Crazy eddie his prices are insane

David Jacob Levi Chen (a.k.a. Crazy Eddie) – A Financial and Legal Odyssey

Eddie Antar, who disappeared in 1989 after the demise of his Crazy Eddie consumer electronics chain, was arrested in June 1992 near Tel Aviv. Antar, 44 years old at the time of his arrest, was discovered by the Israeli police to be living in a luxurious town house in Yavne, a town in central Israel, under the name “David Jacob Levi Cohen.”

In 1996, Crazy Eddie pleaded guilty to a Federal charge that he had defrauded shareholders of more than $74 million by manipulating the company's stock. His plea agreement ended a seven-year financial and legal odyssey, including Mr. Antar's disappearance and flight under an assumed name to Israel to avoid arrest.

In the 1980's, Mr. Antar and several family members built Crazy Eddie into the largest consumer electronics chain in the New York area. Commercials, in which a fast-talking announcer boasted that the stores' prices were "insane," became standard television fare. The company went public in 1984 and, by falsifying its books, Mr. Antar convinced financial analysts that Crazy Eddie was growing when, in fact, it was falling apart. When auditors were on the verge of discovering the scheme, company executives took the falsified documents and threw them in the garbage, according to testimony by the company's chief financial officer.

In 1992, Mr. Antar was convicted by a Federal jury in Newark on 17 separate charges including conspiracy, racketeering and securities fraud. Those convictions, however, were overturned by the United States Court of Appeals. Similarly, his brother, Mitchell Antar, had his convictions in the Crazy Eddie case thrown out. Both Antars ended up with jail sentences: Eddie with 6 years, 10 months and Mitchell with 1.5 years.

In 1998, with the financial backing of Eddie’s mother, Rose, his nephews planned to open a Crazy Eddie in Wayne, NJ with hopes of rebuilding the chain. At the time, Eddie and Mitchell were serving time in Federal prison. As a side note: neither Eddie nor Mitchell was expected to be involved in the new venture! Later in 1998, family members Sam (Eddie’s father), brother Allen and brother-in-law were ordered to turn over more than $27 million that they made from the artificially inflated stock between 1984-87.

Bryant, Adam, “Crazy Eddie’s Chief is Arrested in Israel,” The New York Times, June 25, 1992.

Meier, Barry, “Founder of Crazy Eddie chain Pleads Guilty in Stock Fraud,” The New York Times, May 9, 1996.

Foderaro, Lisa W., “Crazy Eddie’s Returning, Minus 2 Jailed Founders,” The New York times, January 20, 1998.

Associated Press, “Crazy Eddie Profits Sought,” The New York Times, July 16, 1998.

The Crazy Eddie Case

Adapted from The White Collar Fraud website by Sam E. Antar at http:www.whitecollarfraud.com

Eddie Antar was a retailing revolutionary in his day; he broke the price fixing environment that gripped the consumer electronics industry. To survive in this industry, Eddie circumvented the fair trade laws and discounted the consumer electronics merchandise he was selling. He faced retribution from the manufacturers who stopped shipping merchandise to him. Consequently, he had to purchase his inventory from trans-shippers and grey markets. He built up great customer loyalty in the process and his business volume expanded.

Like numerous other independent small businesses in America, Crazy Eddie paid many of its employees off the books. There was a company culture that believed that nothing should go to the government. Eddie Antar inspired intense loyalty from his employees, most of whom were family. It was us against them – customers, the government, insurance companies, auditors, and anyone else who did not serve the company's interests. The Antar family regularly skimmed profits from the business. If profits couldn’t be increased through bait-and-switch tactics, the Antar clan would pocket the sales tax by not reporting cash sales.

The Four Phases of the Crazy Eddie Frauds

1969-1979: Skimming to reduce reported taxable income

1979-1983: Gradual reduction of skimming to increase reported income and profit growth in preparation to take the company public

September 13, 1984: Date of Crazy Eddie initial public offering

1985-1986: Increasing Crazy Eddie's reported income to raise stock prices so insiders could sell their stock at inflated values

1987: Crazy Eddie starts losing money. The main purpose of fraud at this stage is to "cover up' prior frauds due to the "double down" effect.

From the Fraudster’s Perspective

Sam E. Antar was a CPA and the CFO of the Crazy Eddie electronics chain in the 1980s when that securities fraud scandal hit. The fraud cost investors and creditors hundreds of millions of dollars, and others, their careers. In addition to securities fraud, investigators later learned that the Crazy Eddie business was also involved in various other types of fraud, including skimming, money laundering, fictitious revenue, fraudulent asset valuations, and concealed liabilities and expenses, to name a few. Since then, Sam has shared his views on white collar crime, the accounting profession, internal controls, the Sarbanes-Oxley Act, and other related topics with audiences around the country.

According to Sam, there are two types of white collar criminal groups: 1) those with common economic interests (e.g. the Enrons and WorldComs) and 2) other cohesive groups (e.g. with family, religious, social, or cultural ties). Fraud is harder to detect in the second category because of behavioral and loyalty issues. Tone at the top is crucial here.

Contrary to the fraud triangle theory -- incentive, opportunity, and rationalization -- Sam insists that the Crazy Eddie fraud involved no rationalization “It was pure and simple greed,” he says. “The crimes were committed simply because we could. 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." He contends that “White collar criminals consider your humanity as a weakness to be exploited in the execution of their crimes and they measure their effectiveness by the comfort level of their victims.” Sam’s description of how the Crazy Eddie frauds were successfully concealed from the auditors for so long is a tale of, what he refers to as, “distraction rather than obstruction.” For example, employees of the company wined and dined the auditors to distract them from conducting their planned audit procedures and eat up the time allotted for the audit. As the end of the timeframe approached, the auditors were rushed, and didn’t have time to complete many of their procedures. Fraudsters use “controlled chaos” to successfully perpetrate their crimes.

The accounting profession doesn’t analyze auditor error, and therefore, learn from it. Sam’s advice to the accounting profession, antifraud professionals, and Wall Street: “Don’t trust, just verify, verify, verify.” Audit programs are generic and auditors have been too process-oriented. Sam recommends that auditors utilize the internet for searchable items, such as statements to the media and quarterly earnings calls transcriptions. A pattern of inconsistencies or contradictions found in these sources of information when compared to the financial statements and footnote disclosures should raise red flags. As an example, Crazy Eddie’s auditors never thought to check sales transactions to ensure that the deposits came from actual sales. They never considered that these funds came from previously skimmed money.

Sam believes that white collar crime can be more brutal than violent crime because white collar crime imposes a collective harm on society. On using incarceration as a general deterrent, Sam says “No criminal finds morality and stops committing crime simply because another criminal went to jail.”