Fraud might very well play a part in the next financial bubble, as fintech, crypto and NFT becomes ever more popular amongst the masses.

Financial fraud occurs when someone steals your money or otherwise jeopardizes your financial well-being through deceitful, misleading, or other criminal actions. This can be accomplished through various means, including identity theft and investment fraud. Many victim compensation programs do not cover monetary losses resulting from fraud or fraudulent schemes.

There are four categories of financial fraud. Identity theft is the theft of your personal financial information, such as your credit card number or bank account number, to make fraudulent withdrawals from your account. The information might be used to open bank accounts, leaving the victim responsible for any costs. Identity theft can result in a ruined credit rating, rejected checks/refused payments, and being pursued by collection agencies.

The second category is investment fraud. This category involves the sale of investments or securities using incorrect or deceptive information. It might include deceptive promises, concealing facts, and the use of insider trading tips. Mortgage and lending fraud ranks third. A third party can apply for a mortgage or loan using your information or fake information. In another scenario, lenders might sell mortgages or loans using false information, fraudulent practices, and other high-pressure sales techniques. Fourth is mass-marketing fraud. The fraud is perpetrated by mass mailings, unsolicited phone calls, and spam emails. It also includes counterfeit checks, charities, lotteries, and invitations to honor societies. These methods are employed to steal private financial information or solicit funds for fraudulent organizations.

#1. HealthSouth (2003)

HealthSouth, one of the leading healthcare services in the United States, came to public attention when the firm was accused of a massive corporate accounting scam which led to the now infamous $2.8 billion accounting scandal that lasted from 1996 to 2002.

The company’s founder and the chief executive officer instructed staff to disclose grossly inflated profits to attract more investors. In 2003, when its yearly sales were around $4.5 billion, the corporation was generating record profits. It dominated the industries of rehabilitation, diagnostics, and surgery.

The first issue arose in 2002 when the corporation sold $75 million worth of shares. Immediately following this, the corporation released a loss statement.

In 2003, the U.S. Securities and Exchange Commission (henceforth “SEC”) discovered that the corporation had exaggerated its revenues by up to $1.4 billion. As a result, HealthSouth’s stock dropped overnight.

The CEO was charged with fraud, but exonerated on all counts. In the end, he was simply charged with bribery. Along with the CFO and other firm executives, he was sentenced to five years in prison. The specifics of this sensational scandal are listed below.

HealthSouth committed its very first violation in 1998 when it was charged under the Securities Exchange Act with misrepresenting the company’s financial status and failing to disclose negative trends. This was handled by the corporation until 2002 when it became significant. After the corporation sold $75 million worth of stock just before announcing a massive deficit on its financial accounts, larger issues began to accumulate.

The SEC alleged that the corporation committed accounting fraud by inflating its income/profits to more than 10% of its total assets, or $1.4 billion.

It was discovered that the CEO of the company, Richard M. Scrushy, authorized senior corporate executives to misrepresent the profitability of the company in the account books to control the stocks of the company, attract new investors, and meet the expectations of the existing shareholders. Supposedly, this began in 1996, therefore it lasted for seven years. In certain fiscal years, the corporation even exaggerated its profits by 470% of the actual yearly profit. Interestingly, the company had to pay more in corporate taxes based on its overstated income than on its actual income.

By 2003, the CEO had been charged with multiple charges of fraud. The SEC investigated if the selling of stocks immediately preceding the posting of losses is related in any way. Healthsource retained an outside legal firm to investigate the situation, which concluded that the two instances were unrelated. The SEC could not accept this report. The FBI officers examined the company’s headquarters, but they were unable to find any significant proof. Scrushy was cleared of the 36 counts of accounting fraud that could not be shown against him, including a violation of the Sarbanes-Oxley Act, following a two-year trial.

#2. Tyco (2002)

The 2002 corporate controversy involving Tyco International focuses on the subject of unethical business practices and related issues. This business case examines the potential for ethical issues to bring down a whole organisation. Tyco International (now Johnson Controls International plc) was a big security systems company that grew through multiple acquisitions. The company’s case demonstrates that the primary issue was the unethical corporate conduct of a number of its highest-ranking officers, including CEO Dennis Kozlowski. Kozlowski engaged in dubious financial activities that were omitted from the company’s financial filings. To conceal illegal financial transactions, he enlisted the assistance of other Tyco officers and lower-level employees. In addition, Kozlowski exacerbated the issue when his second wife got diverted business funds. Court hearings demonstrated that he stole millions of dollars from Tyco and that he engaged in extensive unlawful financial operations. In 2005, Kozlowski and CFO Mark Swartz were found guilty and imprisoned. Following the crisis, Tyco’s business performance deteriorated and investors lost faith in the corporation.

#3. WorldCom (2002)

Shortly after the fall of Enron, the stock market was shaken by another accounting fraud involving billions of dollars. After yet another case of major “book cooking,” the telecommunications titan WorldCom came under heavy scrutiny. WorldCom’s operating expenses were classified as investments.  The corporation viewed office pens, pencils, and paper as an investment in the company’s future, and consequently expensed (or capitalized) the cost of these products over 12 years.

Normal operating expenses of $3,8 billion, which should have all been recognized as expenses for the fiscal year in which they were incurred, were instead considered as investments and recorded over several years. This small accounting technique significantly inflated profits for the year in which the expenses were incurred. WorldCom reported profits of almost $1.3 billion in 2001. In truth, the company’s operations were growing increasingly unprofitable. Who lost the most in this transaction? Tens of thousands of employees have lost their jobs. 13 Investors were the next group to experience betrayal, as WorldCom’s stock price plunged from more than $60 to less than $1.

#4. Bernard Madoff (2008)

Bernard Madoff, the former chairman of the Nasdaq and creator of the market-making firm Bernard L. Madoff Investment Securities, was arrested on December 11, 2008, for orchestrating a large Ponzi scheme. He was turned in by his two sons. The then-70-year-old hedge fund manager concealed his losses by compensating early investors with funds raised by others. Every year for the past 15 years, this fund has regularly gained 11%. The constant returns were attributed to the fund’s alleged strategy, which consisted of employing option collars designed to reduce volatility. This scheme defrauded around $50 billion from investors. He was given a sentence of 150 years in prison. Madoff passed away in prison on April 14, 2021, at age 82.

#5. American International Group (AIG) Scandal (2005)

American International Group’s (hereafter referred to as ‘AIG’) demise constituted one of the most severe financial disasters of the 2000s.

AIG is a global firm with assets worth around $1 trillion. General Reinsurance Corporation (hereafter referred to as ‘GRC’) assisted AIG in committing fraudulent accounting, which led to the American International Group Scandal.

The company’s revenue loss of around $60 million led to a decline in its stock price on the New York Stock Exchange, as it was interpreted as a sign of its deteriorating financial condition. AIG sought aid from the GRC to remedy the situation. GRC conducted two $250 million fraudulent transactions to increase AIG’s revenue losses. These two transactions helped conceal the losses because AID did not need to disclose the amount in its income statement. After all, no actual risk was transferred. However, they did disclose the $500 million in premium revenue, which comprised loss reserves to pay claims. As a result, the loss reserves and their total rise for the years 2000 and 2001 were inflated.

At least for the next five years, AIG created deceptive financial statements to mislead investors, regulators, and policyholders into believing that the business was generating normal and occasionally extraordinary profits.

In 2004, the Attorney General’s office and the Department of Insurance initiated an investigation into AIG’s malpractices. The U.S. Securities and Exchange Commission (henceforth referred to as ‘SEC’) began the inquiry shortly after AIG was accused of wrongdoing.

The officers of the business who facilitated this fraud did not face any criminal charges, while AIG was required to pay a $1.64 billion fine to the SEC.

Conclusion

Regardless of the sort of financial fraud, it is imperative to report the offenses to law enforcement and the right agencies as soon as possible. As soon as they are found, fraudulent charges should also be contested or canceled. In addition, victims should collect evidence linked to the crime, such as bank statements, credit reports, and tax forms from the current and previous years, and continue to file vital information throughout the reporting process.

 

 

Should there be more government regulation to stop further frauds from happening? Let us know in the comments down below.