Stanley Goldblum was involved in one of the biggest business scandals in history at Equity Funding Corporation of America. To keep stock prices high, Goldblum directed the creation of fake accounting entries reporting fictitious profits. This eventually led to the creation of over 10,000 fake insurance policies and counterfeit bonds. A whistleblower helped uncover the massive fraud, which collapsed Equity Funding and resulted in Goldblum and others receiving prison terms. The scandal highlighted the need for auditor independence, professional skepticism, and integrity from management to prevent such frauds.

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

2. Equity FundingEquity 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 GoldblumBackground:Spent youth in 1930’s Pittsburgh’s Squirrel Hill DistrictEventually moved to Los AngelesJoined Army at age 17Enrolled at University of California at Los AngelesWorked in meat packing plant with father-in-law1958: received call from Gordon McCormick

4. Equity FundingGordon McCormick – Insurance & Mutual fund Salesman combined products1960 changed name from Tongor to Equity Funding1961 – SEC had to register new products; took 18 monthsEquity Funding reemerged in 19631964 – Equity Funding shares offered $6 per share

5. The ScamTo 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 booksIncluded in current years report expected profits

6. The ScamReinsurance: 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 holderExecutives were known to forge fake policiesY policies: Xeroxed copies of policies

7. The ScamForgery 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 executives10,000 policies created during the 1970’s

8. The ScamInsurance Industry posting lossesEquity 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 millionAlso in 1971, Counterfeit Bonds

9. The ScamWhistleblower Ronald H. Secrist, former employeeEquity Stock dropped from $28 to $14/share causing NYSE to halt tradingIn 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 ScamStanley 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 FlagsEquity Funding claiming profits contradictive to other insurance firms“Too good to be true”Auditor (non)independenceProfessional 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 PreventionAuditors:IndependenceInformedEthicsDon’t forget the basics

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