Proactive Investors - “Never in my life have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
That was what new FTX CEO John Ray III said as it was confirmed the failed crypto exchange owed its creditors US$3.1bn.
A damning statement indeed, but the extent of FTX’s failure hits home when you realise John Ray III also oversaw the insolvency of Enron in the early noughties.
FTX has suggested it could take years, possibly decades until creditors are paid, if ever.
Here is a quick rundown of some of the biggest financial scandals in recent history.
Lehman Brothers
At the peak of its power, the Lehman Brothers was one of the four largest investment banks in the United States with 25,000 global employees and US$639bn in assets.
Created by Henry, Emanuel and Mayer Lehman in Alabama in 1844, who originally were cotton merchants, the bank met its end during the 2008 financial crash.
Like many financial firms, it had branched into mortgage-backed securities and collateral debt obligations.
In the few years before the financial crash, it acquired five mortgage lenders which specialised in Alt-A loans, essentially loans given without the banks conducting proper due diligence.
Lehman, in 2007, wrote more mortgage-backed securities than any other firm.
So, when borrowers began to default on payments that they were never able to afford in the first place, Lehman found itself losing money, posting a US$2.8bn loss in the second quarter of 2008.
The securities, which were backed by mortgages, therefore, began to rapidly lose value.
Its share price nosedived 77% in the first week of September as equity markets globally plummeted.
Failed takeover bids from Barclays (LON:BARC) and Bank of America (NYSE:BAC) saw the bank declaring bankruptcy on 15 September 2008.
Whether creditors got their money back depended on whether they were brave enough to wait for a payout.
Many creditors sold their claims against Lehman for a fraction of face value, in some cases a fifth or a quarter of the sum owed.
However, investors who bought claims and waited nearly 10 years for a payout made up to seven times their money.
This was largely due to the fact they were entitled to back interest on their debts.
Bernie Madoff
Bernard Lawrence Madoff, better known as Bernie Madoff, was the mastermind behind the largest ever Ponzi Scheme, defrauding thousands of investors out of tens of billions of dollars over decades.
In layman’s terms, a Ponzi scheme is a type of fraud that pays existing investors with funds collected from new investors.
Before his scheme, Madoff served as the chair of the tech-laden Nasdaq index in the US in the early 90s.
His trading firm, he said, was happy to take the crumbs, executing smaller trades than the Wall Street giants would have turned their nose up at.
Madoff, however, began to attract investors by claiming to provide a steady investment return via a legitimate split-strike conversion strategy.
What he was doing was depositing client funds into an account that he used to pay existing clients who wished to cash out, continuing this cycle the market crashed in 2008.
Madoff was sentenced to 150 years in prison in 2009 and died behind bars in 2021.
It is estimated Madoff’s firm made some US$47bn in profit as a result of the scheme.
By April 2021, a New York lawyer helping victims recover some of their losses had managed to recoup US$14bn.
Separately, a Madoff Victim Fund was created to help those defrauded, and the Department of Justice paid roughly US$4bn into the fund in 2017.
Via the fund, roughly US$3.7bn has been distributed to nearly 40,000 Madoff victims.
Enron
Enron, before its collapse in 2001, was one the largest companies in the world, with shares trading at US$90 at its peak and ‘revenues’ over US$100bn in 2000.
Surely, this was too good to be true. And indeed it was.
It all went wrong when the energy group began trading derivatives. What Enron did to cover its losses was to essentially cook its books.
Enron paid back creditors US$21.7bn between 2004 and the time of its last payout in May 2011, which was 53% of the total value creditors were owed.
Theranos
Theranos was a blood testing start-up created by Stanford drop-out Elizabeth Holmes which claimed it could perform over 240 tests from one single pinprick of blood while existing technology required one vial of blood for each diagnostic.
At one point, Theranos was valued at over US$9bn and was dubbed the rising star of Silicon Valley, with Holmes heralded as the female Steve Jobs.
The problem was that the technology did not work.
First broken by Wall Street Journalist John Carreyrou in 2015, and supported by Theranos whistle-blowers, the technology often failed quality assurance tests, while false information was continually sent to real patients upon which life-changing medical decisions were made.
Despite initially denying the claims, Holmes stepped down in 2018 and was convicted of fraud in 2022, sentenced to 11 years in prison.
Theranos brought in US$700mln worth of investment at the start of its short life, and more than US$600mln of this was lost.
After dissolving in 2018 following its failure to find a buyer, Theranos said it would use its remaining cash, believed to be around US$5mln, to pay back its creditors.
Rupert Murdoch was one of the largest investors in Theranos, stumping up US$125mln of his cash in 2015.
He was paid back US$4mln following the tech company’s settlement with Partner Fund Management.
Wirecard
Wirecard (ETR:WDI) Europe’s answer to PayPal (NASDAQ:PYPL).
At one point, it was a multi-billion financial services company.
However, like Enron, its downfall came as a result of dodgy accounting practices, leading it to file for insolvency in June 2020, owing creditors several billions of dollars and disclosing €1.9bn missing entirely.
As Financial Times investigative journalist Dan McCrum began to break stories, which Wirecard (ETR:WDI) denied, the company allegedly hired spies to investigate McCrum.
Despite denying allegations, Wirecard (LON:0O8X) brought in KPMG to carry out a special audit, which was supposed to be published in March 2020 but was delayed.
By the time the report was released, KPMG said it could not verify whether most of the profits reported between 2016 and 2018 were genuine.
The audit firm also queried the existence of €1bn of cash supposedly held in two Philippines banks.
In June 2020, the group was supposed to release its full-year results, audited by EY. Instead, it said it was missing €1.6bn.
At this point, the two Filipino banks confirmed that no money ever entered the country’s financial system, with Wirecard later filing for insolvency.
Wirecard owed creditors roughly US$4.5bn, although a Reuters report in November 2020 said creditors claimed up to €12.5bn.
In May, a German court ruled in favour of administrators, allowing them to void the final two years of reports, from 1 January 2017 to 31 December 2018, meaning it could claw back some cash from dividends paid out in that year.
Wirecard's revolving facility is due June 2024, which means lenders including, Deutsche Bank (ETR:DBKGn), would likely start demanding repayments.