I’m studying accounting these days. Learning about balance sheets, income statements, and cash flows brought back memories of a story I read about 5 years ago: the story of Crazy Eddie.
Crazy Eddie was an electronics retailer from New York City. Its owners committed various securities fraud from 1969 until they got caught in 1987.
For its first 10 years in business the company was crazy profitable, Crazy Eddie’s management and owner skimmed –stole & hid– cash from the company and under-reported income to pay less taxes.
In the 80’s Crazy Eddie was getting ready for its IPO, and its managers gradually reduced the amount or cash they skimmed to artificially increase income over time. The goal was to increase its Statement of Cash Flows, to make it look like the company was getting more and more profitable in order to get a big fat valuation and raise tons of cash.
After its IPO, Crazy Eddie’s administrators didn’t slow down and committed more securities fraud. They overstated the assets’ value, laundered the money they skimmed by re-investing it into the company, and understated accounts payable to benefit insiders and fool regulators. The company had tons of debts, and didn’t include these liabilities in its statement of cash flows, overstating the company’s position.
The Crazy Eddie story from whitecollarfraud.com is wildly entertaining, I highly recommend it. Sam Antar, Crazy Eddie’s CFO, orchestrated many of these frauds, and created this website to talk about it once he got out of prison for his shenanigans. Securities fraud ain’t no joke.