Only in New York (Part 3)

In George Orwell’s epic allegory, Animal Farm, he describes how, with the passage of time, all of the animals in his fabled barnyard are equal; however, some, he proclaims, “Are more equal than others.”

So, too, can it be said about the element of fraud.

With the passage of time, some fraud can not only become “more equal,” it can become “more accepted,” “more fascinating,” even “more amusing,” perhaps lending credence to the old adage that time does heal all wounds after all.

Nobody likes fraud, scams or schemes, particularly if they’re the victim. But there are some schemes that, after a period of time, have become fascinating to study, perhaps for the sheer audacity, daring or uniqueness of the crime. Maybe it was the character of the perpetrator, or the stupidity, naiveté or greediness of the victim that captured our imagination, enjoyment and, sometimes, admiration for the villains and ridicule for the victims.

Hollywood recognizes this, and we likely cheered for the fictional fraudsters in movies like The Sting, Hot Rock, Oceans 11 and The Thomas Crown Affair. Here the villains were portrayed as Robin Hoodlums, screwing the rich while helping the poor—the poor, in this case, being themselves.

Those were only fictional tales, of course, but in real life, through books and movies, we sometimes find ourselves fascinated by robbers, schemers, hucksters, and, yes, sometimes even mobsters.

Given enough time, real scandals, scams, hoaxes, fakes and frauds that are so audacious become immortalized in books and movies. Not sure of the psychology of it, but even some of the robbers can become a kind of rogue folk heroes that capture, if not our imagination, then certainly our interest.

The Great Brinks Robbery, for example, was a legendary heist committed in the 1950s at the Brinks Building in Boston. Carried out by a nine-member gang, the robbery resulted in the theft of nearly $3 million in cash, checks, money orders and other securities. At the time, it was the largest theft in the history of the United States. Several books and movies were made about this robbery.

The Lufthansa heist took place in 1978 at JFK Airport in New York. It netted about $6 million in cash and jewelry for the thieves, making it the largest cash robbery in US history. The planning and aftermath of the heist was depicted in the 1990s film Goodfellas .

“The Great Train Robbery” was the name appropriately given to a daring theft committed in 1963 in Great Britain. A mail-train was stopped by tampered-with signals, and a 15-member gang got away with £2.3 million (about US $4 million). The robbers became folk heroes in the UK.

I’ll bet you’re fascinated by the above, so how about a smile for these villains as well...

Robert Leroy Parker and Harry Alonzo Longabaugh: you knew them better by the names Butch Cassidy and the Sundance Kid.

Clyde Barrow and Bonnie Parker who, like Elvis , need only go by their first names: Bonnie and Clyde.

Over time, and after having done his time, Willie Sutton became a bank robber you just have to love. How can you hate a bank robber who was “honest” enough to admit, when asked why he robbed banks: “because that’s where the money is”?

In the 1950s, Charles Van Doren became a household name when his so-called genius earned him $138,000 on the TV game show “Twenty-One .” The problem was his genius wasn’t genuine. The producers, eager to attract more viewers, gave the handsome, personable Van Doren the answers to the questions beforehand. A movie, Quiz Show, was made about this hoax.

In the early 1970s, Clifford Irving , an author, was advanced $765,000 by McGraw-Hill to write an authorized autobiography about Howard Hughes, after Irving convinced the giant publisher he had befriended the reclusive billionaire.

Convinced that Hughes, who had completely withdrawn from public life, would never go public to denounce the book, Irving forged Hughes’ handwriting, created faked interviews and hoodwinked McGraw-Hill. He promptly stashed the check in his Swiss bank account. But Irving was wrong. The reclusive Hughes came out of self-imposed exile, arranged a telephone conference call, denounced Irving, said that he had never even met him, and was living quite comfortably, thank you, in the Bahamas. Irving became more famous because of the hoax than he ever would have become as an author.

The Chicago White Sox baseball team, heavy favorites in the 1919 World Series, should easily have defeated the Cincinnati Reds. But eight members of the team allegedly conspired with gamblers to throw (intentionally lose) the series. The legend goes that in the Black Sox Scandal (as it was renamed), one of the eight players involved, Shoeless Joe Jackson, when asked by a disillusioned young boy to “say it ain’t so, Joe,” hung his head in shame. A movie called Eight Men Out was made about this scandal.

The Enron financial scandal will never be redeemed, but the ZZZZ Best Carpet Cleaning Company, which was dubbed “the General Motors of Carpet Cleaning,” was so fraudulent it was almost funny. A teenager named Barry Minkow raised over $4 million to lease and renovate an office building in San Diego. He created over 10,000 phony documents and sales receipts without anybody suspecting a thing. He went public in December of 1986, eventually reaching a market capitalization of over $200 million. The only carpets Minkow cleaned were in the penitentiary. He got 25 years.

There was one other financial collapse that, if you weren’t an investor or vendor like I was (Maxell), is legendary, almost comical, due to the sheer audacity and the street tactics employed, the likes of which could only occur in the Big Apple.
For outrageousness, “fuhgeddaboutit”: this one is going to be very hard to top.

Perhaps someday a movie will be made or a book written about the slick street tough, Eddie Antar, better known as Crazy Eddie after the chain of electronics stores that bore his name. (See Part 1)

It was 1984, and the Securities and Exchange Commission (SEC) had just approved the public trading of the Crazy Eddie electronic chains’ stock. The stock traded on NASDAQ under the symbol CRZY and immediately became a Wall Street superstar. I had dealt with the chain for three years by then, and my prediction that the SEC would never allow them to go public was dead wrong. (Hmm, I guess that was why I got stuck peddling tape and not pumping stocks… oh, well.) (See Part 2)

Embarrassed by my failed prediction, I resorted to sour grapes when I mocked the SEC’s approval as “Animal House Comes to Wall Street.”

I should have kept my big mouth shut and eaten the sour grapes, because soon thereafter, I had to eat a super-sized portion of crow and a slice of humble pie to boot, when after the first year, Crazy Eddie (CRZY) posted an increase in sales of 55%, from $29 million to $46 million as a public corporation. Investors were orgasmic over the earnings Eddie was showing on those sales. Net income for 1985 increased to $1.141 million (compared with $538,000 the year before) The Eddie’s price/earnings was the highest in the electronics industry. The stock soared. Having just completed an MBA by attending 2-1/2 years of night classes, I earned the derisive—albeit affectionate—label “college boy” for my lousy prediction.

The stock may have made a per-share dividend of seventeen cents, but all of this made zero sense to me.

This college boy may never have been able to understand John Maynard Keynes’ macroeconomic theory, but I did understand the Bob Dylan theory: “You don't need a weatherman to know which way the wind blows.” And the answer, my friends, I believed, was “blowing in the wind,” that sooner or later “a hard rain was gonna fall”—on Crazy Eddie’s investors, that is.

Because Crazy Eddie’s books weren’t cooked—they were barbequed!

Now, a public company skimming cash (see Part 1) was small potatoes and for amateurs. Cash that had been previously skimmed off and smuggled out of the country, laundered in secret Israeli bank accounts (see Part 2), then dry-cleaned in Panamanian banks, was now squeaky clean and delivered back into the chain’s US bank account. Perhaps some taxes would have to be paid, as these fictitious revenues were put back into new stores, thereby inflating their sales and earnings. The transfers were intended to deceive investors into thinking that the sales, especially in new stores, were booming.

Perhaps the biggest fraudulent manipulation, though, was with the inventory. Crazy Eddie overvalued inventory by almost $80 million, and employed some pretty outrageous tactics to do it.

First they rented merchandise from suppliers to boost the ending inventory count. Yes, that’s right: rented. They would “rent” the inventory from other distributors, then return it after the audit. They would also place big orders prior to the audit, then simply hold the billing until after the end of the accounting period. They also shipped stock from one store to another so it could be double-counted.

Besides overstating (inflating) the inventory, they counted defective returns and obsolete inventory as new. This part was “only” a little over $1 million, but to paraphrase the late Senator Everett Dirsken of Illinois, “A million here and a million there and pretty soon, you're talking real money.”

How easy was it to do this? Just imagine the Ivy League auditors, just out of college and barely old enough to shave, up against the Antar crew, which couldn’t (or wouldn’t) count straight.

According to Sam Antar, Eddie’s cousin: “The big firms use their audit detail as a training ground. The firm recruits them out of college with their nice 3.5 to 4.0 GPAs.”

“Sammy” went on to say, “Pulling this stuff off [was] like playing with kids. The person who served as our primary auditor had only been at his firm for eight months. He had never even participated in a retail audit.”

The Keystone Cop auditors were no match for Sammy and his cousins.

When the auditors politely asked to use the copy machine, the courteous Antars would “help” the hardworking auditors by offering to make copies for them. But they also helped themselves, making copies of the papers that listed inventory counts and the stores auditors planned to visit. Those stores were quickly stocked with more “rented” merchandise.

When the auditors would climb onto the boxes and call down the count to Sammy, he would obligingly write down the number and likely add a zero at the end.

Eddie’s staff would also graciously provide the auditors with a private office. The auditors did lock the desk at night, but left the key on top of it, in the canister with the paper clips. After they left for the day, the Antars would, surprisingly, run out of paper clips, stumble upon the key to the desk, and couldn’t pass up the opportunity to alter inventory count sheets in the work papers and inflate the numbers.

They also routinely told the stores to hold the books open past the end of an accounting period to falsely inflate sales revenues.
It all worked to perfection.

In 1986, Drexel Burnham Lambert’s declared CRZY was a strong buy, “based on 35% EPS [earnings per share] growth” and with “store sales growth in the low double-digit range.” Crazy Eddie stock, Drexel predicted, would at least double during the next year.

Drexel, as we say in New York, was likely drinking the “Kool-Aid ” (or something stronger) when it suggested, “Crazy Eddie is the only retailer in our universe that has not reported a disappointing quarter in the last two years. We do not believe that is an accident. We believe Crazy Eddie is becoming the kind of company that can continually produce above-average comparable store sales growth.” They portrayed “Eddie” as a “fascinating leader.”

Eddie, nicknamed Kelso after the racehorse, had made a horse’s you-know-what out of Wall Street.
And Kelso not only hit the trifecta, but he would win the Triple Crown.

In the three years since the company went public, Eddie sold 6.5 million shares and made a “modest” profit of $74 million. How was anyone supposed to live off that?

There is a saying that goes “when you’re in a hole, stop digging.” The manipulation was so deep that the company was now at the bottom of the Grand Canyon and in deep doo-doo. The Antars were no longer worried about earnings, but covering up years of fraud and manipulation. Bigger and better schemes were now needed, just to cover up past deficiencies. They swept so much under the rug they were now tripping over it.

And when one of Eddie's disgruntled relatives blew the whistle to SEC about the fraud, it was off to the races for Kelso. He dumped his remaining 1.5 million shares of stock, changed his name to David Cohen, and took off for Israel.

It is said that even a broken clock tells the right time twice a day, so for yours truly, it was revenge of the nerds and sweet vindication for the “college boy.”

But it was more than the nerds who would want revenge: investors wanted Eddie hanged, drawn, and quartered, and the US Government wanted justice.

Eddie's justice, however, would also be “more equal than others.”

(To be continued)