In the case study "That Way Lies Madness," what kind of fraud did Eddie Antar commit? How was the fraud committed? How could such fraud be discovered? CASE STUDY: THAT WAY LIES MADNESS' "I'm Crazy Eddie!" a goggle-eyed man screams from the television set, pulling at his face with his hands. "My prices are in-sane!" Eddie Antar got into the electronics business in 1969, with a modest store called Sight and Sound. Less than the kind of man to yell and rend his clothes. He was busy making money, and he was making a lot of it illegally. By the time his electronics empire folded, Antar and mem- bers of his family had distinguished themselves with a fraud of massive proportions, reaping more than $120 million. A senior official at the Securities and Exchange Commission (SEC) quipped, "This may not be the biggest stock fraud of all time, but for outrageousness it is going to be very hard to beat." The SEC was joined by the FBI, the Postal Inspection Service, and the U.S. Attorney in tracking Eddie down. They were able to show a multipronged fraud in which twenty years later, he had become Crazy Eddie, a millionaire many times over and an international fugitive from justice. He was shrewd, daring, and self-serving; he was obsessive and greedy. But he was hardly insane. A U.S. Attorney said, "He was not Crazy Eddie. He was Crooked Eddie." The man on the screen wasn't Eddie at all. The face so dutifully watched throughout New Jersey, New York, and Connecticut-that was an actor, hired to do a humiliating Antar: but effective characterization. The real Eddie Antar was not Listed smuggled money from foreign banks as sales 1Several names and details have been changed to preserve anonymity. Made false entries to accounts payable 301 Overstated Crazy Eddie, Inc.'s inventory by breaking actually happened at the stores, they wanted that stock to rise. into and altering audit records Took credit for merchandise as "returned" while also counting it as inventory "Shared" inventory from one store to boost other stores' So the seven-point plan was bom. There was the skimmed money waiting overseas, being brought back and disguised as sales. But there were limits to how much cash the family had available and could get back into the country, so they tumed to other methods of inflating the company's financials. In the most daring part of the expanded scam, Antar's peo- audit counts Arranged for vendors to ship merchandise and defer the ple broke into auditors' records and boosted the inventory billing, besides claiming discounts and advertising credits numbers. With the stroke of a pen, 13 microcassette players Sold large lots of merchandise to wholesalers, then spread became 1,327. the money to individual stores as retail receipts Better than that, the Antars figured out how to make their inventory do double work. Debit memos were drawn up showing substantial lots of stereos or VCRS as "retuned to manufacturer." Crazy Eddie's was given a credit for the whole- It was a long list, and a profitable one for Eddie Antar and the inner circle of his family. The seven action items were designed to make Crazy Eddie's look like it was booming. sale cost due back from the manufacturer. But the machines In fact, it was. It was the single biggest retailer of stereos and televisions in the New York metropolitan area, with a dominant and seemingly impregnable share of the market. But that wasn't enough for Eddie. He took the chain public, and billing to a later date. That way Crazy Eddie's had plenty of then made some real money. Shares that initially sold at $8 inventory volume, plus the return credits listed on the account each later peaked at $80, thanks to the Antar team's masterful book. And what if auditors got too close and began asking tweaking of company accounts. Inflating Crazy Eddie's stock price wasn't the first scam report was a safe report. Antar had pulled. In the carly days, as Sight and Sound grew into Crazy Eddie's and spawned multiple stores, Eddie was house games; he "shared inventory" among his nearly forty actually underreporting his earnings. Eddie's cousin, Sam Antar, remembered learning how the company did business holdings and had gone for the day, workers tossed the mer- by watching his father during the early days. "The store man- agers would drop off cash to the house after they closed at ten o'clock, and my father would make one bundle for deposit into arrived at that store, they found a full stockroom waiting to be the company account, and several bundles for others in the counted. Again, this ruse carried a double payoff. The audit family," Sam Antar said. "Then he would drive over to their looked strong because of the inventory items counted multiple houses and drop off their bundles at two in the moming." For times, and the bookkeeping looked good because only one every few dollars to the company, the Antars took a dollar for set of invoices was entered as payable to Eddie's creditors. themselves. The cash was secreted away into bank accounts at Also, the game could be repeated for as long as the audit route Bank Leumi of Israel. Eddie smuggled some of the money out of the country himself, by strapping stacks of large bills across his body. The Antars sneaked away with at least $7 million over several years. Skimming the cash meant tax-free profits, Eddie's was the biggest and baddest retail outlet in the region. and one gargantuan nest egg waiting across the sea. But entering the stock market was another story. Eddie anticipated the initial public offering (IPO) of shares by qui- them he wasn't going to carry their product. Now, he was king etly easing money from Bank Leumi back into the operation. of what is possibly the biggest consolidated retail market in The company really was growing, but injecting the pilfered the nation. Japanese manufacturers were fighting each other funds as sales receipts made the growth look even more impressive: Skim the money and beat the tax man, then draw out funds as you need them to boost sales figures. Keeps the ship running smooth and sunny. But Paul Hayes, a special agent who worked the case with the FBI, pointed out Crazy Eddie's problem. "After building Crazy Eddie's might owe George-Electronics S1 million: by up the books, they set a pattern of double-digit growth, which claiming $500,000 in discounts or ad credits, the bill was cut they had to sustain. When they couldn't sustain it, they started in half. Sometimes there was a real discount, sometimes there looking for new ways to fake it," Hayes said. Eddie, his brothers, his cousins, and several family loyal- ists all owned large chunks of compuny stock. No matter what were kept at the warehouse to be counted as inventory. In a variation of the inventory scam, at least one wholesaler agreed to ship Crazy Eddie truckloads of merchandise, deferring the questions? Executives would throw the records away. A "lost" Eddie Antar didn't stop at simple bookkeeping and ware- stores. After auditors had finished counting a warehouse's chandise into trucks. The inventory was hauled overnight to an early moming load-in at another store. When the auditors demanded. Eddie's trump card was the supplier network. He had considerable leverage with area wholesalers, because Crazy Agent Paul Hayes remembers Eddie as "an aggressive busi- nessman: He'd put the squeeze on a manufacturer and tell to get into this market ... So when Eddie made a threat, that was a threat with serious potential impact." Suppliers gave Crazy Eddie's buyers extraordinary dis- counts and advertising rebates. If they didn't, the Antars had another method: They made up the discount. For example, wasn't. (It wasn't easy, after Eddie's fall, to tell what was a shrewd business deal and what was fraud. "They had legiti- mate discounts in there," says Hayes. "along with the criminal