Some Lessons for Investors
Crazy Eddie's weak internal control issues were disclosed in its footnotes.
Many of the self-dealings by principals were fully disclosed.
Barron's wrote a critical article about Crazy Eddie that had no impact on initial public offering in 1984.
Thorough analysis of the financial statements and disclosures would have raised some red flags.
Never try a hostile takeover of a retailer that has family based management and/or poor internal controls.
In a majority of cases, it is not the auditors who detect fraud. Most frauds are uncovered either because they implode or the co-conspirators fight amongst each other.
A bad economy causes most frauds to implode.
The best prevention against fraud is a strong system of internal controls which are reviewed by independent and skilled external auditors.
Accounting firms cannot conduct a credible audit where there is an absence of good internal controls.
Certain Realities Shown by Crazy Eddie Fraud that Everyone Should Heed
Both firms that audited Crazy Eddies’ books provided significant consulting services and the argument that consulting services helps accounting firms know clients better proved unhelpful in mitigating any fraud.
Crazy Eddie employed a former staff member from its “big eight” auditor as its Chief Internal Auditor in 1987, the year of its biggest fraud misstatement. Therefore, having former staff members of from our auditors had no impact in mitigating the fraud.
Frauds start small and Crazy Eddie had a $40 million market capitalization when it had its initial public offering. The "success" of the fraud increased its market capitalization to over $600 million at one point. Certain Sarbanes Oxley provisions should apply to "small market capitalization companies."
CPA firm size does not matter - Crazy Eddie was audited by a small accounting firm, the number 9 accounting firm which then merged into a "big eight" accounting firm which is a "big four" accounting firm today.
Additional disclosure does not always work - The auditors and the investment community missed the change in accounting method for purchase discounts and trade allowances in 1987.
Good investigative news reporting does not always work - Barron's did a great informative article on Crazy Eddie exposing major irregularities to the extent it could (based on the available information they had) prior its IPO in 1984.
Wall Street analysts do not provide valuable insights to companies - they are at the mercy of management who provide them with "whisper numbers."
Underwriters perform only surface level (no depth) due diligence and are at the mercy of the negative assurances of accounting firms. The public assumes all the information contained in the registrations and presented has been thoroughly examined.
A Warning for Management, Audit Staff, Employees, and Creditors Who Regarding White Collar Crime and Lax Internal Controls
White collar crime affects audit staff members more than supervising partners. The staff members who are relatively young with little and less experience will lose their jobs and have to start over again. They will have to devote a large amount of time answering questions from lawyers and investigators in litigation for possibly years.
White collar crime affects innocent employees. They may lose their jobs if the company fails. The innocent employee will often find themselves prejudiced by the taint of their employment in a company associated with fraud. Their good work (having nothing to do with the fraud) will be tainted.
Former employees may have to spend large amounts of time answering questions from investigators and giving testimony about the fraud. Even twenty years after leaving Crazy Eddie I still receive inquiries from companies and organizations asking about the involvement of people in the Crazy Eddie fraud.
White collar crime affects innocent vendors who may not get paid if the company goes out of business. The job performance of credit departments and its individuals will be affected by the losses companies absorb as a result of fraud by its creditors.
White collar crime affects customers who may lose refunds and future services if the company goes out of business.
Resources and money lost to white collar crime affects the ability of a company to give better compensation to the innocent employees, pay vendors on times, and costs the consumer more money in product costs.
Therefore good internal controls and the integrity of financial information affect everyone including the shareholders of companies.
The Association of Certified Fraud Examiners (ACFE) has published its Report to the Nation on Occupational Fraud and Abuse. Its web site said in part:
U.S. organizations lose an estimated 5 percent of annual revenues to fraud. Based on the U.S. Gross Domestic Product in 2006 – $13.037 trillion – this percentage indicates a staggering estimate of losses around $652 billion among organizations, despite an increased emphasis on anti-fraud controls and recent legislation to combat fraud.
ACFE web site further observed:
The findings come months after the founder and chairman of the ACFE, Joseph T. Wells, CFE, CPA, expressed fears that our nation’s CPAs are not trained to fight what may seem to be an intractable battle against accounting fraud
“As a group, CPAs are neither stupid nor crooked. But the majority are still ignorant about fraud,” explains Wells, considered an international authority on the topic. “That’s because for the last 80 years, untrained accounting graduates have been drafted to wage war against sophisticated liars and thieves. And as multi-billion dollar accounting failures have shown, it hasn’t been much of a fight.”
Link to ACFE Report to the Nation on Occupational Fraud and Abuse
The plain truth is that the accounting profession today (whether in the role of external auditor or internal auditor and accountant) does not have the sufficient education, training, skills, and experience necessary to match wits with criminals of my former caliber.
Frequent Excuses by White Collar Criminals
Excuse: It was the CFO and others who committed the crime.
Excuse: I am not an accountant or lawyer and I relied on the advice of professionals and others.
'Crazy' Eddie Antar and his immediate family tried to blame me as being the sole mastermind of the fraud when they proclaimed their innocence. They knew how to present themselves to the public as detail oriented businessman when things were going great.
As soon as the criminal investigations began they portrayed themselves as people who were ignorant of financial, accounting, and legal issues. All of a sudden there were not detail oriented and knew nothing about what was going on at the company they founded and controlled for almost twenty years. They claimed that they delegated most of the responsibility to others.
However, Eddie Antar and his family made almost $90 million in profit on Crazy Eddie stock and had over $8 million in unaccounted or "skimmed funds" in secret foreign bank accounts.
I lost approximately $8,000 on my Crazy Eddie stock even though at one time I had a paper profit of over $1.5 million. I sold my stock because of margin calls. Even when I sold my stock at a loss the S.E.C. believed it was worthless at the time I sold it and could have taken a $20,000 loss instead.
Excuse: We are good public citizens. We have given large sums of money to charity and have devoted our spare time helping others. We are good people and not criminals.
Eddie Antar, his father, brothers, and others involved in the fraud (including me) gave large sums of money to charity and devoted time to various community organizations.
Some Things I Learned the Hard Way
Crime does not pay and do not commit crime.
Crime hurts people and society.
Crime hurts the innocent: the people around us, employees, investors, creditors, and many others.
Never lie to your attorney.
Never lie to the government or in any way obstruct justice.
Do not "play games" with government investigators, attorneys, etc.
Deal with the government with courtesy and respect.
Never lie to the government.
Never lie under oath.
The costs of defending a white collar criminal and civil prosecution are onerous and substantial.
Over 90% of persons indicted by the federal government end up pleading guilty or being found guilty in court.
If you are guilty, do not underestimate the resolve, resources, and focus of the US government.
If you are guilty and decide to fight the resources of the United States government and others, you will not need laxatives for many years while they continue their long yet focused and deliberate process of bring you to justice.
If you are guilty it is better to cut your losses and settle all litigation (criminal and civil) early since the process of white collar investigations are very costly and time consuming and the odds are substantially against you getting away with it.
If you hesitate to settle, the government may cut deals with other persons making matters more difficult for you later on and increasing the likelihood of prison and more jail time and expenses.
The government can almost force people to testify against you (if you are guilty and the witness has such information) by imposing immunity on that witness.
If the witness than refuses to testify with immunity such witness may face prison if convicted for contempt of court.
This process will exact a huge toll on you personally, financially, psychologically, and worst of all on your family members and loved ones.
My Advice about "Trying a Case in Public"
Neither you nor your lawyer should speak to the press until after the investigation, trial, and sentencing. My lawyers and I gave no comments until after I was sentenced. Trying your case in public or presenting your side of the story in public does not help you. It is good free publicity for your attorney and it tips your hand. It also raises the stakes.
Personal Advice for White Collar Criminals under Investigation
It is far better to face the mercy and graciousness of your victims and a sentencing Judge than their anger. Your life is "not over" as you know it if you seek to honestly turn it around and clean up the mess of your past actions in a transparent, honest, and determined way.
What I Have Learned about our Great Nation
In the United States of America second chances are possible to those who take responsibility not only in words but also in their deeds and actions. That is just another reason why the United States is the greatest country in the world.
