Financial FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Nicole Billick Dwain Carryl Ian Lyngen

Financial FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Background Anthony DeAngelis One of the biggest con artists in market history, aka The Great Salad Oil Swindler Allied Crude Vegetable Oil Refining 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 FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Inventory Overstatement Scheme Warehousing receipts for ~1.8 billion pounds missing oil Warehousing companies trusting, kept blank receipts unlocked The rest was about deceiving auditors – disguising how much oil was actually in tanks Just add water Welded vertical pipes Tape measure Phantom tanks Repainting the numbers Pumps

Financial FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Result American Express Allied Crude Vegetable Oil Refining Tino Brokerage firms - Williston and Beane & Ira Haupt and Co

Financial FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Detection Tino DeAngelis’ dreamed of cornering the market, and to achieve this he needed to own all of the supply. 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. 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 FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Audit Reveals… 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 Overshadowed the scandal in the financial markets. But Tino De Angelis still saw justice, sentenced to seven years in federal prison.

Financial FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud Conceptually What Went Wrong? 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 FraudFebruary 9, 2004 The Salad Oil Scandal Financial Fraud How Could This Fraud Have Been Prevented? SEC Suggests seven steps : 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: 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.