RIZAL TECHNOLOGICAL UNIVERSITY GRADUATE SCHOOL

RIZAL TECHNOLOGICAL UNIVERSITY

GRADUATE SCHOOL
Boni Avenue, City of Mandaluyong

BA232: Financial Management

Assignment #1: Financial Scandals

Professorial Lecturer:

Dr. Cecilia F. Jose

MBA Student:

Justine Rawi A. Corral

Feb 2021

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1. Enron

According to Bowman (2020), the Enron scandal is probably the most

famous of Wall Street’s financial scandals. Enron was a high-flying
energy services company and a darling of the stock market in the last
1990s. When it eventually collapsed shareholders lost as much as $74
billion. The CEO, Jeff Skilling and the CFO, Andrew Fastow, used an
array of dubious accounting practices to inflate revenue and hide debts.
The result was that the company appeared to be the most profitable
company in history, when in fact it was saddled with debt. The
appearance of a healthy balance sheet and large revenues allowed
Enron to easily raise more capital to keep the charade going.

Most of the fraud was committed between 1998 and 2001 resulting in the
stock price trading as high as $90.56. During this period CEO Ken Lay
gave Skilling more and more authority, which Skilling used to manipulate
the company’s accounts. The company was able to exaggerate asset
values and revenue by changing an accounting policy to use market-to-
market prices. These prices were then manipulated. Billions of dollars in
debt were also moved from the balance sheet and hidden in shell
companies in the Cayman Islands. The fraud accelerated when Skilling
took over the CEO position from Lay.

In 2001 the fraud became unsustainable and the company collapsed.

Ken Lay, Jeff Skilling, Andrew Fastow, and others were arrested. Fastow
and Skilling served six and 12 years in prison, respectively. Ken Lay died
before he was sentenced. The scandal didn’t only lead to the collapse of
Enron, but to the demise of the Arthur Andersen, Enron’s auditor. The

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auditor overlooked the financial fraud and helped with the cover up.
Arthur Andersen’s role in the fraud remains one of the biggest
accounting scandals in the United States to date.

2. WorldCom

As stated by Bowman (2020) in Catana Capital, WorldCom was the

second largest telecommunications company in the US during the
1990s. However, in 2002 the company collapsed after wide ranging
accounting fraud was uncovered. Telecom companies performed very
well during the 1990s as the use of mobile phones grew. When the
industry later came under pressure, WorldCom executives turned to
cooking the books. They inflated revenue, and listed expenses as
investments to create the impression that the company was still
profitable and growing.

Investors believed the stock was still a good investment, and so at its
peak the company was valued at $180 billion. At the time this meant it
was one of the most valuable companies in the world. When auditors
discovered that revenues and profits had been overstated by as much as
$7 billion, the stock price quickly collapsed from $60 to $1, and
thousands of employees lost their jobs. The company filed for
bankruptcy protection and later emerged as MCI, a much smaller
restructured company. MCI was later bought by Verizon
Communications.

In 2006, WorldCom’s CEO, Bernhard Ebbers, was sentenced to 25

years in prison. He was released earlier this year after serving 15 years

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and died shortly thereafter. The WorldCom scandal remains one of the
world’s largest corporate scandals and resulted in nearly $180 billion in
losses for investors, and thousands of lost jobs.

3. Wirecard

According to Bowman (2020), fraud at Wirecard has turned out to be one

of Europe’s biggest financial scandals. Wirecard which was a member of
Germany’s leading stock index, and one of the biggest fintech success
stories in the world, collapsed in June this year. The fraud at Wirecard
was actually remarkably simple. Wirecard was a company that
processed payments on behalf of merchants. In certain countries,
Wirecard used subsidiary companies to process these payments on its
behalf. At some point, the company began reporting fictious revenue
from these subsidiaries which eventually accounted for the bulk of
Wirecard’s profits.

When analysts, investors, and journalists questioned the lack of cash

flow from the subsidiaries, Wirecard stated that the cash was all held in
the subsidiary escrow accounts. This would mean the cash was in the
same account that payments were processed through, and therefore
difficult to dispute. When the media and several whistleblowers alleged
the revenue did not exist, Wirecard accused them of trying to manipulate
the share price for short sellers. They even sued the Financial Times,
which resulted in German regulators investigating the journalists rather
than the company. This is an increasingly familiar pattern when financial
scandals involve listed companies.

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Company management will often accuse short sellers and hedge funds
of trying to manipulate the share price. In many cases regulators end up
siding with the company, fearing the effects financial scandals might
have on investor confidence. Eventually KPMG was asked to investigate
and confirmed there was a hole in the balance sheet. It ultimately
transpired that around $2 billion in liquid assets simply didn’t exist.
Within days the share price collapsed from €100 to zero. Wirecard,
which was worth $28 billion at one point, is now insolvent. This makes it
one of Germany’s and Europe’s biggest financial fraud cases.

4. FrancSwiss (2007) - Local

According to Adrian (2019), they promoted as a high-yield investment

program or HYIP, FrancSwiss offered investors daily returns of 4.5% on
a minimum 1000-dollar investment. So, for every investment of $1,000,
investors would gain $45 a day.

The scheme lasted from March to July, and many investors re-invested
after earning back their initial deposits. In fact, the company raised over
$20 million in only a few months. But after a media report that
encouraged investors to withdraw their money, the scheme collapsed.

Many of the SwissFranc’s victims included high-profile individuals, such

as celebrities Claudine Barretto and Raymart Santiago. In 2007, the
National Bureau of Investigation filed syndicated estafa charges against
Eleazar Castillo, its chief financial adviser, as well as nine other people,
which included an American and two Singaporean nationals.

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5. Ponzi schemes in Mindanao (Kapa and Rigen) - Local

As stated by Adrian in the imoney.ph (2019), one of the top financial

scams in the Philippines are the Ponzi schemes that swept through
Mindanao earlier this year. One prominent program was KAPA, a
religious institution that allegedly mandated members to put in
investments for a 30-percent return every month. Its founder, Pastor Joel
Apolinario, called these donations “love gifts” or “blessings.”

Started in 2015, Kapa investors donated between ₱10,000 to

₱2,000,000 to help the ministry in delivering “propagation of the religious
faith, establishment of livelihood programs for the benefits of its
members.” In return, they will enjoy a 30% monthly interest through the
ministry’s investments, for life. So, an investment of ₱10,000 will yield
₱36,000 a year, every year, for as long as the investor was alive.

At least, that was what it purported to do. Last June 4, the Court of
Appeals (CA) ordered the freezing of Kapa’s bank accounts and assets,
upon the petition of the Securities and Exchange Commission and the
Anti-Money Laundering Council. According to SEC Chairman Emilio
Aquino, KAPA had been engaged in a Ponzi-scheme that “[a]s sure as
the sun will rise in the east tomorrow, […] will never be able to sustain
that […] 30% return per month for life.”

Another popular one is Rigen. Founded in Tagum City, RIGEN

Marketing reportedly aims to “help the financial needs of individuals by

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providing a concrete system allowing ordinary people to have solid

additional income” through delivering a 400-percent return on
investments in only 30 days.
The Securities and Exchange Commission has imposed a cease-and-
desist order on Rigen, following President Rodrigo Duterte’s closure
order of all Ponzi-like investment schemes.

While many of their members and supporters would argue that Rigen
and Kapa’s main source of revenue is “trading” and “crypto”, but there is
little to no proof that they’re actually engaged in such. Instead, all signs
point out to them running a ponzi scheme type of investment. Besides,
every well-informed investor knows that legitimate trading can’t
guarantee such a high return with such a low risk. The same thing
applies to cryptocurrency – even when it was on its all time high, it was
extremely volatile that a consistent high return is not a guarantee.

References:

https://catanacapital.com/blog/biggest-financial-scandals-fraud-ponzi-
schemes/

https://www.imoney.ph/articles/top-biggest-financial-scams-philippines/