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, Dunlap gave 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.
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.