A quarter century of financial fraud

A quarter century of financial fraud

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Bernie Madoff and Ken Lay may be top of mind when it comes to financial scoundrels, but they certainly had plenty of company in the last 25 years.

From the savings and loan debacle to the financial crisis and its years of fallout, opportunities for roguery have abounded since the late 1980s, and a bumper crop of scoundrels has taken the advantage. Here's a sampling of the baddest actors of the last quarter century, and a few institutions that tripped up as well.

—By Kelley Holland, Special to CNBC.com
Posted 29 April 2014

CORRECTION: The slide on page 6 has been revised to correct the year Lay and Skilling were convicted to 2006.

Michael Milken

Michael Milken, chairman of the Milken Institute.
Jonathon Alcorn | Bloomberg | Getty Images

With his X-shaped trading desk at Drexel Burnham Lambert and his legendary deal-making, Michael Milken was at the epicenter of the 1980s junk bond market. He was also at the center of that era's biggest scandals.

In 1989, Milken was charged with 98 counts of racketeering, securities fraud, and other crimes—at the time the largest criminal case in Wall Street history. He ultimately agreed to plead guilty to six criminal charges and pay $600 million in fines. He was sentenced to 10 years in prison (later reduced to two.)

Milken was released from prison after 22 months and shortly afterward was diagnosed with prostate cancer. Although he has been banned for life from the securities business, he is a philanthropist and sponsors the closely watched Milken Global Institute Conference.

Charles H. Keating Jr.

Margaret Thomas | The Washington Post | Getty Images

Charles H. Keating Jr. became the face of the savings and loan scandal after Lincoln Savings & Loan failed, leaving taxpayers with a $3.4 billion tab and vaporizing the savings of depositors who bought bonds of Lincoln's parent. It was the largest thrift failure in an industry collapse that cost American taxpayers roughly $120 billion.

Keating was convicted on federal racketeering charges and spent close to five years in prison before his conviction was overturned. He later pleaded guilty to four counts of fraud.

Keating died in early April at age 90.

Nicholas Leeson

Former rogue trader Nick Leeson speaks addresses a packed audience at a business seminar in Hong Kong on June 03, 2008
Mike Clarke | AFP | Getty Images

In 1995, a 28-year-old derivatives trader at a centuries-old British bank did the unthinkable: He sank it.

Nicholas Leeson, who rose through the ranks to head Barings Bank's operations on the Singapore International Monetary Exchange, made huge bets on the direction of Japanese stocks and interest rates. When the markets moved against Leeson and he racked up losses approaching $1.4 billion, he left a note on his desk saying, "I'm sorry," and fled the country with his wife.

Leeson was arrested in Germany and after a plea bargain in a Singapore court, he spent several years in prison. He wrote a memoir, "Rogue Trader," while serving his time, and he is now a regular on the after-dinner speaking circuit.

John Rigas

Adam Roundtree | Bloomberg | Getty Images

The son of Greek immigrants, John Rigas worked in his youth at his family's movie theater. When the family acquired a small cable TV franchise, Rigas built Adelphia Communications into one of the country's largest cable providers.

Things came crashing down in 2002, when Rigas was indicted for bank fraud, wire fraud, and securities fraud. His sons Michael and Timothy, along with two colleagues, were charged with participation in the schemes. (Michael was later acquitted.) After John Rigas was convicted in 2004, Adelphia quickly filed for bankruptcy protection when it became clear that the Rigases had taken out more than $3 billion in loans from the company that were not recorded.

Rigas, now nearing 90, is still in prison.

Jeffrey Skilling and Kenneth Lay

From left: Jeffrey Skilling and Kenneth Lay
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For years, it seemed the energy company Enron could do no wrong. With Kenneth Lay as chairman and Jeffrey Skilling as chief executive, the company reported rapid increases in revenue and earnings, and its stock soared.

Then Skilling left the company and questions surfaced about Enron's unconventional accounting practices. The company in late 2001 restated prior years' results, reducing earnings by more than $600 million. The Securities and Exchange Commission stepped in, Enron's stock price plummeted, and by the end of the year, it was in bankruptcy protection. Enron also took down the accounting firm of Arthur Andersen and wiped out the retirement savings of thousands of employees.

Lay and Skilling were tried together in Houston, and in May 2006 they were convicted on numerous criminal charges. Lay died before he could be sentenced and Skilling's jail term was recently reduced, but he remains in prison.

Richard Scrushy

Richard Scrushy, founder of HealthSource Corp., and his wife, Leslie, arrive for sentencing at the federal courthouse in Montgomery, Alabama, on June 28, 2007.
Dana Mixer | Bloomberg | Getty Images

HealthSouth, a rehabilitation services company, grew rapidly after its founding by Richard Scrushy, a high school dropout who became a businessman and minister. As early as 1989, however, there were questions raised about the company's finances.

In 2004, Scrushy was charged with multiple counts of fraud in connection with HealthSouth. He was acquitted on all 36 counts, handing the government a defeat in its attempt to force better internal corporate controls under the Sarbanes-Oxley Act.

A year later, however, Scrushy was convicted of bribery and other charges related to payments to former Alabama Gov. Don Siegelman. Scrushy has now served his multiyear prison term, but he has been ordered to repay more than $2 billion in restitution for the HealthSouth debacle.

Bernie Ebbers

Bernie Ebbers
David Karp | Bloomberg | Getty Images

In his youth, working as a milkman and a bouncer, Bernie Ebbers didn't seem particularly cut out for corporate life. Later, as a founder and chief executive of WorldCom, a telecom company, Ebbers oversaw a rapidly growing enterprise—until an $11 billion accounting fraud was discovered.

Ebbers was convicted on nine felonies and sentenced to 25 years in prison, where he remains. The remnants of WorldCom are now part of Verizon Communications.

Dennis Kozlowski

Dennis Kozlowski
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Not many corporate chieftains are known for their shower curtains, but then again, a $6,000 shower curtain doesn't come along every day.

That infamous curtain was just one extravagance found in the Manhattan apartment of Dennis Kozlowski, the former chief executive of Tyco International. Kozlowski and his top lieutenant were accused of stealing $150 million from the company and other wrongdoing and convicted in 2005.

Kozlowski was sentenced to 8 1/3 to 25 years in prison, but was recently released on parole. And a judge ruled earlier this year that the shower curtain, which has been held in storage by prosecutors, should be restored to Tyco.

Bernard Madoff

Bernard Madoff in 2009
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As the mastermind of a Ponzi scheme once estimated at over $60 billion, Madoff stands as one of the most notorious criminals in financial history. Madoff's firm was revered for its steady returns, and investors clamored to be allowed to invest with him, until his own sons turned him in.

Madoff pleaded guilty in 2009 and was sentenced to 150 years in prison. One of his sons has since committed suicide.

The amount recovered for victims has exceeded expectations: Of $17.5 billion in actual losses, more than $9 billion has been recovered, along with another $4 billion in fines and penalties.

Angelo Mozilo

Angelo R. Mozilo, founder and former CEO, Countrywide Financial Corporation
Tim Sloan | AFP | Getty Images

Countrywide Financial was once among the country's biggest mortgage lenders, but when it ventured into subprime lending and other risky businesses, it headed for a fall.

Countrywide's chief executive, Angelo Mozilo, fell right along with his company. There were no criminal charges brought against him, but the Securities and Exchange Commission brought a civil fraud case against him, charging that he and several colleagues hid Countrywide's problems from investors and enjoyed improper gains from insider stock sales.

In 2010, Mozilo paid $67.5 million to settle the case. Countrywide is now part of Bank of America.

Jerome Kerviel

French rogue trader Jerome Kerviel (L) arrives on July 4, 2013 in Paris, at the Prudhommes court.
Francois Guillot | AFP | Getty Images

There are bad trades, and then there are really bad trades. Jerome Kerviel racked up an estimated 50 billion euros in unauthorized open positions as a trader for Societe Generale, costing the bank 4.9 billion euros and nearly bringing it to its knees.

Kerviel was convicted on multiple counts, sentenced to three years in prison, and order to pay 4.9 billion euros in restitution to SocGen. He is on a nearly 900–mile walk from Rome to Paris to protest what he calls the "tyranny" of financial markets as described by Pope Francis. France's highest court recently ordered a review of the fine.

Raj Rajaratnam

Billionaire Galleon Group hedge fund co-founder Raj Rajaratnam departs Manhattan Federal Court during his trial March 23, 2011, in New York City.
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As a co-founder of Galleon Group, one of the world's largest hedge funds, Raj Rajaratnam looked like a brilliant investor. But maybe it was just the extra help he had.

Using wiretaps over nine months, government investigators heard Rajaratnam openly swap insider trading tips with corporate insiders and others. He was charged with 14 counts of fraud and conspiracy, and in 2011 he was convicted on all counts.

He is currently serving an 11–year prison sentence.

Rajat Gupta

Rajat Gupta
Peter Foley | Bloomberg | Getty Images

As the former worldwide managing director of McKinsey, Rajat Gupta advised corporate leaders the world over and amassed a fortune. So why he got involved with insider trading is a bit of a mystery.

Nonetheless, get involved he did, providing tips to Rajaratnam about companies where he was a director. The Securities and Exchange Commission in 2011 filed a civil administrative proceeding against Gupta, and in 2012 he was convicted of three counts of securities fraud and one of conspiracy.

Gupta's conviction was upheld by an appeals panel earlier this year, and he has agreed to surrender in June to serve a two year sentence.

Fabrice Tourre

Fabrice Tourre.
Peter Foley | Bloomberg | Getty Images

"Fabulous Fab," as Fabrice Tourre called himself, was not really all that. While a vice president at Goldman Sachs, Tourre was involved in marketing a complicated mortgage deal called Abacus 2007-AC1. The problem, according to the Securities and Exchange Commission, was that investors were never told that a large hedge fund was planning to short the securities in Abacus.

In the end, the hedge fund netted about $1 billion from the deal, while those on the other side of the trade lost the same amount, according to the SEC.

In March, a federal judge ordered Tourre to pay $825,000 in penalties and other costs as the result of a civil suit the SEC brought against him, and forbade Goldman from covering the payments.

Tourre is now earning a doctorate in economics at the University of Chicago. He had been slated to teach an undergraduate course beginning March 31, but just weeks before its start, the university reversed course and said he would not be teaching.

Big banks

Jsmith | E+ | Getty Images

The financial crisis was notable for many things, not least the paucity of criminal convictions related to the years of trading excesses. Still, several large institutions took their lumps—in a way. Here's a sampling.

JPMorgan Chase in 2013 reached a deal with the Justice Department in which, the government said, the bank "acknowledged it made serious misrepresentations to the public" about the quality of mortgages it sold to investors, and agreed to pay $13 billion to settle related charges. (Some of the mortgages were marketed by banks later acquired by JPMorgan.) Attorney General Eric Holder said the deal did not release JPMorgan from any possible criminal liability.

Bank of America in March agreed to pay $9.5 billion to settle lawsuits by the Federal Housing Finance Authority claiming the bank had misrepresented the quality of nearly $60 billion of residential mortgage backed securities. (Some of those mortgages were marketed by Countrywide Financial before it was acquired by BofA.) The bank still faces a Justice Department lawsuit.

Five banks—Bank of America JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial—greed to a $25 billion settlement with state attorneys general and federal agencies to address wrongdoing related to foreclosures and mortgage loan servicing abuses.

Goldman Sachs agreed to pay $550 million to settle SEC charges that it misled investors about a subprime mortgage product. (See Fabrice Tourre, above.)