Great frauds in history: Manfred Schmider, the Sheikh of Karlsruhe

Manfred Schmider was born in 1949 in the German city of Karlsruhe. From a young age he was interested in business, and started out selling life insurance and then used cars. In 1986 he set up FlowTex with Klaus Kleiser in order to sell and rent out machines that used a special technology, licensed from America, which it was claimed allowed utility companies to drill and lay lines and cable without the need to dig up the ground above, thus greatly reducing disruption. By 1999 the apparent success of the company had made Schmider a multimillionaire and one of the most respected entrepreneurs in the region.

What was the scam?

Initially FlowTex raised money legitimately from investors and banks. But when the technology proved impractical, Schmider turned to fraud, inventing sales figures and inflating the number of machines it owned more than tenfold. He then used the forged statistics to borrow more money from banks and leasing companies, in many cases switching licence plates on the machines to fool banks and auditors. Some of the money was used to make interest payments; the rest was squandered on buying multiple villas around the world, a fleet of luxury cars, and even a helicopter to enable him to fly to work. He become known as the “Sheikh of Karlsruhe”.

What happened next?

Schmider’s status as a business success and his lavish parties helped ensure that questions raised by the tax authorities and prosecutors as early as 1996 went ignored for several years. However, by 2000 the interest payments on the loans FlowTex had taken out grew so large that he was not able to raise enough money to pay them. Schmider was arrested on charges of money laundering in February 2000. His firm folded, and he was eventually sentenced to up to 12 years in prison.

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Lessons for investors

The losses from the fraud have been estimated at as much as €2.2bn. Schmider’s lawyer speculates that lenders were blinded by his apparent success, as well as the hospitality that he insisted on lavishing on them every time they visited. Indeed, not only would he give them a ride on his helicopter and invite them to his yacht, but he also insisted on treating them to alcohol-fuelled “liquid lunches”, which may have further clouded their judgement. It’s important to remain focused (and sober) when making important investment decisions.