Great frauds in history: Stanley Goldblum

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


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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.



Investment strategy

How to vaccinate your portfolio against coronavirus

The spread of coronavirus could pose a threat to your portfolio, says Merryn Somerset Webb. Make sure it's protected
27 Feb 2020
Investment strategy

Great frauds in history: Charles Keating

Charles Keating's junk bond scam let the American taxpayer on the hook for $3.4bn.
26 Feb 2020

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020

Most Popular


Will coronavirus kill off the bull market?

It seems clear now the coronavirus will at some point go global. And when it does, will it bring down the stockmarket’s bull market? John Stepek looks…
27 Feb 2020

Gold, coronavirus, and the high cost of face masks in northern Italy

The price of gold is spiking – as it always does in a global panic. But this bull market predates the coronavirus epidemic, says Dominic Frisby, and w…
26 Feb 2020
Pension tax

Why it makes sense to scrap higher-rate pensions tax relief

The point of pensions tax relief is to keep you out of the means-tested benefits system. The current system is ridiculously generous, says Merryn Some…
24 Feb 2020

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019