The Salad Oil Scandal

1. The Salad Oil Scandal Nicole Billick Dwain Carryl Ian Lyngen Financial Fraud

2. The Salad Oil Scandal • Background • Anthony DeAngelis • One of the biggest con artists in market history, aka The Great Salad Oil Swindler • Allied Crude Vegetable Oil Refining • Operation timeline: late 1950s through early 1960s • Involved: $175M salad oil missing - busted 1963 • How started: banks willing to make loans secured by salad oil inventory Financial Fraud

3. The Salad Oil Scandal • Inventory Overstatement Scheme • Warehousing receipts for ~1.8 billion pounds missing oil • Warehousing companies trusting, kept blank receipts unlocked • The rest was about deceiving auditors – disguising how much oil was actually in tanks • Just add water • Welded vertical pipes • Tape measure • Phantom tanks • Repainting the numbers • Pumps Financial Fraud

4. The Salad Oil Scandal • Result • American Express • Allied Crude Vegetable Oil Refining • Tino • Brokerage firms - Williston and Beane & Ira Haupt and Co Financial Fraud

5. The Salad Oil Scandal • Detection • Tino DeAngelis’ dreamed of cornering the market, and to achieve this he needed to own all of the supply. • He borrowed against the overstated inventories through American Express and other lenders. • He then used those proceeds to buy up supply in the commodities market through the spot and futures markets. • In Mid-November 1963, Allied Crude was unable to meet a margin call, because the firm had over-leveraged its position. • Unable to meet the $18 million in margin calls to Ira Haupt & Co. and J.R. Williston & Beane, Allied Crude was forced into Chapter 11 Bankruptcy. • Bankruptcy Referee Denied Chapter 11 and sent to Liquidation. • This was because failed to post $20,000 indemnity for costs to maintain assets. • Liquidation status prompted American Express Warehousing to conduct audits of the oil it would soon liquidate. Financial Fraud

6. The Salad Oil Scandal • Audit Reveals… • Claimed to Have $150 million of oil, but only found $6 million worth. • Allied Crude was claiming to house more vegetable oil then there could possibly be in the country. • Tino had been writing fraudulent warehouse receipts. • Total of 51 companies were stuck with loans on oil supposedly stored by Allied Crude. • Most of the money went to cover operating losses created by Allied Crude’s trades in the commodity markets. Plus $500,000 Tino has in a Swiss Bank account • President John F. Kennedy’s Assassination • Overshadowed the scandal in the financial markets. • But Tino De Angelis still saw justice, sentenced to seven years in federal prison. Financial Fraud

7. The Salad Oil Scandal • Conceptually What Went Wrong? • Allied Crude Vegetable Oil Refining Corp. overstated oil inventory by a variety of schemes to use the inflated inventory as collateral for loans. • Practices of oil inventory auditors facilitated the execution of fraud. • Warning signs were ignored by a number of watch-dogs. • Reality check? Financial Fraud

8. The Salad Oil Scandal • How Could This Fraud Have Been Prevented? • SEC Suggests seven steps: • Set proper tone in top management. • Maintain internal controls • Enforce written code of conduct. • Effective internal audit. • Strong audit committees. • External auditors should not cave to pressures from management • Better education of business professional can reduce risks. • Practical suggestions: • Difficult to prevent the elaborate of a fraud, but early detection can reduce damages. • Make sure audits are done as thoroughly as possible. • Know as much about the people a firm is conducting business with, Tino DeAngelis had already been implicated in a number of questionable practices long before he started Allied Crude. Financial Fraud