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Friday, July 5, 2013

Our Superegos Are INSAAAAAANNNNNNNE

You have all but certainly, at some point, run into the crazed-car-salesman trope. That trope was introduced by 'Madman Muntz', a car salesman based out of Los Angeles who went against the prevailing wisdom of the World War 2 era that car salesmen should come off as cool and level-headed. So it's been around a while.

The man we're focusing on today, though, is Crazy Eddie, aka Eddie Antar, whom New Yorkers might remember. Who was Crazy Eddie? Let's put it this way: this link goes to a site called the 'Con Artist Hall of Infamy'. So that's a promising start to things.

Crazy Eddie wasn't a car salesman, though; he focused on electronics stores. He grew his original store out of Brooklyn into an empire by offering low prices on electronics. The prices were so low they were insane. In fact, the prices were so low they were illegal: fair trade laws required electronics to be sold at prices set by the manufacturer, and Antar regarded those laws as quaint. Customers, caring more than anything about the price to them, flocked to Crazy Eddie. Business grew. New Yorkers saw this kind of thing throughout the 1970's and 80's:



The thing was, offering things at a discount means you make less money. Cut prices too low and you won't have enough left to survive on. Antar had a solution for that, as later told by cousin Sam when he spilled the beans in an effort to atone for his role: tax evasion. Employees were paid under the table to avoid payroll taxes. Any time a customer paid in cash- and back then they paid in cash a lot- Eddie just pocketed the sales tax. There was also the endemic practice of fleecing customers at every opportunity. According to Sam, bait-and-switching was done to customers on an epic scale, setting three different employees on someone to try to pressure them into purchasing something higher-margin than what they came in for, before relenting. When possible, returned merchandise was sold as new instead of used.

Crazy Eddie's got big enough to where, in 1980, the Antars decided they wanted to go public. Going public meant access to more money faster, and access to bigger and better methods of fraud, but it also meant auditors get to have a look at you. Eddie had a solution for this kind of thing: make stuff up. Stack up some empty boxes, have someone climb a ladder and shout out whatever numbers she felt like. In the process, the auditors themselves, young and inexperienced, were placated mainly through being made to feel big and important. They never noticed a thing. They also didn't notice the profit skimming and tax fraud, as Crazy Eddie's also gradually reduced the occurrences of that, not only so that it wouldn't be noticed but also so as to make it look like profits were increasing. When the auditors came along, everyone was being paid on the books.)

So Crazy Eddie's went public in 1984, went big, and the Antars made a whole bunch of money. But the auditors had to be continually kept away, or at least distracted. Sam's role here was to make the year-end audits go as slowly as possible; the auditors had eight weeks to do their thing, and Sam's task was to waste as much of that time as he could so the auditors were forced to skip over as much as possible. This was accomplished through sending in the younger, cuter employees to flirt with the age-20-something single guys doing the auditing. Naturally, the auditors' penises overruled their brains every time.

Auditing the quarterlies? Yeah, that didn't happen.

In the meantime, the Antars had dual citizenship in Israel. They would strap cash to their bodies, travel frequently to Israel, unload it from there into various foreign shell companies they had created, and those shells would then funnel the money to Panama and then, around audit time, into company bank accounts, where the money would be recorded as revenue. This, and other schemes, worked so well that in 1986, auditors actually accused them of understating profits, not overstating them, figuring they were being overly cautious in their accounting practices. Needless to say, the Antars were very sweet to them for paying them the compliment.

In 1987, though, the business environment had changed. Crazy Eddie's was, at least to appearances, doing so well that other electronics companies were taking on their rock-bottom-prices mentality. Crazy Eddie's was no longer the only discount game in town. Customers were starting to be lured away, and Crazy Eddie's posted its first loss. Now the strategies for making a good company look great gave way to strategies to make a bad company look good, and the strategies were undercut by family drama, which I think will be best conveyed at Sam's website (most of the story is), but we'll try here. Eddie controlled two-thirds of the company, but Sam M. Antar, Eddie's dad, was supposed to be family patriarch. After Crazy Eddie's took off, he wasn't patriarch anymore. The family was split on who to support, and things came to a head on New Year's Eve 1983, when Sam M., suspecting Eddie of having an affair, sent daughter Ellen and daughter-in-law Robin to catch Eddie in the act. They caught him. Eddie vowed revenge, as opposed to something truly crazy like, say, being faithful to his wife in the future. Things simmered down for the moment, as ultimately everyone was still making money, but when the money stopped flowing in, the fight began anew. It came down to raw control, and Eddie had it, meaning the anti-Eddie side of the family was driven out through resignations and firings after a failed hostile takeover. Two of the faction, Arnold Spindler and Abe Grinberg, responded by alerting the feds to some very interesting information. Granted immunity from prosecution, they went right to work taking revenge on Eddie's revenge.

Behind Eddie's back, the investigators found about $40 million in nonexistent inventory. The FBI got to Sam first. Sam talked. Eddie, in 1990, fled for Israel, where he was captured two years later. Crazy Eddie's would go into receivership, and the receivers needed until March 2012 to finally be satisfied that they'd found all the money they were going to find.

Why? Why did all this happen? There was no why, according to Sam in a 2006 interview with Herb Greenberg of MarketWatch. Crazy Eddie's didn't need to do any of this. It was legitimately profitable and stable, at least until 1987. It was fraud for the sake of fraud, and the threat of prison didn't even compute. It is not that it was not thought of as credible. It was not thought of at all, for better or worse, as if one was asking a goldfish to contemplate Mars.

"We committed crime simply because we could. Criminologists like to analyze white collar crime in terms of the 'fraud triangle' -- incentive, opportunity, and rationalization. We had no rationalization. Simply put the incentive and opportunity was there, but the morality and excuses were lacking. We never had one conversation about morality during the 18 years that the fraud was going on.
White collar criminals do not think in terms of risk of a long prison sentence but instead think in terms of a successful execution -- no different than a project. No crimes in progress, or any enlightening moments, will benefit from a white collar criminal reading a newspaper, watching television, or reading a blog about the long sentences given to a felon like Bernie Ebbers.
We were uncovered only because of family infighting that resulted in the government being tipped off about the fraud (the government had started its investigation before we lost control in a hostile takeover). Most frauds are not uncovered by government audits, external or internal auditors, but rather because either they implode or the co-conspirators turn on each other."

In 2007, as something of a postscript, Sam and Eddie met for the first time in 20 years on CNBC's Business Nation. (Sam M. had died in 2005.) Sam wasted no time.



Five years later, Eddie went to Russia Today, a place I'd normally never source because I'm concerned about that organization being too much of a mouthpiece for the Russian government. But since Eddie speaks for himself here, I'll let it go. While he and Sam are antagonistic towards each other, on the larger point of white-collar criminal philosophy, they concur. Eddie warned that it's easier to do what he did now than it was when he actually did it.

In my day, I knew auditors were stupid.  I knew auditors were incompetent.  But I always thought that if they saw something wrong, they would do the right thing.  Today, you don't have to worry about them doing something wrong, because they're going to do the wrong thing.  They've gone from being enablers, they've gone from being duped, to being actual co-conspirators, in many cases, co-conspirators to financial statement manipulation.

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