Please see attached for case #2 there are 10 case questions.

Case #2: Crazy Numbers at Crazy Eddie Inc. \"Eddie was a godlike figure to me. We all looked up to him like a leader. He worked out with weights; he carried himself like a prince or something; he was just so charismatic\" (Sam E. Antar) Eddie Antar, his father Sam M. Antar and Eddie's cousin Ronnie Gindi started with a single electronics retailer store in Brooklyn, NY in 1969, called 'Sights and Sounds', with each of them owning a third of the company. In 1971, Eddie purchased his cousin's share in the business for $25,000 and changed the name of the business to 'Crazy Eddie's Ultra Linear Sound Experience' and thereafter to 'Crazy Eddie', after a nickname he acquired during high school. Eddie and his father took their company public in 1984 and were able to grow Crazy Eddie to a chain of 43 stores. They utilized a relentless advertising campaign to draw customers to their stores (Some print examples are shown in Exhibit 1). At its peak in 1987, Crazy Eddie's market capitalization was about USD 600 Million (Clikeman 2013). However, not all was well at Crazy Eddie. Eddie Antar had great ambitions and used all tricks available to him to defraud others. Examples include cash skimming, income tax and payroll tax evasion, overstatement of inventories and corresponding understatement of costs of goods sold, recording of fictitious revenues, money laundering, insider trading, accessing and altering auditor records, insurance fraud, timing differences and improper disclosures. Even with restitution judgments of over USD 700 Million, the now infamous Crazy Eddie fraud was not one of the largest, but it was certainly one of the more famous and memorable ones due to its hard to beat outrageousness (Wells, 2007). Amazingly, the fraud did not come to light for many years. It was not until 1987 that, as a result of a deteriorating stock price, the majority of Crazy Eddie's shares was purchased in a hostile takeover and the new owners quickly discovered a fraud of massive proportions. Another factor contributing to the downfall of Crazy Eddie were disagreements among the Antar family stemming from Eddie Antar cheating on his wife in 1983 with his mistress, an attractive Crazy Eddie employee (conveniently, both were named Debbie). When Eddie's wife found out about his infidelity, it caused a rift in the Antar family as some family members supported Debbie I and were then retaliated against by Eddie. Eddie went on to marry Debbie II and Debbie I in 1987 sued Eddie to challenge the divorce proceedings and the amounts received. Crazy Eddie Inc. declared bankruptcy in 1988 and in 1990, Eddie was ordered to surrender all of his funds located outside of the United States. Rather than complying with this order, Eddie fled to Israel using a forged passport. The U.S. Department of Justice then issued an arrest warrant for Eddie (Exhibit 2). Below are examples of the fraud schemes perpetrated by parts of the Antar family: 1) Phony Insurance Claims Crazy Eddie frequently incurred fire and flood losses. These losses were willfully created and the damaged inventory was vastly overstated. 1 2) Phony Warranty Claims Eddie submitted to manufacturers warranty claims for repairs Crazy Eddie did not perform. As a result, manufacturers paid for phony warranty claims, resulting in inflated revenue for Crazy Eddie. 3) Skimming Before Crazy Eddie was a stock-listed company, the Antars underreported Crazy Eddie's earnings in an effort to evade sales tax payments. Part of the cash sales were not entered into the company books and the cash was secretly transferred to bank accounts at Bank Leumi in Israel via frequent trips of family members to Israel. Other uses for the skimmed money included payments of salary to family members and lifestyle improvements. Eddie knew that skimming would hurt growth prospects as investors would evaluate the company. The skimming was therefore phased out prior to the IPO, creating the appearance of an even faster growing company. 4) Fictitious Revenues In a retail environment, analysts frequently compare individual store performance with prior period data as well as other stores of the chain. The higher the growth, the better. Since some of Crazy Eddie stores did not perform as well as others, Eddie Antar added fictitious revenues to these stores. 5) The Panama Pump To create the appearance of Crazy Eddie as a successful and growing company, money previously deposited in Israel at Bank Leumi was wired to Bank Leumi's Panama branch into an account named \"Aeronautics Traders Corporation\". Aeronautics Traders Corporation then served as a \"customer\" to purchase items at various Crazy Eddie stores, resulting in fictitious revenues with a cash infusion and no associated costs. 6) Illicit Collaboration with Retail Customers Due to the large quantities ordered from suppliers and resulting discounts, Crazy Eddie was also able to sell to other retailers and not only to end consumers. Eddie sold merchandise to such a retailer at cost and did not report these transactions in Crazy Eddie's books. The retailer was then instructed to provide payment with undated checks in $10,000 to $50,000 amounts, so that Eddie could use them to inflate sales at stores of his choosing. These new sales transactions did not have any supporting documentation, specifying the inventory items or quantity sold. 7) Understating Accounts Payable Eddie post-dated purchase orders, so that liabilities attributable to the current period were postponed to the next period. When delivery of the merchandise occurred, all shipping documents and packing slips were intercepted. 8) Poor Disclosure (and again understating accounts payable) In 1987, Crazy Eddie changed its accounting related to purchase discounts and trade allowances. Prior to 1987, purchase discounts and trade allowances were recognized when received. Starting in 1987, purchase discounts and trade allowances were recognized when earned. This change added more subjectivity to the recognition of purchase discounts and trade allowances and was then misused to record numerous fabricated discounts and to aggressively understate accounts payable. While the new accounting policy was included in the financial statements, the fact that it had changed was not disclosed and no prior year comparison of its impact was provided. 2 9) Misleading auditors The auditors of Crazy Eddie routinely left their documents overnight in a locked file cabinet at Crazy Eddie's offices. The Antars observed that the auditors would hide the key to the cabinet in a paper clip box on their work desk at Crazy Eddie. Every night after the auditors had left, Eddie and his cousin Sam E. accessed the auditor cabinet and altered audit records, specifically inventory counts to inflate inventory (Antar, 2011). By reviewing the auditor records, Eddie was able to foresee the auditor route as it relates to inventory inspection and counting. Eddie would then - overnight - ship inventory from stores that had already been counted to stores that have yet to be counted in order to inflate inventory. 10) Insider Trading Eddie and parts of the Antar family had full knowledge about the true economic situation at Crazy Eddie and willfully misled the investing public to entrust in the published financial statements which contained materially misstated information. Utilizing this better knowledge, Eddie and other insiders close to him sold their stock before the truth about Crazy Eddie became publicly known information. Please note that this description only serves as an introduction to the Crazy Eddie fraud and is far from complete. In your research about Crazy Eddie, you will need to employ a host of additional resources. Examples are listed below: 1) Crazy Eddie Annual Reports: 1988: www.whitecollarfraud.com/files/36870848.pdf 1987: www.whitecollarfraud.com/files/36835060.pdf 1986: www.whitecollarfraud.com/files/36835048.pdf 1985: www.whitecollarfraud.com/files/36835043.pdf 2) Opinion by Judge Ackerman: www.whitecollarfraud.com/files/19832592.pdf 3) Sam E. Antar's recollection of the Crazy Eddie fraud: http://business.pages.tcnj.edu/files/2013/02/2011-09-07-The-Crazy-Eddie-Fraud-by-Sam-E.Antar.pdf 4) List of books mentioning the Crazy Eddie fraud: http://samantar.com/book-mentions 5) Wikipedia summary of the Crazy Eddie fraud: http://en.wikipedia.org/wiki/Crazy_Eddie 6) ACFE Report to the Nations (Classification of fraud schemes) www.acfe.com/rttn.aspx Multiple online videos are available and can be used to familiarize yourself with the case. These videos are available on YouTube.com: 1) ACFE: Crazy Eddie http://youtu.be/5f6ZpC2bmbs 2) CNBC: Eddie Antar and Sam E. Antar meet again http://youtu.be/Y_7ntzgTvhs Submission instructions: Deadline: July 22th, 2016. Upload both files (Excel and Word) to the Case #2 Folder of the D2L's Dropbox. Your last name should be part of each file name. Case Questions 1. a) Briefly describe the original business model Eddie Antar pursued as well as its novelty and legality; b) What major store chain have you likely visited in recent years that follows this model? 3 2. The Crazy Eddie fraud can be divided into three phases: a) Crazy Eddie as a closely held private company; b) Crazy Eddie prepares for the IPO; and c) Crazy Eddie as a stock- listed company. List and describe the main violations during these three phases. 3. For the years 1984 to 1987, conduct a horizontal (Exhibit 4 and 6) and vertical analysis (Exhibit 3 and 5) using the provided Microsoft Excel file (available on e-learning Canvas/Blackboard). Feel free to make changes to the Excel Spreadsheet as needed. What red flags are observable? 4. On the third tab in the Microsoft Excel file, for the years 1985 through 1988, calculate five financial ratios of your choosing and discuss in how far they indicate fraud at Crazy Eddie (Exhibit 7). 5. What additional red flags were visible to a) investors and b) auditors? 6. In how far is the fraud motivation triangle (perceived pressure, perceived opportunity, rationalization) applicable to Eddie Antar? 7. a) How can the fraud element triangle (theft act, concealment, conversion) be used to investigate the Crazy Eddie fraud? b) What component of this triangle proved to be particularly useful for the investigation? 8. The Antars faced a similar situation as Ramalinga Raju, former Chairman of Satyam, who in part described the Satyam fraud as follows: "It was like riding a tiger, not knowing how to get off without being eaten." a) How is this statement applicable to Crazy Eddie? b) What plan did the Antars have to get off their tiger alive? c) What happened to the consumer electronics industry in the late 1980s and how does this development relate to the phenomenon referred to by Ramalinga Raju? 9. What actions did the Antars take as they learned about the initiation of a hostile takeover by investors Elias Zinn and Victor Palmieri? 10. Penn & Harwood (until 1984), Main Hurdman (1984-1986, then acquired by KPMG), KPMG Peat Marwick (1987) and Touche Ross (1987-1988, engaged after the takeover) served as the auditors for Crazy Eddie. What, if anything, should the auditors have done differently? References: - Antar, S. E. 2011. The Crazy Eddie Fraud: Confessions of a White-Collar Criminal. http://business.pages.tcnj.edu/files/2013/02/2011-09-07-The-Crazy-Eddie-Fraud-by-Sam-E.Antar.pdf - Clikeman, P.M. 2013. Called To Account: Financial Frauds that Shaped the Accounting Profession. 2nd Edition. New York, NY: Routledge - Wells, J. T. (2007). Corporate Fraud Handbook: Prevention and Detection. 2nd Edition. Hoboken, NJ: John Wiley & Sons 4 Exhibit 1: Crazy Eddie Advertising 5 Exhibit 3: Vertical Analysis of Crazy Eddie's Balance Sheet Fraud Year of IPO % of total Discovered % of total % of total % of total Feb. 28, March 2, March 3, assets assets assets assets 1988 1986 1985 March 1, 1987 1986 1985 1984 31-May-84 1987 Balance Sheet - Vertical Analysis Cash 5,100 9,347 13,296 22,273 Short-term investments 9,846 121,957 26,840 - - Receivables 35,606 10,846 2,246 2,740 2,604 Merchandise Inventories 59,444 109,072 59,864 26,543 23,343 2,846 10,639 2,363 645 514 112,842 261,861 104,609 52,201 27,836 Restricted cash - - 3,356 7,058 - Due from affiliates - - - - 5,739 32,949 26,401 7,172 3,696 1,845 Prepaid expenses Total current assets: PP&E Construction in process 1,375 - - 6,253 1,154 - Other assets 3,008 6,596 5,560 1,419 1,149 Total assets 148,799 294,858 126,950 65,528 36,569 42,752 50,022 51,723 23,078 20,106 Accounts payable Notes payable Short-term debt Unearned revenue Accrued expenses Total current liabilities Long-term debt Convertible subordinated debentures Unearned revenue Total Liabilities - - - - 2,900 24,653 49,571 2,254 423 124 3,861 3,641 3,696 1,173 764 9,332 5,593 17,126 8,733 6,078 80,598 108,827 74,799 33,407 29,972 46 632 8,459 7,701 7,625 80,975 80,975 - - - 5,332 3,337 1,829 635 327 167,537 201,598 84,329 41,667 30,345 18 - - - - Stockholder's equity Preferred Stock Common stock Additional paid-in capital Retained earnings - 315 313 280 134 50 58,630 57,678 17,668 12,298 574 73,829 35,269 24,673 11,429 5,600 Treasury Stock - 3,872 - - - - Total stockholder's equity - 18,738 93,260 42,621 23,861 6,224 148,799 294,858 126,950 65,528 36,569 Total liabilities and stockholder's equity Exhibit 4: Horizontal Analysis of Crazy Eddie's Balance Sheet Fraud Year of IPO % of total Discovered % of total % of total % of total Feb. 28, March 2, March 3, assets assets assets assets 1988 1986 1985 March 1, 1987 1986 1985 1984 31-May-84 1987 Balance Sheet -Horizontal Analysis Cash 5,100 9,347 13,296 22,273 Short-term investments 9,846 121,957 26,840 - - Receivables 35,606 10,846 2,246 2,740 2,604 Merchandise Inventories 59,444 109,072 59,864 26,543 23,343 2,846 10,639 2,363 645 514 112,842 261,861 104,609 52,201 27,836 Restricted cash - - 3,356 7,058 - Due from affiliates - - - - 5,739 32,949 26,401 7,172 3,696 1,845 - - 6,253 1,154 - Other assets 3,008 6,596 5,560 1,419 1,149 Total assets 148,799 294,858 126,950 65,528 36,569 42,752 50,022 51,723 23,078 20,106 - - - - 2,900 24,653 49,571 2,254 423 124 Unearned revenue 3,861 3,641 3,696 1,173 764 Accrued expenses 9,332 5,593 17,126 8,733 6,078 80,598 108,827 74,799 33,407 29,972 46 Prepaid expenses Total current assets: PP&E Construction in process Accounts payable Notes payable Short-term debt Total current liabilities Long-term debt Convertible subordinated debentures Unearned revenue Total Liabilities 1,375 632 8,459 7,701 7,625 80,975 80,975 - - - 5,332 3,337 1,829 635 327 167,537 201,598 84,329 41,667 30,345 Stockholder's equity Preferred Stock 18 - - - - Common stock 315 313 280 134 50 58,630 57,678 17,668 12,298 574 5,600 Additional paid-in capital Retained earnings - 73,829 35,269 24,673 11,429 Treasury Stock - 3,872 - - - - Total stockholder's equity - 18,738 93,260 42,621 23,861 6,224 148,799 294,858 126,950 65,528 36,569 Total liabilities and stockholder's equity Exhibit 5: Vertical Analysis of Crazy Eddie's Income Statement Fraud Year of IPO Year ended Year ended Year ended Discovered % of Sales % of Sales % of Sales % of Sales Income Statement - Vertical Analysis Feb. 28, March 2, March 3, Year ended Year ended 1987 1986 1985 1984 1988 1986 1985 March 1, May 31, 1987 1984 Net Sales 315,539 352,523 262,268 167,147 137,285 Cost of goods sold Gross profit Selling, general and administrative expense Interest and other income - 346,791 - 31,252 - 96,195 - 5,972 Income before taxes - 133,419 Pension contribution Income taxes - 272,255 - 80,268 - - Interest expense Net income - 61,341 5,233 - 67,897 - 7,403 - 194,371 42,975 21,097 820 - 26,431 - 27,312 572 22,560 706 - 522 7,975 - 500 - 800 - 600 24,321 - 10,001 - 13,268 - 6,976 13,244 - 13,943 - 10,596 106,934 30,351 1,418 109,098 - 39,528 3,210 - 127,619 6,367 - 4,202 3,773 Exhibit 6: Horizontal Analysis of Crazy Eddie's Income Statement Income Statement - Horizontal Analysis Net Sales Cost of goods sold Gross profit Selling, general and administrative expense Interest and other income Fraud Year of IPO Year ended Year ended Year ended Discovered % of Sales % of Sales % of Sales % of Sales Feb. 28, March 2, March 3, Year ended Year ended 1987 1986 1985 1984 1988 1986 1985 March 1, May 31, 1987 1984 315,539 352,523 262,268 167,147 137,285 - 346,791 - 31,252 - 96,195 - 5,972 Income before taxes - 133,419 Pension contribution Income taxes - 272,255 - 80,268 - - Interest expense Net income - 61,341 5,233 - 67,897 - 7,403 - 194,371 42,975 21,097 820 - 26,431 - 27,312 572 22,560 706 - 522 7,975 - 500 - 800 - 600 24,321 - 10,001 - 13,268 - 6,976 13,244 - 13,943 - 10,596 106,934 30,351 1,418 109,098 - 39,528 3,210 - 127,619 6,367 - 4,202 3,773 Exhibit 7: Ratio Analysis Ratio Analysis Financial Ratio # 1 Ratio Name Ratio Formula Calculation for 1984 to 1988 (Please link to information on first two tabs) Discuss any implications for the Crazy Eddie fraud: Financial Ratio # 2 Ratio Name Ratio Formula Calculation for 1984 to 1988 (Please link to information on first two tabs) Discuss any implications for the Crazy Eddie fraud: Financial Ratio # 3 Ratio Name Ratio Formula Calculation for 1984 to 1988 (Please link to information on first two tabs) Discuss any implications for the Crazy Eddie fraud: Financial Ratio # 4 Ratio Name Ratio Formula Calculation for 1984 to 1988 (Please link to information on first two tabs) Discuss any implications for the Crazy Eddie fraud: Financial Ratio # 5 Ratio Name Ratio Formula Calculation for 1984 to 1988 (Please link to information on first two tabs) Discuss any implications for the Crazy Eddie fraud: 1988 1987 1986 1985 1984