wrong with the numbers in the book. The waste management company received penalties for 457 million dollars.

Tyco Financial Scandal

Tyco was well-known in the financial world, being a blue-chip security systems firm, based in New Jersey, but originally from Switzerland. The 2002 financial scandal, however, shed light on how the company actually operated.

The CFO and CEO of the company were stealing money from the company (about 150 million dollars) and inflated the firm’s income by 500 million dollars. Dennis Kozlowski, who was the CEO at the time and Mark Swartz, former CFO, were siphoning money through various schemes, such as unapproved loans. Money was then taken out of the company in the form of executive benefits and bonuses.

They were eventually caught by investigators who uncovered these questionable practices. They were sentenced to serve time in prison (8 to 25 years) and the company was also forced to pay almost 3 billion dollars back to the investors.

Here you can read more about the Tyco Scandal.

The Savings and Loan Crisis

Back in the 80s, there were many financial scandals taking place in the United States alone. One famous example is the Savings and Loan scandal. Between the 80s and early 90s, numerous loan associations began to fail and left behind massive losses. Taxpayers and investors were left with billions of dollars in costs with the failure of 1043 out of 3234 savings and loan associations in the US.

With the Federal Home Loan Bank Act of 1932, a system that promoted homeownership for the working class was in place. S&L worked by paying lower than average interest rates on deposited money, while offering lower than average mortgage rates.

The stagflation, low growth and high inflation of the seventies and eighties made the FED raise their interest rates to fight high inflation. With the recession that followed fewer applied for mortgages, which lead to a situation where S&L:s found themselves with many low paying mortgages, and an inability to raise interest rates to compete with other players. The reason for this inability was that there was a legislation set cap on the interest rates that S&L:s could charge.

With fewer people applying for mortgages, and people moving their money to other banks in search of higher interest rates, the S&L:s found themselves in economic predicament.

Here you can read more about this period.

The Enron Company Scam

The financial world has seen many schemes over time, but the Enron financial scandal remains something we still talk about to this day.

Back at the beginning of the millennium, the Enron company was viewed as one of the most innovative companies in the United States. The Fortune magazine actually named it six years in a row to be the best company in America.

However, the Enron case is a very interesting one. After years of being one of the top companies in America, Enron lost investors a lot of money by dropping abruptly in just one year. In 2001, a share price in the company had fallen to less than $1.

Why did this happen?

Well, investors discovered that Enron company had held billions of dollars in debt off the balance sheet. The decline of the company was obvious and it soon declared itself as bankrupt.

Here you can read more about the Enron company Scam.

The Worldcom Company Scandal

You probably also heard about the Worldcom scandal. It is probably the famous story of a corporate bankruptcy in the United States. The Worldcom Company was very respected and admired in its time, until a financial scandal made people discover what was hidden underneath.

In 2002, investors that put their trust in Worldcom discovered that the company’s assets were inflated by over 11 billion dollars worth of accounting errors.

At the time, Bernard Ebbers, who was chief executive of the company, was sentenced to no less than 25 years in prison. The financial scandal got famous all over the world and, since then, Bernard Ebbers has been seen as one of the most corrupt CEO in the history of time.

Here you can read more about the Worldcom Financial Scandal!

The Fall of Lehman Brothers

The investment world has many interesting stories and financial scandals. One very famous example was the fall of the Lehman Brothers. Imagine a 150 years old company that is trusted by millions of people and thousands of investors. And then imagine it collapsing. Nobody had seen this coming in the 2008 financial crisis!

The Lehman Brothers’ financial services firm was one of the strongest presences on the market, being at the time the number four in the investment banks top of America. The financial scheme that used accounting tricks to earn more money was exposed because of the mortgage crisis. In short, Lehman Brothers had hidden over $50 billion in loans, disguised as sales.

The bank filed for bankruptcy, but there were severe outcomes on the global economy, following this financial scandal.

Here you can read more about the Lehman Brothers financial scandal.

Bernard Madoff Financial Scandal

Charles Ponzi may have been known as the “Ponzi scheme” inventor, but Bernard Madoff is known as the man who implemented the biggest Ponzi scheme in history. Bernard was a well-respected Wall Street mogul, having his own investment firm and knowing his way around the financial world. Now, he is known as the mastermind of a great financial scandal in the history of the United States.

What did Bernard Madoff do? He implemented the famous Ponzi scheme to defraud investors of large sums of money. The estimate of how much he won is at around 60 billion dollars. Even though we still don’t know when he started to implement this scheme, it is believed that it started somewhere in the 1980s. His empire fell once the 2008 financial crisis hit the market.

The story says that Madoff confessed in December to his family that he built a big lie and that his business is not what it seems. His sons made the right call and turned him in. Now, Bernard Madoff is serving his time in prison – he has a 150 years sentence!