3) EFCA financial frauds
Equity Funding Corporation of America (EFCA) began selling life insurance in the early 1960s with an innovative twist that combined the safety of traditional life insurance with the growth potential of stock mutual funds. The company would sell a mutual fund to a customer, who would then borrow against the fund to purchase life insurance.
The fraud began in 1964 when EFCA was bumping up against a deadline to complete and issue its annual report. The company’s new mainframe computer couldn’t produce the needed numbers in time and Stanley Goldblum, the CEO of the company, ordered fictitious accounting entries made to the company’s financial statements to meet the deadline.
Goldblum and other employees of EFCA continued this fraud by creating phony life insurance policies to produce revenue to back up these earlier false entries. The company then reinsured these fake policies with a number of other insurers and even faked the deaths of some of these nonexistent individuals.
The fraud eventually reached mammoth-sized proportions, with tens of thousands of phony insurance policies and nearly $2 billion in nonexistent revenues over a multi-year period.
In 1973, a disgruntled ex-employee, who had been fired, reported the scheme to Ray Dirks, a Wall Street analyst who covered the insurance industry.
The case led to the establishment of a new legal precedent regarding insider trading. The fraud at EFCA is considered by some to be the first computer-based fraud, as the creation of phony documents needed to back up the phony policies became so cumbersome that the company started using computers to automate the deception.
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