Albert Dunlap was born in New Jersey in 1937 and studied at West Point Military Academy, briefly serving in the army before moving into the paper industry. Despite being dismissed as president of paper-mill Nitec in 1976 for manipulating earnings, he ran several companies in the 1980s and 1990s, gaining a reputation for saving troubled firms with mass redundancies (hence his nickname, "Chainsaw Al").
In 1996 he was put in charge of Sunbeam, a struggling manufacturer of grills and garden furniture. The stock jumped by 50% after he was hired and then tripled as the company announced an increase in profits.
What was the scam?
Dunlap hired his friend, Russell Kersh, as Sunbeam's new financial officer. Kersh deliberately started attributing costs incurred in 1997 to the previous year, helping exaggerate the positive impact of Dunlap's appointment.At the same time, Dunlapgave customers massive discounts, and even the right subsequently to cancel their orders if they bought Sunbeam's grills out of season in late 1997, rather than the following spring.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What happened next?
Dunlap's strategy of boosting current profits by attributing costs to the previous year and bringing forward future revenue was clearly unsustainable and by early 1998, following a sharp drop in profits, board members were asking serious questions about the firm's accounting. Dunlap was fired in June. The US Securities and Exchange Commission charged him with fraud he would later settle the case in return for a $500,000 fine and he was banned for life from serving as a company director.
Lessons for investors
Dunlap's shenanigans, combined with the group's debt load, forced Sunbeam to file for bankruptcy in 2002. Although shareholders eventually received $125m from lawsuits against auditors Arthur Andersen and Dunlap, this was a fraction of Sunbeam's peak market value of $4bn.
The main mistake that investors and board members seem to have made was being blinded by Dunlap's celebrity status and bluster: he once posed as Rambo and published a bestselling memoir subtitled How I Save Bad Companies and Make Good Companies Great.
-
‘I installed a heat pump in my home – here are five things I’ve learnt’From the size and noise of a heat pump to how much it costs to run one, Ruth Emery reveals what she’s learnt after installing one in her home six months ago
-
3 ways to work out if a stock is good valueThe only thing you can really control in investing is the price you pay for an asset – but how can you tell if you’re getting a good deal when it comes to the price of a stock?
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radiosProfiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoaxProfiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empireProfiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt bingeProfiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scamProfiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debtsProfiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
