THE CON: Equity Funding sold life insurance policies to other companies for huge commissions. The only problem: more than 60,000 of those policies were fabricated out of thin air. When the con was exposed, $100 million in assets were missing.
THE DAMAGE: $100 million
THE OUTCOME: Equity sold $525 million in life insurance policies and mutual funds - and at least $25 million in counterfeit bonds. Public confidence in the regulation of the insurance industry took a major hit. Equity president Stanley Goldblum got 8 years and a fine of $20,000. Five other top execs served sentences ranging between 3-7 years.
Before the fraud was exposed in 1973, the Equity Funding Corporation of America sold as many as 60,000 phony life insurance policies and collected millions in death benefits. The con was so outrageous – and drew in so many leaders of the financial and business worlds– people wondered where to place blame. Was it the fault of the auditors who accepted lists of deposit certificates as proof of their existence? The insurance companies that scooped up the fabricated policies? The regulators who failed at their task or the banks that made loans of up to $50 million? Even the computer – a new and unfamiliar tool in 1973 – came under suspicion. Equity Funding used computer codes to track its bogus insurance policies, which caused some to question the machine’s dangerous power. Others saw this view as misguided; an early computer expert told The New York Times, blaming the fraud on computers was “like blaming pencils for all the swindles that happened before.”
No matter how the fraud went unnoticed, Equity's fall was as dramatic as its meteoric rise. The Chicago-based conglomerate, which combined life insurance sales with mutual funds, was flying high at the end of 1968. According to its sales figures, Equity sold $425 million worth of life insurance policies and $100 million in mutual funds. The only hitch was that most of the policies were bogus – complete fabrications sold to other insurance companies for hefty commissions.
To make the sales, the CEO of Equity Funding – a former scrap dealer and meat salesman named Stanley Goldblum – assembled a huge workforce. According to a 1969 article in Forbes magazine, Equity hired 150 new salesmen every month. After the firm's collapse, one newspaper speculated that up to 1,000 people at the company knew about the fraud. These employees kept quiet, perhaps out of fear; intimidation and even threats of violence were rumored to have kept the scheme running.
Still, it was a disgruntled employee who opened the case up by confiding the truth – that one-third of Equity’s life insurance business was phony – to a well-regarded Wall Street stock analyst. Rather than taking that explosive information to authorities, the analyst told people in his circle what he had learned. Virtually overnight, Equity stock plummeted from $28 to $14, prompting the New York Stock Exchange to halt trading. Just before the company declared bankruptcy, it was slapped with a handful of fraud charges. Six top executives, including Goldblum, received prison sentences.
Con Timeline: 1968-1973
