Top 10 Financial Scandals of All Time

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TO GO WITH AFP STORY by Virginie MONTET,
Timothy A. Clary/AFP/Getty ImagesA Bernie Madoff Halloween mask.
Putting together any type of Top 10 list is a dicey business. Once you get past the usual subjects, the criteria for the rest of the candidates is a matter of personal opinion. So for my list of the Top 10 Financial Scandals of all time I'm taking the approach of a blockbuster Hollywood movie and throwing in everything.

Want massive financial losses? We have those, but there are also political double-dealings, public spectacles, massive pyramid schemes, celebrity downfalls, rogue traders and a sprinkling of Nazis.

1. The Scandal: The Panic of 1792

The players: Alexander Hamilton, William Duer, George Washington.

The story: In 1791, George Washington signed a charter creating the Bank of the United States, a precursor to the Federal Reserve. During its initial public offering, investors aggressively bought up shares of the bank, causing them to soar in value.

William Duer, a speculator and signer of the Article of Confederation, attempted to corner the market by buying all available shares with borrowed funds. Using them as collateral, he then attempted to start a rival bank but overextended himself, forcing the liquidation of his holdings and sending share prices plummeting. Duer lost everything and was thrown into debtors' prison, where he died seven years later.

The credentials: Considered the first crash ever in the United States, it prompted securities dealers to enter into the Buttonwood Agreement, named for the location where it was signed at 68 Wall St. This created the first exchange for buying and selling securities, what we now call the stock market.

Fun fact: Treasury Secretary Alexander Hamilton's quick action contained the financial damage. A friend of Duer, he tried to intervene on his behalf but couldn't keep him out of prison.

2. The Scandal: The Ponzi Scheme

The players: Charles Ponzi.

The story: In 1918, Charles Ponzi came up with an idea to buy and sell international reply coupons, which due to high inflation, could be purchased cheaply in his home country of Italy and sold for a profit in the U.S.

With promises of 400 percent returns, he formed an "investment company" to expand his still-legitimate scheme. The public dumped millions of dollars into his company but soon the coupons were ignore. Instead, early investors were paid off with money from new investors until authorities uncovered the fraud, shut it down and sent Ponzi to prison.

The credentials: Though not the first scheme of its kind, it was the most well-known and by far the largest of its time – losing investors the equivalent of $200 million. So much so that the name "Ponzi" is now forever inexorably linked with financial fraud.

Fun fact: While out on bail, Ponzi shaved his head, grew a mustache and tried to flee the U.S. on a merchant ship bound for Italy.

3. The Scandal: Teapot Dome

The players: Warren Harding, Albert B. Fall.

The story: In 1921, President Harding issued an executive order transferring control of the Teapot Dome, Wyoming, oil fields from the U.S. Navy to the Department of the Interior. Interior Secretary Fall then awarded drilling rights to private oil companies, without competitive bidding. That was technically legal. However, accepting money to award those rights was illegal.

Fall personally profited to the tune of $7 million in today's money, but when he couldn't explain his new-found wealth to a Senate committee, he was investigated, charged with bribery and sent to prison.

The credentials: Until Watergate, Teapot Dome was considered the greatest and most sensational scandal in the history of American politics, effectively rendering the Harding presidency irrelevant.

Fun fact: Fall has the dubious distinction of being the first former Cabinet member to be sentenced to prison.

4. The Scandal: Hitler Defaults

The players: Adolf Hitler, Franklin D. Roosevelt, Wall Street bankers.

The story: In 1919, the Versailles Treaty that ended World War I obligated Germany to pay reparations, which it did by issuing bonds. By the time Hitler came to power in 1933, most of those bonds ended up on Wall Street and servicing them was crushing the German economy.

Seeking to free up funds to build his war machine, Hitler sent his top banker, Hjalmar Schacht, to the White House to discuss refinancing the bonds. President Roosevelt listened intently, then asked, "Who owns the bonds?" "Mostly Republican bankers," replied Schacht. Slapping his knee, Roosevelt responded, "Well, serves them right." Three weeks later, Hitler repudiated all foreign debt, and the bonds, which totaled $600 billion in today's dollars, became worthless.

The credentials: Even without the political partisanship, global intrigue and Nazi connection, the sheer size of this default alone puts this on the list.

Fun fact: In 1953, West Germany agreed to service the debt obligation of these bonds, making the final interest payment in 2010, 92 years after they were issued.

5. The Scandal: Albanian Pyramid

The players: Albanian government, banking system, most Albanians.

The story: In the early 1990s Albania emerged from 40 years of Communist rule, which unfortunately left its citizens extremely naive about investment fraud. As the new private sector started to emerge, so-called "fund companies" began soliciting the public to invest, promising up to 30 percent return a month.

At the scheme's height, Albanians sold their houses, personal possessions and even their livestock in order to invest in these funds, which held little or no assets. Like all pyramid schemes, it eventually fell apart under its own weight, but not before conning more than two-thirds of the population to the tune of $1.5 billion.

The credentials: Financial scandals happen all the time, but finding one that directly effects practically the entire population of country is unprecedented. It is the largest pyramid scheme in history in terms of the number of victims involved.

Fun fact: The five largest investment funds companies were named Gjallica, VEFA, Cenaj, Kamberi and Sude.

6. The Scandal: Barings Bank Collapse

The players: Nick Leeson.

The story: In 1995, Leeson, the head derivatives trader for Barings' Singapore operation, began to conceal his losing trades in a secret account. He was able to do this because he was also in charge of auditing and reporting all trading activity.

As his losses piled up, Leeson took on riskier trades, unknown to his superiors in London, in an attempt to make back the money. But things went from bad to worse as he ultimately lost more than $1.3 billion, twice Barings' total available capital, causing the bank to collapse and sending Leeson to jail.

The credentials: Never before, or since, had a single person been able to destroy a major financial institution like Barings, which had been in business for 238 years and counted the Queen of England as a client at the time of its demise.

Fun fact: In 2007, the trading jacket that Leeson wore was sold on eBay (EBAY) for $35,000 -– all of which went towards paying Barings' creditors.

7. The Scandal: ImClone Systems Insider Trading

The players: Martha Stewart.

The story: On Dec. 28, 2001, ImClone Systems stock dropped dramatically after the U.S. Food and Drug Administration announced that its drug Erbitux didn't receive regulatory approval. Numerous ImClone executives, including the founder, were eventually found guilty of insider trading, selling their shares before the announcement was public.

But then it was revealed that Martha Stewart had sold her shares one day before the announcement after receiving a "tip" from her broker. Stewart tried to conceal that fact from investigators which eventually led to her conviction on conspiracy, obstruction and making false statements to federal investigators.

The credentials: Arguably the first celebrity financial scandal of the 24/7 media age, Stewart was the talk of the nation for weeks, which probably didn't make her list of "good things." As she famously said on CBS's morning show that summer: "I just want to focus on my salad."

Fun fact: While incarcerated at the Alderson, Va., Federal Prison Camp, Stewart received more than 15,000 pieces of fan mail.

8. The Scandal: Enron Bankruptcy

The players: Ken Lay, Jeffrey Skilling, Andrew Fastow.

The story: Named "America's Most Innovative Company" six years in a row by Fortune magazine, Enron was a major energy player with revenues of $101 billion in 2000. In reality, much of that revenue was due to "planned accounting fraud," which created "limited liability special purpose entities" in which the company hid its liabilities.

After a whistle-blower revealed Enron's deception to authorities, the stock dropped from a high of $90 to just a few pennies. Authorities struck a plea-deal with CFO Andrew Fastow to testify against CEO Jeffrey Skilling and founder Ken Lay, both of whom were convicted of securities and wire fraud and sentenced to prison.

The credentials: Enron's bankruptcy was the largest in U.S. history at the time, but more importantly, was the most egregious example of planned accounting fraud ever seen. So much so that it was a major factor in the creation of the Sarbanes-Oxley act of 2002 and the cause of "Big Five" accounting firm Arthur Anderson to go out of business.

Fun fact: Recipients of the Enron Prize for Distinguished Service -- a $10,000 honorarium, $15,000 sculpture and a crystal trophy --included Colin Powell, Mikhail Gorbachev, Nelson Mandela and Alan Greenspan.

9. The Scandal: Lehman Brothers Collapse

The players: Dick Fuld, Timothy Geithner, Hank Paulson.

The story: Lehman Brothers was a major buyer of sub-prime loans – aka toxic debt -- during the housing boom of the mid-2000s. Using an accounting trick, it "sold" much of this debt to Cayman Island entities -- agreeing to buy it back at a later date – in order to make its balance sheet look stronger than it was.

When housing values began to drop in 2007, Lehman was forced to disclose its losses, which rendered the company fiscally unsound. Treasury Secretary Hank Paulson and New York Federal Reserve President Tim Geithner arraigned a meeting with Lehman' Chairman Dick Fuld and the CEOs of other major banks in order to find a buyer for the company. When none could be found, the 158-year old company filed for bankruptcy.

The credentials: Lehman's bankruptcy – at $691 billion, the largest in U.S. history – is widely considered the cause of the 2008 financial crisis.

Fun fact: Lehman was such a global powerhouse that its collapse even effected the economy of countries like Iceland, Latvia and Pakistan.

10. The Scandal: Madoff Investments

The players: Bernie Madoff.

The story: Madoff claimed to use a strategy of buying blue chips stocks and then hedging them with options, the "proprietary" nature of which allowed him to deliver investors consistently larger returns than the S&P 500 (^GPSC) . In reality, Madoff was just running an elaborate Ponzi scheme that falsified its numbers and relied on a continuing stream of new investor money to stay afloat.

When the market began to weaken due to the 2008 financial crisis, investors requested $7 billion in withdrawals. Madoff confessed to his sons that his firm was "one big lie," and they turned him in. Madoff pleaded guilty to 11 federal crimes: securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, making false filings with the SEC and theft from an employee benefit plan. He received a sentence of 150 years in prison.

The credentials: Prosecutors allege the fraud -- easily the largest Ponzi scheme in history -- to be $64.8 billion. It may also be the longest-running Ponzi scheme, having started as early as the 1980s, according to prosecutors.

Fun fact: In a letter to his daughter-in-law, Madoff wrote about his prison treatment, stating, "As you can imagine, I am quite the celebrity, and am treated like a Mafia don. They call me either Uncle Bernie or Mr. Madoff. I can't walk anywhere without someone shouting their greetings and encouragement, to keep my spirit up."

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."

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