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Greg Kyte

From Mob Graves to Corporate Fraud: A Prosecutor’s Journey Through America’s Most Notorious Cases

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When former federal prosecutor Sam Buell received an unexpected phone call asking if he wanted to join the Enron Task Force, he had zero background in accounting or corporate finance. “I just got the Enron case. Do you want to come work with me?” asked his former supervisor Leslie Caldwell. Just like that, Buell found himself thrust into what would become one of the most significant corporate fraud cases in American history.

In a fascinating episode of “Oh My Fraud” podcast, Caleb Newquist and Greg Kyte interview Buell about his remarkable journey from prosecuting mob bosses to untangling Enron’s complex accounting schemes. Now the Bernard M. Fishman Distinguished Professor of Law at Duke University, Buell offers rare insider perspective on how major fraud cases are built and why corporate criminals are so difficult to prosecute.

From Organized Crime to Corporate Fraud

Before tackling Enron’s financial mysteries, Buell cut his teeth on cases straight out of a crime drama. After graduating from NYU Law School, he clerked for a federal judge in Brooklyn’s Eastern District of New York during the early 1990s.

“That courthouse was the most interesting place I had ever been in my life,” Buell explains. “At that time, in the early 90s, there was more crime than anybody knew what to do with. The murder rate in New York City was around 2,000 murders a year at its peak.”

The district was a hotbed of criminal organizations – not just the Italian Mafia, but diverse groups organized around various ethnic communities. These enterprises ran everything from drug trafficking to extortion, illegal gambling, and even human smuggling operations.

“These guys aren’t doing fraud,” Buell notes. “What they’re doing is real… it’s black markets. The question is simply what’s getting detected and caught and what isn’t. It’s a pure cat and mouse game.”

After moving to Boston, Buell joined the infamous Whitey Bulger investigation. Though Bulger himself was a fugitive, his lieutenant, Kevin Weeks eventually cooperated with authorities.

“Weeks took us to some locations where we recovered a total of five bodies,” Buell recounts. “The bodies were exactly where he said they were going to be. After 20 years, vegetation changes, everything changes. But I don’t think you forget that.”

Working on these cases taught Buell to “follow the money” – a skill that would prove invaluable when he later tackled corporate crime.

The Call That Changed Everything

In late 2001, while still working on the Bulger case, Buell received the call that would redirect his career. Leslie Caldwell, his former supervisor from New York who was now heading the Enron Task Force, invited him to join the investigation of America’s most spectacular corporate collapse.

Despite having a young child and a new house, Buell’s wife encouraged him to take the opportunity. “This is the one shot to do something,” she told him.

The learning curve was steep. “I needed a high-speed education,” Buell admits. “I didn’t even know what LIBOR was. People would say ‘LIBOR plus basis points,’ and I’d be like, ‘what is LIBOR?'”

Fortunately, prosecutors worked closely with SEC experts who could explain the complex accounting issues. “You’re talking to a lot of people who are experts, including lots of the witnesses who were CPAs. You’re like, ‘explain it to me like I’m your mother.'”

Despite the technical complexity, Buell found the fundamental challenge familiar: follow the money and identify the deception. “The people you’re dealing with speak a different language, but that doesn’t mean they’re smarter than you or capable of understanding things you’re not capable of understanding.”

The Slippery Slope of Corporate Fraud

Unlike TV crime dramas where villains set out to commit fraud from day one, Buell explains that most corporate fraud cases follow a pattern of gradual escalation.

“Once you tell the first lie, once you mess with the first number, it’s like… you read about what happened in Worldcom,” he says. What eventually became a billion-dollar accounting scandal often begins with small manipulations that executives might consider minor stretches of the rules.

Buell calls this “the creep effect” – a series of increasingly problematic decisions driven by pressure to maintain appearances and stock prices.

“These companies are being lauded as great success stories. And no CEO wants to say, ‘actually, we’re not succeeding,'” Buell explains. This reluctance creates enormous pressure, especially when executive compensation is tied directly to stock performance.

At Enron, “the tail was wagging the dog,” as Buell puts it. “Everything was designed not to have the stock price be a reflection of fundamental value, but a reflection of excitement about all the things they were going to do.”

Personal financial entanglements made this pressure even more intense. Many executives had borrowed against their company stock to finance lavish lifestyles.

“Ken Lay at Enron was being told to buy things like yachts and horses and cars and real estate—not very liquid stuff,” Buell explains. “So when the stock price starts coming down, there’s margin calls coming from the personal bankers, and they can’t be satisfied with selling other assets because you’ve put all your money into illiquid things.”

This creates a powerful motivation to keep the stock price up at all costs.

The Arthur Andersen Controversy

One of the most controversial aspects of the Enron case was the prosecution of Arthur Andersen, Enron’s accounting firm, for obstruction of justice. When Andersen employees shredded Enron-related documents as the SEC investigation began, prosecutors saw a clear case of obstruction.

“To have a big five accounting firm that was already in trouble with the SEC…suddenly have the relationship partner and somebody in the in-house counsel’s office telling all the junior people in Houston to shred everything other than the official working papers…because the SEC is looking at Enron – this was shocking,” Buell explains.

The Justice Department offered Andersen a settlement, but the firm refused to admit wrongdoing, fearing this would destroy them in civil litigation. When prosecutors proceeded with an indictment, Andersen launched a massive PR campaign with “full page ads in the Wall Street Journal about how the Justice Department is trying to put 10,000 people out of work.”

Though a jury convicted Andersen, the Supreme Court later overturned the conviction on a technical point regarding jury instructions. By then, however, Andersen had already collapsed.

The case had lasting repercussions for corporate prosecutions. “It explains a lot about why the settlement market in corporate criminal prosecutions has boomed over the last 20 years,” Buell notes. Defense attorneys now routinely argue, “You don’t want to have another Arthur Andersen,” to secure deferred prosecution agreements for corporate clients.

“Boeing got a deferred prosecution agreement and hundreds of people died,” Buell points out. “General Motors got a deferred prosecution agreement. The argument was being made, ‘Hey, you can’t slam GM. You know, you want to win Michigan.'”

Proving Criminal Intent in Corporate Settings

The central challenge in prosecuting corporate fraud isn’t just finding misleading statements – it’s establishing criminal intent in environments where some level of deception is normalized.

“When we say someone has the intent to defraud, what we really mean is that they have the intent to engage in a kind of deceit that is wrongful in the context. And they know it,” explains Buell.

He illustrates this through a comparison: “Think about the difference between poker and golf. In poker, it’s part of the game that everyone is trying to deceive each other… In golf, you’re supposed to apply the rules very strictly to yourself.”

This distinction extends to financial markets, where different sectors have different norms about acceptable negotiation versus fraudulent misrepresentation.

Applying this framework to Enron reveals why the case was so complex. “It wasn’t like there was no there there,” Buell explains. Unlike a pure Ponzi scheme, Enron had legitimate business operations. “The criminal case was a collection of pieces of the business and incidents over time where they stepped over the lines and told lies. That doesn’t mean that the whole company was a fraud.”

Buell describes Enron as “a Rube Goldberg device…cantilevered off of itself constantly.” This complexity made it challenging not only to identify fraud but also to explain it to juries.

Why Corporate Fraud Persists

Despite landmark prosecutions and regulatory reforms like Sarbanes-Oxley, corporate fraud continues to plague our financial system. When asked what continues to surprise him, Buell answers simply: “That the scandals never stop.”

He points to ineffective regulation as a key factor. “Every single one of these cases almost…you can see directly the story of taking advantage of ineffective regulators.” From Boeing’s relationship with the FAA to Volkswagen’s emissions cheating, companies exploit weak oversight.

Sarbanes-Oxley, passed after Enron, had limited impact on criminal enforcement. More troublingly, it “never took up the question of what kind of products are being traded, by whom, and what is the danger of that…the shadow banking problem.”

Buell sees Enron as “a canary in the coal mine” that foreshadowed the 2008 financial crisis. “Enron, even though it was an energy company, was basically trying to run itself like an investment bank, trading products that were not regulated by the banking system in ways that ended up being much riskier than people realized.”

Most disappointing is how little we seem to learn from these cases. “Every time one of these things blows up, there’s all this talk about lessons learned. But the lessons don’t actually seem to get learned.”

For a fascinating first-hand account of how major corporate fraud cases are built from the prosecutor’s perspective, listen to the full conversation with Sam Buell on the Oh My Fraud podcast. His experiences provide essential context for understanding why corporate fraud remains so persistent despite our best efforts to prevent it. 

You can also earn free CPE for listening with Earmark.

From Sponsorships to Fake Consultants—Inside the Airbus Bribery Scheme

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Modern corporate bribery rarely looks like someone handing over a briefcase of cash. It often masquerades as something legitimate: a sports sponsorship, an inflated “consulting” contract, or a generous commission payment. 

As discussed in an episode of Oh My Fraud, one of the most striking examples is the Airbus bribery scandal, which resulted in the largest bribery fine in world history—€3.6 billion.

From Watergate to the FCPA

Corporate bribery isn’t new, but its legal and ethical landscape changed significantly in the 1970s after the Watergate scandal revealed a web of illicit corporate payments. In response, Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, prohibiting bribery of foreign officials and requiring accurate financial records. The FCPA doesn’t just apply to U.S. companies; it also covers foreign companies listed on U.S. stock exchanges or operating within the United States. This means that industry giants like Airbus can face American prosecution if they’re caught bribing, no matter where they are located.

Airbus Takes Flight—and Then Self-Reports

Founded in 1970 by French, German, and British aerospace firms (Spain joined later), Airbus’s mission was to compete with American manufacturers like Boeing. By 2003, Airbus surpassed Boeing and became the world’s largest commercial aircraft maker. 

Yet in 2016, an internal Airbus audit discovered a systemic bribery operation: “secret agents” were allegedly bribing officials to secure plane sales worldwide. Faced with French laws that would revoke operating licenses for bribery convictions—and an even steeper potential fine of €8 billion—Airbus surprised everyone by self-reporting to the Parquet National Financier (PNF), France’s financial crimes investigative body.

Inside the Massive Bribery Scheme

The Airbus bribery setup was surprisingly elaborate:

Secret Agents and Shell Companies
Airbus hired intermediaries—sometimes called “secret agents”—to close deals. These agents requested large “commissions” Airbus paid to shell companies with opaque ownership. A portion of that money went to officials in Ghana, Sri Lanka, Malaysia, Taiwan, Indonesia, China, and elsewhere.

Sports Sponsorships as Kickbacks
In one example, Airbus paid $50 million to sponsor a sports team owned by an airline executive. In return, the airline ordered 180 planes. Even if each plane were the least expensive model (over $70 million apiece), Airbus captured a staggering deal in exchange for a $50 million bribe concealed as “sponsorship.”

Consulting Contracts for Spouses
Another scheme involved hiring an airline executive’s spouse as a highly paid consultant. The spouse had zero aviation experience, making it clear the contract’s real purpose was to influence purchasing decisions.

These arrangements gave Airbus “plausible deniability”: officially, they were paying for legitimate-sounding services.

The Record-Breaking Settlement

By cooperating fully after their self-disclosure, Airbus negotiated a Deferred Prosecution Agreement (DPA) rather than face trial. Under the DPA:

Historic Fine
Airbus agreed to pay €3.6 billion—the largest bribery fine ever imposed. If they hadn’t turned themselves in, estimates suggest it could have topped €8 billion.

Three-Way Split
The French PNF, the UK’s Serious Fraud Office (SFO), and the U.S. Department of Justice (DOJ) shared the settlement. The DOJ alone collected roughly half a billion euros.

Leadership Shakeup
Although he wasn’t forced out, CEO Tom Enders resigned, expressing genuine remorse and a desire for Airbus to reform. An ongoing class action lawsuit from Airbus shareholders claims the company misled investors about its business practices.

Is It Marketing or a Bribe?

One reason corporate bribery is so insidious is that it can closely resemble legitimate business development. From event tickets to lavish client dinners, there is often no bright line defining when hospitality veers into bribery. Private-sector organizations don’t always have a rigid gift limit—like the $20 rule, the U.S. military has—making it even harder to police.

According to the 2024 ACFE Report to the Nations, the median loss to corruption is $200,000. Yet tracking actual losses is complicated. In Airbus’s case, officials needed new aircraft either way, so the “loss” might be seen as switching from one vendor to another for questionable reasons. It underscores how intangible “costs” can be when bribes drive commercial decisions.

Lessons for Finance Professionals

The Airbus scandal highlights a rapidly evolving corruption landscape:

Structural Sophistication
Bribes are concealed through sponsorships, commissions, and consulting contracts rather than suitcases of cash.

Gray Areas vs. Bright Lines
Understanding intent is crucial. Based on purpose and scale, the same “thank you” gift can be innocent or corrupt.

Robust Compliance Measures
Basic compliance and traditional red flags may fail to uncover cleverly disguised bribery. Periodic internal audits, detailed transaction analysis, and cultural shifts emphasizing ethics are vital.

Global Enforcement
In an interconnected world, bribery probes are often multinational. Being listed or doing business in certain countries (like the U.S.) exposes companies to multiple layers of enforcement.

In the end, Airbus’s self-reporting likely saved the company from greater financial and operational damage, yet the scandal still cost billions and tarnished its reputation. To hear a more in-depth discussion of how Airbus got “AirBusted,” check out the full Oh My Fraud podcast episode.

DC Solar’s Billion-Dollar Green Energy Con

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The following article is based on the “Burned by Solar” episode of the Oh My Fraud podcast, which provides a behind-the-scenes look at how DC Solar orchestrated one of the largest green energy frauds in U.S. history.

In December 2018, 175 federal agents from the FBI, IRS, and U.S. Marshals raided the headquarters of DC Solar and the California home of its CEO, Jeff Carpoff (sometimes spelled “Karpov” in news reports). This dramatic event unveiled one of the largest frauds ever prosecuted in the Eastern District of California—a scheme that claimed to sell 17,000 portable solar generators when, in reality, only about 6,000 existed.

Origins and Ambitions

Jeff Carpoff spent most of his life in Martinez, California. After failing to run successful auto repair shops and briefly selling drugs, he sobered up and co-founded a shop specializing in Land Rover repairs. Eventually, he latched onto a promising idea—creating portable, solar-powered generators he called the “Solar Eclipse.” This invention would supposedly replace traditional gas or diesel generators on movie sets, at disaster sites, and even in stadium parking lots during tailgates.

DC Solar marketed these generators as versatile, eco-friendly power sources that could be towed anywhere to provide clean energy. While the vision looked sound, it was the business model—centered on a lucrative federal tax credit—that truly turned heads among investors.

The 30% Tax Credit Hook

The U.S. government offered a 30% tax credit for investments in alternative energy equipment, including solar. DC Solar pitched a straightforward proposition to prospective investors:

  1. Purchase DC Solar’s generators, sold at a hefty price of $150,000 each.
  2. Pay only 30% of that cost upfront (the exact amount investors would recoup via the federal tax credit).
  3. DC Solar would cover the remaining 70% of the purchase price through lease revenue.

In theory, investors could fully offset their upfront cost with tax credits—and possibly earn additional returns if leasing income exceeded loan payments. Companies like Sherwin-Williams, T-Mobile, and even Warren Buffett’s Berkshire Hathaway bought into the hype, hoping to cut their tax bills while backing a “green” initiative.

Early Warning Signs

Despite its promise, DC Solar’s operations quickly drew skepticism. During a visit to one of the company’s facilities, Sherwin-Williams representatives discovered only a few rows of fully assembled units. Behind them, dozens of unfinished generator shells suggested the product was far less complete than advertised. Confronted about it, Carpoff reportedly brushed the issue aside.

Other troubling red flags emerged:

  • Performance Failures: Some trailers lost power on major film sets and at concerts, forcing DC Solar to sneak in diesel generators to cover the outage.
  • Lease Rate Discrepancies: DC Solar claimed that 80–90% of its generators were leased out, but internal accounts put the rate closer to 5%.

Faced with cash flow pressures, the company devised a “circular” approach: using money from new investors to fulfill lease payments it had promised to earlier investors. Internally, DC Solar employees allegedly referred to this patchwork as “re-renting,” but investigators later described it as classic Ponzi activity.

Fraudulent Tactics

To sustain the illusion, DC Solar:

  • Faked VINs: Employees scraped VIN stickers off certain generators and reapplied them onto others, matching whatever batch investors expected to see.
  • Synthetic Tracking: GPS transponders were buried in vacant fields so investors believed their units were deployed.
  • Paper Leases: Executives fabricated large, long-term leasing contracts with major telecom and entertainment companies, sometimes enlisting outside patsies to sign phony agreements in exchange for sizeable payouts.

Meanwhile, Carpoff and his wife, Paulette, enjoyed the spoils. They amassed a fleet of 149 classic cars—many of them gas-guzzling muscle cars, paradoxically funded by a “green energy” enterprise—purchased stakes in a Napa winery, rented private jets, and even sponsored a NASCAR race (the DC Solar 300). They also bought the Martinez Clippers, an independent league baseball team, and emblazoned their company parking spots with initials like “JMFC,” short for “Jeff Motherf***** Carpoff.”

The Whistleblower and the Raid

The scheme began to unravel when a DC Solar employee, Sebastian Giuliano, realized the company was paying old investors with new investor money and filed a whistleblower report to the SEC. Suspicions deepened when the IRS audited some of DC Solar’s earliest deals, concluding that the actual fair market value of each generator was around $13,000—far below the $150,000 asking price.

In December 2018, armed with information from the whistleblower and their own investigations, federal agents descended on DC Solar’s facilities and the Carpoff residence. They seized $1.7 million in cash from a safe, confiscated the entire muscle car collection, and gathered further evidence of fraud.

Aftermath and Sentencing

DC Solar collapsed into bankruptcy by early 2019, owing millions to creditors, NASCAR, racetracks, and various vendors. Major investors, including Berkshire Hathaway, announced the probable loss of hundreds of millions of dollars in invalidated tax credits.

Criminal charges soon followed. In 2020, Jeff Carpoff pleaded guilty to conspiracy to commit wire fraud and money laundering; he was sentenced to 30 years in prison. His wife, Paulette, received an 11-year prison term. Several other executives, including the CFO and outside conspirators who fabricated leases or faked verification reports, also received prison sentences ranging from three to eight years.

Lessons and Oversight Gaps

DC Solar’s downfall highlights several vulnerabilities in green energy tax credit oversight:

  1. Physical Verification: Authorities relied too heavily on documents without insisting on direct, thorough inspections. Fake VINs and strategically placed GPS devices allowed DC Solar to fabricate nearly 11,000 nonexistent generators.
  2. Valuation Transparency: Inflated price tags ($150k vs. $13k real value) went unchecked, maximizing undeserved credits.
  3. Circular Financing Scrutiny: Leasing revenue was artificially maintained with new investor funds, a hallmark of Ponzi schemes, yet it initially escaped scrutiny.
  4. Due Diligence and Audits: Complex alternative energy incentives require rigorous checks to confirm the actual equipment, usage, and economic substance of each deal.

For accountants, attorneys, and investors, the DC Solar saga is a sobering lesson. Fraudsters can exploit these incentives no matter how appealing a tax benefit or environmentally friendly pitch may sound. Robust financial controls, thorough audits, and consistent physical verifications are key to safeguarding genuine green energy efforts.

For a more in-depth exploration of DC Solar’s rise and fall—and the comedic twists along the way—listen to the Oh My Fraud podcast episode linked above. The story of DC Solar stands as a testament to how easily good intentions and generous credits can be warped into massive fraud when accountability is lax.

When Trust Turns Toxic: Inside the World of Pink Collar Crime

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Could your most trusted employee be secretly siphoning company funds?

In a recent episode of the Oh My Fraud podcast, fraud investigator Kelly Paxton shares how seemingly reliable staff—often overlooked for potential misconduct—can exploit organizational blind spots.

According to the Bureau of Labor Statistics, nearly 90% of bookkeepers in the United States are women. While many people assume women are less likely to commit fraud, Paxton warns that it’s not gender but position and access that matter most. By trusting certain employees implicitly and failing to establish strong controls, businesses inadvertently cause serious financial losses. 

As Paxton’s cases illustrate, ignoring stereotypes and adopting “trust but verify” strategies are crucial steps toward preventing fraud.

Kelly Paxton’s Path to Fraud Investigation

Kelly Paxton did not start out in law enforcement. She began her career in financial services as a commodities and bond trader. One day, a U.S. Customs agent called her brokerage firm asking about a suspicious client. Kelly alerted the agents, which led to a deeper conversation—and ultimately, a job offer. She joined U.S. Customs and conducted investigations into money laundering, narcotics, and other major crimes before moving into background checks for federal agencies.

Her investigative focus shifted when she joined a local sheriff’s office and noticed that nearly all the embezzlement suspects she encountered were women. Wanting to understand why, she discovered criminologist Kathleen Daly’s 1989 work referencing “pink collar crime,” a term describing embezzlement often perpetrated by those in bookkeeping or finance positions. Paxton’s takeaway: Access plus trust is the real key—90% of bookkeepers may be women, but it’s the opportunity that matters most.

Understanding Pink Collar Crime

Pink collar crime typically involves smaller amounts stolen over extended periods—fraudsters who make subtle “lifestyle” upgrades rather than lavish purchases. This can happen when the organization deeply trusts an employee. In many cases, they’re seen as family, invited into the home, and never suspected of wrongdoing. Victims are often embarrassed when they discover the truth and hesitate to report it—what Paxton calls “no victim shaming”: the more we shame victims, the less they come forward.

Key characteristics include:

  • Position-based access: Bookkeepers and finance staff control incoming or outgoing funds.
  • Incremental theft: A pattern of small transactions that grow larger over time.
  • Rationalization: Fraudsters may plan to “pay it back” but rarely do.
  • Deep trust: Employers assume loyal staff, especially women, “would never steal.”

When Pink Collar Crime Turns Deadly: “Red Collar” Cases

Most pink-collar crimes involve embezzlement without violence. However, some cases escalate to “red collar crime,” where financial fraud intersects with homicide. As Paxton explains, desperate fraudsters may resort to extreme measures when they fear exposure.

The Lori Isenberg Case

One chilling example is Lori Isenberg, a nonprofit executive director in Coeur d’Alene, Idaho. Her organization provided housing for low-income individuals—hardly the type of place where you’d suspect significant embezzlement. Yet over three years, Lori allegedly stole between $500,000 and $2.5 million by creating fake accounts, forging checks, and misusing her daughters’ and husband’s names.

When investigations closed in on her scheme, Lori took drastic action. In February 2018, on the same day local news broke a story about her suspected fraud, she took her husband out on a boat trip in the freezing Idaho winter. He mysteriously fell overboard and drowned. An autopsy revealed a lethal dose of Benadryl in his system. Lori claimed it was a suicide attempt gone wrong—an explanation contradicted by digital evidence showing she researched how to drug someone with Benadryl.

After disappearing for four months, Lori was eventually caught and accepted an Alford plea, which essentially concedes that a jury would likely find her guilty without formally admitting guilt. She received 30 years for second-degree murder, with an additional 5 years for her financial crimes, making it highly unlikely she will ever be released. The Lori Isenberg case underscores how far a fraudster might go to avoid being exposed—a stark reminder that misplaced trust and weak internal controls can have devastating consequences.

The Role of Trust, Bias, and Access

Society is conditioned to trust women—parents instruct children to seek a “nice lady” for help if they’re lost, for instance. This assumption carries over into workplaces, where female employees handling finances often face less scrutiny.

Paxton recalls her own days in U.S. Customs: “You put two women in a Honda Accord, and no one thinks anything is unusual. You put two men in a Ford Focus, and they’re pegged as cops.” Similarly, a “helpful bookkeeper” can escape suspicion for years.

What About Sentencing?

Sentencing for embezzlement and related fraud varies widely:

  • Federal Cases: They follow sentencing guidelines based on dollar amounts and other factors.
  • Local Cases: Judges can have broad discretion. Some jurisdictions impose tough sentences, while others might view fraud as a “civil matter,” limiting law enforcement intervention unless there are other serious elements (e.g., homicide).

This inconsistent approach can embolden perpetrators who believe they can dodge severe penalties—until a high-profile case, a dogged investigator, or a high-stakes victim (like a large corporation) brings full prosecution.

Avoiding Blind Spots: Trust but Verify

Rather than assuming anyone is “too nice” or “not smart enough” to steal, Kelly Paxton encourages businesses and nonprofits to focus on position-based controls:

  1. Segregate Duties: Ensure no single person handles every financial task.
  2. Surprise Audits: Don’t just check large transactions; occasionally review smaller ones.
  3. Vendor Verification: Confirm that vendors and accounts are legitimate, especially if newly created.
  4. Encourage Transparency: Cultivate a culture where employees and clients can report suspicious activity without fear.
  5. No Victim Shaming: Publicizing embezzlement—when safe to do so—helps others learn and prevents repeat offenders from quietly moving on to the next company.

Learn More from Kelly Paxton

Kelly Paxton now hosts the Fraudish Podcast (formerly Great Women in Fraud), interviewing fraud investigators, victims, and even fraudsters themselves. She also covers topics like red-collar crime, employee embezzlement, and how biases impact investigations. Her new book, Embezzlement: How to Detect, Prevent, and Investigate Pink Collar Crime, is available on Amazon.

For a deeper look at Lori Isenberg’s story—and other fraud sagas—listen to the full episode of Oh My Fraud. You can also earn CPE credit by downloading the Earmark app and completing a short quiz related to the episode.

From Wall Street Darling to Financial Disgrace: Unraveling the Equity Funding Scandal

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In 1973, the financial world was rocked by a scandal that seemed almost too outrageous to be true: a respected insurance company had fabricated over 56,000 policies, amounting to a staggering $2 billion fraud. This wasn’t just a case of cooking the books; it was a masterclass in how innovation, technology, and unbridled ambition could combine to create one of history’s most audacious financial deceptions.

Welcome to the Equity Funding Corporation of America world, where the line between financial innovation and fraud is blurred beyond recognition. In this episode of the Oh My Fraud podcast, we dive deep into this fascinating case, which offers crucial lessons for modern finance and fraud prevention.

Join us as we explore the birth of Equity Funding’s innovative insurance-mutual fund product, its evolution into a complex fraudulent scheme, and its ultimate unraveling. Along the way, we’ll uncover valuable insights that resonate in today’s world of high-speed trading, complex financial instruments, and ever-present market pressures. The Equity Funding scandal may be a story from the past, but its lessons are more relevant than ever in our ongoing battle against financial fraud.

The Seeds of Fraud: Financial Innovation Gone Awry

At the heart of the Equity Funding scandal lay an innovative financial product that seemed too good to be true—and ultimately proved to be just that. In the late 1950s, Gordon C. McCormick devised a clever combination of mutual funds and term life insurance that would become the cornerstone of Equity Funding’s success.

The product was revolutionary for its time. As Caleb Newquist explains, “Customers could borrow against their mutual fund holdings to pay for a ten-year term life insurance policy.” The genius was in the timing: “The idea was that at the end of the ten years, the value appreciation in the mutual funds would outpace the total amount of the loan.”

This approach offered customers a win-win scenario: they could invest for the future while securing life insurance protection, all without significant upfront costs. For Equity Funding, it was a ticket to rapid growth. The company quickly became one of Wall Street’s favorite financial insurance stocks.

However, this innovative product also laid the groundwork for fraud. Its complexity made it difficult for regulators and auditors to scrutinize, while its success created immense pressure to maintain growth. The stage was set. What began as financial innovation would soon evolve into one of the most elaborate deceptions in corporate history.

The Anatomy of Deception: Crafting a Fraudulent Empire

As Equity Funding’s success grew, so did the pressure to maintain its meteoric rise. At the helm of this growing empire were Stan Goldblum, Fred Levin, and Sam Lowell—a trio whose backgrounds ironically included insurance regulation and embezzlement detection. Goldblum’s approach to leadership was summed up in a chilling statement to Levin: “publicly held companies do not lose money.”

This pressure to always show growth led to the perversion of their innovative product into an elaborate fraud. The company began creating fake insurance policies, manipulating their original concept of combining mutual funds and life insurance into a vehicle for deception.

Technology played a crucial role in this fraud. Greg explains, “Equity funding’s Electronic Data processing department had designed a computer program that would recognize categories of insurance by a code number. Code 99 indicated a business that involved no direct billing. These blocks of policies, Code 99, were then sold to the reinsurers.”

The fraud’s complexity was mind-boggling. A group known as the “Maple Drive Gang” created physical policy files to fool auditors. In a macabre touch of realism, the company even simulated policyholder deaths at a rate comparable to actual mortality rates.

The scale of the deception was staggering. By the time the fraud was uncovered, Equity Funding had created over 56,000 fake policies worth approximately $2 billion. Of the $117 million in loan receivables booked to finance these bogus policies, $62 million was completely non-existent.

The Unraveling: Detection, Exposure, and Consequences

The elaborate fraud at Equity Funding began to unravel in February 1973 when Ronald Secrist, a recently fired vice president, made two pivotal phone calls—one to the New York Insurance Department and another to Raymond Dirks, a securities analyst.

Dirks’ investigation quickly gained momentum. He interviewed former employees, met with current executives, and compiled extensive notes. As word spread, the company’s stock plummeted. On March 27th, the stock hit a low price of $14, and trading was suspended. Desperate attempts by Goldblum and his associates to maintain the facade, including bugging their own offices, proved futile.

The legal consequences were swift and severe. As Caleb details, “On November 1st, 1973, indictments against 22 defendants on 105 counts ranging from securities fraud, mail fraud, bank fraud, filing false documents with the SEC, interstate and transportation of counterfeit securities were filed.” Goldblum, Levin, and Lowell received prison sentences of eight, seven, and five years respectively.

The Equity Funding scandal exposed significant weaknesses in auditing and regulatory oversight, particularly in the face of emerging technologies. Greg’s observation is telling: “I was surprised during the story how much they relied on computers to help perpetrate the fraud.”

This case offers enduring lessons for modern fraud prevention. It underscores the need for robust checks and balances, the importance of whistleblower protections, and the need to adapt auditing practices to keep pace with technological advancements in finance.

Lessons from a Financial Scandal

While rooted in the 1970s, the Equity Funding scandal offers timeless lessons for our modern financial landscape. This case vividly illustrates how innovation can spiral into massive fraud when warped by greed and enabled by technology.

Key insights from this scandal resonate powerfully today:

  1. Complex financial products require equally sophisticated auditing practices
  2. Technology can be a double-edged sword – both a tool for fraud and its detection
  3. Robust whistleblower protections are crucial in exposing corporate malfeasance
  4. Regulatory oversight must evolve as quickly as the financial instruments it governs

As we navigate an era of AI-driven finance, blockchain technologies, and ever-more complex derivatives, the fundamental challenges highlighted by Equity Funding persist. The methods may change, but the potential for fraud remains.

To truly appreciate the intricacies of this landmark case and its relevance to modern fraud prevention, we invite you to listen to the full episode of Oh My Fraud. Whether you’re a finance professional or simply fascinated by white-collar crime, this deep dive into the anatomy of corporate fraud offers valuable insights.