Motley Fool Hidden Gems Investing - Crazy Eddie and the Art of Stock Fraud

Episode Date: October 23, 2022

Spotting a stock fraud is extremely difficult, but finding some smoke is significantly easier.  Founded by Eddie Antar, Crazy Eddie was a chain of consumer electronic stores in the Northeast. After going public in the 1980s, the stock became nearly a ten-bagger before investigators found it to be a fraud. Investors may not have suspected that the retailer boosted profit margins by manipulating a cash skim, but there were some other signs that the soaring stock price didn’t tell the whole story. Ricky Mulvey talked with Gary Weiss, author of “Retail Gangster: The Insane, Real-Life Story of Crazy Eddie” about: - Why investors bought into Eddie Antar’s hype - How criminals save money on sales tax - The eventual downfall of Crazy Eddie Host: Ricky Mulvey  Guest: Gary Weiss Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. It's a little bit like a Ponzi scheme. If you begin by committing fraud, you've got to continue committing fraud. And that's exactly what he had to do. So how do you commit fraud? One of the ways you commit fraud, one of the easiest ways to boost your earnings is to inflate your inventory. You know, it's not known to most lay people. It certainly wasn't known to the people in the warehouses. It's crazy. But if you increase your inventories, if you inflate your inventories, you're inflating profits. I'm Chris Hill, and that's author Gary Weiss.

Before Theranos and before Enron, there was Crazy Eddie, a chain of consumer electronics stores throughout the Northeast founded by Eddie Antar. The business went public in 1984, and within two years, the stock was up more than nine times in value. But the good times didn't last because Eddie Antar was boosting his company's margins and profit growth with fraud. Ricky Mulvey caught up with Gary Weiss to get the background on one of the most colorful stock scams of all time, which Weiss details in his new book Retail Gangster, The Insane Real-Life Story of Crazy Eddie. Joining us now is Gary Weiss. He's the author of Retail Gangster,

the insane real-life story of Crazy Eddie. Thanks for being here. My pleasure. My pleasure entirely. Let's get into it. Before Eddie Antar started one of the more well-known stock scams, he was working in clip joints in Times Square, where he was selling overpriced gizmos and electronics to tourists there. What was his experience there like, and how did that experience shape Eddie's attitude toward business and interacting with investors? Yeah, well, first of all, thanks very much for having me. I really appreciate this.

I'm looking forward to talking to you guys. Those clip joints, I think there might still be a few left in Times Square. They were filled with, you walk past and you've got these windows filled with all these cameras and gadgets and so forth. And you go in, and what you find is that they're selling you products grossly, grossly overpriced. Now, Eddie was taught to rip off people, essentially, in these clip joints. And the art of ripping off someone and really overcharging them, this art was perfected at these Times Square stores. uh you know you really have to have to be good at selling in order to sell someone you know a 60 camera for uh you know for 400 you know you have to be really good you have to really know

what to do so you know you go into one of these stores at least in the old days you go to one of these stores and they jump on you and they they con you and they lie to you and this is this is how eddie learned salesmanship and this is sort of what he inculcated in his stores except of Of course, they weren't quite that bad. They didn't rip off people quite the way he did in Times Square. But that's where he learned salesmanship. For Eddie, was there any difference for him between a Wall Street analyst who's looking at the IPO, considering recommending the company, and a tourist who was in those Times Square stores? Yeah, I think maybe the Wall Street analysts

were stupider you know and they also maybe had had uh you know more reason to you know to be skeptical than the uh tourists wandering in you know after they were trained supposedly to sniff out fraud and they just swallowed whole the lies that he fed to them you know in in the run-up to the to the ipo which was a which was a work of art in the stock front and afterwards we just continually cook the books to elevate the stock price. At the heart of this is a company that did make some amount of money. It was a chain of electronic stores throughout the New York area, or the tri-state area up in the Northeast. I know you've never stepped foot in a Crazy Eddie store, but you walk through the customer experience in the book. What was it like for someone who

wanted to go, let's say, buy a microwave or a television, maybe saw a commercial on television, and then walked into a crazy Eddie store. Yeah, well, Eddie, personally, and later as one of his salesmen, he'd jump on you. Their philosophy was, you know, you walk in the store, you're not to leave without buying something. You know, NAD, nail at the door. So you go in, you're looking for like a Sony stereo. He might have advertised the Village Voice or his other places. And he would want to sell you not the higher-priced Sony, but a lower-priced stereo, which provides him with a higher markup, which he would manipulate in order to make maximum money.

So it didn't look to the customer necessarily like bait-and-switch, because usually bait-and-switch is, hey, you're trying to sell somebody something that is more expensive. We tried to sell you something that was less expensive." But it was still basically the same principle. A customer walks in looking for an advertised product and walks away with something else. That was the big con game with Crazy Eddie. That was the big switch that they pulled. It was a big switch game. And it was from the beginning to the end. That was one of them. There could be a case, let's say I'm looking for a Sony television and then i hear my salesperson is going out to lunch what's really going on right well as i said you know the you know the switch was was was the main thing but let's say you were really

a tough customer and you you said i want that sony i want it i came in for that sony i'm gonna get it you know you're one of these educated consumers you know you're not going to be switched so you so if they would sell it you know look if it's in stock they're going to sell it here there's actually a chance that it's going to be out of stock because you know everybody wants a sony you know a lot of people want the sony so you might hear somebody say well you know let's go at a lunch you know we gotta go to lunch what happened was that was like a code word if they go into the back they take a table model or a model that was returned because it wasn't all that great it was maybe defective and they polish it off and they put it back in its original

packaging the tools were kept in a bag called the lunch bag you know it looked like a lunch bag and they'd bring it out they say okay here it is and actually they were selling you a used and possibly even defective product. That was known as the lunch process. The way that he was able to beat competitors at that time was simply skimming the sales tax. The stores would charge customers sales tax for the products and then return nothing to the IRS. I understand that this was a period where crime was relatively rampant in New York, but how was the IRS not hip to this? This seems like the one institution you really wouldn't want to mess with. Yeah. Well, it wasn't just the IRS.

was also the new york state tax authorities too you know they were supposed to be collecting sales tax on all these purchases and of course they'd send some money over to the new york state sales tax authorities but the majority of it was not sent you know you charge you charge like say 200 you're supposed to be getting 200 200 plus say a 14 sales tax okay on a particular item the 14 sales tax was not sent to the state taxing authorities it was sort of was a built-in profit-pushing for Eddie. This $14 was used to enable Eddie to actually charge less than sometimes on the wholesale price. He was able to charge less, cut his prices, by simply swindling the customer, basically lying to the customer that he was collecting sales tax,

and committing tax fraud. He was never caught for it. Never caught for it. If this is going so well for him, the business, Sammy Antar as well, why go public? Why take the risk of opening your books to more investors when you have a perfectly good crime going? Yeah. Well, they just wanted to make more money. The way to make money, after all, if you're in business, certainly in those days when the IPO boom was just beginning, was to sell stock to the public. You know, they correctly gauged, you know, that the market for, you know, electronic stores, that there'd be a market for electronic stores. It was very hot in those days.

You know, nowadays you think, oh, my God, an electronics chain. Who's going to buy stock in an electronics chain? It was very hot in those days. It was the big thing. It was like Bitcoin, you know. It was a 1986 equivalent of Bitcoin, one of these other crappy things that they sell, like AMC, whatever. So they decided, look, we're going to go public. And Sammy Antar, the financial wizard, the cousin, Eddie Antar's cousin, Sammy Antar,

came up with a terrific idea to make that IPO really shine. Came up with a great idea. And that idea was simply reducing the skim, right? And that idea was to reduce the skim. They were taking money out of the company, see? They were taking money out of the company, taking money out to avoid paying taxes. So he was saying, look, you're shooting yourself in the foot, guys. You're shooting yourself in the foot.

You're taking money out of your profits, but you want more profits. You want profit growth in order to really entice investors. So take money out of the company in less and less quantities to make it seem as if you're really growing. And it was a brilliant idea. They had 2% profit growth in, I think, 1983, 84. They expanded that to 48%. 48% profit growth. It was ridiculous. But because of a reduction in the scam, they were able to do it. They got a great underwriter, they got Oppenheimer, they got Wall Street

behind them. They were off to the races at that point. One of the ways that most people know about Crazy Eddie was from the advertising, the commercials, the famous Jerry Carroll screams. We have an example of those. This is the only time we'll do free advertising on the show it's a crazy and he blow out blitz crazy and he's not playing with a full deck because he's practically giving away tvs vcrs microwave oven stereo rack systems video camcorders anything and everything at home entertainment and lots of home appliances too remember we are not undersold we will not be undersold we cannot be undersold and we mean it it's a crazy and he blow out blitz and crazy and he's going nuts with his lowest sale prices ever

see crazy and he now his blowout blitz sale prices are Gary, what did these crazy, fast-talking commercials mean for the company? That's how most people knew the business, right? Oh, sure. I mean, look, these commercials are just terrific. I mean, to this day, people remember them. And in those days, they drove people into the stores. You know, people didn't necessarily like the commercials.

They didn't necessarily like being bombarded with these commercials day in and day out and day out. But nevertheless, it made people curious about Crazy Eddie. And, you know, it drove into their minds the idea that you're going to get the cheapest prices at Crazy Eddie. So it really drove sales for the company, and it made them expand and expand and expand. You know, at their peak, they had 43 electronic stores. That would be unheard of today, 43 electronic stores in the Northeast from Philadelphia up into Massachusetts. It was all because of Jared Carroll, that guy in the commercials. Terrific, terrific guy. There's a couple of hallmarks of the commercials that I found interesting.

The first of which is that, while there's a lot of fast talking about low prices, they never promised a specific deal. Was that deliberate? Yeah. They weren't promising the deal that, you know, they're playing off everybody else's prices you know you bring in their prices and we'll beat it so they lost so the competitors lost the credibility of their pricing and they hated crazy eddie for doing that you know because you know no matter what we charge he's going to beat him now in actual an actual fact he didn't beat them most people didn't want to negotiate they didn't want to do all that but nevertheless that was their image and you know and they didn't really give customers the lowest prices necessarily

Most people didn't ask for it. But nevertheless, it just really upended the whole world of electronics. In those days, it was very hard to engage in discounting because of the fair trade laws. Eddie surmounted them in various ways. He submitted those fair trade laws, and he did beat the competition. He did. Was there a point where the novelty of these wore off? I mean, one of the ventures that I found particularly interesting is that Crazy Eddie tried to have Jerry Carroll on for a full hour of that sort of fast-talking delivery, which sounds, first of all, just exhausting. But second of all, struck me as a point where the effectiveness of just bombarding people with these fast-talking yet memorable ads wore off. Yeah. Well, at one point, they attempted to create a home shopping network. That was very hot in the 80s, a home shopping network.

They tried to create a crazy 80s home shopping network with Eddie on for constantly. The problem is, he couldn't add live that much. So, they had to write every single word. It just didn't work. It didn't work. He was good for 30 seconds. So, not all of Eddie's schemes were public knowledge during the IPO process that you talked about, except the bait-and-switch, which was a little bit of a different method.

It's hard to guess, though, that a company is artificially boosting growth by reducing its cash skim. What did the public, and particularly those Wall Street bankers, know about the bait-and-switch? And why didn't they really care, you think? Well, they didn't care for a couple of reasons. First of all, they just figured, well, if the state doesn't care, very rarely were there consumer complaints against Crazy Eddie. There was very little on the public record indicating that these were sleazeballs when it came to salesmen. So they just didn't care. They used euphemisms.

Eddie used to use euphemisms in describing what they were doing, educating the consumer rather than switching the consumer. So they didn't really care. Their job was to sell stock. It was to bring in merchandise, meaning stock, meaning companies, and sell it. So that was the aim. It wasn't supposed to do due diligence. They still are. They're supposed to do due diligence. They did due diligence, but they were easily misled. Who the hell knows whether they really wanted to be misled? They did not ever determine what was going on. They never really saw what

was going on under the surface. How did Crazy Eddie court these Wall Street analysts. My understanding is that he would spend one-on-one time with them for hours, take them through the stores, take them out to dinner, and that had a huge effect on the stock and reception of his company. Oh, yeah. Well, Eddie was very good at one-on-one. He didn't like to appear. He didn't like to be interviewed. He never gave interviews, at least not at that point. He never gave interviews, he never appeared. But he was actually very persuasive and charming on a one-on-one basis. They hired a PR guy I mean, Ed Collivan, who was an old time Wall Street PR guy, did a wonderful job for them.

And he would set up Eddie with these analysts and he'd take them on tours. Eddie would take them on tours of the store that they had on 57th Street, which was their showcase tour. And he'd go one-on-one on them. The one-on-ones, as they called them, really charmed the pants off these analysts. And it led to glowing analyst reports, not in these cheesy little investment banks, but in major investment banks. You know, Donald, Sulevkin, and Jenrette, which, you know, nowadays it's known mainly for the junk bonds or Michael Milton. But they had a very powerful equities research component. And, man, they were charmed.

They charmed the hell out of those guys. Major analysts, major retail analysts were completely bamboozled by Eddie. Eddie's intense focus on his stock price kicked off a number of other scams as a public company, including bloating inventory numbers. At first, you may wonder, that's not bloating your sales numbers. Why was it in Eddie's interest, and Sam E. Antar, who was the CFO at the time, why was it in their interest to bloat the amount of inventory they had on the books? well everything went public you know they had to continue to to commit fraud they had to they had to continue to elevate the stock price because eddie was the biggest shareholder and he wanted

to get rid of his stuff you know the stock you know the company was garbage they wanted to dump it so in order to do that they had to keep on generating better and better and better in numbers because it's a little bit like a ponzi scheme if you begin by committing fraud you've got to continue committing fraud and that's exactly what he had to do so how do you commit fraud But one of the ways you commit fraud, one of the easiest ways to boost your earnings is to inflate your inventory. You know, it's not known to most lay people. It certainly wasn't known to the people in the warehouses and crazy. But if you increase your inventories, if you inflate your inventories, you're inflating profits.

Because inventories are used, inventory levels are used to compute profits. I won't go into the mathematics now, but they are. It's really simple math, too. So he'd call in the guys from the warehouses and say, look, we've got to boost the value of the profits. We've got to boost the value of the warehouses. We've got to boost what's in the warehouses. And he said, well, you know, why do we have to do this? You know what I mean?

It doesn't seem necessary. He said, look, it's good for the company. Got to do it. So they did. And it boosted the – it really boosted their profits. And it enabled Eddie to produce phony financial statements and dump his stock. Was that something? And the only thing that Eddie really couldn't lie about to investors was his stock sales, it seems.

That's right. Which he was, when the price of the Crazy Eddie stock went up, his PR representative would go to the press and say, we're still intensely focused on growth. And then there might be a little paragraph that, oh yeah, Eddie Antar sold millions of dollars worth of stock. Yeah. For investors at the time, because I'm sympathetic to them, you want to believe what you read in an IPO document,

and they aren't necessarily fools. Was the insider selling really the only sign that you think, let's say, a retail investor at the time could have picked up that something was awry? Well, for one thing, those insane growth numbers seemed a little suspicious. There was a negative article before the IPO in Barron's. They actually did. One of the very few skeptical articles was in Barron's. They looked at these numbers, and it was sort of a skeptical article. They said, yeah, it's going to be very hard for them to sustain these numbers. Of course, they had no idea that there was any kind of fraud. But there were certain red flags that were showing up, like the excessive, the too-good-to-be-true numbers. There was also self-dealing. There

was constant self-dealing among the Antares, which had to be disclosed in the IPO and in the financial statements, which just didn't look good. It was legal, but it didn't look good. And there was a lot of smoke, but there was no fire. What kind of self-dealing? Oh, well, for instance, one of the things that Eddie did, he established a medical school in the Caribbean. Oh, yes.

It was one of his side businesses. So here's a guy with a high school dropout, bright guy, but he's operating a medical school in the caribbean with partners in the caribbean where the whole uh the whole pitch was you see if you wanted to get into medical school you didn't have the grades well come down to the caribbean and you know we'll let you in and it was a big scam okay but because he loaned money because crazy eddie the business loaned money to his to his uh medical school venture he had to disclose it i mean he didn't have to disclose it but it would have been no it was they couldn't take the risk. Let's disclose everything." They disclosed it. It was in the IPO. It looked

bad. Barron's, in their article in 1984, they focused on this very comical little medical school in the Caribbean. But it didn't bring down the whole company. It was just a red flag. You mentioned that the administrator of the medical school was essentially hired because he was loyal to crazy eddie and that gave him the qualifications to run a medical school in the caribbean yeah well they had a they had actually one of eddie's pals was a was a psychologist was a licensed psychologist but you know he wasn't a medical doctor and they didn't have any medical doctors on the faculty uh they did have one of their guys who was actually a store manager down there in the caribbean uh to manage things and eventually he had to bribe his way out of the

country because they wanted to arrest them you know apparently they arrest people in the caribbean if you owe money and they would have thrown him in jail so he sent sammy antar sent his cousin down to the down to the caribbean with a whole lot of cash and bribed everybody and got him out of there jeez one of my favorite lines in the book is uh quote the frauds were like hungry rattlesnakes that needed to be fed lest they strike and kill you interviewed sammy antar extensively for the book the cfo of crazy eddie was there a point where you you the frauds became too too much to contain? Was there a singular point where, at least for Sam, that he realized there's really no turning back from this inventory scam? We started with a couple million dollars

of lies, and now we're at $50 million. Well, one of the things that really nailed them at a certain point was comp store sales. Investors were looking at the sales store by store. Are they growing because of expansion? Or are they growing because more people coming in and buying stuff, comp store sales. So they looked at the sales of stores that had been around for a while. So they had a boost. Comp store sales was lousy. I mean, everything was lousy. There was a lot of competition. People were coming in and they were competing with Eddie on price because he's going to open the door to competition electronics. So there were all kinds of stores coming in and saying, oh, we have the real

lowest prices. So they were being hammered by comp store sales, by their competition around 1985, 1986. So they had to boost comp store sales to do this. They had cash in Israel, okay, that they'd skimmed in previous years. Look, let's take this money that we got sitting there in the Caribbean. Let's bring it in. Let's stop it into the cash registers of these older stores to boost our comp store sales. That became known as the Panama Pump.

It was one of the more interesting instances of money laundering sort of going into reverse to prop up a company. panama pump they pumped in money from israel through panama they thought well you know if we if we go put it through panama nobody will notice you know they don't realize that you know bank secrecy isn't what it's what it's all cracked up to be um they were eventually discovered but anyway they brought in this money and they threw it into the cash and they improved their cost of sales enabling eddie to uh cash out his stock but they they couldn't really continue you're doing this. It was just getting to be too big. There was too much fraud. So Eddie decided,

I got to get out of here. I can't be here anymore. So he started an exit strategy. I got to get out of here. What am I going to do? Send this money to Israel? And he followed. He followed with fake identities and fake passports. And he made the mistake of assuming that israel would be okay with um lying about his identity yeah yeah well he set up uh he said he gave a citizenship to a non-existent person to a to an alias which israel didn't like you know setting up a uh citizenship uh uh for an alias you know terrorists could do that but you see what got him overseas you see was that he was taken over so they didn't occur to them when they went public it didn't occur to them that when you go public and you're selling stock to the

to the public that somebody can come and buy up all your stock kick you out and then if they do that and it's a fraudulent company well they're going to discover the world that's exactly what happened with with eddie you know they started to get interest take over interest and sure enough that's what was the catalyst that was actually the catalyst that that got eddie out of the company and into israel this you know he knew that the the volume of fraud was such he was going to go to jam unless he got out of the company. But he messed up his flight to Israel. As you pointed out, he violated the law in Israel, too, and the Israelis didn't like it. Something I found shocking about the takeover candidates as well were that once they found

out that there were some amount of fraud going on at the company, that still didn't dissuade them from wanting to take over the company. Sam Antar basically told them, you have no idea what kind of can of worms you're opening by trying to you don't want this company and yet even when they found an amount of fraud with with inventory levels when they went in and looked at the books that's they they were still interested in taking over this this kind of bum company well they didn't really discover the inventory fraud until after they after the check cleared you know they'll say you know don't celebrate until the check clear well after they bought the company okay and when i say they i'm talking about smart guys i'm talking to my fellow named victor palmieri and he was one

of the sharpest takeover people in the 1980s oh he had he had puffed pieces coming out his ears believe you me and this guy would have had some of the best publicity he was a sharp dude he took over the company in partnership with this fellow from texas and they took over the new cfo came in You know, they threw out the old management. UCFL came in and they said, what the fuck is this going on here? They discovered that the inventories had been grossly, grossly inflated. And then it was all downhill from there. They were done.

One part that shocked me, surprised me, I should say, about Eddie Antar's trial when he had been brought back to the United States out of Israel is that none of the equity analysts who'd been duped by him showed up to testify. Yes. And these were some of the people who were fraud victims, and yet they didn't want to explain how they'd been duped. That's right. That's right.

The prosecutor went to all the guys who had recommended the stock, and they said, look, you know, you were victimized bad. He lied to you, so you relied on those lies, right? So, you know, let's testify. They said, no, no, no, no, no, no. You don't get it, they said to him. And we were selling the stock. That was our job, to sell stock, not to, you know, so we weren't misled by nothing. We saw that we can't testify to that. None of them would testify for the prosecution because the prosecution, well, for a time, naively believed that these guys were victims. They weren't victims. They were called conspirators. And they admitted to it. They wouldn't testify. They got some schlub. They got some little

investor to testify that he bought the stock on the bank. No, they had to get somebody to testify to that. They got some little guy from New Jersey to testify. I believed what I read. They couldn't get the pros. They couldn't get the analysts to do that. The book, Retail Gangster, The Insane Real-Life Story of Crazy Eddie, I recommend it. It was a wild ride. I very much enjoyed it. Thank you for joining us on Motley Fool Money. Gary, Oh, thank you. I enjoyed talking to you. Thanks very much. As always, people in the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.