Top Five Corporate Frauds of The Century

hello and welcome back to patrick boyle on  finance in today's video we're going to look   at some of the biggest corporate scandals since  the turn of the century in no particular order   but we're going to see if there's anything we can  learn from them okay so first up we have terranos   the blood testing company now like all good tech  founders elizabeth holmes had a great backstory   her father had worked for an aid agency overseeing  relief work and elizabeth claimed that she'd been   brought up wanting to change the world for the  better at the age of 19 she came up with an idea   that she believed could change the world so like  all tech founders before hershey dropped out of   university started dressing like steve jobs and  filed her first patent the only problem at this   point in the story is that her idea didn't work  terranos was a blood testing company and while the   existing technology for blood testing requires  one vial of blood for each diagnostic test   terranos claimed to be able to perform over 240  tests ranging from checking cholesterol levels   to complex genetic analysis with just a single  pinprick of blood this idea surprised a lot of   people in the industry as obviously a certain  amount of blood gets used up on each test the   technology was claimed to be an automated  fast and inexpensive technology that would   revolutionize medicine and save lives the world  over the blood once it was collected was put in a   nano container and analyzed in the terenos edison  machine they obviously had to call it an edison   machine because the name tesla had already been  taken the pitch appealed to the pharmacy chain   walgreens who partnered with terranos offering the  blood tests in its stores teranos raised over 700   million dollars from brand name investors people  like larry ellison and tim draper and it was seen   as a rising star in silicon valley the company was  valued at over nine billion dollars at its peak   and holmes who owned more than half of the  company was the world's youngest female   self-made billionaire she had a lot of big names  on her board of directors including two former u.s   secretaries of state henry kissinger and george  shulls with hindsight it's easy to point out that   few of the big names while famous had any  experience in medicine or science now john cario   a journalist at the wall street journal first  broke the story in 2015 after receiving a tip   that the technology didn't work his interest was  triggered by holmes's alleged ability to invent   a groundbreaking medical technology after just  two semesters of a chemical engineering degree   employees began sharing their experiences at  the company revealing lies to board members   a culture of intimidation and  secrecy technology that never worked   and worst of all test results that were being  sent out to real patients that were false   life-changing medical decisions were being  made based upon these fabricated test results   the entire company had been built on a foundation  of lies the wall street journal revealed that   terenos was not using its own technology to run  the majority of its tests due to the fact that the   edison machines just didn't work at first holmes  denied the claims threatening to sue both the   journalists and the wall street journal in 2018  holmes stepped down as ceo and was charged with   criminal fraud having misled investors and made  false claims about the blood testing technology   after an fbi investigation the company officially  shut down the sec summed up what was wrong with ms   holmes and thuranos in a damning report  which finished up with the statement   innovators who seek to revolutionize and disrupt  an industry must tell investors the truth about   what their technology can do today not just what  they hope it might do someday okay so next up on   our list is luck and coffee luck and coffee had  an ambitious goal to defeat starbucks in china   selling coffee to a nation of tea drinkers because  there would be an app it is of course a technology   company and disruptive and because investors love  tech they love apps and they love disruption most   didn't notice that the coffee was terrible  founded in 2017 with capital from some of   the highest profile asia-focused vc firms luck and  coffee was quickly valued at one billion dollars   they opened 5 000 locations and reported sales of  as much as 200 million dollars a quarter in 2019   this success drew in big international  investors like blackrock and support from   banks including credit suisse lucken went  public in the united states in may 2019   raising 561 million dollars the overall firm  was valued at more than four billion dollars   its founder had a long business history firstly in  the telecom industry then auto insurance and then   car rentals where he raised hundreds of millions  of dollars from international investors built up   a car rental company that went public and then  collapsed carson block a well-known short seller   watched lucan's rising share price with skepticism  in autumn of 2019 luckin reported an almost   six-fold increase in quarterly sales while block  suspected that some of luck and sales weren't real   proving it would obviously be expensive but then  in late 2019 a fund manager contacted him with   the results of an investigation requesting that  bloc released it the fund manager had created a   research report which was the work of more than  1000 investigators who monitored sales and foot   traffic at luck and locations in china they had  gathered more than 25 000 receipts from customers   the report showed that lochen was inflating  the number of items sold per day by 69 in the   third quarter of 2019 and 88 in the fourth it also  concluded that the average cost of items sold was   lower than the company had reported in other words  luckin was a fraud luckan denied the allegations   its stock price plunged immediately after  the report came out but then it recovered   auditors from ey were working on lucan's  2019 accounts and found evidence that some   managers had been fabricating transactions the  false sales had inflated the company's income   costs and expenses in april 2020 luckin said that  its chief operating officer and some employees   might have faked more than 300 million dollars  in revenue a special committee would be formed   to conduct an internal investigation this  announcement resulted in the stock price crashing   and several executives being fired trading was  then suspended and the company was delisted from   nasdaq in june 2020 the company filed for chapter  15 bankruptcy in the united states in february   2021 luckin says that the company's outlets remain  open for business and the chapter 15 petition is   not expected to affect its day-to-day operations  our number three company on the list is wirecard   now wirecard was a german fintech firm launched  in the late stages of the dot-com boom in 1999   as a payment processor helping web-based stores to  collect credit card payments from their customers   they almost went bust in the early 2000s and in  2002 marcus brown a former kpmg consultant who   once again dressed like steve jobs took over as  the new chief executive they went public not by   the normal route but by taking over the listing  of a defunct company thus avoiding the scrutiny   usually applied to an initial public offering  a lot like the way spaks do it actually went on   to become a member of the german dax index in  2006 wirecard moved into banking meaning that   they could both issue credit cards and handle  money on behalf of merchants this was a unique   hybrid of banking and non-banking businesses and  made wirecard difficult to compare with its peers   this helped them to persuade investors to rely  on adjusted versions of financial statements   in the 2010s wirecard went on a shopping spree  buying up small payments companies across asia   in a series of oddly structured deals in 2015  the financial times began writing a series of   articles raising questions about inconsistencies  in the group's accounts the core of the fraud   was a small dubai-based third-party acquirer  called al-alam solutions acquirers are the   link in the payments chain that collects money  from card issuers and deposits it in the store   owner's bank accounts merchants will usually  negotiate directly with the acquirers to process   payments on their behalf for each payment that  acquires help root they charge a fee on paper   al-alam was one of wirecard's most valuable assets  processing billions of dollars of payments across   europe the middle east and the united states yet  when the financial times investigated they found   an operation with just seven full-time employees  the ft called up the biggest customers of al-alam   fifteen said that they had never heard of al-alam  and eight of the big customers were no longer in   business in addition neither visa nor mastercard  could confirm any relationship with al-alam so   wirecard was inflating revenue by reporting false  transactions these false transactions led to fees   that were reported and recognized as revenue  but never existed and were then deposited in   fake offshore bank accounts over a 10-year period  this led to 2.2 billion dollars in false revenues   the financial times posted story after story  containing descriptions of these inaccuracies   and what ended up happening wirecard accused the  ft of conspiring with evil short sellers to bring   their stock price down this tactic actually worked  and germany's financial regulatory authority   baffin filed a complaint against the ft and  also banned short selling of wirecard stock   this was the first time that a regulator had  ever banned short sales of an individual stock   in june 2020 wirecard caved in and announced that  1.9 billion euros was missing and the next day   marcus brown the ceo resigned wirecard later  announced that the 1.9 billion euros of cash   probably never existed marcus brown was arrested  and wirecard filed for insolvency our number four   corporate scandal is worldcom bernie ebers  started out his career as a bar bouncer a   milkman then a school teacher he managed a garment  warehouse and then began buying up small hotels   one of which included a long distance  telephone service as a sideline   this sideline business became lds and  was later renamed worldcom a decade later   by 1999 bernie was a billionaire and worldcom  was one of the stars of the new internet economy   from its humble beginnings worldcom expanded  through an aggressive growth by acquisition   strategy eventually becoming the second largest  long-distance telephone company in the united   states and one of the largest companies handling  internet data traffic worldwide worldcom bought 65   companies over a six-year period between 1991  and 1997. mergers and acquisitions obviously   present significant challenges for company  managers firstly management has to integrate the   organizations into a single smoothly functioning  business and secondly they must account for the   financial aspects of the acquisition worldcom did  not do a great job of integrating these purchases   dozens of conflicting computer systems were in  place and billing systems were never coordinated   these issues were ignored by investors at the  time worldcom used a liberal interpretation of   accounting rules when preparing their financial  statements worldcom would write down millions of   dollars in assets it acquired while including  in the charge against earnings the cost of   company expenses expected in the future the  result was bigger losses upfront but smaller   ones going forward so that the profit picture  would appear to be improving as long as they   could continue doing acquisitions worldcom  could continue these practices but in 1999   revenue growth slowed and the stock price began  falling the growth through acquisition strategy   was stopped dead in its tracks in 2000 when  worldcom's proposed merger with sprint was blocked   due to competition concerns worldcom's earnings  were not going to meet analyst expectations   so in order to increase revenue worldcom reduced  its accounting reserves tied to the mergers   by 2.8 billion dollars and moved this money into  the revenue line of its financial statements   this wasn't good enough though so in 2000 they  began classifying operating expenses as long-term   capital investments these were expenses like  rentals on phone lines that were paid out to   other telecom companies this gave worldcom another  3.85 billion dollars and turned their losses   into profits of 1.38 billion dollars for 2001. it  also made world comes assets appear more valuable   the fraud was uncovered when an internal auditor  cynthia cooper discovered the fraudulent balance   sheet entries eventually worldcom was forced to  admit that it had overstated its assets by over   11 billion dollars at the time this was the  largest accounting fraud in american history   in 2002 worldcom filed for bankruptcy protection  and in 2005 bernie ebers was found guilty of fraud   conspiracy and filing false documents with  regulators he was sentenced to 25 years in prison   and died in february 2020. okay last on the list  we have enron which was founded in 1985 by ken   lay in the merger of two natural gas pipeline  companies deregulation in the early 1990s meant   that enron lost its exclusive right to operate  its pipelines with the help of jeffrey skilling   a former consultant enron transformed itself into  a trader of energy derivative contracts acting as   an intermediary between natural gas producers and  their customers enron soon dominated the market   for natural gas contracts and started to generate  huge profits the bull market of the 1990s helped   to fuel enron's ambitions and contributed to its  rapid growth the company was ready to create a   market for anything that anyone was willing to  trade it traded derivative contracts for a wide   variety of commodities including electricity coal  paper and steel and even weather derivatives an   online trading division enron online was launched  during the dot-com boom and the company invested   in building a broadband telecommunications network  to facilitate high-speed trading enron was named   america's most innovative company by fortune  magazine every year from 1996 through to 2001   the year it went bankrupt enron wrote the  dot-com wave to superstar status and became   the seventh largest company in the united states  at least on paper as the boom years came to an   end an enron faced increased competition in the  energy trading business the company's profits   shrank rapidly company executives began  to rely on dubious accounting practices   including a shift to mark to model and mark to  market accounting which they had successfully   lobbied the sec to allow for their business this  allowed the company to write unrealized future   gains from trading into current income statements  thus giving the illusion of higher current profits   the troubled business lines of the company were  transferred to special purpose entities doing this   meant that they were kept off enron's books making  its losses look less severe than they really were   notorious short selling hedge fund manager jim  chanas noticed several red flags in their accounts   and initiated a short position the sec began  investigating their accounts and as the details   of the frauds emerged the stock price fell from  ninety dollars per share to below one dollar lian   skilling resigned and fast out the cfo was fired  two days after the sec investigation started   on december 2nd 2001 enron filed for chapter 11  bankruptcy protection many enron executives were   indicted on a variety of charges and were later  sentenced to prison arthur anderson their auditor   who had worked as a consultant for the firm  came under intense scrutiny and was eventually   dissolved due to the scandal the scandal resulted  in a wave of new regulations and legislation   such as the sarbanes-oxley act designed to  increase the accuracy of financial reporting   the act also prohibited auditing firms from doing  any concurrent consulting business for the clients   that they ordered well that's it that's our top  five list there are of course many more companies   i could have included i know some of you will  be disappointed that nicola didn't make the list   let me know in the comment section who  you think should have been included   and what lessons you take away from these  cautionary tales one of the more noticeable   commonalities i noticed when researching this  piece was that so many of the scandal-ridden   companies were in traditional businesses things  like coffee shops gas pipelines and health care   but claim to be new economy companies don't forget  to hit the like button and subscribe if you'd   like to see more content like this and i look  forward to seeing you soon in the next video bye

Channel: Patrick Boyle

Views: 355,042

Keywords: finance, trading, patrick boyle, on finance, cfa exam, level 1, level 2, level 3, kings college london, business school, queen mary university of london, quantitative finance, financial derivatives, personal finance, investing, investments, theranos, elizabeth holmes, wirecard, markus braun, worldcom, bernie ebbers, enron, jeff skilling, luckin coffee, fraud, top ten, top five corporate frauds, corporate scandals, top five corporate scandals, top ten corporate scandals

Id: Y9KPcQqG0ao

Length: 19min 47sec (1187 seconds)

Published: Mon Mar 08 2021