9 Bad Boys of Business: The Class of 2012
By Christopher Witrak Jan 18, 2013 3:50 pm
A list of notable kleptomaniacs, pathological liars, incompetent businessmen, and narcissists from last year's headlines.
Former National Lampoon CEO Timothy Shawn "Tim" Durham made a mockery of the individuals who invested in his commercial financing firm Fair Finance.
Over 5,000 clients of the firm lost most of the $208 million collectively investing in Durham's poorly named Ponzi scheme between 2005 and 2009. Durham and his two associates James Cochran and Rick Snow spent the money collected from investors and loaned it to their other businesses.
Durham served as CEO of several companies acquired by the Indianapolis-based buyout firm Obsidian Enterprises, of which he also served as the CEO. Obsidian bought Fair Finance in 2002.
The trio used their clients' money to buy mansions, classic cars, and other luxury items. Durham became known for throwing lavish parties at his 30,000-square-foot mansion in Fortville, Indiana. One of his most noted bashes -- a Playboy Manison-themed birthday gala -- included 30 glamour models and several Indianapolis Colts players among 1,000 invitees. Customer funds also financed grand parties in Los Angeles, Miami, and on Durham's yacht in the Caribbean.
The depraved fun ended in 2009 when FBI agents raided the offices of Obsidian and Fair Finance, and the US Attorney's Office indicted the three partners with one count of conspiracy to commit wire and securities fraud, 10 counts of wire fraud, and one count of securities fraud. US District Judge Jane Magnus-Stinson sentenced Durham to 50 years in prison after a jury convicted him of all charges in November of last year. For his crimes, Durham will serve the longest white-collar fraud sentence in Indiana history.
Among their clients, Fair Finance counted many elderly individuals planning on using the stolen money they had invested for retirement. Barbara Lukacik, a 74-year-old nun from Ohio, lost $125,000 in the collapse of the firm.
Durham's attorney tried convincing the jury that Fair Finance struggled through the 2008 financial crisis, and that investors had run with their money when regulators placed the firm under scrutiny.
Judge Magnus-Stinson wasn't convinced, however, saying about Durham, “He has earned a place among the greediest, most selfish and remorseless of criminals.” Although he apologized, Durham did not appear truly remorseful. Now a broken man, Judge Magnus-Stinson will allow Durham to file an appeal as an indigent.
Mike Lynch and HP Executives
Either Hewlett-Packard (NYSE:HPQ) executives and employees embody incompetence, or former Autonomy (PINK:AUTNF) CEO Michael Lynch is a pathological liar.
HP shocked investors when it announced in November of last year $8.8 billion in charges related to its $11.1 billion acquisition of Autonomy in August of 2011. Investors promptly sent the stock to 10-year lows on the news.
HP took a $5 billion write-down on the value of the company and alleged that Autonomy engaged in serious "accounting improprieties, disclosure failures, and outright misrepresentations.” How did HP executives miss this amount of financial fraud, though?
HP claims it could not have had knowledge of Autonomy’s hijinks.
No one has officially been found guilty of any crimes yet, but HP points fingers at Lynch. HP stated it began its own investigation “after a senior member of Autonomy’s leadership team came forward, following the departure of Autonomy founder Mike Lynch, alleging that there had been a series of questionable accounting and business practices at Autonomy prior to the acquisition by HP.” According to Forbes, a source from within HP said, "There was really sketchy accounting going on," speaking of Autonomy's books.
Lynch vociferously denies HP’s accusations and recently stated, “HP has again failed [to] publish any explanation of the serious allegations. It is now less clear how much of the $5 billion write-down is in fact being attributed to the alleged accounting issues, and how much to other changes in business performance and earnings projections.”
The Department of Justice has opened a probe into the scandal, and investors have filed a class-action lawsuit against HP. Lynch says he will comply with the investigation.
In one way, Paul Burks has earned the ignominious title of operating a bigger Ponzi scheme than Bernie Madoff.
While the website ZeekRewards.com lost $600 million, which pales in comparison to the $64.8 billion stolen by Madoff, its closure in August of this year by the Securities and Exchange Commission has impacted more than 1 million of its investors. Madoff worked for 4,800 clients.
Burks' company Rex Venture Group ran ZeekRewards.com, and the ZeeksRewards scam began in early 2011. The website had 2.2 million members, and it offered several ways to earn money through the ZeekRewards program. Two involved purchasing contracts that were not registered with the SEC. Allegedly, the website promised investors 50% of the company’s daily net profits through a profit-sharing system in which they accumulated reward points that could be received as a cash payout or rolled over to compound for better returns.
The scam required investors to roll over their points to keep it functional.
Federal investigators said ZeekRewards made false claims of profitability and that the company owed investors much more than the company’s cash position. Stephen Cohen, an associate director of the SEC’s enforcement division stated, “ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing. In reality, their cash was just going to the earlier investors.”
The SEC said 98% of the money invested in ZeekRewards ended up covering the payouts for the higher-up affiliates, making the company a pyramid scheme. In July of this year, ZeekRewards brought in $162 million and paid out $160 million, but an increase in requests for cash payouts would have pushed the company into insolvency.
Burks personally cashed in on this intricate scheme by siphoning several million dollars of investors' funds. He also distributed $1 million to family members.
Although he has avoided any jail time, Burks has agreed to settle charges with the SEC and pay a penalty of $4 million. As for his involvement in the mess, he did not admit or deny any of the allegations.
Sung Kook “Bill” Hwang
Tiger Asia Management under the leadership of Bill Hwang performed well in 2011, securing a 8.6% return when the average hedge fund lost 5%. Last year was rough for the fund, and Tiger Asia Partners (the other hedge fund founded by Hwang), though. Rather than seeing returns of any sort, both funds settled a costly insider trading case.
In 2001, Hwang founded both “Tiger Cubs,” an appellation given by Wall Street to funds started by protégés of Julian Robertson. Robertson himself had managed the former Tiger Management, and Hwang was Robertson’s top Asia manager.
Facing federal charges, Hwang admitted in December that the firm illegally traded using insider information and pleaded guilty to wire fraud. The fund used nonpublic information received through private placement offerings to sell short shares of the Bank of China (HKG:3988), China Construction Bank (SHA:601939), and one other stock. Then the funds covered the short positions with private placement shares purchased at a significant discount to the stocks' market price. (View the SEC press release here.)
Under the control of head trader Raymond Y. H. Park, Tiger Asia Management used the information provided by the three investment banks to time the trades when Tiger Asia had made legal agreements that it would not utilize the non-public information to execute the trades.
In a separate act, Hwang and Park established a manipulative trading scheme that produced $496,000 in fake management fees.
To settle the case, Tiger Asia forfeited $16.3 million, the amount gained from illegal trades executed from December of 2008 to January of 2009. Hwang will not do any jail time and remained silent on his civil allegations, but he and Park will have to pay $8.3 million in penalties each, separate from the penalty placed on Tiger Asia. The total settlement reached $44 million.
Regulators in Japan and Hong Kong have also begun pursuing legal action against Tiger Asia for manipulating the market.
Suspicions of Libor rate rigging had existed for years, and the scandal finally made headlines last June when Barclays reached a $450 million settlement with regulators in Washington and London. After months of investigations, prosecutors have begun making their first charges against individuals.
Officials from the US Department of Justice have focused on Tom Hayes (photo unavailable) in their investigation. In the UK, the Serious Fraud Office and City of London Police arrested Hayes last month along with two others in the first arrests tied to the rate-rigging scandal.
Former British UBS AG (NYSE:UBS) trader Tom Hayes faces charges of wire fraud and price-fixing for manipulating the yen Libor rate while working at the firm from 2006 to 2009. Hayes also must answer to charges of conspiracy to manipulate the interbank lending rate with his former peer Roger Darin, who was a onetime short-term interest-rates trader at UBS.
Other individuals from UBS have been charged, too. However, the Commodity Futures Trading Commission (CFTC) said, “The volume of unlawful requests submitted by one particular senior yen derivative trader dwarfed them all.” The one trader made at least 800 requests to UBS’s yen Libor rate-setters, about 100 requests to traders at other banks, and 1,200 requests to interdealer brokers to alter the rates.
The CFTC has not officially specified who requested these manipulations, but the Department of Justice has pretty damning evidence against Hayes.
Electronic chat messages between Hayes and Darin obtained by investigators have Hayes asking Darin:
“Hi roger i have a 500k usd fix in 6m today, can we try to keep it on the low side pls?”
In another example, he had switched to Citigroup (NYSE:C) and asked an interdealer broker on March 3, 2010:
“Any favours you can get with [Bank C Submitter] would be much appreciated ... even if [the Bank C Submitter] only move 3m down 1bp.”
The broker replied, “Libor lower ;)”
Rebekah Brooks has made the list as the one women who belongs in the company of these bad boys of business.
Brooks ran News International, News Corp.’s (NASDAQ:NWS) UK news unit, as its CEO until July of 2011 when she found herself at the center of the defunct News of the World phone-hacking scandal. Brooks resigned in that month as the chief executive of News International when it became known that News of the World hacked the voicemail messages of kidnapped and murdered 13-year-old Milly Dowler.
Brooks has been brought to court for other charges in addition to the phone hacking.
At a preliminary hearing in London last month, Brooks faced accusations of conspiracy to intercept communications, conspiracy to pervert the course of justice, and conspiracy to commit misconduct in public office.
Prime Minister David Cameron's former communications director Andy Coulson and veteran Sun journalist John Kay along with Brooks stand accused of conspiracy to pay approximately 100,000 British pounds for information from a Defense Ministry Official. The information formed the basis of several news stories between 2004 and 2011.
Bribing a public official carries a potentially hefty jail sentence of 10 years in prison.
News Corp. does take care of its own, though. News International paid Brooks 10.9 million British pounds. It officially stated that it made the payment to “one director as compensation for loss of office.”
The author has a position in Microsoft.