8 Examples of Business Fraud You Should Learn From

  • Nov 21
8 Examples of Business Fraud You Should Learn From

On average, fraud schemes cost businesses somewhere between a median $115,000 and $125,000 annually. However, some schemes run for decades, pushing losses into the range of billions of dollars, especially for larger corporations. Of course, there are many types of fraud, ranging from bribery to financial statement concealment. And some of the largest historical examples of fraud cover a wide range of these methods.

So, we’ve put together a short list of eight business cases to help you understand not only the signs to look for to prevent fraud but also the cost for bad actors. After each case, we’ve also included links to more in-depth information about each scheme and the results.

Major Case Examples of Fraud in Business

1. Fyre Festival

One of the most recent examples of fraud was that of Fyre Festival, a purported luxury music festival from 2017. Founded by Billy McFarland and Ja Rule, an influential rapper, tickets cost up to $100,000.

The festival was to take place on the Bahamian island, Great Exuma, where guests would find lavish accommodations. They were promised great food, beautiful art and music, and a once-in-a-lifetime adventure. Attendees were also urged to prepay $300-$500 for every day they planned to spend there. However, of the roughly $2 million collected from these prepayments, roughly 40% went toward paying off a short-term loan.

When guests arrived at the island, the festival site was in complete disarray, with rough-shod tents and mattresses left out on the wet ground. The only food provided were packaged sandwiches of bread and cheese, and luggage was thrown haphazardly into an unlit lot.

Acts for the festival quickly pulled out, and the only band to play was a local act.

The next morning, the festival was “postponed”. However, many attendees found themselves stranded as flights to and from Great Exuma were canceled. The poor conditions left some guests hospitalized, and multiple lawsuits followed.

Eventually, the prosecutors dropped the case against Ja Rule. Billy McFarland received a six-year prison sentence. However, he only served four. As of 2023, he still owes $26 million in restitution.

2. The Enron Scandal

In the late 1990s, Enron was one of the most powerful U.S. businesses. However, in 2001, it basically collapsed overnight as a series of corrupt practices came to light.

The company, originally formed in 1985 as part of a merger, shifted in 1992 to a approved mark-to-marketing accounting method. This essentially allowed Enron to enter estimated future profits as actual earnings for the current year. So, while the company was making far less than reported, investors saw major opportunity with a burgeoning business. Enron further abused the option to distribute assets to special purpose entities (SPEs), transferring toxic or troubled assets there to keep them off-book.

Finally, the corruption came to a head in late 2001, when Enron announced a $638 million loss for the third quarter. This came after analysts started looking into publicly released financial statements. Eventually, the SEC also investigated different transactions between Enron and its SPEs.

As a result, the company’s stock price went into freefall, dropping from $90.75 per share to just $0.26 before its ultimate collapse. Shareholders filed a $40 billion lawsuit against Enron, and the CEO and CFO both went to prison.

The scandal resulted in new legislation designed to increase accuracy in financial reporting, including the Sarbanes-Oxley Act that levied harsh penalties for destroying, altering or fabricating financial records.

3. ZZZZ Best

ZZZZ Best was a carpet cleaning company set up in 1982 by 16-year-old Barry Minkow. Although it experienced initial difficulties, it eventually branched into carpet restoration for insurance firms. It’s best client at the time was called Interstate Appraisal Services. However, there was one major problem. That company didn’t exist. It was another firm set up by Minkow.

With purported buy-in from large clients, Minkow took loans from various figures, moving money around between different accounts. This convinced banks to lend him even higher sums. While active, ZZZZ Best was the central figure in a credit card scheme involving over $70,0000 in fraud charges. He repaid all the victims except one, which proved to be his eventual undoing.

Owed several hundred dollars, this person investigated ZZZZ Best, exposing other instances of fraud. This led to a sharp decline in stock price, and lenders began calling their loans. Unable to pay, the truth came out that the company’s investors were fictitious.

As a result of the Ponzi scheme, Minkow served 25 years in prison. Though initially appearing reformed, he was eventually convicted again on a separate charge of fraud in 2011. He served another five years for that incident. Overall, he was ordered to pay back $612 million in restitution.

4. Theranos

Another recent entry for our examples of fraud is Theranos, a medical startup formed by Elizabeth Holmes at the age of 19. Theranos promised to revolutionize blood testing with the proposition of the Edison machine in 2014. It claimed to test for over 240 different conditions with a single pinprick of blood rather than the vial required of other competing machines.

Holmes managed to raise over $700 million in investment funding, and the company itself was valued at $9 billion.

The major issue was that the company’s Edison machine proved unable to perform more than 200 of the blood tests it promised. Furthermore, those it could handle were extremely flawed, leading to misdiagnosis in potentially life-threatening cases.

John Carreyrou, a Wall Street journalist, broke the story in 2015, led by a tip of nonconfidence in the machine. He was also suspicious of Holmes herself, wondering how she could design such a product after only two semesters of Chemical Engineering classes at Stanford.

Former employee whistleblowers eventually revealed a litany of lies told to board members. They also noted a culture of intimidation and secrecy, and that incorrect test results were knowingly sent to patients.

Though she at first denied the claims, Holmes stepped down in 2018 and went to trial in 2021. The jury found her guilty on four charges of defrauding investors. As a result, she was sentenced to eleven years in prison in 2022 and ordered to pay $452 to victims of the scheme.

5. Wirecard

Until recently, Wirecard was Germany’s fastest growing fin-tech company. Formed in 2000, it quickly earned the confidence of the Germine elite as a European response to PayPal. However, in 2020, after EY refused to sign off on fiancial statements from 2019, the company announced that nearly two billion euros were missing from Singaporean accounts. This was the sum total of what it had ever claimed making for profits.

In fact, the money had never existed.

Jan Marsalek, COO of Wirecard, subsequently fled and is still a fugitive, assumed to be hiding in Russia. Afterward, the company filed for bankruptcy, and multiple individuals were charged. Many received prison sentences, including Markus Braun, the CEO.

Essentially, various accounting irregularities and other corrupt practices led to whistleblower complains that helped bring about the downfall of the company.

6. Luckin Coffee

Luckin Coffee, a Chinese rival to Starbucks, was founded in 2017. However, it was found to have inflated its reported revenue by more than $300 million in 2020.

During the time that this scheme occurred, it raised over $684 million from investors. However, after being sued by shareholders, its stock plummeted by about 81% in a matter of two months.

Eventually, the company settled for a $180 million penalty in a class action lawsuit. Unlike many of the other business in these examples of fraud, Luckin Coffee has made a comeback since the scandal. At the end of 2022, the company had a valuation of roughly $4.4 billion.

7. Airbus

Cutting right to the chase, Airbus is a French maker of civilian and military aircraft which paid bribes to China and other nations. They then concealed those bribes, hoping to expand business in various regions. Furthermore, they falsely reported information about their conduct to the U.S. for over five years in order to secure export licenses for military tech.

The company paid roughly $4 billion worldwide, with $582 million going to the U.S. A plea agreement was reached so that Airbus could avoid criminal prosecution and continue operations in the states, seeking public contracts. As of 2023, the company’s three-year probation period has ended in the U.K., France, and the U.S.

Unfortunately, bribery is one of the most common examples of fraud found the world over. And different cultural factors that normalize this behavior easily contribute to different instances. If you want to know more about how business and culture impact one another, check out our course on the topic.

8. Bernie Madoff

Finally, we come to the last in our examples of fraud. Bernie Madoff was an American financier who, potentially for decades, executed the largest Ponzi scheme in history.

He attracted investors with false claims of generating large returns using legitimate trading strategies. However, in reality he pushed all the funds into one bank account. Whenever clients opted to cash out, he would use this account to pay them, relying on future investors to replenish funds.

When the 2008 recession hit, he was unable to keep up with the cash-out payments and confessed the scheme to his sons. They subsequently reported him, and he was arrested.

The final statements noted Bernie Madoff had $64.8 billion in client assets. Several people committed suicide as a result of the scheme, including one of Madoff’s sons. He was sentenced to 150 years in prison and forced to forfeit $170 billion.

Madoff died while incarcerated in 2021.

Discover Other Major Examples of Fraud

Unfortunately, fraud is widespread, and there are plenty of other cases to examine. That’s exactly what our online course options do, helping reveal the psychology around it as well as prevention methods.

So, if you’re looking to know more be sure to check out our courses today.

Article written by Braden Norwood

Last Updated November 14, 2023