Great frauds in history: Cortes Randell

Cortes Randell was born in Virginia in 1935 and went on to found the National Student Marketing Corp (NSMC) in 1965. The idea behind the company was that the growing numbers of college students (a result of the post-war baby boom) would create huge demand for youth-related products such as employment services.

After it floated in 1968, NSMC started buying up related firms, including a computing job placement service, a beer mug manufacturer and a travel guide publisher. Thanks to these acquisitions and a booming equity market, NSMC’s share price soared from $6 a share when it listed to a peak of $144 by the end of 1969.

What was the scam?

Randell used NSMC shares to buy other companies, so as long as the company’s share price kept rising, it was easy for it to keep snapping up rivals. A soaring share price also allowed him to entice employees with promises of stock options. Lavish parties and aggressive earnings projections also helped him win the favour of analysts.

However, he also engaged in balance sheet fraud, including counting $2.8m in so-called “unbilled receivables” – revenue that had not been received or even requested. He also claimed another $3m in income from subsidiaries that had not been yet acquired.

What happened next?

Shortly after the stock peaked, Barron’s, an American investment magazine, ran an article questioning NSMC’s reported earnings. While this immediately caused the price of NSMC shares to fall by $20, the real blow came in early 1970 when the company reported a loss, confounding analysts’ predictions of large profits.

To make matters worse, the company was forced to restate the report a few weeks later. Its losses were then revised upwards and revenue revised downwards. With his stake reduced to 10% by the various mergers, Randell was removed as CEO in February 1970. By the summer of 1970 the stock was back down to $6 a share.

Lessons for investors

Randell was sentenced to 18 months in jail and would later do another stint in prison for an unrelated count of mail fraud. One of NSMC’s auditors would also spend ten days in jail for covering up evidence that Randell had misled investors.

Ultimately, the main lesson of NSMC’s rise and fall, which took place during the final stage of a stockmarket boom, is that it is important not to get carried away by wild promises of meteoric growth, however compelling the long-term prospects for the sector in question might appear.