Excerpt from the book "Frankenstein's of Frauds" written by Joseph T. Wells:
Sammy Finds His Calling
His whole life, Sammy had lived in his cousin’s shadow. Eddie made the big splashes. Eddie expanded the family into a conglomerate. Eddie got the girls. Sammy cleaned the bathrooms, totalled receipts, and banded skimmed cash into bricks for Eddie to haul to Tel Aviv. Whatever Eddie wanted, Sammy obliged."We need an accountant," Eddie announced when Sammy finished high school. "I’m gonna send you to college."
Sammy attended Baruch City College from 1979 to 1983 and earned an accounting degree. For his professional apprenticeship Sammy worked—where else?—at Penn and Harwood, the firm that performed Crazy Eddie’s audits and who owed a third of their business to Crazy Eddie fees.
Sammy wasn’t the only one helping Eddie fudge his numbers. David Neiderbach, the company’s warehouse manager, said Eddie approached him near the end of the fiscal year 1985. "Eddie asked me to make changes to the inventory figures to show more inventory than was being counted. He said he wanted to do this to make the company look better and I never questioned that." Neiderbach boosted total inventory by $2 million in 1985 and $6 million in 1986.
When the auditors came to make their counts, Neiderbach climbed onto the product stacks himself, and called the numbers down to the person below. If the auditor insisted on climbing up, Neiderbach held the auditor’s notebook and marked the counts himself. Neiderbach said he used a range of inflationary strategies: counting empty boxes as merchandise; listing cheap merchandise at premium prices; building tall ‘dummy’ columns at the edge of a large shelf and claiming the containers were stacked three or four deep when the rear area was in fact empty.
Besides overstating the inventory ready for shipping to stores, the warehouse also fiddled with what retail people call their "reeps." Reeps is short for repossession, i.e., products that have to be returned to the manufacturer, who then refunds the wholesale cost of the merchandise to the store. Crazy Eddie’s reeps were inflated with $1 million of phony returns in fiscal 1985.And as the saying goes, a million here, a million there—after a while you’re talking real fraud.
How easy was it do all this?" Sammy asks. "Pulling this stuff off is like playing with kids. The big firms use their audit detail as a training ground. It’s not their fault, but these auditors, they’re kids just out of college. The firm recruits them out of college with their nice 3.5 to 4.0 GPAs.
"The person who served as our primary auditor had only been at his firm for eight months. He had never participated in a retail audit. The kid who came in and worked on the Accounts Payable he was going to testify to—he worked on our books about three days. His supervisor reviewed the papers for less than a day." Besides being unprepared, the auditors "only took inventories of about a third of the stores anyway. And I helped them decide which stores to look at. We had, at the height, about 30 stores; I showed them a list of 10 stores, and they chose eight of those and added two more that they picked on their own."
Sammy and his cousins also found ways to spy on the auditors. "This one guy in 1986, he hands one of our warehouse clerks a sheet of paper and says, ‘Make me a copy of this, will you?’ The paper listed the test counts, showing which parts of the inventory the auditors planned to do tests on and which parts they’d just take rough counts. Of course we made a copy for ourselves. We knew where they were counting and where we could do what we pleased."
When Eddie made Sammy his Chief Financial Officer in 1986, he wasn’t exactly doing his cousin a favor. There was a $3 million deficit from the previous year’s inventory fraud that needed covering up. Plus, Eddie said they were going to need a $10 million bump for the coming year. Growth in new sales had slowed from 20 percent to just four percent, but Crazy Eddie had never had a down year, and wasn’t going to start now. Eddie told Sammy to make the books look profitable. "He asked me about how to commit certain frauds. It wasn’t like I was surprised or thinking, ‘Wow-wee, how dare we do this thing?’ It was a casual thing. He said, ‘We need to do this and this.’ And I said, okay, I’ll show you how I would do it."
Now, we commanded a lot of respect," Sammy muses, "Some people might call it fear, with a lot of businesses in the market. So it was easy to convince a couple of our large vendors to ship us a bunch of merchandise right as the fiscal year was ending. Privately, the vendor agreed to hold the bill for the merchandise until after the end of the fiscal year. Then we’d either pay for the merchandise in the new year, or we’d send it back after the audit was over. We basically borrowed inventory."
Sammy also brought new blood to the reeps fraud. The year before, Eddie and his lieutenants had simply claimed to handle more returned merchandise than they actually had, collecting about $1 million in reimbursement from manufacturers. Again with the year-end visit from the auditors in mind, Sammy suggested they produce documents saying that large lots of merchandise had been shipped off as reeps. In fact they kept the reeps merchandise stacked in the warehouse, and counted it as inventory.
Sammy’s stroke hit full bore when created his Panama Pump. That’s the name prosecutors used to describe Sam’s plan for manipulating the family’s international banking connections. "I was surprised, really, that nobody had thought of doing it before," Sammy admits. "We had been gradually moving the money we skimmed into Israeli banks. So then I learned how to bring the money back using what’s called a double secrecy jurisdiction transaction. Panama today has one of the strictest bank secrecy laws in the world. The country has no currency of its own. Panama uses U.S. currency. And some of the biggest banks in Panama are owned by Israelis. Since the banks are in the same network, you can request that both the withdrawal and the new deposit be kept secret. So we opened accounts in Panama using false names. Using the secrecy laws we transferred a million and a half dollars from Bank Leumi Israel to the Leumi bank in Panama. Then we had the alias-owned Panama account write drafts payable to Crazy Eddie. Now we had successfully brought the money into the company. The worst that happens is we have to pay some taxes."
Sammy broke up the million-five into smaller checks, ranging from $75,000 to $150,000. The funds helped stoke a figure known in retail lingo as comparable store sales. Comparable store sales, or comps, break down a retail chain’s revenue store by store. Each location’s present-year sales are compared to its sales for the prior year. To really see if a chain-store operation is growing you have to check to see if their comps are growing. Sammy puts it this way: "If I have one store and I go from $100,000 in sales to $200,000, then great. I just doubled my business. But say I open up 10 new stores and, again, I go from $100,000 to $200,000. I’m only making 100,000 extra dollars off 10 new stores, only about $10,000 a store. Now my numbers don’t look so impressive. The comps tell you the real performance of the company."
By salting individual stores with the Panama drafts, Sammy pumped their comps by two or three-fold. It was a simple ruse that anyone attentively looking at the Crazy Eddie books should have seen in a flash. For one thing, Sammy listed each Panama check as a single transaction. "Suppose you’re looking at the store’s books, and you see this draft from an Israeli bank operating in Panama that says $116,000 even. Wouldn’t you raise a question? Regular John Smith doesn’t walk off the street and buy $116,000 of audio equipment. What kind of retail receipt totals $116,000? Also, you might ask, why are other checks, equally large, drawn from this same bank, showing up in other stores’ receipts? Why are the drafts, deposited in different stores, consecutively numbered? And if you noticed several large checks, all from the same account name, deposited into different stores, you would ask, why are these checks all being deposited at comp stores?"
Like most Antar tricks, the Panama Pump didn’t require a lot of brains, just balls. "During the year [1986], our comps were down, around four percent, where they’d been 20 percent the year before. This money from Israel, it brings our comp stores up from four percent to ten percent for that last quarter. Over the year, we got a 13 or 14 percent growth in comps. On March 5th, we announce our comps. Everybody cheers. March 7th is the new public offering. The stock shoots to $22 a share. Eddie and the old man cash in for millions."
Basking in his success, Sammy carried himself with more confidence than he’d ever known. "I had basically taken charge of all the frauds by this time. I didn’t have a nameplate, I mean fraud wasn’t in my job description, but that would have been my major occupation now."
On Wall Street where the market’s best and brightest danced to Sammy’s tune. Drexel Burnham Lambert’s "BUY" recommendation for 1986 was explicitly "based on 35 percent EPS [earnings per share] growth" and "comparable store sales growth in the low double-digit range" (emphasis added). CRZY stock prices, the report predicted, would double and more during the next year. As if they were working from an Antar script, DBL declared, "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." The encomium singled out the chain’s elusive but fascinating leader: "Mr. Antar has created a strong organization beneath him that is close-knit and directed. . . . Despite the boisterous (less charitable commentators would say obnoxious) quality of the commercials, Crazy Eddie management is quite conservative."
