ACCOUNTING SCANDALS

ENRON SCANDAL (2001)

 Company: Houston-based commodities, energy and service corporation

 What happened: Shareholders lost $74 billion, thousands of employees and
investors lost their retirement accounts, and many employees lost their jobs.
 Main players: CEO Jeff Skilling and former CEO Ken Lay.
 How they did it: Kept huge debts off balance sheets.
 How they got caught: Turned in by internal whistleblower Sherron Watkins; high
stock prices fueled external suspicions.
 Penalties: Lay died before serving time; Skilling got 24 years in prison. The
company filed for bankruptcy. Arthur Andersen was found guilty of fudging
Enron's accounts.
 Fun fact: Fortune Magazine named Enron "America's Most Innovative Company"
6 years in a row prior to the scandal.

WORLDCOM SCANDAL (2002)

 Company: Telecommunications company; now MCI, Inc.

 What happened: Inflated assets by as much as $11 billion, leading to 30,000 lost
jobs and $180 billion in losses for investors.
 Main player: CEO Bernie Ebbers
 How he did it: Underreported line costs by capitalizing rather than expensing and
inflated revenues with fake accounting entries.
 How he got caught: WorldCom's internal auditing department uncovered $3.8
billion of fraud.
 Penalties: CFO was fired, controller resigned, and the company filed for
bankruptcy. Ebbers sentenced to 25 years for fraud, conspiracy and filing false
documents with regulators.
 Fun fact: Within weeks of the scandal, Congress passed the Sarbanes-Oxley
Act, introducing the most sweeping set of new business regulations since the
1930s.

TYCO SCANDAL (2002)

 Company: New Jersey-based blue-chip Swiss security systems.

 What happened: CEO and CFO stole $150 million and inflated company income
by $500 million.
 Main players: CEO Dennis Kozlowski and former CFO Mark Swartz.
 How they did it: Siphoned money through unapproved loans and fraudulent stock
sales. Money was smuggled out of company disguised as executive bonuses or
benefits.
 How they got caught: SEC and Manhattan D.A. investigations uncovered
questionable accounting practices, including large loans made to Kozlowski that
were then forgiven.
  Penalties: Kozlowski and Swartz were sentenced to 8-25 years in prison. A
class-action lawsuit forced Tyco to pay $2.92 billion to investors.
 Fun fact: At the height of the scandal Kozlowski threw a $2 million birthday party
for his wife on a Mediterranean island, complete with a Jimmy Buffet
performance.

HEALTHSOUTH SCANDAL (2003)

 Company: Largest publicly traded health care company in the U.S.

 What happened: Earnings numbers were allegedly inflated $1.4 billion to meet
stockholder expectations.
 Main player: CEO Richard Scrushy.
 How he did it: Allegedly told underlings to make up numbers and transactions
from 1996-2003.
 How he got caught: Sold $75 million in stock a day before the company posted a
huge loss, triggering SEC suspicions.
 Penalties: Scrushy was acquitted of all 36 counts of accounting fraud, but
convicted of bribing the governor of Alabama, leading to a 7-year prison
sentence.
 Fun fact: Scrushy now works as a motivational speaker and maintains his
innocence.

FREDDIE MAC (2003)

 Company: Federally backed mortgage-financing giant.

 What happened: $5 billion in earnings were misstated.
 Main players: President/COO David Glenn, Chairman/CEO Leland Brendsel, ex-
CFO Vaughn Clarke, former senior VPs Robert Dean and Nazir Dossani.
 How they did it: Intentionally misstated and understated earnings on the books.
 How they got caught: An SEC investigation.
 Penalties: $125 million in fines and the firing of Glenn, Clarke and Brendsel.
 Fun fact: 1 year later, the other federally backed mortgage financing company,
Fannie Mae, was caught in an equally stunning accounting scandal.

AMERICAN INTERNATIONAL GROUP (AIG) SCANDAL (2005)

 Company: Multinational insurance corporation.

 What happened: Massive accounting fraud to the tune of $3.9 billion was alleged,
along with bid-rigging and stock price manipulation.
 Main player: CEO Hank Greenberg.
 How he did it: Allegedly booked loans as revenue, steered clients to insurers with
whom AIG had payoff agreements, and told traders to inflate AIG stock price.
 How he got caught: SEC regulator investigations, possibly tipped off by a
whistleblower.
  Penalties: Settled with the SEC for $10 million in 2003 and $1.64 billion in 2006,
with a Louisiana pension fund for $115 million, and with 3 Ohio pension funds for
$725 million. Greenberg was fired, but has faced no criminal charges.
 Fun fact: After posting the largest quarterly corporate loss in history in 2008
($61.7 billion) and getting bailed out with taxpayer dollars, AIG execs rewarded
themselves with over $165 million in bonuses .

LEHMAN BROTHERS SCANDAL (2008)

 Company: Global financial services firm.

 What happened: Hid over $50 billion in loans disguised as sales.
 Main players: Lehman executives and the company's auditors, Ernst & Young.
 How they did it: Allegedly sold toxic assets to Cayman Island banks with the
understanding that they would be bought back eventually. Created the
impression Lehman had $50 billion more cash and $50 billion less in toxic assets
than it really did.
 How they got caught: Went bankrupt.
 Penalties: Forced into the largest bankruptcy in U.S. history. SEC didn't
prosecute due to lack of evidence.
 Fun fact: In 2007 Lehman Brothers was ranked the #1 "Most Admired Securities
Firm" by Fortune Magazine.

BERNIE MADOFF SCANDAL (2008)

 Company: Bernard L. Madoff Investment Securities LLC was a Wall Street

investment firm founded by Madoff.
 What happened: Tricked investors out of $64.8 billion through the largest Ponzi
scheme in history.
 Main players: Bernie Madoff, his accountant, David Friehling, and Frank
DiPascalli.
 How they did it: Investors were paid returns out of their own money or that of
other investors rather than from profits.
 How they got caught: Madoff told his sons about his scheme and they reported
him to the SEC. He was arrested the next day.
 Penalties: 150 years in prison for Madoff + $170 billion restitution. Prison time for
Friehling and DiPascalli.
 Fun fact: Madoff's fraud was revealed just months after the 2008 U.S. financial
collapse.