The Early Years The original predecessor company to Crazy Eddie was ERS

Electronics, which was founded by Eddie Antar, Sam M. Antar (Eddie's father),
and Ronnie Gindi (a first cousin) in Eddie, Ronnie, and Sam owned equal 1/3
shares of ERS Electronics. The original store was located on 1117 Kings
Highway in Brooklyn. The company operated under the name of Sights and
Sounds. During the early 1970's, consumer electronics was "fair traded."
Manufacturers were allowed to require retailers to sell merchandise at the
same price to avoid price competition among retailers for their products. The
larger retailers, who had large advertising budgets, were forcing smaller
retailers out of business. The smaller retailers, who had lower overheads than
the bigger retailers, were not able to compete with larger retailers on price
due to fair trade. Therefore, the smaller retailers could not use their cost
efficiencies to effectively compete against the larger retailers and pass along
better values to consumers. Around, Sights and Sounds, like many other small
retailers was struggling to stay in business. In 1971, Eddie Antar purchased
Ronnie Gindi's share or ERS electronics for $25,000 in cash. Eddie Antar now
owned 2/3 of Sights and Sounds and his father Sam M. Antar owned 1/3 of
Sights and Sounds. To survive in business, Eddie Antar resorted to
circumventing fair trade by discounting merchandise to customers. The
manufactures retaliated against Eddie Antar by refusing to sell Sights and
Sounds any products. Eddie Antar was forced to buy excess merchandise from
other retailers and access grey markets (overseas) to purchase merchandise.
However, Eddie Antar built up great customer loyalty during the process of
circumventing fair trade. In 1971, a co-worker of Deborah Joyce Rosen, Eddie
Antar's first wife, told her about the great buys on electronics that he received
from purchasing merchandise from a "guy" he called "Crazy Eddie" at Sights
and Sounds. Afterwards, Eddie Antar changed the name of the business to
"Crazy Eddie." Around 1972, manufacturers were no longer able to require
retailers to sell merchandise at the same price and fair trade was outlawed.
Eddie Antar became the hero to the New York metropolitan area consumer
because of his major role in abolishing fair trade. For many consumers, Eddie
Antar was a "retailing revolutionary" and they rewarded him handsomely, as
he opened up more store and his business volume expanded. He ran one of
the largest advertising blitzes ever known in the tri state area and studies
showed that Crazy Eddie had better name recognition than Coca Cola among
New York area consumers.
The Crazy Eddie "Culture"
Eddie Antar was a great leader who inspired intense loyalty from his
employees. It was us against them. Them meaning customers, the
government, insurance companies, auditors, and everyone else who did not
serve the company's interests here was a culture at Crazy Eddie that said
nothing should go to the government. Cash sales were routinely skimmed to
avoid paying income taxes and to steal sales taxes. Customers were considered
to be fools to be taken advantage of. Eddie often told me, "People live on
hope." The Antar clan ruling Crazy Eddie and top management exploited the
hopes and dreams of others in the pursuit of money and power. Eddie Antar
developed a tight knit loyal company culture to insure that crimes went
undetected and unreported. In the early years, a person was required to be a
relative, a friend of the family, or a friend of a friend of the family, to work for
the company. There were no so called "employees." Rather, we were called
"Crazy Eddie people." There were no "punch clocks." Everyone working at
Crazy Eddie was considered part of the extended family. Eddie Antar was
readily accessible to all of his employees. If you had a problem, you went to
Eddie and he took care of it. After the Christmas holiday season ended, Eddie
Antar routinely doled out large cash bonuses to key employees. He developed
a cult leader type status. Everyone looked up to him. Securities litigator
Howard Sirota described Eddie Antar as a "larger than life Brooklyn Fonz type
figure." Sirota knew Eddie in his youth and eventually represented victims of
Crazy Eddie's frauds as Chairman of the Class Action Litigation. Crazy Eddie
even developed its own internal language which was a combination of Arabic,
pig Latin, and other retailing slang, handed down from the Antar family's
multigenerational merchant roots. Eddie Antar was a very aggressive sales
person and his sales people learned fast from him. It was not uncommon for
Eddie to follow customers out of the store in order to talk them into buying
merchandise. The motto was to make every sale or "beha" and that "nobody
walks.”
How Crazy Eddie was able to discount consumer electronics
Eddie Antar, the "retailing revolutionary," was a ruthless competitor. Eddie
Antar knew that his business could not survive in the long run, if it constantly
offered steep discounts to consumers. Therefore, Eddie Antar resorted to a
combination of income tax evasion, stealing sales taxes, and "bait and switch"
practices to make Crazy Eddie profitable.
Cash skimming and paying employees "off the books"
Some of the cash skimming was used to pay employees "off the books" to
avoid paying payroll taxes. In addition, employees paid "off the books" did not
pay income taxes and social security taxes. Therefore, Crazy Eddie used tax
evasion to reduce labor costs and make the company more competitive against
other retailers. If a customer paid in cash, Crazy Eddie stole the sales taxes and
the company made a gross profit of about 8%, even if it sold merchandise to
consumers at cost. That gave Crazy Eddie a great competitive advantage
against competitors who conducted their businesses legitimately.
"Bait and Switch" sales practices 
Crazy Eddie sales persons used "bait and switch" high pressure sales tactics to
"steer" customers to higher profit margin merchandise after being baited into
the stores by our "beat any price" policy. The first sales person main job was to
"switch the customer" or "SW" the customer to higher margin products and
services such as selling them alternative products for "better value" and high
margin extended warranty plans. If the first sales person did not succeed in
"switching the customer" to higher margin products and services, a second
sales person was assigned to "take over" or "T.O." the customer in an effort to
make a bigger profit. If the second sales person was unsuccessful in swaying in
swaying the customer to purchase higher margin products, a third sales person
known as the "nail at door" person or "NAD" person made the final effort to
convince the customer to purchase higher margin products and services.
Selling used and defective merchandise as brand new products
Sometimes, Crazy Eddie did not have a particular product in stock at the time it
was sold to a customer. In such cases, if a floor item or customer returned
merchandise (known as "reeps") was available, we repackaged (known as
"lunching") such merchandise as brand new and sold them to unsuspecting
customers. 
Crazy Eddie s Relentless Advertising Campaign
Crazy Eddie's advertising campaign was nothing short of revolutionary. For
almost 17 years the northeast was blanketed with its ads. Among New York
metropolitan area consumers, Crazy Eddie had better name recognition than
Coca Cola. The message was: Shop around. Get the best prices you can find.
Then go to Crazy Eddie's and he'll beat it! Crazy Eddie. His Prices are
Insaane!!!!!!!!!! It is often said that imitation is the sincerest form of flattery.
Crazy Eddie's advertisements have appeared in many movies such as Splash!
and parodies of its ads appeared on such shows as Saturday Night Live. Around
1971, WCBS FM account representative Norm Golden talked Eddie Antar into
purchasing radio advertising for $5 a spot. In 1972, Jerry Carroll, known as "Dr.
Jerry" adlibbed some Crazy Eddie ads and Eddie Antar liked his antics. Soon
afterwards, Jerry Carroll became the official face of Crazy Eddie and was later
immortalized as one of the greatest spokesmen in advertising history. Crazy
Eddie's original Advertising Director was Larry Weiss. He deserves great credit
for the genius and success of Crazy Eddie's advertising campaign. There were
many others who contributed to this great advertising campaign as well.
Today, the words "Crazy Eddie" are synonymously used to describe price
discounting, predatory pricing, etc. and that is a measure of credit to the
success of its brilliant and historic advertising campaign. In a post on the
MusicRadio77.com Message Board on March 5, 2005, Larry Weiss wrote the
following insightful story about the history of Crazy Eddie's famous advertising
campaign: The recent thread about the Court TV documentary on Crazy Eddie
got me reminiscing. As the man responsible for developing Crazy Eddie s
advertising and managing that campaign from 1974 through 1983, it still
amazes me that 30 years after that work began it is still so highly talked about
and remembered. I was asked to participate in the Court TV documentary, but
other than providing a few photographs, I declined. So instead, as long as I was
reminiscing I thought I d share with you here some Crazy Eddie history and
trivia that few people talk about, or even know about Crazy Eddie (or Sights
and Sounds as it was named back then) was one of the very early regular
advertisers on FM radio. The corporate name then was ERS Electronics (ERS
stood for Eddie, Rose and Sam Eddie s parents). 
The first station Eddie advertised on was WCBS FM. The rate was $5 a spot,
buy one get one free. To top that, Eddie never paid the bill, and CBS FM kept
the spots on the air anyway. Norm Golden was the CBS FM account executive
who first talked Eddie into radio advertising. Eddie told Norm the only way he
could get the order was if he first went outside on Kings Highway and urinated
on a bus. Norm did. The original free price quote line was a pay phone on the
wall at 1117 Kings Highway. Nobody expected it to ring. They were wrong. In
that recent thread, George Kowal said he remembered an account exec at
WKHK FM who claimed he was the one who introduced Jerry to Eddie and
started the whole thing. That account exec was probably Jeff Coleman. Jeff was
working at WPIX FM at the time. Back then stations were each producing their
own Crazy Eddie commercials, and at WPIX the chore was generally divided
between Dennis Quinn and Jerry Carrol (and occasionally Howard Hoffman
when he joined PIX). It was Jeff who introduced me to Eddie, and it was I who
eventually narrowed the talent down to using Jerry exclusively although
Howard was close. Among the other personalities who were seriously
considered and were almost hired to be the Crazy Eddie spokesman was TV
sitcom actor Jay Thomas, who at the time was doing morning drive on 99X. He
called me almost every day asking for a chance, and he nearly got it. Good
thing for his career he didn’t. Mork and Mindy was a better deal. Also in the
running was none other than James Brown who also called me nearly every
day trying to talk me into it. We hired a small production company called
Neshobe Films to produce the first television commercials. They had recently
completed the series of Did You Hear What He Said This Morning? Spots for
Don Imus and WNBC. Their Cameraman was Jay Dubin who went on to direct
hundreds of Crazy Eddie commercials and then to MTV fame (Billy Joel and
others) eventually producing and directing the Beekmans World television
series (shot in very much the same format as Crazy Eddie commercials). We
initially had trouble deciding what direction to take the television advertising.
We knew it would have to be outrageous, satirical and tongue in cheek, but we
couldn t decide whether to go with a pitchman or with creative satire. So we
decided to do both. Having watched Jerry voice our radio spots for some time,
it was clear he should be the TV pitchman. I proposed it to him while doing
radio spots in the WPIX production room and he accepted immediately. The
first TV spots we shot were the Boys in the Bathroom spot and a Jerry Carrol
Hard Sell. They were shot on the same day. The Bathroom was the mens room
near the Cafeteria at Pratt Institute. The lyrics to the When You Think You re
Ready, Come Down to Crazy Eddie song were written by a grateful Crazy Eddie
customer initially as a folk song performed by myself and my friends Jeff
Gottschalk and John Russo, and was vaguely inspired by Dion s A Sunday Kind
of Love. Jeff went on to write songs for Dianna Ross and Cher, and currently
performs with the Rascals. John teaches music in a public school district on
Long Island. The first TV spots with Jerry Carrol were shot in the Village store,
overnight after the store was closed. I initially proposed ending the spots with
the line, Crazy Eddie the MAN is Insane! Eddie actually took personal offense at
this. We eventually settled on, Crazy Eddie, his prices are insane! I hired
unemployed, former Korvettes ad manager Larry Miller to buy our television
time. He had just started his own little one man media buying company out of
his apartment in the East 60 s. It wasn t long before his Corinthian
Communications became one of the largest media buying services in the
world. The first TV spots aired on Mary Hartman, Mary Hartman. Crazy Eddie
persuaded many New York television stations to stay on the air overnight, by
offering to buy advertising (usually $10 a spot or less). We also started
sponsoring local movies, including Casablanca, filling the commercial breaks
with spots and our spoofs of the movies. For many years Crazy Eddie was the
largest volume buyer of radio time in New York City. Among the account
executives calling on me regularly were Mel Karmazin, Judy Ellis, Steve Dinitz,
Mike Kakayonis and others. Crazy Eddie never ever bought any advertising on
77 WABC. The chicken costume (it was a chicken, not an ape, Tom) was
spposed to be a turkey for a Thanksgiving spot. Rubies Costumes delivered the
wrong outfit. We shot it as a goof. But, then again, so were most of the spots.
Every radio station had a stand by spot carted up and ready to go called Crazy
Eddie s Blizzard Blitz. Whenever winter weather got extremely severe I would
call directly in to each studio and authorize the on air personalities to run
those spots, which claimed, if you re crazy enough to come out in this weather,
Crazy Eddie is crazy enough to give you the most unheard of crazy deal Once
Eddie and I had lunch with Don Imus at the Swiss Center in Rockefeller Center.
The Swiss Center was the restaurant run by the Swiss Embassy featuring fine
Swiss cuisine. Eddie ordered a cheeseburger. Imus ordered an American
cheese sandwich. The waiters were flabbergasted, but they brought the food.
The major dealer for Cerwin Vega speakers, Crazy Eddie had the honor of
dispensing with those giant subwoofers that had been used to create
Sensoround in theaters all over the country for the movie Earthquake. Many of
those subwoofers were installed in major clubs around the City, most notably
Studio 54. I made arrangements with the producers of Saturday Night Fever to
shoot a scene in the Crazy Eddie Record and Tape Asylum on Kings Highway.
Eddie s brother in law Bennie shot it down. He was appalled that I would want
to shut the store down for a day to shoot a movie. Such was the mentality of
that place. I did, however get a Crazy Eddie commercial featured in the movie
Splash. Carson productions also featured Crazy Eddie commercials in their TV s
Greatest Commercials special with Dick Clark and Ed McMahon. The Crazy
Eddie spoof of Saturday Night Fever was shot at the 2001 Odyssey House,
same as the movie. It was easy to duplicate the lighting each of the lights from
original movie shoot had melted holes in the ceiling. Our spoof of Superman
got Warner Brothers mad and they sued us. The NY Post headline read, It
Takes Superman to Stop Crazy Eddie. Eddie countered with threats of halting
all sales of Warner owned Atari video games (we were the largest dealer), and
we settled. Crazy Eddie was responsible for the demise of what was then
known as the Fair Trade Laws, where manufactures dictated the prices at
which retailers could sell their products. Crazy Eddie was primarily responsible
for the demise of Blue Laws (that prevented retailers from opening on Sunday,
by being one of the first major retailers to open on Sundays, not to mention
Christmas, New years and Thanksgiving. Paramus was the only regional
location where blue laws remain today. Once a Crazy Eddie manager was
arrested for going into the Paramus store on a Sunday. He was only there to
retrieve his wallet, accidentally left there the day before. I remember the first
time we decided to open on Christmas Day. We all looked at each other and
thought, hey we re all Jewish why not. Was one of the highest grossing days of
the year. After his release from jail, Eddie contacted me and asked me to get
involved in rebuilding the company. We gave it a quick shot. A lot of old timers
came back to work and we produced a new series of hilarious radio and TV
spots. But potential investors were unable to see Eddie Antar other than as the
convicted felon he was and I don t blame them. Eddie refused to bow out
dooming the new venture. There were a lot of hard feelings and, sadly, a whole
lot of the original players are no longer talking to each other. There s much,
much more hardly enough bandwidth for it all. Hope you all enjoyed reading
this as much as I enjoyed typing out these great memories.
 The Crazy Eddie Fraud
Compared to today s frauds in the billions of dollars, Crazy Eddie s fraud was
smaller in size. However, the Crazy Eddie fraud was much more outrageous
than most frauds committed because of its time span (18 years), its use of a
combination of multiple methods, and the sheer audacity of its perpetrators.
As I will detail below, were three main phases to the Crazy Eddie fraud
spanning from 1969 to (1) : Skimming and under reporting of income (tax
fraud) prior to planning to go public (2) : Gradual reduction of skimming to
increase profit growth in preparation for initial public offering, known as
committing securities fraud by going legit (3) : As a public company,
overstatement of income to help insiders sell stock at inflated prices by the
following means: Money laundering to increase revenues and reported profits,
known as the "Panama Pump" Fraudulent asset valuations to increase
reported profits (inflating inventories) Timing differences to increase reported
profits (accounts payable cut off fraud) Concealed liabilities and expenses to
increase reported profits (debit memo fraud) Improper financial statement
disclosures to cover up crimes (changing disclosures to cover up fraud)
Phase 1: From 1969 to 1979, our primary fraud was income tax evasion and
stealing sales tax through skimming cash sales from customers.
In 1971, at the age of fourteen, I began my employment at Crazy Eddie as a
stock boy. From the very beginning of my employment at Crazy Eddie, I was
involved in cash skimming and overstating insurance loss claims. From 1975 to
1980, I attended Bernard M. Baruch College and majored in public accounting.
Eddie Antar and other family members believed that my formal college
education in public accounting would help them execute more sophisticated
financial crimes in the future. Therefore, the Antar family paid my tuition and
paid me a full time salary while attending college. I continued working at Crazy
Eddie at nights, weekends, holiday breaks, and summer vacation. In 1980, I
graduated Bernard M. Baruch College Magna Cum Laude and was on the Dean
s List. The Antar s were ready to take full advantage of my accounting
education as the de facto Chief Financial Officer of the company to execute
even more sophisticated crimes on behalf of the family.
Phase 2: Around 1980, we planned to make Crazy Eddie into a public
company so the Antar s could sell their stock at inflated values to
unsuspecting victims. Gross up "on the books" payroll to compensate
employees previously paid "off the books" 
To prepare for the future as a potential public company, we needed to
legitimize the business. All employees who were paid fully off the books or
partially "off the books" in cash had to be paid on the books. We grossed up
those employee s "on the books" compensation to help them avoid a drop in
net payroll income. Both external audit firms (Penn and Horowitz and Main
Hurdman in 1984) noticed that many employees, who were previously paid
what seemed to be extremely low wages (considering their positions and
responsibilities at Crazy Eddie), had received raises in multiples of ten to
twenty times their previously reported salaries. For example, a district
manager who was paid $5,200 per year "on the books" and $50,000 per year
"off the books" was now paid "on the books" over $75,000 per year on the
books, instead of receiving any "off the books" compensation. Therefore,
according to Crazy Eddie's books and records such a person's annual salary
suddenly went from $5,200 per year to $75,000 per year. The auditors did not
know that Crazy Eddie management was "grossing up" the employee's total
compensation to make up for the loss of "off the books" compensation and
higher payroll and income taxes. The auditors accepted our silly explanation
that such employees had sacrificed many years working at below average
wages for the opportunity to be part of what they hoped might become a
growing public company. Around 1980, I helped devise a plan to gradually
reduce our skimming to artificially increase the growth of Crazy Eddie's
reported profits to create the appearance that it was a thriving growing
company. In effect, we planned a "securities fraud by going legit." That same
year, I passed the CPA examination with a 90% and scored in the top 1% in the
country. From 1980 to 1983, while working off the books as the de facto CFO
of Crazy Eddie, I also worked Penn & Horowitz, the accounting firm that
audited Crazy Eddie s books and records. I worked at Penn & Horowitz for two
purposes: (1) To fulfill my auditing experience requirement necessary to obtain
my CPA license (2) To learn how to take advantage of auditors, especially if
Crazy Eddie became a public company as planned. In 1984, I left Penn &
Horowitz and officially began working for Crazy Eddie again, "on the books."
Around the same time, Crazy Eddie replaced Penn & Horowitz with a Main
Hurdman, a major accounting firm. (Note: In 1986, Main Hurdman merged
with Peat Marwick Mitchell to become Peat Marwick Main. In 1987, that
accounting firm became known as KPMG, after another merger). In 1985, I
finally obtained my CPA license. From 1980 to 1984, Crazy Eddie gradually
reduced its skimming from approximately $3 million per year in starting in
fiscal year 1979 to near zero in fiscal year As a result of the gradual reduction
in skimming, Crazy Eddie s reported pro forma annual profits grew from $1.709
million in fiscal year 1980 to $7.975 million in fiscal year If we factor in new
store openings during the same period, Crazy Eddie s pro forma profit per
store grew from $219, per unit in fiscal year 1980 to $617, per unit in fiscal
year Without the gradual reduction in skimming, Crazy Eddie s pro forma
profits only grew from $4.709 million in fiscal year 1980 to $7.975 million in
fiscal year Most importantly, Crazy Eddie s pro form profit per store only grew
from $606, per unit in fiscal year 1980 to $617, in fiscal year Therefore, Crazy
Eddie's real per unit profitability was hardly growing at all, except in the minds
of unsuspecting investors who were unaware that we gradually reduced our
skimming to skew our growth. (See table 1 below).
Phase 3: On September 13, 1984, Crazy Eddie had its initial public offering. As
a public company our primary fraud shifted from under reporting income (as
a private company to avoid paying taxes) to over reporting income to help
Antar family members to sell millions of dollars of stock at inflated prices to
unsuspecting investors.
In fiscal years 1984 to 1987, we inflated inventories and under reported
accounts payable to increase reported profits. In addition, we artificially
increased our reported sales volume and profits by laundering previous
skimmed funds back into Crazy Eddie in a scheme known as the Panama Pump.
(See table 2 below). During that same period, Antar family members sold
almost $90 million of common stock to unsuspecting investors at inflated
prices due to our over reporting of income in financial reports files with the
SEC. The auditors simply did not observe the inventory counts in all of the
Crazy Eddie stores at fiscal yearend. In fiscal year 1986 and 1987, the auditors
observed the inventory counts in roughly 50% of the stores. We inflated
inventory counts in all stores (including both store counts observed by auditors
and store counts not observed by the auditors at year end). Regarding store
inventories that the auditors observed, they failed to take copies of the entire
store inventory counts with them after leaving the store premises. The
auditors only took their "test counts" with them and not copies of the entire
store inventory. We monitored their test counts. Therefore, we knew which
inventory counts to falsify. We were nice to our friends and nicer to our
enemies. When boxes were stacked really high and deep, we were very
courteous to those young kids just out of college who felt that it was beneath
their dignity to do physical work. We climbed and counted the inventory for
our lazy auditors. The process continued through the night. We gained our
auditors trust by buying them coffee during their breaks or we performed
small errands for them. For example, we volunteered to make copies of their
audit test counts. The unsuspecting auditors were very happy to have us make
copies for them. Afterwards, we inflated inventories in even greater amounts,
since we knew what items to inflate and what items to avoid.
By 1987, the warehouse inventory was automated and it was no longer
possible inflate those inventories. Therefore, we needed to be more aggressive
in inflating the store inventories in greater proportions than in previous years.
We gained access to all of the auditors work papers. The audit work papers
were left behind in locked boxes on Crazy Eddie premises during the audits.
We knew that the audit manager had left the keys in a small 2" paper clip box
and hid it in an unsecured desk. As a result, it was relatively easy for us to
falsify store inventories and larger amounts compared to prior years.
Fiscal year 1986: The "Panama Pump"
By fiscal year 1986, the effect on our growth in sales and profits from reducing
our prior skimming had run its course and was no longer beneficial. Antar
family members wanted to sell even more stock to unsuspecting investors and
of course make millions, more. In the first month (December 2005) of the last
quarter of fiscal year 1986, same store sales increased 20% over the previous
December. However, in January and February 1986, same store sales only
increased 4% over the previous fiscal year period. The analysts, who followed
Crazy Eddie, expected at least a 10% increase in same store sales during the
January February 1986 period over the previous year's period. Eddie Antar and
his father Sam M. Antar wanted to sell over $30 million in stock by the first
week of March 1986 at the highest possible price. Therefore, to meet analysts'
sales expectations, we conceived of a plan known as the "Panama Pump."
Eddie Antar and other family members advanced $1,500,000 to Crazy Eddie
from their secret bank accounts in Israel which contained funds skimmed while
Crazy Eddie was a private company. Those funds were first wired from Bank
Leumi Israel to Bank Leumi Panama (both countries were bank secrecy
jurisdictions). After the funds were transferred to Panama, another family
member withdrew those funds from Bank Leumi in the form of drafts or non
negotiable instruments, to avoid violating disclosure laws on the movement of
funds into the country. The bank drafts were issued in amounts ranging from
$25,000 to $100,000 in order to make it easier to deposit such drafts in each
comparable store bank account and conceal the phony sales. On Sunday,
March 2, 1986, Crazy Eddie s fiscal year ended. However, I received those bank
drafts a day later. Those bank drafts were deposited into each comparable
store's bank account after the last day of the fiscal year, which was on Monday
March 3, 1986 and no invoices were generated to backup those deposits. Since
Crazy Eddie s weekend checks from sales to customers were deposited on
Monday anyway, there was no problem including such bank drafts with the
weekend sales proceeds. The bank drafts were dated before the fiscal year
ended
lso, another $500,000 in currency from Antar family mattresses that did not
make its way to Israel was deposited in the same store sales. Finally, a sale of
$200,000 to another retailer called trans shipping was counted as a retail sale
and included in same store sales. The sum total of $1.5 million in bank drafts,
$500k in currency, and $200k from counting a transshipping sale as a same
store sale, artificially increased same store sales in total by $2,200,000 for fiscal
year 1986 and reported profits by $2 million. In Q4 1986, Crazy Eddie reported
a 14% same store sales increase, instead of a 9% same store sales increase, due
to the "Panama Pump" and other schemes described above. Likewise, Crazy
Eddie reported a 10% same store sales increase for January and February 1986,
instead of the 4% same store sales increase due to the Panama Pump. As a
result of the Panama Pump fraud, Crazy Eddie s reported same store sales for
January February 1986, met analysts’ expectations for that period.
Why the auditors failed to find the Panama Pump
The auditors failed to test internal controls for sales and conduct a sales cutoff
test at year end. If the auditors had conducted such a sales cut off test, they
could have noticed unusually large deposits in transit on the bank
reconciliations since the drafts did not clear the bank before fiscal year end.
These large deposits in transit of $25,000 to $100,000 from bank drafts were
listed next to normal deposits in transit from legitimate sales ranging from $10
to $1,000 on the bank reconciliations. The auditors did not trace any monies
from deposits in transit to actual sales invoice. In addition, the auditors failed
to notice that same store sales increased % for no apparent reason in the last
week of the fiscal year.
Eddie Antar and Sam M. Antar sell $30 million of common stock based on
hyped same store sales
On March 7, 1986 Eddie and his father sold over $30 million dollars of stock at
inflated prices and I was a hero. The press release issued by Crazy Eddie
reported a same store sales increase of 14% for Q and everybody was happy
with the news. However, the same store sales report did not include any
information about Crazy Eddie s reported profits. The audited financial
statements for fiscal year 1986 were yet to be issued and Eddie Antar and his
father wanted no earnings surprises in fiscal year 1986 after they cashed out
$30 million in stock to unsuspecting investors at inflated prices.
Fiscal year 1986: inventory inflation
We already artificially inflated our earnings by $2,000,000 from fictitious sales
resulting from laundering previously skimmed funds back into Crazy Eddie
($1.5 million from bank drafts and $500k in currency). The $200k trans
shipping sale did not increase profits, since the merchandise was sold at cost to
the non-end user.
I helped Eddie Antar and other family member plan and execute
overstatement inventories and understatement of accounts payable that taken
together with the fictitious sales fraud initial overstated net income by
approximately $15 $18 million. Inflation of store inventories was particularly
easy since the auditors did not supervise the counting of more than 40% of the
store units or store inventory values. In addition, it was quite easy in a
company where the family controlled everything to receive merchandise
weeks before the auditors arrived without any records or audit trail on Crazy
Eddie books and then receive postdated invoices weeks after the auditors
concluded their audit. In the warehouse, our conspirators were very
accommodating to audit personnel in helping them count merchandise by
volunteering to climb over huge stacks of boxes and count all of the units. In
addition, they helped the audit manager make copies of his test count work
papers. That same trick was also done in stores in which the auditors
supervised the inventory counts. In effect, we committed fraud by
accommodation.
Fiscal year 1986: Inclusion of consignment merchandise in year-end inventory
or accounts payable cut off fraud
A certain vendor from whom we purchased over 10% of our merchandise and
whose volume with us was over 35% of their business shipped us merchandise
prior to year end. After our external auditors completed their audit, that
vendor invoiced Crazy Eddie as if the merchandise was shipped after year end.
That scheme resulted in Crazy Eddie's inventories being overstated by another
$3 to $4 million in 1986 or accounts payable being understated by a likewise
amount.
Why the auditors failed to uncover accounts payable cut off fraud
The auditors failed to adequately examine internal control procedures for
receiving merchandise and paying bills.
Too much earnings inflation in fiscal year 1986
We were so successful in overstating inventory and understating accounts
payable that our auditors believed that Crazy Eddie had substantially
understated its profits during fiscal year Crazy Eddie s gross margins for the
year had been computed at close to 40% when historically it never exceeded
25%. Our gross margins for the last quarter exceeded 60%. Eddie and I had
discussions with the auditors regarding this so called dilemma. The issue of
accounting fraud never came up. The auditors felt we were the kind of client
they could work with. The partner said, Nobody got sued for under reporting
earnings. To solve the problem, he set up artificial cushions that he would call
rainy day funds or accountants liability insurance. Therefore, he arbitrarily set
up non GAAP allowances of $8 million to offset his perceived $16 million
understatement of earnings, not knowing the con job that Eddie and I pulled
over him. We rewarded Main Hurdman very dearly after the 1986 audit. We
awarded them various contracts for computer system implementation,
employee benefit compliance, and other work totalling in excess of $1 million
per year. However, the annual audit fee was only approximately $150,000.
There is a saying, Keep your friends close and keep your enemies closer.
Fiscal year 1987: channel switching
Eddie Antar and Sam M. Antar wanted to continue inflating same store or
comparable store sales in fiscal year 1987 to prevent any revenue surprises
after selling about $30 million in common stock at inflated prices, as detailed
above. To continue the same store sales inflation, we devised a scheme to sell
(trans ship) merchandise to non retail customers who were not end users, such
as other retailers and wholesalers, and count such sales as if they originated
from those comparable stores. That scheme is known as "channel switching."
Those trans shipping sales originated from the main office. However, such sales
were counted as if they originated from comparable stores as retail end user
sales. The trans shipper issued a series of checks in small denominations for
their purchase of merchandise from Crazy Eddie instead of issuing one large
check per order. The small checks (usually in denominations of $10,000
$20,000) were deposited into the bank accounts of the comparable store sales
and treated as a regular off the street customer retail channel sale. In Q
(March to May), Crazy Eddie reported a same store sales increase of 10%
instead of 8% due to $680,000 of trans shipping sales improperly included in
same store sales. In Q (June to August), Crazy Eddie reported a sale store sales
increase of 15% instead of 5% due to $4.5 million of transshipping sales
improperly included in same store sales. In Q (September to November), Crazy
Eddie reported a sale store sales increase of 5% instead of negative 10% due to
$7.9 million of transshipping sales improperly included in same store sales.
Why the auditors missed the "channel switching scheme"
The auditors failed to test internal controls for sales, failed to examine deposits
in transit, failed to examine actual invoices underlying deposits, and failed to
make sales cutoff tests for interim periods. Payments from such sales must be
examined and merchandised should be traced.
Fiscal year 1987: inventory inflation
From the early 1970 s to 1986, Crazy Eddie was a profitable company. Prior to
Crazy Eddie s initial public offering in 1984, we understated profits to commit
income tax evasion and steal sales taxes. From 1984 to 1986, we inflated Crazy
Eddie s reported profits to help Antar family members sell stock at inflated
prices. However, in 1987, Crazy Eddie started losing money and our efforts
were focused on reducing reported losses. We made desperate attempts to
cover past frauds and continue the current fraud. 
In the previous fiscal year, we had falsified our store level inventories by $3 to
$4 million. However, in fiscal year 1987, Crazy Eddie's store level inventories
were estimated to have been falsified by $15 to $20 million. In stores that
existed in both 1986 and 1987, where the auditors observed inventory counts,
those gross inventory levels increased from $ million to $ million or about 71%.
Meanwhile, in stores that existed in both 1986 and 1987, where the auditors
did not observe the inventory counts, gross inventories grew from $7.972
million to $ million or about 195%. Therefore, inventory growth in stores
where the auditors failed to supervise the year end physical inventory counts
were more than double in comparison to stores where the auditors did
supervise the counting of year end inventory.
Why the auditors failed to find the 1987 inventory inflation
The auditor's left their work papers at Crazy Eddie s premises overnight until
the audit was completed in supposedly secured locked metal trunks. However,
the audit manager dutifully left the key to these locked metal trunks in a small
2 inch paper clip box on Crazy Eddie premises. Therefore, we were able to
falsify inventories that the auditors observed at year end in an effort to make
the growth in inventory levels in such stores similar to the inventory levels in
stores where they were not present to witness the inventory counts. However,
due to our desperate attempt to reduce reported losses, the growth in
inventories in unobserved stores almost doubled the growth in inventories of
stores observed by the auditors. The auditors never questioned this red flag.
Fiscal year 1987: Debit Memo Fraud
In fiscal year 1987, we could not rely mainly on inflating inventory levels to
reduce our reported losses. Instead, we artificially reduced amounts owed to
vendors or accounts payable to reduce our cost of goods sold, increase gross
profits, and reduce losses. We conceived of a plan to use phony debit memos
or charge backs to reduce our losses. However, up to fiscal year 1986, Crazy
Eddies' accounting policy for purchase discounts and trade allowances as
disclosed in the company s footnotes to the financial statements were:
"Purchase discounts and trade allowances are recognized when received."
Crazy Eddie did not reduce its accounts payable (thereby increase its profits)
until a credit memo was received from a vendor. Crazy Eddie's accounting
principles for trade discounts and allowances was conservative since "earned"
discounts and allowances were not recognized as income until the credit
memo was received from a vendor. 
Therefore, we were unable to use phony debit memos to reduce our accounts
payable, since the vendors could not recognize them as legitimate deductions.
Unless a vendor recognized a debit memo or charge back to them as legitimate
in the form of a vendor s credit memo, and such charge backs could not be
reflected in our reported income. To enable the use of phony debit memos in
fiscal year 1987, Crazy Eddie's accounting policy for purchase discounts and
trade allowances was changed and disclosed in the footnotes to the financial
statements as follows: "Purchase discounts and trade allowances are
recognized when earned." As soon as purchase discounts and allowances were
earned, regardless of whether or not Crazy Eddie received the credit memo
from the vendor, they were recognized and accrued as deductions from
accounts payable. Therefore, we could generate phony debit memos and use
them to reduce our accounts payable and reported losses, since we did not
have to wait for a vendor s corresponding debit memo. The change in
accounting policy for purchase discounts and allowances gave us the
opportunity to generate $20 million in phony debit memos and $8 million in
legitimate debit memos to offset almost $78 million in accounts payable.
Why the auditors missed the phony debit memo scam
In previous years, we generated an accounts payable aging schedule for our
auditors. For fiscal year 1987, no accounts payable aging analysis was
generated for our auditors. Since the accounts payable aging schedule was not
generated in 1987, the auditors were unable to determine the true volume of
collectable debit memos. In some cases, Crazy Eddie had negative accounts
payable balances for certain vendors. In other cases, there were large amounts
of debit memos offsetting gross accounts payable balances. However, the
auditors conducted no analytical tests to determine the collectability of debit
memos. The auditors believed our false rationale that the reason that accounts
payable was lower in relation to inventory compared to previous years was
due to Crazy Eddie using short term commercial paper to pay its vendors more
promptly. However, the real reason for the relative percentage reduction in
accounts payable in relation to inventory was due to the large volume of non
reconciled bogus debit memos. The true accounts payable excluding those
bogus debit memos was about $71 million. Furthermore, the auditors
reconciled the accounts payable of only three major vendors. Each vendor had
significant amounts of reconciling items, resulting from the bogus debit
memos. For a certain vendor, that had claimed that Crazy Eddie owed them
$17 million, we said they were owed them $7 million. A significant factor in the
gap between the differing amounts claimed by the vendor and Crazy Eddie was
the bogus debit memos. 
 The auditors never contacted any of the companies they reconciled
concerning any discrepancies. The audit staff member responsible for the
accounts payable audit had no retail accounts payable audit experience and
only six months experience in other audit areas. He first learned about debit
memos during the Crazy Eddie audit. The audit partner approved the so called
audited financial statements for a press release at a board meeting before the
accounts payable audit was completed. The inexperienced audit staff member
began his test work on Sony (which contained over $4 million of the $20
million in phony debit memos) on April 28, 1987, the same day our auditors
signed off on the audit according to his testimony in a deposition. In his sworn
testimony, he said that his work continued for more than one day. The audit
opinion was signed as of April 28, The partner had approved the release of
Crazy Eddie's financial reports to the Board of Directors on the previous day.
An excerpt from the work papers said, "...PMM traced all debit memos into
A/P status report as of 03/01/87. No further work necessary." An A/P Status
report simply lists all invoices and debit memos. Therefore, the debit memos
were traced to a report listing the phony debit memos and no further work
was necessary garbage in, garbage out. No efforts were made to contact Sony
about the discrepancies in its confirmation of accounts payable. The senior
staff member did conduct an interview of Crazy Eddie's Accounts Payable
Manager (a coconspirator) after the staff auditor finished his testing and after
the partner signed off on the audit. His work paper is dated May 22, There was
a similar lack of follow through with other confirming vendors regarding any
discrepancies. In addition, the change in the accounting policy relating to the
cash discounts and trade allowances required additional computations under
Accounting Principal Bulletin 20. No such computations were contemplated or
done by the auditors.
Fiscal year 1987: Inclusion of consignment merchandise in year end inventory
or accounts payable cut off fraud
In fiscal year 1987, we continued to use a certain vendor to ship Crazy Eddie
merchandise prior to year end and after the audit was completed, invoice the
company as if the merchandise was shipped after year end. That scheme
resulted in Crazy Eddie's inventories being overstated by another $5 to $7
million in 1987 or accounts payable being understated by a likewise amount.

a.
Falsification of inventory count sheets
# t5is could 5a'e )een identified if auditorswould 5a'e inspected "raz Eddie:s
stores randoml and c5eck its in'entor.;nce t5e in'entor )eing c5ecked all
in'entor count s5ould )e put on specialcount s5eet wit5 auditors mark or
signature on t5e end of eac5 s5eet. < doingt5is auditors would a'oid adding
items ) t5e client. +n addition auditors s5ouldmake sure t5at t5ere is a proper
internal control in place. ).
  Bogus  debit  memos for accounts payable
 4 "raz Eddie:s auditors s5ould 5a'econtacted 'endors9 suppliers9 )anks and
creditors and get confirmations9 t5entrace t5e information from t5e
confirmation9 to t5e general ledger. +n addition tot5at auditors s5ould
randoml select c5arges included in AP account and c5eck t5e support
documentation to confirm e8istence of t5e c5arges. ;n t5e top of t5atsu)se
%uent e'ent s5ould )e in'estigated.c.
  Recording  transshipping transactions  as retail sales
 - auditors s5ould 'iewrecorded sales and all aspect of it9 especiall sales
occurred ) t5e end of t5e ear.+n addition9 t5e auditors s5ould c5eck t5e
procedures of recording of transaction.d.
  Inclusion of consigned merchandise in year-end inventory
# (5is pro)lem
would )e unco'ered if= "raz Eddie:s auditors would 5a'e o)ser'ed t5e entire e
ar  p5sical in'entor and 5a'e good written polic to do it so

Cash went from 3.8% in 1984 to 34% of their total assets in 1985. That’s a
1520% increase in the first year according to the horizontal analysis. Then in
1986, cash only represented 10.5% of their total assets. This could be a sign
that Crazy Eddie tied up most of their cash into investments and did not
haveenough for other expenses. Inventory should have been a main concern
during this time. When the company went public (9/13/1984), inventories
really increased.Inventory went from 63.8% in 1984 then dropped to 37% by
year 1987. This shows that they overstated the books, and the fraud was
discovered at this time. (Please see answer to question 3a for an example.)
Accounts payable decreased $1,707 from 1986-1987. During this time,
inventory increased $49,208 which was unusual. Normally, auditors expect the
changes between these two accounts would be associated. The more
inventory Crazy Eddie purchases, the higher its year-end accounts payable
should be. In this case, it is not which could pose a higher-than-normal level of
audit risk. Short-term debt jumped from .3% in 1984 to 16.8% in 1987 which is
due to expanding and opening more stores. As short-term debt increases,
accrued expenses decrease from 16.6% in 1984 to 1.9% in 1987 which makes
you wonder how this could be if they are expanding.The vertical analysis of the
balance sheet shows that Crazy Eddie manipulated their current liabilities
because the percentages of current liabilities to total liabilities and
stockholders equity decrease almost every year. By throwing everything in
short term debt, the current ratio is therefore incorrect which means they
really did not have money to pay back their liabilities which is why the current
ratio when from .93in ’84 to 2.41 in 1987. The quick ratio, which measures a
company’s liquidityincreased every year from 1984-1987 from .15 to 1.40. This
would be inaccurate since current assets are needed when calculating
thisratioand the receivables were most likely influenced.
 Inventory Turnover is getting slower. Since sales are going up, you’d
assume inventory would be turning over faster.
 Consider the electronics industry: you would assume that the goods
would turnover more often than 4 months (113 days).
 Accounts Receivable Turnover: every 7 days? Seems odd…
 Gross margin and Profit margin going down, but sales going up…
something is fishy.
 Sales went from -7% to +92% to +34%. Very volatile.
 Notice that Crazy Eddie's inventory increased dramatically over this time period, from $23
million in 1984 to nearly $110 million in 1987. Also notice that the company's inventory
turnover slowed considerably during 1987 resulting in the average age of inventory leaping
from 80 days to more than 111 days. When the age of a company's inventory increases
significantly, the risk of obsolescence and related valuation problems must be seriously
considered by the firm's auditors.