Transcript The Salad Oil Scandal Financial Fraud February 9, 2004 Nicole Billick

The Salad Oil Scandal
Nicole Billick
Dwain Carryl
Ian Lyngen
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Background
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Anthony DeAngelis
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One of the biggest con artists in market history,
aka The Great Salad Oil Swindler
Allied Crude Vegetable Oil Refining
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Operation timeline: late 1950s through early 1960s
Involved: $175M salad oil missing - busted 1963
How started: banks willing to make loans secured
by salad oil inventory
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Inventory Overstatement Scheme
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Warehousing receipts for ~1.8 billion pounds missing oil
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Warehousing companies trusting, kept blank receipts unlocked
The rest was about deceiving auditors –
disguising how much oil was actually in tanks
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Just add water
Welded vertical pipes
Tape measure
Phantom tanks
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Repainting the numbers
Pumps
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Result
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American Express
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Allied Crude Vegetable Oil Refining
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Tino
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Brokerage firms - Williston and Beane & Ira Haupt and Co
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Detection
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Tino DeAngelis’ dreamed of cornering the market, and to achieve this
he needed to own all of the supply.
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He borrowed against the overstated inventories through American Express
and other lenders.
He then used those proceeds to buy up supply in the commodities market
through the spot and futures markets.
In Mid-November 1963, Allied Crude was unable to meet a margin call,
because the firm had over-leveraged its position.
Unable to meet the $18 million in margin calls to Ira Haupt & Co. and J.R.
Williston & Beane, Allied Crude was forced into Chapter 11 Bankruptcy.
Bankruptcy Referee Denied Chapter 11 and sent to Liquidation.
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This was because failed to post $20,000 indemnity for costs to maintain
assets.
Liquidation status prompted American Express Warehousing to conduct
audits of the oil it would soon liquidate.
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Audit Reveals…
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Claimed to Have $150 million of oil, but only found $6 million worth.
Allied Crude was claiming to house more vegetable oil then there
could possibly be in the country.
Tino had been writing fraudulent warehouse receipts.
Total of 51 companies were stuck with loans on oil supposedly stored
by Allied Crude.
Most of the money went to cover operating losses created by Allied
Crude’s trades in the commodity markets. Plus $500,000 Tino has in
a Swiss Bank account
President John F. Kennedy’s Assassination
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Overshadowed the scandal in the financial markets.
But Tino De Angelis still saw justice, sentenced to seven years in
federal prison.
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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Conceptually What Went Wrong?
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Allied Crude Vegetable Oil Refining Corp. overstated oil
inventory by a variety of schemes to use the inflated
inventory as collateral for loans.
Practices of oil inventory auditors facilitated the
execution of fraud.
Warning signs were ignored by a number of watch-dogs.
Reality check?
Financial Fraud
February 9, 2004
The Salad Oil Scandal
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How Could This Fraud Have Been Prevented?
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SEC Suggests seven steps:
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Set proper tone in top management.
Maintain internal controls
Enforce written code of conduct.
Effective internal audit.
Strong audit committees.
External auditors should not cave to pressures from management
Better education of business professional can reduce risks.
Practical suggestions:
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Difficult to prevent the elaborate of a fraud, but early detection can reduce
damages.
Make sure audits are done as thoroughly as possible.
Know as much about the people a firm is conducting business with, Tino
DeAngelis had already been implicated in a number of questionable
practices long before he started Allied Crude.
Financial Fraud
February 9, 2004