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

Manfred Schmider massaged the sales figures at FlowTex, his utility technology company, and used investors’ money to buy villas around the world, a fleet of luxury cars, and even a helicopter.

Manfred Schmider
(Image credit: © Alamy)

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.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri