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White Collar Fraud

Sam Antar

Crazy Eddie Red Flags

Red Flags Missed by Auditors

Comparable store sales for the fiscal year ended 03/01/87 decreased 1.5% from the prior year. However, inventories in comparable stores increased 92.55%. Inventory in stores observed by auditors increased 70.71%, while inventory in comparable stores not observed by auditors increased 195.16%. Overall, Crazy Eddie inflated its consolidated inventories (comparable stores, new stores open during 1987, and warehouse inventories) by approximately $22.5 to $28 million in 1987.

Crazy Eddie Comparable Store Inventory Red Flags by Sam Antar

Red Flags Missed by Auditors and Investors

The increases in inflated inventory amounts from 1985 to 1987 made it appear like Crazy Eddie was taking longer periods of time to turnover its inventory. The understatements of accounts payable mainly due to booking fictitious purchase discounts and trade allowances in 1987 decreased the account payable-to-inventory ratio.

Notes:

Days-sales-inventory (DSI) = (Average inventory/cost of goods sold during period) X Number of days in period.

Average inventory = (Beginning Inventory balance + ending inventory balance)/2

A consistently rising DSI is a red flag for possible overstatement of inventory amounts.

Red Flag Spotted, but Widely Ignored

Thorton L. Oglove was the only analyst who correctly noted and went public with concerns about Crazy Eddie’s troubling growth in inventory in relation to sales. According to Crain’s New York Business, “he noticed that for the fiscal half ended Aug. 31, Crazy Eddie’s sales had risen 41%, while inventories had mushroomed 147%. Previously, sales and inventories had generally moved in unison.” However, his concerns were widely ignored by investors.

Why it’s important to read and compare the footnotes in financial reports

In 1987, Crazy Eddie changed one word in its footnotes to overstate income by $20 million.

Annual Report Fiscal year 1986:

Purchase discounts and trade allowances are recognized when received.

Up until 1986, discounts and trade allowances were not recognized as income until a credit memo acknowledgment was actually received from a vendor, even if the discount was already earned.

Annual Report Fiscal year 1987:

Purchase discounts and trade allowances are recognized when earned.

Starting in 1987, Crazy Eddie immediately recognized discounts and trade allowances as income when earned. We did not have to wait for a credit memo acknowledgment to arrive from a vendor before recognizing a purchase discount or trade allowance. Instead, we could recognize them as income as soon as we claimed that they were earned by us or owed to us. The change in accounting policy enabled Crazy Eddie to recognize discounts and trade allowances faster and also inflate income by creating $20 million in fictitious discounts and trade allowances due from vendors.

More details of the techniques involved in Crazy Eddie’s accounting fraud can be found on the Crazy Eddie Fraud page.

See Appendix C – Frequently Asked Questions

Written by, Sam Antar

© Copyright by Sam Antar. All rights reserved.

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White-Collar Crime

  • Crazy Eddie CFO: ‘We are in the golden era of white-collar crime’ – CNN Inside Wall Street, November 17, 2014
  • Crazy Eddie fraudster says SEC can’t keep up – MarketWatch, June 7, 2013
  • Crazy Eddie’s Cousin Sam Sees Greater Potential for Fraud – Accounting Today, June 29, 2012
  • Crazy Eddie’s Insanely Successful Criminal Enterprise – Mental_Floss, March 31, 2016
  • Crazy Like A Fox, Guess who’s tipping off the SEC on alleged accounting frauds? None other than the guy who cooked the books at Crazy Eddie – Crain’s NY Business, October 5, 2009
  • Convicted Felon, Former Crazy Eddie CFO, Sam Antar, Talks to Lauren Lyster About Accounting Fraud – Zero Hedge, August 3, 2012
  • Country Club Sopranos – Village Voice, October 31, 2012
  • A Few Words from a Fellow Fraudster – Gawker, December 24, 2008
  • Financial fraud — accounting for criminals – CNN, October 9, 2009
  • How to Be a Better Bean Counter – NY Times, July 16, 2005
  • Inside The Mind Of A Financial Criminal – NPR Planet Money, July 5, 2011
  • ‘On Like Donkey Kong’: How a Dubious Super PAC Boosted a Questionable Penny Stock – ProPublica, May 27, 2016
  • Redemption and the white-collar criminal – CNN, October 2, 2009
  • Sam Antar: The CFO behind the Crazy Eddie’s fraud – MarketWatch, July 29, 2014
  • Sam E. Antar, Con With A Conscience: Decoding the Deception – Northern Hoot, February 17, 2015
  • Special Report: From Hannibal Lecter to Bernie Madoff – Reuters, April 20, 2011
  • Still Searching For Repentance – Jewish Week/Times of Israel, September, 22, 2009
  • The 25 Most Dangerous People in Financial Media – Huffington Post, June 18, 2012
  • The bold and the gullible: the incredible story of Crazy Eddie [Part I], Sean Munger, January 15, 2018
  • The bold and the gullible: the incredible story of Crazy Eddie [Part II], Sean Munger, January 18, 2018
  • The bold and the gullible: the incredible story of Crazy Eddie. [Part III], Sean Munger, February 1, 2018
  • When Sam Antar Speaks, People Listen…and Speak Their Mind – Forbes, March 5, 2012
  • White Collar Crime 101: How to Defraud a Company – Wall Street Journal, July 29, 2014
  • Why Drug Lords and Criminals Are So Risk-Averse – Bloomberg, February 21, 2014
  • Why is Bank Leumi telling foreigners to close their accounts? And what’s the link to Israel’s malignant black economy? – The Times of Israel, September 12, 2016

Government Corruption

  • Crazy Eddie’s cousin stars in state Republican hearing on public corruption – Atlantic City Press, August 17, 2009
  • ‘Crazy’ Eddie’s Cousin, a Former Fraudster, Speaks Out on Syrian ‘Subculture of Crime’ – Jewish Daily Forward, August 26, 2009
  • Witness: Treat corrupt pols as we do serial killers – Asbury Park Press, August 19, 2009

Overstock.com Fraud

  • Overstock.com Accounting Fraud
  • White Collar Fraud Blog Archive – Overstock.com
  • Crazy Like A Fox, Guess who’s tipping off the SEC on alleged accounting frauds? None other than the guy who cooked the books at Crazy Eddie, by Aaron Elstein, Crain’s NY Business, October 5, 2009
  • Contemporary Auditing, 11th Edition, by Michael C. Knapp, Section 2.11: Overstock.com
  • Selling America Short: The SEC and Market Contrarians in the Age of Absurdity, by Richard Sauer, Chapter 12: The Overstock Flame Wars

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