5 biggest stock scams that investors wish were April Fools’ Day hoaxes

Highlights

• Any day can turn out to be an April Fools’ Day for an investor who is inexperienced and who tests the depth of the water with both legs.
• Diversification of one’s portfolio is always a safe bet.
• The year 2002 proved to be the worst year for US investors as another blue-chip company sank investors by siphoning their money through fraudulent loans and stock sales.

History is witness to stock scams that have wiped away the fortunes of gullible people who trusted these companies until the day arrived, giving them the shock of their lives.

Looking at these past disasters can save current investors from being duped the way their predecessors had to deal with.

Enticed into investing, these shareholders had no idea what was brewing inside.

Here, we will look at the five biggest stock scams in recent times, some of which are too tricky to believe to be true:

1. Enron Corporation

If the phrase “cook the books” became a household term, its credit goes to Enron, the Houston-based energy trading company, which was the seventh-largest company in the United States (based on its revenue) prior to its fall in 2001.

The modus operandi was the involvement of shell companies that camouflaged Enron’s hundreds of millions of debts, keeping the investors in the dark. It fooled the investors and analysts who took the company as very stable. It was only when the share price tanked from over US$90 to less than 30 cents, the whole nation woke up with a jolt.

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2. WorldCom

Following close on the heels of Enron, telecom giant WorldCom also rocked the stock world with its own style of “book-cooking” that recorded operating expenses as investments.

The company grossly inflated profit figures, guising with tricky accounting, while showing US$3.8 billion of operating expenses as investments for several years. 

At the receiving end were the employees who became jobless when the company went bust in 2002, along with the investors who suffered insurmountable losses as WorldCom’s stock price plummeted from over US$60 to less than US$1. 

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3. Tyco International

The year 2002 proved to be the worst year for US investors as another blue-chip company sank investors by siphoning their money from Tyco in the form of fraudulent loans and stock sales.

CEO Dennis Kozlowski was the kingpin, who, along with CFO Mark Swartz and CLO Mark Belnick, gobbled US$170 million in low-to-no interest loans without the consent of shareholders. They funded their lavish lifestyle with the investors’ money until the fraud came to light with Tyco shares hitting the nadir. The share price dropped nearly 80% within a span of six weeks in 2002 creating a furor among investors.

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4. HealthSouth

As one of America's largest providers of healthcare services, HealthSouth enjoyed rapid growth and acquired several other firms in the healthcare-related business.

In the late 1990s, CEO and founder Richard Scrushy began to order his employees to inflate revenues and overstate HealthSouth's net income to lure unsuspecting investors.

The lid was blown off the irregularities when in March 2003, the SEC announced that HealthSouth exaggerated revenues by US$2.7 billion.

The information leaked when the CFO William Owens, along with the FBI recorded Scrushy talking about the fraud. Soon after, the stock hit rock bottom falling 97% to as close to 11 cents in a single day.

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5. Bernard Madoff

Bernard Madoff was a former chair of the Nasdaq who founded the market-making firm Bernard L. Madoff Investment Securities. He was running a vast Ponzi scheme in 2008 when he was 70 years of age. He hid his hedge fund losses from his investors and duped them out of close to US$50 billion which led to his arrest on December 11, 2008.

Bernard was sentenced to 150 years in jail, and he died in prison on April 14, 2021, at the age of 82.

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Bottom line:  

These companies always point toward one thing- investing in stocks is tricky and requires in-depth knowledge of the market. Any day can turn out to be an April Fools’ Day for an investor who is inexperienced and who tests the depth of the water with both legs. Diversification of one’s portfolio is always a safe bet.