Great frauds in history: Stanley Goldblum

Stanley Goldblum's insurance fraud cost investors $300m and reinsurance companies $1.8bn

948_MW_P29_profile_bottom

838608284

(C) 2010 The Denver Post, Media News Group

American insurance salesman Gordon McCormick set up Equity Funding Corporation of America (EFCA) in 1960. The idea was that people would buy a mutual fund and then borrow against the fund to pay the premiums of the life-insurance policy. Provided the mutual fund's returns outperformed the interest payments on the loan, people would be protected in the event of death and have money left over. Six months after EFCA was set up McCormick was removed in a boardroom coup, leaving Stanley Goldblum (pictured) in charge. In 1964 EFCA was floated on the stock exchange.

What was the scam?

Initially, EFCA started exaggerating revenues to attract new investors. When it began acquiring insurance companies of its own, it also started to sell fictitious policies to reinsurers (companies that buy insurance policies from insurers). This gave EFCA a large revenue boost, but meant it had to pay the reinsurers hefty annual premiums. At first it covered the costs of this by selling on more fake policies (turning it into a de facto Ponzi scheme). Later it started pretending the subjects of the policies had died to save on future premiums and pocket the death benefits.

What happened next?

In March 1973 Ron Secrist, a former EFCA executive, contacted Ray Dirks, a well-known insurance stock analyst, as well as the New York insurance commissioner. Dirks interviewed EFCA's management and, unconvinced by their depiction of Secrist as a disgruntled ex-employee, went to the Securities and Exchange Commission (SEC), though not before advising his clients to dump their EFCA shares. After learning about the fraud, the SEC suspended trading in EFCA shares. The company was formally placed under court supervision in April 1973, and a $100m discrepancy between reported and actual assets was discovered.

Lessons for investors

Goldblum was sentenced to eight years in prison for fraud (he served four) and EFCA's auditors were forced to pay $44m in compensation. Investors were wiped out (losing an estimated $300m) and the reinsurance companies were left holding $1.8bn in losses. The whole EFCA debacle demonstrates that investors should never solely rely on auditors they cannot be relied upon to uncover fraud.

Recommended

Investment trusts for your ISA
Investment trusts

Investment trusts for your ISA

Depending on your investment aims, these are the investment trusts to consider for your ISA
7 Mar 2023
What is an investment trust?
Too embarrassed to ask

What is an investment trust?

“Active” investment funds come in two main varieties, one of which is investment trusts. But what exactly is an investment trust?
2 Mar 2023
What is a dividend yield?
Too embarrassed to ask

What is a dividend yield?

Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
21 Feb 2023
How to invest in ChatGPT and other AI tech changing the world
Tech stocks

How to invest in ChatGPT and other AI tech changing the world

Technology, like ChatGPT, is changing the way we live and work, and this new tool could have a huge impact on the tech industry says Dominic Frisby.
23 Jan 2023

Most Popular

Bank of England hikes key interest rate to 4.25%
UK Economy

Bank of England hikes key interest rate to 4.25%

The Bank of England raised rates by 0.25% following a surprise jump in inflation.
23 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

The Bank of England raised rates to 4.25%, its 11th consecutive increase. Does the base rate have further to go?
23 Mar 2023