Corporate Fraud, Research Paper Example

Corporate fraud is rampant in the United States, from small companies defrauding investors to large financial institutions whose activities have nearly crippled the U.S. economy, as exemplified by the economic crash of 2008. This paper focuses on the relatively small case of Edward Ehee and Viper Capital Management. It demonstrates how easily some companies and individuals can dupe people into giving up millions of dollars to schemes that are designed solely to fleece the unwitting and ill-informed investor.

On February 12, 2009, the New York Times ran a story entitled “FBI probes 530 corporate fraud cases.” The story broke on the same day that it was revealed that the wife of Bernie Madoff, the now-imprisoned investment manager who stole billions of dollars from his clients, withdrew $15 million in the days before his arrest (Wash. Times; 2009). Were Mrs. Madoff’s actions mere coincidence? It certainly seems unlikely, though to date, Mrs. Madoff has never been charged with any criminal offense. In recent years, the news has been dominated by stories of corporate and financial malfeasance. Financial companies created so-called “bundled” investments, which included the high-risk loans made to many homeowners, and sold these “financial instruments” to investors with the assurance that they were safe. These investments, in fact, helped to contribute to the financial round-robin that caused the housing bubble, and led to the crash of 2008. At the same time, hundreds of companies were duping investors in other ways, by using investor’s money in Ponzi schemes, or simply spending it. One such company, Viper Capital Management, was actually just the public face of one man: Edward S. Ehee. Though the Justice Department announced his conviction for corporate fraud in 2010, his story stretches back almost two decades.

In 1994, a man named Senyon Kim invested money with Mr. Ehee, operating under the impression that Mr. Ehee was a representative of a company called Viper Capital Management; in reality, Mr. Eheewas Viper Capital Management.  By early in the year 2000, Mr. Kim was growing wary of Viper/Ehee, and confronted Mr. Ehee about the situation. Mr. Ehee provided a promissory note in the amount of $300,000, though he later refused to pay Mr. Kim (Shain, 2008).

In July of that same year, Mr. Kim files suit against Viper Capital Management and Mr. Ehee in the State Superior Court of California. Mr. Ehee was also charged with a criminal count of “conversion” (defined as “the unlawful turning or applying of personal goods of another to the the use off the taker…”).  Mr. Kim sued for the amount indicated in the promissory note, as well as $1,000,000 in damages. Ultimately, Mr. Ehee settled the civil case out of court for an undisclosed amount, and the criminal charges against him were dropped (Shain, 2008).

The following year, in 2001, Mr. Eheeagain faced a lawsuit; the plaintiff sued for $9000 in unpaid expenses he claimed he was owed by Mr. Ehee. The plaintiff, Jack Mason, was employed by a company called Serengeti Software, which was tenuously connected to Viper Capital Management. Mr. Mason, concerned about expenses he had incurred in carrying out his work for Serengeti Software, was assured in writing by Mr. Ehee that he would be reimbursed for $8976.69. When he requested his reimbursement, Mr. Ehee failed to pay, and Mr. Mason filed suit in the California court system. Again, Mr. Ehee ended up settling out of court (Shain, 2008).

There were other lawsuits along the way, including one from a Mr. Simon Cho, who claimed he was owed upwards of half a million dollars by Mr. Ehee. Though the specific records of this and several other lawsuits are difficult to track down, it appears that Mr. Ehee was running a classic Ponzi scheme for well over a decade, as he took money in from new investors and used that money both to satisfy earlier investors and to fund his own lavish lifestyle (Shain, 2008).

As a sidenote, a brief explanation of “Ponzi schemes” may be appropriate here. Named after a man named Charles Ponzi, who in 1920 scammed investors for millions of dollars –a phenomenal sum in 1920 dollars- Ponzi schemes involve paying earlier investors with money taken from later investors. Also known as “pyramid schemes,” these scams are almost always the same, with the later investors left carrying the losses of the scam (Shain, 2008). As mentioned in the introduction to this paper, the most infamous Ponzi scheme in history was carried out by Bernie Madoff. For years, Madoff provided astonishingly high returns to his investors, and he became known as “the investor to the stars,” as so many of the elite of Hollywood and the music scene invested money with him. Madoff somehow managed to conduct his nefarious business right under the virtual noses of the Securities and Exchange Commission (SEC) for many years (Wash. Times, 2009).

Like all Ponzi schemes, Madoff’s scheme eventually collapsed. Some Ponzi-schemers may well escape unscathed, but Madoff’s crimes, and the billions he stole, were so spectacular that there was no escape for him. Madoff is now serving life in prison. Apparently scarred by the trauma associated with his crimes, Madoff’s son committed suicide not long after Madoff was imprisoned; investigators do not believe the son was connected to the crimes perpetrated by his father (Wash. Times, 2009).

In 2006, the SEC filed suit against Mr. Ehee and Viper Capital Management. In the press releases surrounding this action, it was announced that the SEC was actively investigating or prosecuting a large number of Hedge fund companies and managers (Anderson, 2006). Hedge funds, loosely defined, are a complicated system of investment strategies designed to take advantage of economic downturns and bear markets. They have grown in popularity in recent decades, largely because some Hedge fund managers have reaped enormous profits for investors (Shain, 2008).

Not all companies or individuals who refer to themselves as “Hedge fund managers” are, in fact, actual Hedge fund managers (Shain, 2008). The complicated nature of Hedge funds, and the promise of potentially enormous profits for investors, means that many of those investors may not actually do any due diligence before investing their money with these individuals or companies (Shain, 2008). Mr. Ehee, for example, represented himself as a Hedge fund manager to the clients he was fleecing, and was in fact labeled as a Hedge fund manager by the SEC when he was charged in 2006 (Anderson, 2006). Just because Ehee described himself as a Hedge fund manager,  however, does not change the fact that he was, according to the available evidence, a mere scam artist.

The 2006 SEC suit filed against Ehee, as well as two companies, Viper Capital Management and Compass Fund Management (both of which seemed to be simply shell names, with no actual employees apart from Mr. Ehee), accused him of bilking 18 investors out of millions of dollars (Anderson, 2006). A New York Times article, dated November 9, 2006, described the manner in which Mr. Ehee took advantage of his investors. Using falsified banking and accounting records, he created the appearance that Viper Capital Management had nearly $20 million dollars on hand, and he offered prospectus documentation to potential investors that described his strategies as “market neutral trading” and “systemic equity trading strategies,” phrases which likely sounded convincing to those unfamiliar with the investment process. According to the New York Times article, Ehee took in roughly $4 million under the Compass Fund name; the article does not specify how much he raised under the Viper Capital name (Anderson, 2006).

Among those who invested with Ehee were a neighbor who handed over his children’s trust fund, and that same neighbor’s mother-in-law, who invested her retirement savings. Under the names Viper Capital Management and Compass Fund Management, Ehee continued to take in millions between 2002 And 2006, using the money both to pay “dividends” to earlier investors and to finance a lavish lifestyle of his own. In addition to using the funds to pay his own mortgage, he also spent money on automobiles, vacations, gambling trips to Las Vegas, and on gifts for friends and family members.Ehee apparently continued taking in money from unwitting investors until the moment he was indicted by the SEC (Anderson, 2006).

Although the actual crimes with which Ehee was charged took place several years ago, it was only recently that the case against him reached a conclusion. The fact that it took such a long time to reach a conviction against Mr. Ehee is a reflection of the complexity both of the judicial system and the actual nature of the crimes Mr. Ehee committed. Forensic auditing of his finances revealed a tangled web of money trails; Ehee diverted and misappropriated funds under various company names and for various purposes as he continued to keep his crimes hidden for many years (Gillund, 2009).

After years of legal wrangling, in 2009 Mr. Ehee pleaded guilty to “wire fraud, tax evasion and making and subscribing a false tax return,” according to a press release from the U.S. Department of Justice. Under the plea agreement, Mr. Ehee was required to detail the ways in which he misused funds for his own expenses, how he paid off earlier investors to keep his scheme afloat, and that he failed to file a Federal income tax return in 2005. He further admitted to falsifying the documents he used to convince investors of the legitimacy of his various companies (Gillund, 2009). Considering all of the possible crimes with which Mr. Ehee could have been charged, his plea agreement seems fairly lenient.

In January of 2010, almost a decade since he began his Ponzi scheme, Mr. Eheewas sentenced for his crimes. According to information provided by the Internal Revenue Service, Ehee was sentenced to serve four years and three months in Federal prison, followed by a three-year period of supervised parole. In addition to his prison sentence, Ehee was ordered to pay restitution of approximately $4 million to the 18 investors he bilked, though how he will be able to pay such restitution remains to be determined (IRS.gov, 2010).

Sadly, the case of Mr. Ehee is just one of literally hundreds and hundreds of cases uncovered or being actively investigated by agencies such as the IRS and the SEC (Wash. Times, 2009). How many more remain unseen, as unwitting investors hand over their hard-earned savings, remains a mystery. What’s worse is that the Ehee case is actually small-time as compared to much of the corporate malfeasance that has gone on over the last decade, and that continues to this day. With financial institutions running wild, and corporate profits at record highs, the United States economy itself is beginning to look like a Ponzi scheme. Unfortunately, history has proven that, like a house of cards, such schemes always collapse eventually.

Bibliography

Anderson, J. . (2006, November 9). S.e.c. accuses hedge fund manager of deceiving investors . The New York Times. Retrieved from http://query.nytimes.com/gst/fullpage.html?res=9A05E2D91E3FF93AA35752C1A9609C8B63

Fbi probes 530 corporate fraud cases. (2009, February 12). Washington Times. Retrieved from http://www.washingtontimes.com/news/2009/feb/12/fbi-investigating-530-corporate-fraud-cases/

Gillund, J. U.S. Department of Justice, (2010). San ramon man pleads guilty to wire fraud, tax evasion. Washington, D.C.: Retrieved from http://www.justice.gov/usao/can/press/2009/2009_03_13_ehee.guiltyplea.press.html

Irs.gov: examples of corporate fraud investigations – fiscal year 2010. (2010, October 15). Retrieved from http://www.irs.gov/compliance/enforcement/article/0,,id=213768,00.html

Shain, R. (2008). Hedge fund due diligence: professional tools to investigate hedge fund managers. (pp. 90-104). Hoboken, NJ: John Wiley & Sons, inc.