BULL STREET - The art of the Con

Crazy Eddie And His Cooked Books

Eddie Antar never finished high school but that didn’t make him any less the entrepreneur. Eddie was a strange sight around the neighborhood; he was a body builder whose muscles had muscles. That along with his ritual outfit gym sweats that it seemed he never took off and the massive guard dog that was his pet, it didn’t take everyone in the area to know who Eddie was. Upon leaving his Brooklyn high school he started selling television sets door to door in his neighborhood. He ultimately opened up a unpretentious 150 square foot facility in Coney Island to sell consumer electronics in partnership with his cousin.

If you lived on the East Coast at the time, you can probably remember a fast talking pitch master who would recite the names of products so fast that you couldn’t even discern what he was saying. He would wind up this garbled spiel by telling you that you should shop at Crazy Eddie’s because his prices were insane!!!

And effectively Antar’s pricing was first rate. If you walked into one of his early stores and if he was there ([140]), if you tried walking out the door without making a purchase, he would block your way, quote you lower and lower prices on the goods that you had been looking at until he had made the sale. This was where Antar received the nickname Crazy Eddie. Antar continued to expand Crazy Eddie until he had established over forty stores selling almost $400 million in merchandise a year. Antar created other innovations such as the “double dip” warrantee. Effectively, Antar would have store customers purchase an additional warrantee when in reality they were already covered by the manufacture. When a customer made a claim on defective merchandise, Eddie would reclaim the cost from the manufacture and was able to make a tidy profit. If Crazy Eddie was able to sell all their client warrantees, he discovered that he could sell his inventory at cost and still make a sizeable profit.

Eddie had so much clot with the manufacturers because he was buying in such large quantities that he could resell to smaller dealers at prices that even the manufacturers themselves wouldn’t match. While no one other then Eddie Antar and his smaller clients were happy with this practice, numerous attempts to pull the plug on this part of Crazy Eddie’s business were not successful.

It did not take the Crazy one long to start cashing in on his hard work. The company by this time had gone public and it would seem that Antar was a natural seller of his own stock. He kept on selling until he had dumped over $70 million of shares in his own company[141]. Then again, Antar knew something that we didn’t. His prices may well have been insane, but Eddie Antar sure knew how to cook the books when it came time to report earnings. When Crazy Eddie’s was taken over by another group in a proxy fight, they found that his inventory had been dramatically overstated and the profits that he had been consistently reporting were a total illusion. Antar ultimately pled guilty to a racketeering conspiracy charge relative to his scheme to defraud investors of over $74 million.

Antar had impressed Wall Street with his no-nonsense approach to the retail business. He was, would you believe, a grammar-school dropout who wore a sweatshirt to the office and carried on conversations in which every other word was literally unprintable. Street analysts advised him on what numbers he had to achieve in order to have his stock do well and in Antar’s mind, if he didn’t hit those numbers, he would fabricate them. In the meantime, he was consistently peddled his stock, as did his dad, who pocketed almost $20 million by misleading shareholders.

In the meantime, without knowledge of the “Street”, Crazy Eddie was running into the same kinds of problems that every business has to go through. The cycles in the consumer electronic business were dramatic and Crazy Eddie was now caught in a vicious downturn. Being public had placed an additional strain on management with all of the reporting that was required along with the necessary Wall Street interviews. Having executives that were hired for their loyalty (relatives) instead of their competence soon started to exact a price and that problem escalated when Eddie and his wife split up. The divorce was horrendous and the relatives took sides in the disputes. In the meantime, Eddie’s brother was the CFO and doing the books, a job where he was clearly over his head.

The store chain closed when the vendors’ cut off all credit, and Crazy Eddie’s net worth dropped from healthy (albeit phony) positive numbers to almost $26 million in the red. The new board, which had committed to try and keep things going, threw in the towel when they learned that both the company’s credit and its net worth were zero. The Securities and Exchange Commission in an investigation that they conducted found that the books had been cooked at Crazy Eddie’s almost from the minute that they had gone public. He would constantly overstate inventory while understating his account payable. Another trick that Eddie used was most unusual, he would take the sales that he had been making to other stores and assign them internally to his own shops. This made the financials appear that sales were ever increasing on a same store basis; a critical part of the security analysis process. For a guy that retired from school at 16, Antar certainly knew how to cover his bases.

The case reads like a detective novel, and in 1990 when Antar did not appear in court to answer charges by the Securities and Exchange Commission as he thought that he was better off taking up residence in Israel. His flight cost Antar the option of appealing the case which was instead, decided in his absence. The fact is that when Antar saw that the regulators were moving in, he fled to Israel, changed his name five times and was not heard from again until investigators cornered him and forced Antar back to the states to face charges.

It took two years to bring Antar back because although he had civil judgments against him, he, at that time, had not been criminally indicted. Eventually a Grand Jury supplied the needed criminal documentation and the U.S. Marshals who had be keeping track of his whereabouts picked him up. When arrested, he was carrying a Brazilian Passport in a phony name. In reality, Antar had become an Israeli citizen but was not entitled to any protection from extradition because of the fact that his crimes predated his citizenship. He had been living in a luxury apartment in Yavne, Israel, a suburb of Tel Aviv. The big question on everybody’s mind at this point was whether or not Antar had an attorney or not. The lawyer that had been representing Antar made a hasty exit when Antar fled the country and became a fugitive. He said something about the fact that his client, whose innocence he was proclaiming, was making him look like a jerk.

When he was brought back, and pleaded guilty, the U.S. Attorney in Newark, Faith S. Hochberg said of the Crazy Eddie, that he was, “The biggest stock-fraud schemer in New Jersey history has admitted his quilt.” For his efforts, Eddie Antar was convicted on 17 counts of racketeering, conspiracy and mail fraud. The judge remanded him to prison for over 12 years and ordered him to pay restitution of in excess of $120 million. Strangely, on appeal it was shown that the judge that had heard the case was negatively biased against Antar and the verdict was thrown out. Similarly to the Keating case, rather than go at it again in court, the two side sat down and worked out a plea bargain. Eddie got a seven-year sentence but while he was awaiting trial and retrial he had already served a substantial amount of that time. When the smoke had cleared, Antar wound up having to serve only two additional years of his sentence.

In another similarity to a case in this book, Edie’s brother Sam the accountant also received jail time. As in the ZZZZ Best case, Sam hit the lecture circuit when he got out and started telling the auditors and other regulators how it all happened, how it could be spotted and how to prevent it from happening again. He even went into the details of how he had been chosen to go to accounting school by his brother who had footed the bill, so that an outsider would not be privy to the books and records. Barry Minkow after being released from prison had followed the same line. Sam also showed the same remorse that had been expressed by Minkow although you never no whether these people are serious or not. It just probably played well on the lecture circuit. He admitted in his speeches that he was a cold-blooded thug and an willing participant and an expansive criminal action. “I hurt a lot of people. A lot of people lost their life’s savings….Accountants had to pay out money for crimes they did not commit, although they were negligent.” ([142])

Eddie Antar along with his brother, Mitchell ([143]) and according to the to the SEC, Antar’s father and his brother-in-law, used every device known to man in order cook the books for the years 1984 to 1987 ([144]). Primarily though, his imaginary inventory and sales were his best efforts. This produced over $45 million in illusionary profits that made Crazy Eddie stock scream higher and higher. When the sorted tale came to light, new management had already been installed and Antar tried to shift the blame unto them, saying he wasn’t there when it all happened. Inconceivably, no one believed poor Edie’s story and things really started to unravel, when Crazy Eddie was forced into bankruptcy. This is when Antar booked his plane reservations for overseas points. The family members were left holding the bag and ultimately were hit with the short end of $72.7 million in court ordered judgments for their role in the matter.

This is a unique situation from another point of view though. Crazy Eddie had two sets of accountants during the period of time in question. The first were a company called Penn & Horowitz who represented the company before it went public. During the period (which is when most of Eddie Antar’s magic bookkeeping to place) of the public issue and thereafter, the accounting firm of Main Hurdman had taken over. Peat Marwick later merged with Main Hurdman so that their names eventually replaced Hurdman’s on the financial reports. Touch Ross in turn replaced peat Marwick when the new owners took over.

Hurdman quickly developed conflicts by having some of their people internally employed at Crazy Eddie. In addition to auditing Crazy Eddie, Hurdman also acted as their consultant and as such supplied Antar with a huge computerized inventory control system at a multi-million dollar cost. It was that inventory system that Antar was able to manipulate so effectively to through Hurdman off the track when he indulged in his book cooking routines. Moreover, Antar soon found out that it was easier to fool the auditors with the quill pen approach and soon after installing it went back to keeping the inventory by hand. This, of course created both chaos and an inability for the accountants to find anything.

Almost the entire fraud took place under the Main Hurdman-Peat Marwick watch. What is unique here is that both accounting firms settled major class action lawsuits for substantial amounts of money after being charged with either knowing what was going on or the fact that they should have known what was happening. ([145]) Shareholders legal actions were substantial and most horrifying of all was the fact that so many of the documents requested relative to finding the facts in this matter had either been destroy or had conveniently disappeared.

We are unfamiliar with the quality of accounting that had occurred before the public offering but what went on thereafter was shameful. For Eddie Antar and his brother to be able to inflate inventories and earnings in the fashion that they did was absolutely shameful. The percentage of non-existent inventory reported in each financial report that the accountants certified will probably stand as a record in the annals of accounting screw-ups. I mean, we are not talking about General Motors here, yet the inventory inflation was over $80 million. That probably was more by double than the actual inventory that Crazy Eddie carried and in saying that we are being extremely kind. This would literally indicated that the accounting firms never even looked at the inventory when they were doing their audit and that doesn’t sound possible, but what else could have happened.

The bottom line was that in 1993 a universal settlement was reached relative to the civil part of the Crazy Eddie litigation. Both the accounting firms Penn & Horowitz and Peat Marwick became part of that settlement which totaled $42 million. It was never disclosed who paid what. I was invited to the victory celebration in the offices of Sirota and Sirota. Howard Sirota was the lead lawyer for the plaintiff’s in the civil action and had put in massive time in helping the authorities along with his clients. At the victory celebration were the prosecutors, the bankers, the plaintiffs and an assortment of hangers on. It was a joyous affair and we were served carryout Chop Suey.



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