Mainframe: Madoff-size Money, Monstrous Misapplication – LOGON

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The IBM704 computer: Image courtesy of Lawrence Livermore National Laboratory

The Equity Funding scam and sham of 50 years ago is still the colossus crime: committed with support of a computer system.

Up until Bernie Madoff’s Ponzi scheme was sniffed out by the SEC, the Equity Funding Corporation of America scandal of the late 1960s and early 1970s was the biggest Wall Street swindle, in terms of total dollars, in the two hundred year history of the United States of America – raking in $2 billion!

The Players: Gordon McCormick and Stanley Goldblum

Gordon McCormick was a successful insurance and investment salesman who came up with a crafty sales and marketing concept: Why not package life insurance and mutual fund products in a program together? Customers could choose a mutual fund and a life insurance policy and then use a portion of the mutual fund’s proceeds to pay the life insurance’s premiums. Any appreciation of the investment above the annual amount paid for the insurance (and, of course, agent commissions) would become client profit.

McCormick already had a recruit in mind to hopefully help him penetrate the California marketplace, an ambitious young man who’d spent his youth in Pittsburgh, Pennsylvania before he’d enlisted in the U.S. Army at 17. Afterwards, the young man had relocated and enrolled at the University of California, and worked for his father-in-law’s meat packing plant in 1960.

Equity Funding was headquartered in Los Angeles, California. Image by Kmusser

Stanley Goldblum, unhappy that things weren’t happening fast enough for him in his life, received a call from McCormick. McCormick told Goldblum of the plans for the fledgling firm he’d formed with $10,000, and innocuously named Tongor. Shortly thereafter, Goldblum was earning twice as much as he’d been making with his wife’s family business, while learning the ropes of selling and marketing financial products and services.

Soon, a grateful McCormick, pleased as punch with the gains of the company and the growth of Goldblum, gradually gave his go-to guy the go-ahead to do his thing; including but not limited to changing the company’s name to Equity Funding Corporation of America, and going public. In 1964, with assets of $9 million and pre-tax earnings of $620,000, EFCA’s shares started trading on the New York Stock Exchange at a price of $6 per share of stock. Gordon McCormick didn’t know it at the time, but he’d given Stanley Goldblum the keys to a kingdom, which would kindle, then kill, the American dream for thousands upon thousands of U.S. citizens.

Equity Funding Corporation: How the Scam Began

Computer crime dates back to the earliest mainframes – Image courtesy of Deviant Art

Stanley Goldblum’s own dreams had him discontented with just one corporation. He was a big man, 6 foot 3 inches, with a body builder’s physique – and he thought big, too. He decided to take over other companies, but his plans for mergers and acquisitions took money, lots of money. Therefore, it became critical to Mr. Goldblum to maintain Equity Funding’s stock price. That way, he could use the stock to compensate the owners of the companies he was buying out. To keep the value of the stock up, generating yearly earnings growth was important.

At the end of 1964, an annual report was about to be printed, yet the final figures simply could not be extracted from the computer, an IBM manufactured mainframe, colloquially called “Big Iron.” In despair, the head of data processing told his boss, Stanley Goldblum, the bad news; the annual report would not be ready on time.

During the delay, Goldblum came up with a creative accounting method to temporarily increase the company’s sales figures. His accounting was designed to make EFCA look good to investors. In January of 1965, he directed the company’s controller to make fictitious “advance” entries in certain receivable and income accounts. This action was the first step on a course of action that ended with disaster – the epic Equity Funding Scandal.

Sources:

• Clarke, Tom. The Billion Dollar Bubble. (1978). © British Broadcasting Corporation

• Gross, Leonard & Dirks, Raymond L. The Great Wall Street Scandal. (1974) © McGraw Hill.

• Hancox, David R. Could the Equity Funding scandal happen again? Auditors need to guard against the scenario that led to one of auditing’s darkest hours. (1997). © Internal Auditor.

• Kabay, M.E. The Equity Funding Fraud. (2002). © Network World Security Newsletter.

• Kabay, M.E. Use of Computers in Crime. (2003). Bidgoli, H., editor. Encyclopedia of Information Systems, Volume 1. © Academic Press.

• Keough, Howard R. An Inside Job. (1989). © American Society for Industrial Security.

• Seidler, Lee J. & Epstein, Marc J. & Andrews, Frederick The Equity Funding Papers: The Anatomy of a Fraud (1977). © Wiley.

• Senft, Sandra & Manson, Daniel P. & Gonzales, Carol & Gallegos, Frederick. Information Technology Control and Audit. (2004). © Auerbach Publications.

• Soble, Ronald L. & Dallos, Robert E. The Impossible Dream: The Equity Funding Story; The Fraud of the Century. (1975). © G. P. Putnam’s Sons.

• Trumbore, Brian. Ray Dirks and the Equity Funding Scandal. (2004). © Stocks and News.

• Wells, Joseph T. Frankensteins of Fraud. (2004). © Obsidian Publishing Company.

• Zigler, Brad. The Felon Index: Valhalla of the Vile. (2002). © Registered Rep.

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