Stock Market Scandals

Biggest Stock Market Scandals in History

8 min read

I always found scandals in the stock market entertaining. It always takes at least one guy to find a new way to screw the system. Today, we’ll take a look at different scandals. Every stock market scandal has at least one red flag. It may not always be easy to spot them. Often, they result from reports or profits that seem too good to be true. A shareholder needs to anticipate any wrongdoings from a company with sudden success. Below, we will look at major scandals over the last century.

Stock Market Scandals

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1. Charles Ponzi’s Ponzi Scheme (1919)

Before getting into stock market scandals, I think looking at one of the oldest and most original scams created is reasonable.

In 1919, Charles Ponzi came up with the brilliant idea to make money with International Reply Coupons (IRC), which can be exchanged for postal stamps. His idea was simple.

He bought IRCs in Europe and claimed to make a profit by selling them in the US. He promised investors a 50% profit within 45 days and a 100% profit in 90.

There is a reason why many of today’s scams wear the same name. Charles Ponzi paid his first investors with the money he received from the next ones. He was moving millions of dollars monthly. He had many doubters, and some wanted details on his operations.

However, he didn’t want to disclose that to keep his success a secret. His scheme was revealed after a series of articles by the Boston Post. 

Nowadays, many fraudsters are still involved in such schemes. When Bitcoin gained popularity, many companies were involved with Ponzi schemes. If it seems too good to be true, it probably is.

2. ZZZZ Best (1986)

If you thought stamps were an original idea, wait until you hear about carpets. Honestly, just the name of the company sounds ridiculous.

16-year-old Barry Minkow created a carpet-cleaning company. Somehow, It went as far as an IPO. At its peak, the business was worth $280M. How did this go undetected?

Barry created a series of fake companies, from clients to accounting and even insurance companies. He stole money from clients and family. He borrowed money from banks, sketchy individuals, and even did burglaries. 

Ernst & Whinney, now Ernst & Young, didn’t do enough background checks and performed very poor due diligence. Over 20,000 phony company documents later, shareholders won a $35M lawsuit against them to shorten their losses.

There are many red flags in this story. First, it’s a carpet cleaning company. Second, many senior executives were ex-convicts. Lastly, Barry was only a teenager during this entire process. He was sentenced to 25 years in jail. In 2011, he went right back for insider trading.

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3. Enron (2001)

Enron’s story is well known so that I won’t spend too much time on it. It’s the biggest stock market scandal on Wall Street.

Investors lost $74B. The energy company’s senior executives inflated revenues and misled investors and audit companies with fake financial statements.

For more on this story, you can read the following article.

4. Tyco (2002)

Before the scandal, Tyco was a blue-chip stock. They manufactured electronic components, equipment for health care and safety. The company was actually a legit business.

There is always a however. In this case, the senior executives were crooks. They sold stock illegally, loaned money almost interest-free, and disguised bonuses as stock sales.

Greediness led to the fall of Tyco. Top executives along with their audit firm were heavily penalized and served time in jail. Investors were eventually repaid hundred of millions of dollars. When a legit business conspires with auditors, it becomes difficult to spot red flags. 

5. Bernard Madoff (2008)

Bernie Madoff’s Ponzi scheme was the largest to date in history. Wealthy investors and fund managers lost approximately $64B. This wasn’t over a short period.

The scheme began in the 1980s and was only uncovered during the 2008 financial crisis. That’s over 20 years! Bernie Madoff wasn’t a nobody. He was once the former chair of the NASDAQ.

Madoff’s strategy for his hedge funds was quite simple. He posted double-digit gains for over ten years, and investors reinvested their money instead of withdrawing it. This allowed him to pay early investors with the funds of the new ones. Madoff defied investors by saying the funds were invested in blue-chip stocks and hedged with options

Throughout the scam, many red flags were reported. Ultimately, the SEC decided to ignore them. Even some of the investors were aware of the false returns.

However, the returns were too juicy to complain about. The scheme was finally uncovered when Madoff’s sons reported him after he revealed everything to them. He received a 150-year sentence for his crimes.

6. 1MDB (2009)

How often do governments and financial scandals meet? Let’s cross the ocean to Malaysia. In 2009, the prime minister of Malaysia, Najib Razak, created a strategic development company, 1MDB, with Environmental, Social, and Governance (ESG) goals.

The project aimed to grow Malaysia’s economy through sustainable incentives. In 2012, Goldman Sachs helped the company raise over $6B via bonds. 

In the next two years, the company missed a loan payment. Hence, the ongoing uncovering of one of Asia’s biggest market scandals began. Over $700M was transferred to Malaysia’s prime minister. Furthermore, over $4.5B was also transferred to other key officials. 

Jho Low was the young financial mastermind in charge of the entire scandal. Since then, he’s been accused of other financial crimes. He is still on the run despite an INTERPOL arrest warrant. As for Razak, he was sentenced to prison. Surprisingly, he tried to run for the presidency again. As for Goldman Sachs, they had to pay $3.9B for their role in this scam.

7. Wirecard (2019)

If I say Germany, do you immediately think of one of Europe’s biggest financial scams? Wirecard processed payments for merchants around the world. It was also part of major stock indexes in Germany and a successful fintech company. 

The Financial Times and a series of whistleblowers accused Wirecard of falsifying certain documents and inflating revenues. Wirecard fired back by suing everyone. Independent auditors failed to find over $2B in the balance sheet. The company eventually admitted its wrongdoings. 

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8. Luckin Coffee (2020)

Luckin Coffee is one of the most recent stock market scandals that affected US investors. The Chinese coffee company had more outlets than Starbucks at one point. That was surprising when it debuted in 2017. The company went public on the NASDAQ in May 2019 and had an incredible run to over $50 by January 2020. By May 2020, the price was below $2. 

However, the scam was quickly uncovered. It was revealed that top company officials inflated the revenues and created fictitious statements. Luckin Coffee was delisted from the NASDAQ and had to pay millions in damages. Incredibly, the company is still solvent and conducting business. It is attempting a comeback on the NASDAQ. How do investors feel about a fraudulent company?

Final Thoughts: Biggest Stock Market Scandals

Which red flags were you able to spot across the scandals above? Personally, my favorite is the carpet company with a ridiculous name. Ponzi schemes may be difficult to pinpoint. However, when returns seem too good to be true, especially when the economy is struggling, it is probably a red flag.

Other red flags appear when whistleblowers and auditors see anomalies before anything seems wrong with the business but when revenues are too good to be true. 

In any case, investing in companies that grow very quickly is always a risk. Digging deeper and getting out when the business is reaching unsustainable growth is highly recommended.

If you want to learn more about how to profit from the stock market, head over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.

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