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A History of Wall Street Crime and Punishment: The 10 Most Intriguing Cases


That money attracts crime comes as no surprise, but the heights of these heists might exceed your expectations.

As long as there has been a Wall Street, there have been thieves to plunder it. Oddly enough, the nature of the crimes hasn't changed much over the years. Magnates with rich political ties quietly manipulate the market, maintain a squeaky-clean public image, and try to run off with their bag of loot just as their sandcastles are crumbling.

Do they get away with it? More often than not, the answer is yes. Bernie Ebbers, the most unfortunate of the bunch below, is currently serving 25 years in a low-security prison. The rest either received wrist slaps or, as Sun Tzu and Bud Fox have both said, had the chance to "split and re-evaluate."

Jay Gould: Black Friday Robber Baron
This forefather of insider traders was already a railroad magnate at the age of 23. When he opened his first brokerage, Gould raked in a fortune due to his "private sources of information in the field (which helped him) turn almost any success or defeat of the Union Army to profitable account," according to the New York Times.

The robber baron's next move? Buy up all the gold in the United States of America. In 1869, Gould almost succeeded. The price of gold, formerly at a low, skyrocketed. President Ulysses S. Grant warned Gould to stop buying, or else the Treasury would suppress prices by releasing its own gold into the market. Gould reacted by spreading rumors about an impending gold shortage while divesting his own gold at a profit.

When the Treasury did take action, on Black Friday, 1869, the price of gold crashed within 15 minutes, with "nearly half of Wall Street … involved in the ruin," writes the New York Times. A furious mob and militia gathered on Wall Street, according to the Wall Street Journal, but Gould escaped. Eight years later, a trader, angry at his losses, punched Gould and threw him down an eight-foot flight of stairs, the Wall Street Journal reports. Gould, however, survived long enough to con his way into even bigger fortunes. He died of tuberculosis at the age of 56.
WorldCom: He Who Goes Bankrupt With the Most Toys, Still Goes Bankrupt

Bernard Ebbers, co-founder and CEO of telecommunications behemoth WorldCom, managed to simultaneously build a business and personal empire before being handcuffed by the Feds. His WorldCom snapped up more than 60 companies after its 1983 founding, culminating with the $37 billion merger with MCI in 1997. Meanwhile, Ebbers used his own WorldCom stock to back loans on personal investments, including Canada's biggest working cattle ranch, more than 500,000 acres of U.S. timberland and a minor league hockey team.

By the time WorldCom tried-and failed-to merge with Sprint (S) in 2000, the telecommunications industry was in a recession. WorldCom directors, worried Ebbers would force down the stock price by selling his holdings, loaned Ebbers $408 million to cover his margins. Meanwhile, Ebbers and his executives carved about $9 billion in expenses out of the company books, which roughly doubled the stock price between early 2000-01. By the time the company filed for the biggest bankruptcy in US history in 2002, the stock was at zero, Ebbers' cover was blown and WorldCom changed its name to MCI. Today, Ebbers is in a low-security prison in Oakdale, Louisiana, serving out a 25-year sentence.
Galleon Group: Tapping the Insider Wires

New York's Galleon Group, formerly one of the largest hedge fund managers in the world, touted "the fundamental belief in rigorous investment analysis combined with active trading around core positions." Post-trial, that translates to deliberately creating a network of corporate insiders, milking them for information, and creating a $7 billion hedge fund from it.

Thanks to an ongoing federal crackdown, Galleon founder and principal Raj Rajaratnam has traded his insider deals on IBM (IBM) and AMD (AMD) for an 11-year prison sentence. Prosecutors wiretapped Rajaratnam's phone in 2008, after guilt-ridden McKinsey consultant and partner in crime Anil Kumar spilled his soul to lawyers. (Rajaratnam had paid Kumar $500,00 per year, via an offshore account, for inside information on McKinsey clients.) The investigation uncovered a vast insider network, carefully cultivated from the tight-knit South Asian tech and finance community. Twenty-six of those people, including former beauty queen Danielle Chiesi, were charged as a result of the investigation.
Drexel-Burnham: Insider Junk

In the mid-1970s, Drexel Burnham Lambert broker Michael Milken realized that below-investment-grade bonds were generally undervalued, and that investing heavily in them was a profitable business. The now-famous junk bond market of the 1980s was born. Milken created more than half of Drexel Burnham Lambert's profits through his junk bonds, which helped finance mergers and acquisitions, including hostile takeovers by the likes of T. Boone Pickens and Ted Turner. In 1986, Drexel Burnham Lambert made $545.5 million, an annual profit never before seen at a Wall Street firm. Milken himself took home $550 million that year.

Milken, however, disdained regulations. The SEC lurked in his shadow for years, trying to catch him for something. In 1986, colleague Ivan Boesky implicated Milken as an inside trader. Milken plead guilty and served about 2.5 years in prison, on top of paying $1 billion in fines. Drexel Lambert Burnham, meanwhile, declared bankruptcy in 1990.
Enron: Magical Accounting

The "Crooked E" deserves an "A" for creativity in accounting. Through a slew of special-purpose entities and the magic of mark-to-market accounting, Enron claimed profits before they happened and sunk its losses and debts into offshore shell companies. Independent auditor Arthur Andersen caught none of this.

When Enron stock hit high of $90 per share in 2000, executives, worried their house of cards might collapse, quietly sold off their stock. The stock price plummeted to less than half its former value within the year. The SEC opened an investigation, forcing Enron to reveal $1 billion in debt and losses. The company filed for Chapter 11 reorganization in 2001, the biggest bankruptcy in US history at the time.

Most Enron executives served two to six years in prison, with the exception of former CEO Jeff Skilling, who is serving a 24-year sentence. Ken Lay, arguably the master engineer of the scandal, died in Colorado of a coronary just before his sentencing.
Bernie Madoff: Master of Deception

"The strategy is the strategy and the returns are the returns." That was how Bernie Madoff explained his consistent, non-volatile returns in a 2001 interview with MARHedge's Michael Ocrant. At the time, Madoff was seen as an elite hedge fund manager with up to $7 billion in his portfolio. Although his so-called proprietary trading formula aroused suspicion, the former NASDAQ chairman and SEC panelist's status more than offset the questions. Investing with Madoff was akin to being admitted to an exclusive club, according to CNNMoney. Eminent clients included 600 brokerages, Steven Spielberg's foundation and Kentucky University, among many others.

In 2009, the good guy admitted to running America's biggest Ponzi scheme, worth an estimated $10-$20 billion. Madoff is currently serving a 150-year sentence at Butner, North Carolina, the "best and most layback [SIC] prison in the US," according to this letter he wrote his daughter.
Richard Whitney: The Man Who Almost Saved Wall Street

Richard Whitney was the man who almost saved the market. Leading bankers elected the brokerage founder and New York Stock Exchange vice president to stave off a financial crash on October 24, 1929-Black Thursday. At the trading floor, Whitney placed large orders on blue chip companies at above-market rates. The strategy stabilized the Dow Jones Industrial Average for several days, but on Black Tuesday, Oct. 29, the market collapsed.

Meanwhile, the President of the NYSE, so elected in 1930, "did business in an insolvent condition for 3.5 years," according to 1942 Congressional proposal. He would offset his brokerage's significant investment losses by borrowing from friends, family and business acquaintances. When nobody would loan him more money, he embezzled it from elsewhere, including the New York Stock Exchange Gratuity Fund and the New York Yacht Club, where he was the Treasurer.

Whitney kept the fragile condition of his company a secret until it collapsed in 1938. He served three years in prison and lived the rest of his life as a farmer and textiles business owner.
Bond Fraudsters: Japanese Intrigue

In June 2009, Italian police seized $134 billion in US bearer bonds-1% of the GDP of the United States-from two Japanese nationals, according to the New York Times. The bonds, discovered near the border of Italy and Switzerland, were found under the false bottom of a suitcase. They included 10 Kennedy bonds, worth $1 billion each, and 249 paper bonds worth $500 million each.

The Treasury Department later announced the bonds were fakes, claiming real bonds only run in denominations as high as $10,000. Speculation as to why anyone would attempt to counterfeit such bonds runs rampant. One Italian official suggested that the bonds "may have been useful to guarantee business deals among people who don't use cash," writes the New York Times. Or that Italians wanted the money. (Italian law dictates that Italy receives 40% any amount of money smuggled into the country worth more than $10,000 euros.)

Where are the two men now? Nobody knows. Nobody ever arrested them.
Charles Keating: S&L Guru

Like many newly deregulated savings and loan associations (S&Ls) of the 1980s, Charles Keating's Lincoln Savings and Loan aggressively invested its federally-insured deposits into land, real estate development and junk bonds. In 1985, a federal law limiting S&Ls' direct investments to no more than 10% of their deposits, put Lincoln -- which had accrued heavy debt -- on the federal audit radar. Investigators from the Federal Home Loan Bank Board (FHLBB) found that Lincoln had failed to report $135 in losses and had invested $600 million over its 10% limit.

Keating fought the charges by playing political chess. He tried to hire away FHLBB members and their families. He convinced President Regan to appoint a real-estate developer ally to the FHLBB. He also commissioned a study by Alan Greenspan, an independent economist at the time, proving the harmlessness of direct investments.

When none of that worked, Keating reached into his pockets and donated a total of $1.3 billion to five US senators, the "Keating Five," in an effort to stop the investigation. Keating rounded it all out by suing the FHLBB.

In 1988, the FHLBB forgave Lincoln of all its violations. Nonetheless, Lincoln collapsed in 1989, costing the federal government $2 billion. Keating served four years of a 12-year sentence before his conviction was overturned. He was sentenced again in 1999. A Senate Ethics Committee investigation the "Keating Five" doled out the worst punishment to Sen. Alan Cranston of California, who received a verbal reprimand.
Ameriquest: The Predator

Ameriquest used to tout itself as the "proud sponsor of the American dream." These days, the now-defunct lender might as well call itself the proud sponsor of the American subprime crisis. The predatory lender's Red Bull-swigging, boiler-room culture, as described by the Los Angeles Times, produced more than $80.6 billion in subprime loans between 2005-07. The company's rigmarole included forging documents such as appraisals, providing loans to people with bad credit, hard-selling refinances and padding mortgages with hidden fees and rates, writes the LA Times.

Founder Roland Arnall, who made billions from Ameriquest, admitted no wrongdoing when he settled a $325 million lawsuit against Ameriquest in 2006. George W. Bush appointed him US Ambassador to the Netherlands the same year. Arnall served for two years before returning to the US in 2008, also the year Citigroup (C) bought Ameriquest. He succumbed to cancer one year later.
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