Equity Funding Scandal

1. Case Study: Stanley Goldblum & The Equity Funding Scandal Michael E. Rust Jr.

2. Equity Funding Equity Funding Corporation of America was one of the biggest business scandals in history, an unsavory mess that includes charges of false bookkeeping, large numbers of bogus insurance policies and the dumping of huge blocks of soon-to-be-worthless stock by company officers and other investors on the basis of inside information

3. Stanley Goldblum Background: Spent youth in 1930’s Pittsburgh’s Squirrel Hill District Eventually moved to Los Angeles Joined Army at age 17 Enrolled at University of California at Los Angeles Worked in meat packing plant with father-in-law 1958: received call from Gordon McCormick

4. Equity Funding Gordon McCormick – Insurance & Mutual fund Salesman combined products 1960 changed name from Tongor to Equity Funding 1961 – SEC had to register new products; took 18 months Equity Funding reemerged in 1963 1964 – Equity Funding shares offered $6 per share

5. The Scam To keep the value of the stock up, generating yearly earnings growth was important. In 1965, Goldblum told CFO to create fictitious entries in the books. CFO created Shell Company to clear the books Included in current years report expected profits

6. The Scam Reinsurance: One company will sell another insurance company some of its policies to generate immediate cash and to mitigate the risk of a large payout that could occur. Equity Funding created fictitious policy holders and the death of the policy holder Executives were known to forge fake policies Y policies: Xeroxed copies of policies

7. The Scam Forgery moved to Maple Drive facility. Girls being paid $2/hr were paid to create false policies. “Maple Street Girls” Fictitious names were added later by executives 10,000 policies created during the 1970’s

8. The Scam Insurance Industry posting losses Equity Funding is claiming $11 million in profits (actually a $7 million loss) Claimed in 1971, $27 million in earnings when in fact it had lost $30 million Also in 1971, Counterfeit Bonds

9. The Scam Whistleblower Ronald H. Secrist, former employee Equity Stock dropped from $28 to $14/share causing NYSE to halt trading In November 1973, as a result of a coordinated investigation by the United States Attorney in Los Angeles, the S.E.C., the United States Postal Service, the Federal Bureau of Investigation, the Federal Reserve Board, and the insurance departments of the States of California and Illinois charges were brought up

10. The Scam Stanley Goldblum was sentenced to eight years imprisonment and fined $20,000. The other Equity Funding conspirators received various prison terms. Each of the auditors received two-year sentences suspended on the condition they serve three months imprisonment, four years probation, and perform 2,000 hours of community service work.

11. Red Flags Equity Funding claiming profits contradictive to other insurance firms “Too good to be true” Auditor (non)independence Professional skepticism of Auditors

12. What could have been done? The ethics and integrity of management and employees. Management's philosophy and operating style. The independence of the auditors. Professional skepticism of the auditors. External impairments to the audit.

13. What can be done? Future Prevention Auditors: Independence Informed Ethics Don’t forget the basics

14. Equity Funding MSNBC video clip of Stanley Goldblum & Equity Funding scandal