A History of Wall Street Crime and Punishment: The 10 Most Intriguing
by Drea Knufken
As long as
there has been a Wall Street, there have been thieves to plunder
it. Oddly enough, the nature of the crimes hasnt changed much
over the years. Magnates with rich political ties quietly manipulate
the market, maintain a squeaky-clean public image, and try to run
off with their bag of loot just as their sandcastles are crumbling.
Do they get away with it? More often than not, the answer is yes.
Bernie Ebbers, the most unfortunate of the bunch below, is currently
serving 25 years in a low-security prison. The rest either received
wrist slaps or, as Sun Tzu and Bud Fox have
both said, had the chance to split and re-evaluate.
Jay Gould: Black Friday Robber Baron
of insider traders was already a railroad magnate at the age of
23. When he opened his first brokerage, Gould raked in a fortune
due to his private sources of information in the field (which
helped him) turn almost any success or defeat of the Union Army
to profitable account, according to the New
barons next move? Buy up all the gold in the United States
of America. In 1869, Gould almost succeeded. The price of gold,
formerly at a low, skyrocketed. President Ulysses S. Grant warned
Gould to stop buying, or else the Treasury would suppress prices
by releasing its own gold into the market. Gould reacted by spreading
rumors about an impending gold shortage while divesting his own
gold at a profit.
When the Treasury
did take action, on Black Friday, 1869, the price of gold crashed
within 15 minutes, with nearly half of Wall Street
involved in the ruin, writes the New York Times. A
furious mob and militia gathered on Wall Street, according to the
Street Journal, but Gould escaped. Eight years later, a
trader, angry at his losses, punched Gould and threw him down an
eight-foot flight of stairs, the Wall Street Journal reports.
Gould, however, survived long enough to con his way into even bigger
fortunes. He died of tuberculosis at the age of 56.
He Who Goes Bankrupt With the Most Toys, Still Goes Bankrupt
co-founder and CEO of telecommunications behemoth WorldCom, managed
to simultaneously build a business and personal empire before being
handcuffed by the Feds. His WorldCom snapped up more than 60 companies
after its 1983 founding, culminating with the $37 billion merger
with MCI in 1997. Meanwhile, Ebbers used his own WorldCom stock
to back loans on personal investments, including
Canadas biggest working cattle ranch, more than 500,000 acres
of U.S. timberland and a minor league hockey team.
the time WorldCom tried and failed to merge with Sprint
(S) in 2000, the telecommunications industry was in a recession.
WorldCom directors, worried Ebbers would force down the stock price
by selling his holdings, loaned Ebbers $408 million to cover his
margins. Meanwhile, Ebbers and his executives carved about $9 billion
in expenses out of the company books, which roughly doubled the
stock price between early 2000-01. By the time the company filed
for the biggest bankruptcy in US history in 2002, the stock was
at zero, Ebbers cover was blown and WorldCom changed its name
to MCI. Today, Ebbers is in a low-security prison in Oakdale, Louisiana,
serving out a 25-year sentence.
Galleon Group: Tapping the Insider Wires
New Yorks Galleon Group, formerly one of the largest hedge
fund managers in the world, touted the fundamental belief
in rigorous investment analysis combined with active trading around
core positions. Post-trial, that translates to deliberately
creating a network of corporate insiders, milking them for information,
and creating a $7 billion hedge fund from it.
Thanks to an
ongoing federal crackdown, Galleon founder and principal Raj Rajaratnam
has traded his insider deals on IBM (IBM) and AMD (AMD) for an 11-year
prison sentence. Prosecutors wiretapped Rajaratnams phone
in 2008, after guilt-ridden McKinsey consultant and partner in crime
Anil Kumar spilled his soul to lawyers. (Rajaratnam had
paid Kumar $500,00 per year, via an offshore account, for inside
information on McKinsey clients.) The investigation uncovered a
vast insider network, carefully cultivated from the tight-knit South
Asian tech and finance community. Twenty-six of those people, including
former beauty queen Danielle Chiesi, were
charged as a result of the investigation.
In the mid-1970s, Drexel Burnham Lambert broker Michael Milken realized
that below-investment-grade bonds were generally undervalued, and
that investing heavily in them was a profitable business. The now-famous
junk bond market of the 1980s was born. Milken created more than
half of Drexel Burnham Lamberts profits through his junk bonds,
which helped finance mergers and acquisitions, including hostile
takeovers by the likes of T. Boone Pickens and Ted Turner. In 1986,
Drexel Burnham Lambert made $545.5 million, an annual profit never
before seen at a Wall Street firm. Milken himself took home $550
million that year.
Milken, however, disdained regulations. The SEC lurked in his shadow
for years, trying to catch him for something. In 1986, colleague
Ivan Boesky implicated Milken as an inside trader. Milken plead
guilty and served about 2.5 years in prison, on top of paying $1
billion in fines. Drexel Lambert Burnham, meanwhile, declared bankruptcy
The Crooked E deserves an A for creativity
in accounting. Through a slew of special-purpose entities and the
magic of mark-to-market accounting, Enron claimed profits before
they happened and sunk its losses and debts into offshore shell
companies. Independent auditor Arthur Andersen caught none of this.
stock hit high of $90 per
share in 2000, executives, worried their house of cards might
collapse, quietly sold off their stock. The stock price plummeted
to less than half its former value within the year. The SEC opened
an investigation, forcing Enron to reveal $1 billion in debt and
losses. The company filed for Chapter 11 reorganization in 2001,
the biggest bankruptcy in US history at the time.
Most Enron executives served two to six years in prison, with the
exception of former CEO Jeff Skilling, who is serving a 24-year
sentence. Ken Lay, arguably the master engineer of the scandal,
died in Colorado of a coronary just before his sentencing.
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