Capital Markets

School for Scandal

A primer on some of the most notable financial scandals of the past 150 years.
Lisa YoonFebruary 1, 2006

Examine our Enron archive

Jay Gould and the Gold Market

The pioneer of declaring bankruptcy as a strategic move, railroad tycoon Jay Gould (1836-1892) was notorious as the most unethical of the robber barons of the 19th century. Gould, among those satirized by Mark Twain in The Gilded Age, was also infamous for his failed attempt to corner the gold market in 1869. With fellow tycoon/crook Jim Fisk, Gould used their social connections to President Ulysses S. Grant — who included Grant’s brother-in-law and an assistant Secretary of the Treasury — to halt the sale of gold by the government, resulting in skyrocketing prices and plummeting stocks. After realizing the situation, Grant approved the sale of $4 million in gold on September 24, which became known as Black Friday. The premium over face value of a gold double eagle fell from 62 percent to 35 percent, and investors, though not Gould and Fisk, were ruined.

Charles Ponzi and the Original Pyramid Scheme

Charles Ponzi (1882-1949) earned the rare distinction of giving his name to a specific type of fraud. Promulgator of the original pyramid scheme, in 1919 Ponzi pooled money from an initial set of investors by promising to increase it by 50 percent in 45 days. The first investors’ enthusiasm brought in a second set of investors, whose money was paid off the original backers. The second wave of investors were paid off with money from new investors, and so on, until a Boston newspaper exposed his scheme. Ponzi, who was jailed and then deported to his native Italy, seems to have had a way with names: His enterprise was called the Securities and Exchange Co.

Teapot Dome

In 1921, under President Warren G. Harding, three strategic oil reserves set up for the benefit of the Department of the Navy were transferred to the Department of the Interior at the behest of Interior Secretary Albert B. Fall. The following year, Fall leased two oil fields without competitive bidding: Wyoming’s Teapot Dome, to Harry F. Sinclair’s Mammoth Oil Co., and California’s Elk Hills, to Edward L. Doheny’s Pan American Petroleum Co. A Senate investigation led by Montana’s Thomas J. Walsh found that Fall — whose standard of living noticeably improved after the lease deals — had received interest-free “loans” from Sinclair, Doheny, and others totaling about $400,000. The investigation led to criminal prosecutions, and Fall was convicted of accepting bribes, a charge for which he was sentenced to a year in prison and fined $100,000. The oil fields were restored to the U.S. government through a Supreme Court decision in 1927.

Samuel Insull and the Holding Company

After a long career as a legitimate electrical utilities and railroad/streetcar entrepreneur, by 1930 Samuel Insull (1859-1938) had assembled a $2 billion utility holding company. (In an act memorialized by Orson Welles’ Citizen Kane, he also built the Chicago Lyric Opera for his wife, an untalented opera singer.) When the Great Depression set in, however, Insull’s company was revealed to be a house of cards dependent upon highly leveraged borrowing and constant transfers of stock and money among the companies. Insull was unable to cover his loans, and, as his companies toppled and bankers demanded control, investors lost some $700 million, the biggest U.S. corporate failure until the Savings and Loan crisis of the 1980s. In 1934, after 19 months of dodging U.S. authorities overseas, Insull was extradited from Greece and tried on charges of mail fraud, bankruptcy, and embezzlement. He was found not guilty on all counts.

Savings and Loans

After increasing deregulation beginning in 1980, by the end of that decade more than 1,000 American savings-and-loan institutions failed from an array of causes including rising interest rates, fluctuation in real estate values, lack of regulatory oversight, mismanagement, and, in many cases, fraud. In a push to take advantage of high interest rates and a booming real estate market, institutions lent more than they should have to risky ventures, often in areas in which the lenders had no competence and frequently aggravated by fraud and insider abuse. The wave of failures created lossed totalling approximately $150 billion — most of which was covered by the U.S. government, which helped lead to the massive federal budget deficits of the early 1990s.

Credit Lyonnais

France’s biggest state-owned bank began aggressively expanding in 1988 under new chief executive officer Jean-Yves Haberer, who wanted to transform Credit Lyonnais into a rival to Germany’s Deutsche Bank. Credit Lyonnais went on a spending spree, buying other banks and investing in a slew of companies that were either of poor investment quality or embroiled in scandal, including the Swiss SASEA Holdings and Hollywood’s MGM Studios. During France’s economic slump of the early 1990s, the bank began hemorrhaging money and nearly went bankrupt in 1993, at which point Haberer was replaced. It took three government bail-outs totaling $20 billion to save Credit Lyonnais from collapse; the bank was privatized in 1999 and bought by Credit Agricole in 2002.

Barings Bank

Britain’s oldest merchant bank — it had financed the Napoleonic Wars and the Louisiana Purchase — owes its 1995 bankruptcy to Singapore general manager Nick Leeson. After successfully resolving a back-office mess at the Barings’s Jakarta office, Leeson went to Singapore in 1992 to trade in low-risk arbitrage opportunities between derivatives contracts on the Singapore Mercantile Exchange and Japan’s Osaka Exchange. But he did more than that: Leeson’s unauthorized (and unlucky) derivatives and futures speculation eventually racked up $1.4 billion in losses. By falsifying accounts, Leeson was able to hide the losses from Barings management until he fled to Indonesia in February 1995, leaving the company bankrupt. After his eventual arrest and trial on charges of fraud, Leeson was sentenced to six and a half years in a Singapore prison. He was released for good behavior in 1999.


In 1998 — a year after it was formed by the merger of HFS Inc., a group of travel and real estate brands, and CUC International, a direct marketing group — Cendant Corp. disclosed that over the course of a decade, CUC had inflated its income by more than $500 million. Cendant’s stock lost almost half its value — some $14 billion — in a single day. Cendant later revealed that operating profits over the three years beginning in 1995 were inflated by $640 million. Last year, Cendant vice chairman Kirk Shelton was sentenced to 10 years in prison for his role in the scandal; as of January 26, the jury in the retrial of chairman Walter Forbes was still deadlocked.

At the time of the initial disclosure, Cendant’s accounting scandal was the biggest in U.S. history. That, of course, was years ago, in the 1990s.