His Company Set Up a Fake Bank Branch in Chicago to Answer Its Own Auditors' Mail

Chicago, Illinois

0:00This is Chicago, Illinois.

0:00Here, a bankruptcy trustee later reported, a Los Angeles company rented an office under a name close to a real bank's, and mailed letters there. To train the post office.

0:10The company was Equity Funding. Its chairman was Stanley Goldblum.

0:19The office in Chicago was waiting for one envelope.

0:19During the audit of nineteen seventy two, the trustee's report says, the auditors were given a computer printout of twenty four million dollars in bonds, said to be held at American National Bank in Chicago.

0:34When the auditors asked the bank to confirm it, a request was prepared, addressed to the office that was not a bank, and handed to the auditors to mail.

0:45The bonds did not exist.

0:45According to the report, an officer of the company went to Chicago to receive the letter.

0:51Nothing came for several days.

0:51The report describes great consternation among the conspirators, who feared the post office had delivered the request to the real bank.

1:05They later learned, the report says, that the auditors had simply forgotten to mail it.

1:12When the letter finally reached the office, the report says, the officer apparently signed it and sent it back to the auditors in Los Angeles.

1:23The bonds were not the only thing on the books that did not exist.

1:23At the end of nineteen seventy two, the company's life insurance subsidiary showed three point two billion dollars of life insurance in force. About two point one billion dollars of it, the accounting profession's committee later found, was fictitious.

1:46Twenty two people would be indicted. Every one of them was found guilty, by a plea or by a jury.

1:56And three of the twenty two were the company's own auditors.

Act One: The Program

2:13Equity Funding was incorporated in nineteen sixty, to sell life insurance, mutual funds, and something it called an equity funding program.

2:18The program was a package, Fortune explained. The customer bought mutual fund shares, then borrowed against those shares to pay the premium on a life insurance policy.

2:29The minimums, in later years, were three hundred dollars a year of premium and seven hundred fifty dollars a year of fund shares. After ten years, the customer sold enough shares to pay off the loans.

2:46The pitch was that the shares left over might be worth as much as the customer had put in, so the insurance would have cost nothing.

2:55The company went public in nineteen sixty four. Its president was Stanley Goldblum.

2:59Fortune described him as the manager who stayed in the background, while the executive vice president was the promoter out front.

3:09His desk, the magazine wrote, was a gilt-edged leather surface with a large baroque inkwell on it. He kept it bare of papers. His telephone was stashed away in a drawer.

3:20At home in Beverly Hills, Fortune reported, a maroon Rolls-Royce and a Ferrari shared the garage.

3:26The company's own vice president for compliance, a former enforcement officer at the Securities and Exchange Commission, told the magazine: I was completely taken in by Stanley Goldblum. He gave you the impression that if he caught somebody stealing, he wanted him out. He seemed so upright.

3:48According to the federal Court of Appeals, Equity Funding operated legitimately and profitably until nineteen sixty four. That year, the government proved, it began to publish inaccurate and false financial statements.

4:02The committee the accounting profession later commissioned to study the case found that one part of it, fictitious loans to program customers, appears to have begun as early as nineteen sixty four.

4:18Two sets of printed papers disagreed.

4:18In nineteen sixty six, a later Equity Funding prospectus said, the company sold two hundred twenty six point three million dollars of life insurance, most of it in one other company's policies.

4:29That other company's own prospectus said Equity Funding had sold fifty eight point six million dollars of its insurance.

4:44By Fortune's account, the difference seems not to have been noticed by any auditor or regulator until a financial weekly printed it, in April nineteen seventy three.

4:55In nineteen sixty seven, the company bought a small Chicago life insurer called Presidential Life. One of its officers came with the deal. His name was Fred Levin.

5:09In January nineteen sixty nine, that executive vice president was killed in his bed, when a mudslide came through the roof of his home in Brentwood.

5:16Within three months, Goldblum made Fred Levin executive vice president in charge of insurance.

5:27That year, the company moved into new offices at nineteen hundred Avenue of the Stars, in Century City.

5:32By Fortune's account, it was a bad year. Mutual fund sales were off, an acquisition had gone wrong, and expenses were soaring.

5:43None of those problems showed up in the company's financial reports, the magazine wrote.

5:48Its reported earnings were up nearly forty percent.

Act Two: The Plug

6:02The company's books were audited by a small Los Angeles firm, Wolfson, Weiner, which had audited Equity Funding since it was first incorporated.

6:08Its partner Julian Weiner was one of the auditors who would be indicted. So was the man who managed the audits, Solomon Block.

6:21Fortune reported that Block had his own office on Equity Funding's executive floor. Until nineteen seventy three, the magazine wrote, he had never passed the examinations to become a certified public accountant.

6:32Another partner of the firm, Marvin Lichtig, became Equity Funding's treasurer during the nineteen sixty eight audit. The Court of Appeals recorded that he bought shares in the company while still acting as its independent auditor.

6:51What happened inside those audits was told later, in a federal courtroom, by executives who had already pleaded guilty. Among them were the company's controller, Samuel Lowell, and its assistant controller, Michael Sultan.

7:04After an acquisition in nineteen sixty nine, according to their testimony, the company was short in the account that produced most of its paper profit.

7:14They testified that Goldblum wrote a letter to the auditors, saying a sale of certain future commissions was in process, and that he would personally guarantee the purchase.

7:24By that accounting, the court recorded, the company increased its paper income by more than thirteen million dollars, and no real sale was anticipated.

7:38Lowell and Sultan testified that two million dollars of Equity Funding's own money was routed through two shell corporations in Europe, and paid back to Equity Funding as the supposed down payment on that sale.

7:51In the Court of Appeals' summary of the evidence, Equity Funding paid itself.

8:00Then there was the plug.

8:00According to the evidence, Lowell told Weiner that if the auditors did not add up the detail behind the loan figure, the company could take care of the shortfall.

8:11It did so by inserting two million dollars that appeared in the total, but not in the detail lists. Lowell testified that he showed the computer card containing the plug to Lichtig.

8:20The company's director of financial services, Lloyd Edens, confirmed the device in his own testimony.

8:32Lowell testified that when Block questioned some procedures, Lowell, with the agreement of others in the scheme, offered him a trip to Rome if he would cooperate.

8:41After that conversation, the court recorded, a reconciliation explaining a ten million dollar gap in the same loan figure was given to Block, and he was told to handle it himself. He raised no further questions about it.

8:57Lowell also testified that he had confirmations manufactured at Weiner's request.

9:02Block, the court noted, once pointed out to him that the envelopes carrying those confirmations had unlikely postmarks.

9:13By nineteen seventy two, the loan figure had a printout behind it.

9:13The accounting committee found that the company's staff used a computer to list real loans over and over, until the desired total was reached. To hide the repeats, the listing left off the borrowers' names, and the first two digits of each five digit loan number.

9:34According to Fortune, about twenty thousand programs were really in effect, and the company's annual report for nineteen seventy two would have reported fifty thousand.

9:44When the auditors picked a fictitious loan to confirm, the committee was informed, the request was addressed to company personnel, or to friends, who had been told how to respond.

10:00The loans were one scheme. The insurance, the committee found, was a second, separate one.

10:05The loans stayed on the company's own books. The insurance was sold on to other insurance companies. And they paid in cash.

Act Three: Department 99

10:24A life insurer can sell part of its business on to another insurer, a reinsurer, which takes over the risk.

10:28Equity Funding's life company did this on a large scale. Its reinsurers, the committee found, paid it cash equal to about eighty percent of the first year's premium on each policy they took.

10:46Shortly after Levin's promotion, Fortune reported, the life company signed a large deal of this kind with another insurer, Ranger National Life. By the end of nineteen seventy two, Ranger held some eight hundred thirty five million dollars of insurance passed to it by Equity Funding.

11:02In the Ranger deal, Fortune reported, the life company guaranteed that policies representing eighty five percent of the first year's premiums would still be paying in the second year, or it would make up the difference. The committee found guarantees as high as eighty five percent in many of its deals.

11:24The two main sources disagree about when the policies being passed on stopped being real.

11:30The accounting committee dates the recording of fictitious insurance policies to nineteen sixty nine. Fortune reported that most, probably all, of the business reinsured in nineteen sixty nine was real, and that the inventing began in nineteen seventy.

11:49Either way, the arithmetic had a second year in it.

11:49After the first year, the reinsurer was owed its share of every renewal premium. A real policyholder pays a renewal. A fictitious one pays nothing.

12:00In the committee's words, the need for cash to make these payments led to the creation of still more fictitious policies, which were also reinsured. Without other sources of cash, each year's fraud required an even larger fraud the following year.

12:23Fortune asked an accountant experienced in insurance audits to model it, using general industry assumptions.

12:28On his estimate, a company that sold off one million dollars of premiums in year one would have to invent two hundred fifty million dollars of insurance by year five. In the tenth year alone, it would have to invent more than three point seven billion.

12:49Inside the company's computer, according to Fortune, the invented business was centered in insurance listed as coming from one department. Department ninety nine.

12:57The business was growing fast. The company explained it as mass-marketing operations, like sales by mail.

13:09But, Fortune reported, no bills were ever mailed on this business. Some of the data processing staff knew it, and wondered.

13:19In nineteen seventy two, and perhaps earlier, the committee found, the computer was used to rebuild the life company's journals, its insurance files and its general ledger for the whole year, to spread the fictitious entries in an apparently normal fashion.

13:34The committee said this could have been done by hand, with an enormous amount of clerical work.

13:43The press had called it a computer fraud. The committee wrote that it would be more accurate to call it a computer-assisted fraud. The computer, it concluded, was not essential to the basic fraudulent acts.

14:00State insurance premium taxes, the committee found, were paid on the fictitious policies, as well as the genuine ones.

14:05Records were falsified to show a pattern of terminations and death claims on the fictitious policies. The Ninth Circuit recorded that the life company collected spurious death claims it filed on behalf of fictitious insureds.

14:20Since nearly all of these policies were reinsured, the committee wrote, a major object was to deceive the reinsurers.

14:32By nineteen seventy two, Fortune reported, virtually all the business the life company reinsured was phony.

14:37And each phony policy, Fortune reported, was eventually to have a file.

Act Four: 341 North Maple Drive

14:55The company had what it called a mass-marketing office at three forty one North Maple Drive, in a small building a couple of miles from headquarters.

15:05According to Fortune, it was staffed by a few young women who seem not to have grasped its real mission.

15:10The mission, the magazine wrote, was to invent phony files, such as applications and health records, to go with the phony insurance policies.

15:24When auditors picked a fictitious policy to test, according to the accounting committee, the life company's staff either created bogus documentation, including copies of policies, applications and medical reports, or produced papers from real policies that had already lapsed.

15:40An Illinois court later found that many validly issued policies which had lapsed were kept on the books as if they were still in force.

15:55The reinsurers were the ones paying cash. One of them wanted to look.

15:55Fortune reported that the president of Ranger's parent company wanted to make sure the policyholders were not, in his word, fenceposts.

16:05Three times, in nineteen seventy and nineteen seventy one, a young accountant from an outside firm and an official of the reinsurer came to check.

16:18On the second visit, according to Fortune, more than twenty percent of the policies in their sample turned up exceptions. In some cases, the files were missing.

16:31Levin, Fortune reported, had always forbidden auditors to mail confirmations to policyholders, on the theory that it would upset the salesmen.

16:37So the accountants wrote instead to the salesmen who had sold the policies. Sixty six letters went out to branch offices. Forty nine came back positive.

16:53Then, Fortune reported, some officials drew up a plan to sit in their Century City offices posing as salesmen from around the country, and confirm the policies over a speaker telephone.

17:03It is not clear whether the plan was ever used.

17:09When the accountants came back for a third visit, the magazine wrote, the officials were too busy to help. The accountants left, and never came back.

17:21Fortune reported that no auditor ever confirmed a policy directly with a policyholder, until the rumors of fraud began. Such confirmations were not standard practice in life insurance auditing at the time.

17:36In January nineteen seventy two, an investment officer at one of the company's insurers in New Jersey resigned after three months.

17:45He told Fortune that Levin offered him a big raise to stay, and then, as he remembers it, said this.

17:50If I had met you before we started this, maybe I wouldn't have done it. But now we're trapped.

18:00One insider told Fortune there had been some hope that real business would grow fast enough to take the place of the phony business. Asked how such a plan could have escaped the auditors, the insider told a little joke. Its punch line was: we've been lucky so far.

18:19In February nineteen seventy three, a vice president named Jim Smith fired an executive named Ronald Secrist.

Act Five: March 1973

18:37On Tuesday the sixth of March, nineteen seventy three, Secrist telephoned Raymond Dirks, an insurance analyst at a New York brokerage firm.

18:46He did not go to the Commission. He had heard, the court of appeals in Washington later recorded, that it had passed on information from employees to Equity Funding's president.

18:56Two years earlier, the same court recorded, the Commission had been approached by an Equity Funding employee with reports of questionable accounting. It performed a cursory investigation and took no further action.

19:14The next day, Secrist told his story first to the New York State Insurance Department, and then to Dirks, for several hours.

19:22The court called his allegations detailed but nearly incredible. The main one was that a subsidiary had created false insurance policies. Some of his other charges, the court noted, eventually proved false. He had no documents to back any of it.

19:36Dirks decided to investigate.

19:42The New York department passed it to California. On Friday the ninth of March, a California insurance official repeated the charges to a staff attorney at the Commission's Los Angeles office, and asked for help.

19:52The attorney said disgruntled employees had made similar allegations before. He recommended delaying any type of inspection until next year, when more personnel are available.

20:03His memorandum was not read until after the Commission's interviews with Dirks had begun.

20:16On Monday the twelfth of March, two Illinois insurance examiners arrived at nineteen hundred Avenue of the Stars without notice, pretending to conduct a routine audit.

20:25Levin, Fortune reported, had worked three years in the Illinois Insurance Department, and knew companies were usually given notice. The front did not fool him for long.

20:39Dirks flew to Los Angeles on the nineteenth of March. He had already telephoned Goldblum, who denied there was any fraud and invited him to visit.

20:44Equity Funding's officers, the court recorded, continued to deny, and even to ridicule, the notion that anything was amiss.

20:54Over the next two days, Dirks reached four men. Two had worked as computer technicians at Equity Funding. One had worked for the firm that programmed its computers. One still worked there.

21:10Each had come, independently, to the same conclusion: that the company's computer files contained large blocks of phony policies.

21:21On the weekend of the twenty fourth and twenty fifth of March, Fortune reported, some employees of the life company tried to mix up the phony business and the good business, so investigators would find it harder to tell them apart.

21:30At some point, the magazine added, they also counterfeited bonds. These were apparently never used, perhaps because the quality was so poor.

21:46Dirks told what he was learning to clients and investors who asked. Some of them sold their stock.

21:52He also pressed the Wall Street Journal's Los Angeles bureau chief to write the story. The reporter was afraid that publishing damaging rumors supported only by hearsay might be libelous, and declined.

22:07On Friday the sixteenth of March, the stock closed at twenty five and three eighths. By Tuesday the twenty seventh, it was fourteen and three eighths.

22:16Late on the twenty seventh, the New York Stock Exchange halted trading. The next day, the Commission suspended trading in all the company's securities for ten days.

22:31On Friday the thirtieth of March, the second in command of the California Insurance Department got a summary seizure order. That evening he walked into the life company's offices and served copies on everyone in sight.

22:41He later admitted to Fortune: at that point we had not found one fake policy. We had nothing but stories. Our hearts were in our mouths.

22:59Earlier that afternoon, Fortune reported, the Illinois examiners went to the real American National Bank and Trust Company, in Chicago.

23:04The bonds had never been in the bank.

23:09The sources give different figures for them. The Court of Appeals in Washington said twenty million dollars. Fortune said twenty four point six million. The trustee's report, twenty four million.

23:26A few days before the board met, Fortune reported, a cleaning woman had found a tape recorder in the private bathroom next to Goldblum's office.

23:32A cord ran from it into the ceiling. It was not quite clear where the cord led.

23:37The boardroom, the magazine noted, was next to his office.

Act Six: Sunday, 1 April

23:55On the afternoon of Sunday the first of April, the board met eighteen floors below its own boardroom, in the conference room of a bankruptcy law firm in the same building. Given the tape recorder, Fortune wrote, a change of venue seemed prudent.

24:09It was a Sunday, so the air conditioning was off. By Fortune's account the room filled with smoke, and then with the smell of half-eaten pastrami sandwiches.

24:23Goldblum sat at the head of the table. He was forty six, Fortune reported, about six feet four, and kept in shape by lifting weights.

24:29Days earlier, the Commission had asked him for a sworn affidavit that the rumors had no basis. According to Fortune, his personal lawyer then told the company's general counsel that he would not make it, and that if subpoenaed, he would be advised to take the Fifth Amendment.

24:52One outside director had known him since nineteen sixty two, and thought he could put an end to the meeting. Fortune reports the question he asked.

24:58Stanley, I want to know one thing. Did you put your fingers in the till? If you answer no, I'll leave right now.

25:08Goldblum replied that he would not answer, on the advice of counsel.

25:13The director told the magazine he felt as though the earth would open and swallow him.

25:23The Commission had already given an ultimatum, Fortune reported. Unless Goldblum, Levin and Lowell resigned, it would force the company into receivership on Monday.

25:34Goldblum asked what the directors had in mind in the way of vacation and severance pay. He was told these were not matters for negotiation.

25:44Goldblum offered to resign. Levin and Lowell agreed they had to go too.

25:51The meeting ran until half past ten at night. Three accountants from the company's audit firm reported on a telephone survey.

25:56Acting on tips from employees of the life company, they had called policyholders listed in suspicious blocks of insurance.

26:08Of thirty five people listed as policyholders whom they reached by telephone, Fortune reported, only six confirmed they had the policies they were supposed to have.

26:21The next day, Monday the second of April, the Commission filed its complaint. The Wall Street Journal ran the story on its front page.

26:27In early April, the company filed for reorganization under Chapter Ten of the Bankruptcy Act.

26:33A trustee was appointed on the tenth of April.

26:42In the federal court's summary of his investigation, the trustee concluded that the company had falsified its records from at least as early as nineteen sixty four, until the day the petition was filed. Contrary to its published reports, he said, it was probably never profitable.

26:58From nineteen sixty four through nineteen seventy two, he found, at least one hundred forty three million dollars of fictitious pre-tax income, and fictitious assets to match, had been recorded.

27:09When the court's auditors finished, stockholders' equity went from one hundred forty three point four million dollars to a deficit of forty two point one million.

27:26The stockholders' interest, the court found, was without value. Under the plan, the court expected them to realize substantial recoveries as fraud claimants instead.

27:36The real customers came through. The court found that not a single public customer had been damaged, apart from some who bought programs before nineteen sixty three, and the plan provided for them.

27:52On Thursday the first of November, nineteen seventy three, a federal grand jury in Los Angeles returned an indictment.

27:58It had one hundred and five counts, and twenty two names.

Act Seven: Five Counts

28:14An indictment is a charge, not a finding.

28:14This one charged all twenty two with conspiring, from January nineteen sixty five to April nineteen seventy three, to commit securities fraud, mail fraud, bank fraud, and the interstate transport of counterfeit securities, among other crimes.

28:31It also charged electronic eavesdropping, as one object of the conspiracy.

28:41Before Goldblum's trial began, eighteen of the others pleaded guilty.

28:41Among them were Fred Levin. Samuel Lowell. Michael Sultan. Jim Smith. Arthur Lewis. Lloyd Edens. Lowell, Sultan and a former treasurer, Jerome Evans, would later testify for the prosecution.

29:03Goldblum went to trial on forty five counts.

29:03On Tuesday the eighth of October, nineteen seventy four, the fifth day of his trial, he changed his plea.

29:13He pleaded guilty to five felony counts. Conspiracy. Securities fraud. Filing false documents with the Securities and Exchange Commission. Mail fraud. And interstate transport of property taken by fraud.

29:30Eavesdropping was not among the five.

29:35The three auditors were tried separately, in the first months of nineteen seventy five.

29:41Their lawyers called Goldblum as a defense witness. He refused to testify, and asserted his Fifth Amendment right.

29:46On Tuesday the twentieth of May, nineteen seventy five, the jury returned its verdict. Julian Weiner and Marvin Lichtig were convicted. Solomon Block was convicted on some counts, and acquitted on others.

30:03In nineteen seventy eight, the Court of Appeals affirmed all three.

30:09In the end, a federal court wrote, nineteen pleaded guilty and three were convicted.

30:18The auditors were sentenced in July nineteen seventy five. The records this film draws on do not give the length of any sentence in the case, including Goldblum's.

30:31In nineteen seventy eight, the Court of Appeals described Goldblum as serving a term of imprisonment for his participation in the Equity Funding fraud.

30:36That June, NBC was about to broadcast a film about the case, called Billion Dollar Bubble.

30:48On Wednesday the seventh of June, slightly more than twenty four hours before the broadcast, Goldblum sued to stop it. He argued it would inflame the public against him, and jeopardize his release on parole.

30:59The district judge ordered NBC to bring the film to court at nine the next morning, so he could view it for inaccuracies. NBC's lawyer declined. The judge ordered him imprisoned until he produced the film.

31:12Shortly after noon, NBC's emergency petition reached the Court of Appeals. That same day, it vacated the orders.

31:27The Commission had found that Raymond Dirks aided and abetted violations of the securities laws, by repeating the allegations to investors who then sold, and censured him.

31:36On Friday the first of July, nineteen eighty three, the Supreme Court reversed. It held that Dirks had no duty to abstain from using the information, and so there was no actionable violation by him.

31:48The Commission never charged Ronald Secrist with any wrongdoing, the Supreme Court noted. He was not among the twenty two indicted.

32:01In December nineteen seventy five, the court approved a plan to rebuild the company around two real life insurers it still owned, one in New Jersey and one in Seattle.

32:11The life company was outside the federal bankruptcy. As an insurer, it was taken over by the Illinois Director of Insurance, who seized its assets, and it was liquidated in Illinois. Fraud claims against it came to about three hundred fourteen million dollars. Those were claims asserted, not losses found.

32:35The accounting profession's committee studied what the auditors had missed.

32:35It concluded that customary audit procedures, properly applied, would have provided a reasonable degree of assurance that the fraud would be detected.

32:52In Chicago, the trustee's report says, the office under a name close to a real bank's had waited several days for a letter the auditors had simply forgotten to mail.

33:03On North Maple Drive, Fortune reported, every phony policy was to have its own file.

33:08When the scandal broke, the magazine wrote, the office had come nowhere near finishing them.