hello and welcome back to patrick boyle on finance in today's video we're going to look
at some of the biggest corporate scandals since the turn of the century in no particular order
but we're going to see if there's anything we can learn from them okay so first up we have terranos
the blood testing company now like all good tech founders elizabeth holmes had a great backstory
her father had worked for an aid agency overseeing relief work and elizabeth claimed that she'd been
brought up wanting to change the world for the better at the age of 19 she came up with an idea
that she believed could change the world so like all tech founders before hershey dropped out of
university started dressing like steve jobs and filed her first patent the only problem at this
point in the story is that her idea didn't work terranos was a blood testing company and while the
existing technology for blood testing requires one vial of blood for each diagnostic test
terranos claimed to be able to perform over 240 tests ranging from checking cholesterol levels
to complex genetic analysis with just a single pinprick of blood this idea surprised a lot of
people in the industry as obviously a certain amount of blood gets used up on each test the
technology was claimed to be an automated fast and inexpensive technology that would
revolutionize medicine and save lives the world over the blood once it was collected was put in a
nano container and analyzed in the terenos edison machine they obviously had to call it an edison
machine because the name tesla had already been taken the pitch appealed to the pharmacy chain
walgreens who partnered with terranos offering the blood tests in its stores teranos raised over 700
million dollars from brand name investors people like larry ellison and tim draper and it was seen
as a rising star in silicon valley the company was valued at over nine billion dollars at its peak
and holmes who owned more than half of the company was the world's youngest female
self-made billionaire she had a lot of big names on her board of directors including two former u.s
secretaries of state henry kissinger and george shulls with hindsight it's easy to point out that
few of the big names while famous had any experience in medicine or science now john cario
a journalist at the wall street journal first broke the story in 2015 after receiving a tip
that the technology didn't work his interest was triggered by holmes's alleged ability to invent
a groundbreaking medical technology after just two semesters of a chemical engineering degree
employees began sharing their experiences at the company revealing lies to board members
a culture of intimidation and secrecy technology that never worked
and worst of all test results that were being sent out to real patients that were false
life-changing medical decisions were being made based upon these fabricated test results
the entire company had been built on a foundation of lies the wall street journal revealed that
terenos was not using its own technology to run the majority of its tests due to the fact that the
edison machines just didn't work at first holmes denied the claims threatening to sue both the
journalists and the wall street journal in 2018 holmes stepped down as ceo and was charged with
criminal fraud having misled investors and made false claims about the blood testing technology
after an fbi investigation the company officially shut down the sec summed up what was wrong with ms
holmes and thuranos in a damning report which finished up with the statement
innovators who seek to revolutionize and disrupt an industry must tell investors the truth about
what their technology can do today not just what they hope it might do someday okay so next up on
our list is luck and coffee luck and coffee had an ambitious goal to defeat starbucks in china
selling coffee to a nation of tea drinkers because there would be an app it is of course a technology
company and disruptive and because investors love tech they love apps and they love disruption most
didn't notice that the coffee was terrible founded in 2017 with capital from some of
the highest profile asia-focused vc firms luck and coffee was quickly valued at one billion dollars
they opened 5 000 locations and reported sales of as much as 200 million dollars a quarter in 2019
this success drew in big international investors like blackrock and support from
banks including credit suisse lucken went public in the united states in may 2019
raising 561 million dollars the overall firm was valued at more than four billion dollars
its founder had a long business history firstly in the telecom industry then auto insurance and then
car rentals where he raised hundreds of millions of dollars from international investors built up
a car rental company that went public and then collapsed carson block a well-known short seller
watched lucan's rising share price with skepticism in autumn of 2019 luckin reported an almost
six-fold increase in quarterly sales while block suspected that some of luck and sales weren't real
proving it would obviously be expensive but then in late 2019 a fund manager contacted him with
the results of an investigation requesting that bloc released it the fund manager had created a
research report which was the work of more than 1000 investigators who monitored sales and foot
traffic at luck and locations in china they had gathered more than 25 000 receipts from customers
the report showed that lochen was inflating the number of items sold per day by 69 in the
third quarter of 2019 and 88 in the fourth it also concluded that the average cost of items sold was
lower than the company had reported in other words luckin was a fraud luckan denied the allegations
its stock price plunged immediately after the report came out but then it recovered
auditors from ey were working on lucan's 2019 accounts and found evidence that some
managers had been fabricating transactions the false sales had inflated the company's income
costs and expenses in april 2020 luckin said that its chief operating officer and some employees
might have faked more than 300 million dollars in revenue a special committee would be formed
to conduct an internal investigation this announcement resulted in the stock price crashing
and several executives being fired trading was then suspended and the company was delisted from
nasdaq in june 2020 the company filed for chapter 15 bankruptcy in the united states in february
2021 luckin says that the company's outlets remain open for business and the chapter 15 petition is
not expected to affect its day-to-day operations our number three company on the list is wirecard
now wirecard was a german fintech firm launched in the late stages of the dot-com boom in 1999
as a payment processor helping web-based stores to collect credit card payments from their customers
they almost went bust in the early 2000s and in 2002 marcus brown a former kpmg consultant who
once again dressed like steve jobs took over as the new chief executive they went public not by
the normal route but by taking over the listing of a defunct company thus avoiding the scrutiny
usually applied to an initial public offering a lot like the way spaks do it actually went on
to become a member of the german dax index in 2006 wirecard moved into banking meaning that
they could both issue credit cards and handle money on behalf of merchants this was a unique
hybrid of banking and non-banking businesses and made wirecard difficult to compare with its peers
this helped them to persuade investors to rely on adjusted versions of financial statements
in the 2010s wirecard went on a shopping spree buying up small payments companies across asia
in a series of oddly structured deals in 2015 the financial times began writing a series of
articles raising questions about inconsistencies in the group's accounts the core of the fraud
was a small dubai-based third-party acquirer called al-alam solutions acquirers are the
link in the payments chain that collects money from card issuers and deposits it in the store
owner's bank accounts merchants will usually negotiate directly with the acquirers to process
payments on their behalf for each payment that acquires help root they charge a fee on paper
al-alam was one of wirecard's most valuable assets processing billions of dollars of payments across
europe the middle east and the united states yet when the financial times investigated they found
an operation with just seven full-time employees the ft called up the biggest customers of al-alam
fifteen said that they had never heard of al-alam and eight of the big customers were no longer in
business in addition neither visa nor mastercard could confirm any relationship with al-alam so
wirecard was inflating revenue by reporting false transactions these false transactions led to fees
that were reported and recognized as revenue but never existed and were then deposited in
fake offshore bank accounts over a 10-year period this led to 2.2 billion dollars in false revenues
the financial times posted story after story containing descriptions of these inaccuracies
and what ended up happening wirecard accused the ft of conspiring with evil short sellers to bring
their stock price down this tactic actually worked and germany's financial regulatory authority
baffin filed a complaint against the ft and also banned short selling of wirecard stock
this was the first time that a regulator had ever banned short sales of an individual stock
in june 2020 wirecard caved in and announced that 1.9 billion euros was missing and the next day
marcus brown the ceo resigned wirecard later announced that the 1.9 billion euros of cash
probably never existed marcus brown was arrested and wirecard filed for insolvency our number four
corporate scandal is worldcom bernie ebers started out his career as a bar bouncer a
milkman then a school teacher he managed a garment warehouse and then began buying up small hotels
one of which included a long distance telephone service as a sideline
this sideline business became lds and was later renamed worldcom a decade later
by 1999 bernie was a billionaire and worldcom was one of the stars of the new internet economy
from its humble beginnings worldcom expanded through an aggressive growth by acquisition
strategy eventually becoming the second largest long-distance telephone company in the united
states and one of the largest companies handling internet data traffic worldwide worldcom bought 65
companies over a six-year period between 1991 and 1997. mergers and acquisitions obviously
present significant challenges for company managers firstly management has to integrate the
organizations into a single smoothly functioning business and secondly they must account for the
financial aspects of the acquisition worldcom did not do a great job of integrating these purchases
dozens of conflicting computer systems were in place and billing systems were never coordinated
these issues were ignored by investors at the time worldcom used a liberal interpretation of
accounting rules when preparing their financial statements worldcom would write down millions of
dollars in assets it acquired while including in the charge against earnings the cost of
company expenses expected in the future the result was bigger losses upfront but smaller
ones going forward so that the profit picture would appear to be improving as long as they
could continue doing acquisitions worldcom could continue these practices but in 1999
revenue growth slowed and the stock price began falling the growth through acquisition strategy
was stopped dead in its tracks in 2000 when worldcom's proposed merger with sprint was blocked
due to competition concerns worldcom's earnings were not going to meet analyst expectations
so in order to increase revenue worldcom reduced its accounting reserves tied to the mergers
by 2.8 billion dollars and moved this money into the revenue line of its financial statements
this wasn't good enough though so in 2000 they began classifying operating expenses as long-term
capital investments these were expenses like rentals on phone lines that were paid out to
other telecom companies this gave worldcom another 3.85 billion dollars and turned their losses
into profits of 1.38 billion dollars for 2001. it also made world comes assets appear more valuable
the fraud was uncovered when an internal auditor cynthia cooper discovered the fraudulent balance
sheet entries eventually worldcom was forced to admit that it had overstated its assets by over
11 billion dollars at the time this was the largest accounting fraud in american history
in 2002 worldcom filed for bankruptcy protection and in 2005 bernie ebers was found guilty of fraud
conspiracy and filing false documents with regulators he was sentenced to 25 years in prison
and died in february 2020. okay last on the list we have enron which was founded in 1985 by ken
lay in the merger of two natural gas pipeline companies deregulation in the early 1990s meant
that enron lost its exclusive right to operate its pipelines with the help of jeffrey skilling
a former consultant enron transformed itself into a trader of energy derivative contracts acting as
an intermediary between natural gas producers and their customers enron soon dominated the market
for natural gas contracts and started to generate huge profits the bull market of the 1990s helped
to fuel enron's ambitions and contributed to its rapid growth the company was ready to create a
market for anything that anyone was willing to trade it traded derivative contracts for a wide
variety of commodities including electricity coal paper and steel and even weather derivatives an
online trading division enron online was launched during the dot-com boom and the company invested
in building a broadband telecommunications network to facilitate high-speed trading enron was named
america's most innovative company by fortune magazine every year from 1996 through to 2001
the year it went bankrupt enron wrote the dot-com wave to superstar status and became
the seventh largest company in the united states at least on paper as the boom years came to an
end an enron faced increased competition in the energy trading business the company's profits
shrank rapidly company executives began to rely on dubious accounting practices
including a shift to mark to model and mark to market accounting which they had successfully
lobbied the sec to allow for their business this allowed the company to write unrealized future
gains from trading into current income statements thus giving the illusion of higher current profits
the troubled business lines of the company were transferred to special purpose entities doing this
meant that they were kept off enron's books making its losses look less severe than they really were
notorious short selling hedge fund manager jim chanas noticed several red flags in their accounts
and initiated a short position the sec began investigating their accounts and as the details
of the frauds emerged the stock price fell from ninety dollars per share to below one dollar lian
skilling resigned and fast out the cfo was fired two days after the sec investigation started
on december 2nd 2001 enron filed for chapter 11 bankruptcy protection many enron executives were
indicted on a variety of charges and were later sentenced to prison arthur anderson their auditor
who had worked as a consultant for the firm came under intense scrutiny and was eventually
dissolved due to the scandal the scandal resulted in a wave of new regulations and legislation
such as the sarbanes-oxley act designed to increase the accuracy of financial reporting
the act also prohibited auditing firms from doing any concurrent consulting business for the clients
that they ordered well that's it that's our top five list there are of course many more companies
i could have included i know some of you will be disappointed that nicola didn't make the list
let me know in the comment section who you think should have been included
and what lessons you take away from these cautionary tales one of the more noticeable
commonalities i noticed when researching this piece was that so many of the scandal-ridden
companies were in traditional businesses things like coffee shops gas pipelines and health care
but claim to be new economy companies don't forget to hit the like button and subscribe if you'd
like to see more content like this and i look forward to seeing you soon in the next video bye