Equity Funding

1
Equity Funding

• Dr. Donald K. McConnell Jr.

2
Key Facts of the Case

• Goldblum and Levin well-known and respected in
  life insurance industry
• Equity Fundings sales and earnings grew
  dramatically over a short period
• Among 10 largest life insurance companies and
  United States in 1972
• Company actually technically insolvent
• Goldblum sustain market price of company stock
  at all costs
• Massive collusive fraud and rampant amoral
  corporate culture

3
Key Facts (con.)

• Fraud revealed to SEC by disgruntled employee
• Goldblum, Levin, 20 others convicted
• Goldblum four years
• Levin two years
• Despite expressed remorse, both later involved
  in additional frauds
• After Goldblums release, Seidman Seidman
  resigned audit of client whose CEO he became
• mid-1990s Goldblum key participant in largest
  workers compensation fraud in California history

4
Key Frauds Fictitious Insurance Policies
Underwritten

• Equity Funding created fictitious life policies
  to maintain revenue growth
• Offsetting debits were to non-existent
  investments
• Allegedly controlled by state insurance boards
• What is best way to audit such debits?
• Confirmation with state boards of insurance
• Equity Funding officers provided auditors with
  bogus PO addresses
• P.O. Boxes actually maintained by officers of
  Equity Funding

5
Key Frauds Fictitious Death Claims

• To make the fictitious life policies look
  realistic
• So that analytical ratios would not show anomaly
  between premiums earned and loss expenses paid
  out
• Cookie Jar Caper

6
Key Frauds Reinsurance Fraud

• Equity Funding able to generate positive cash
  flow from fictitious insurance policies!
• Accomplished through fraudulent reinsurance
  practices

7
AICPA Study of the Equity Funding Debacle

• Major conclusion
• Massive interdepartmental collusive fraud
  perpetrated against auditors
• Audits cannot be expected to detect clever
  collusive fraud
• One audit breakdown cited
• One auditing firm there had been several had
  not locked up work papers
• Auditors spirited away to elaborate luncheons
• Midnight file stuffing parties