Great frauds in history: OPM Leasing Services

Childhood friends Mordecai Weissman and Myron Goodman founded O.P.M. Leasing Services in 1970 above a sweet shop in New York. O.P.M – whose initials officially stood for Other People’s Machines, but seems to have been a cynical play on Other People’s Money – borrowed to buy mainframe computers from IBM, which it leased to large companies. By offering substantially lower rates than its competitors and by allowing companies to return the equipment if it became obsolete, O.P.M. quickly took a large share of the market. By 1978 it was one of the five largest leasing companies in the United States, employing 250 people over 11 offices.

What was the scam?

O.P.M. lost money from the start because of low rental fees and poor management, and quickly became insolvent. However, the duo persuaded banks to keep lending them money by pledging the same machines as collateral for multiple loans. They also inflated the value of the computers the firm owned and exaggerated the amount of money they were getting from each lease. As well as using the infusion of cash to pay O.P.M.’s expenses, Weissman and Goodman siphoned off large amounts of money from their company for their own personal spending on mansions, a private jet and a chauffeured limousine.

What happened next?

In 1977, IBM announced a new generation of computers, prompting customers to take advantage of the clause allowing them to cancel their leases if their equipment became obsolete. With business imploding, Weissman and Goodman decided to borrow even more money, altering and forging contracts with defence contractor Rockwell to give the impression that business was still booming. However, after the resignation of O.P.M.’s law firm in late 1980, the fraud became impossible to hide. By early 1981 it declared bankruptcy. Weissman and Goodman eventually received long jail sentences.

Lessons for investors

Overall, O.P.M. fraudulently borrowed $200m (equivalent to $621m in 2019) from banks. It was only able to repay less than a third of that amount. The banks were heavily criticised for not bothering to check either the leases or the ownership of the underlying machines properly. Instead, they relied on the blue-chip reputation of the firms with whom O.P.M. was supposedly doing profitable business. This is a reminder that you can’t take anything on trust. The fact that the fraud was rapidly exposed by the arrival of improved computer systems also shows how new technology can rapidly upend a firm’s business model.