EQUITY FUNDING PAPERS - THE ANATOMY OF A FRAUD

• NCJ Number: 57732
• Author(s): L J SEIDLER; F ANDREWS; M J EPSTEIN
• Date Published: 1977
• Length: 589 pages
• Corporate Author: John Wiley and Sons
• Sale Source: John Wiley and Sons
• Publication Type: Report (Study/Research)
• Language: English
• Country: United States of America
• Note: WILEY/HAMILTON SERIES ON ACCOUNTING AND INFORMATION SYSTEMS

Annotation

THE MECHANICS OF THE EQUITY FUNDING STOCK FRAUD ARE DISCUSSED, ALONG WITH FACTORS DELAYING AND CONTRIBUTING TO ITS EVENTUAL EXPOSURE.

Abstract

THE TRUSTEE'S REPORT (FILED IN ACCORDANCE WITH A PROVISION OF THE BANKRUPTCY ACT), EXTENSIVE FINANCIAL INFORMATION, AND THE TRANSCRIPT OF THE AUDITORS' TRIAL FORM THE CORE OF THIS VOLUME. THE TRUSTEE'S REPORT IS THE BASIC SOURCE OF FACTUAL INFORMATION ABOUT THE FRAUD AND ITS OPERATION. THE PROXY STATEMENTS, PROSPECTUSES, FINANCIAL STATEMENTS, INTERIM REPORTS, AND THE SUPPLEMENTARY INSURANCE SCHEDULES ARE THE RAW MATERIALS INCLUDED FOR THOSE WHO WISH TO DETERMINE FOR THEMSELVES WHETHER OUTSIDE FINANCIAL ANALYSTS, CREDITORS, AND INVESTORS SHOULD HAVE BEEN ABLE TO DETECT THE FRAUD. ACCORDING TO THE TRUSTEE'S REPORT, THE FRAUD AT EQUITY FUNDING CORPORATION OF AMERICA WAS ESSENTIALLY A SECURITIES FRAUD. WHILE MUCH ATTENTION HAS BEEN FOCUSED ON THE INSURANCE ASPECTS, ESPECIALLY THE MANUFACTURE OF BOGUS POLICIES, THAT ACTIVITY WAS MERELY ONE PART OF A MUCH LARGER STOCK FRAUD THAT BEGAN AT OR BEFORE THE TIME OF EQUITY FUNDING'S FIRST PUBLIC OFFERING IN 1964. THE PERPETRATORS OF THE FRAUD, WHO WERE MAJOR HOLDERS OF THE COMPANY'S STOCK, INTENDED TO INFLATE AND KEEP THE MARKET PRICE OF THE COMPANY'S COMMON STOCK FOR THE PURPOSES OF PERSONAL ENRICHMENT AND EGO ENHANCEMENT. THEY WANTED TO BE KNOWN AS THE MANAGEMENT FORCE BEHIND A COMPANY BELIEVED TO PHENOMENALLY SUCCESSFUL. THE FRAUD WAS IMPLEMENTED PRINCIPALLY BY INFLATING THE COMPANY'S REPORTED EARNINGS LARGELY THROUGH RECORDING NONEXISTENT COMMISSION INCOME. THIS PRACTICE APPEARS TO HAVE BEGUN AT LEAST AS EARLY AS 1964 IN ANTICIPATION OF THE COMPANY'S FIRST OFFERING OF COMMON STOCK; IT CONTINUED ON AN INCREASING SCALE UNTIL THE FRAUD WAS DISCOVERED IN EARLY 1973, PRIMARILY DUE TO A FIRED EMPLOYEE'S REVELATIONS TO INSURANCE REGULATORY AGENCIES IN STATES WHERE THE COMPANY OPERATED. ALTHOUGH OUTSIDE AUDITORS AND FINANCIAL ANALYSTS EXAMINED COMPANY FINANCIAL STATEMENTS, THE FRAUD CONTINUED FOR A DECADE. WHILE SPECULATIONS ARE OFFERED AS TO WHY THE FRAUD WAS NOT UNCOVERED SOONER, AS SPECIFIC CONCLUSIONS ARE DRAWN. CORE DOCUMENTS ARE INCLUDED.