Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finalies of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. 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 is 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 Warrows. 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 scam. He was working in clip joints in Times Square where he was selling overpriced gizmos and electronics to the 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 going to talk to you guys. Those clip joints, I think there might still be a few left in Times Square. They were filled with, you know, you go, you walk past, and I got these windings. 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, you know, you really have to have to be good at selling in order to sell someone, you know, a $60 camera for, 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 age, you go into one of these stores, and they jump on you and they con you and they lie to you. And this is how Eddie learned salesmanship. And this is sort of what he inculcated in his stores,

except, of course, they didn't, they were quite that bad. They didn't rip off people quite the way he did in Times Square. But that's where he learned salesmanship. And 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. And they also maybe had more reason to be skeptical. tourists wandering in, you know, after they were trained supposedly to sniff out fraud. And they

just swallowed whole the lies that it fed to them, you know, in the run-up to the IPO, which was a work of art in the stock fraud. 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 tricycle. state area up in the Northeast. And I know you've never stepped foot in a crazy Eddie store, but you walk through the customer experience in the book. So 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, well, Eddie personally,

and later it's 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, N-A-D. nail at the door. So you go in, you're looking for like a Sony stereo. He might have advertised the Village Voice, his other places. And he would want to sell you not the higher priced Sony, but a lower price 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 usually bait and switch. You know, hey, you're trying to sell somebody, something that is more expensive.

We try to sell you something that was less expensive. But it was still basically the same principle. Customer walks in looking for an advertised product, and he walks away with something else. And that was the big, big con game with Crazy Eddie. That was the big switch that they'd pull. 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 switch 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 going to get it. You're one of these educated consumers. You know, you're not going to be switched. So if they would sell it, you know, look, if it's in stock, we'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 to sign. So you might hear somebody say, well, you know, let's go at a lunch. You know, we've got to go to lunch. What happened was that was like a code word that 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'd say, okay, here it is. And actually, they were selling you were used and possibly even. defective product. That was known as the lunch process. And the way that he was able to beat competitors at that time was simply skimming the sales tax. So, 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. It was also the New York state tax authorities, too. They were supposed to be collecting sales tax and 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 plus, say, $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. And this $14 was used. used to enable Eddie to actually charge less than sometimes on the wholesale price. So he was able to charge less, cut his prices by simply swindling the customer, was basically lying to the customer that he was collecting sales tax and committing tax fraud. And he was never caught for it, you know, never caught for him. So 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 of you, if you're in business, is to, you know, certainly in those days when the IPO boom was just beginning, was to sell stock to the public.

You know, they correctly gauge, you know, that the market for, you know, electronic stores, that there'd be a market for electronics. It was very hot in those days. You know, nowadays, you think, oh, my God, electronics. who's going to buy stock in the electronics? It was very hard in those days. It was the big thing. It was like Bitcoin, you know. It was a 1980s 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 the credit eye. And that idea was simply reducing the skim, right? And that idea was to reduce the skim when he decided, look, you know, they were taking money out of the company, say, they were taking money out of the company, taking money out to avoid paying taxes.

So he was saying, look, you're shooting yourself on 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. 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 skin, they were able to do it. And they got a great

underwriter. They got Oppenheimer. They got Wall Street behind them. Ah, 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, and this is the only time we'll do free advertising on the show. It's a Crazy Eddie blowout blitz. Crazy Eddie's not playing with a full deck because he's practically giving away TVs, VCR's, Michael Aevovin, stereo, video camcorders, and 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 blowout blitz, and crazy, and he's going nuts with his lowest sale prices ever. See, crazy and he now, his blowout split sale prices are insane.

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. You know, I mean, to this day, people remember them, you know. 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 it drove into their minds the idea that you're going to get the cheapest prices of Crazy Yetty. So it really drove sales for the company and it made them expand and expand and expand. At their peak, they had 43 electronic stores. That'd be unheard of today, the 43 electronic stores in the Northeast. from Philadelphia, up into Massachusetts. It was all because of Jerry Carroll, that guy in the commercials. Terrific, terrific guy.

And 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? Well, yeah. I mean, they were promising the deal that, you know, they're playing off everybody else's prices. You bring in their prices. and we'll beat it.

So the competitors lost the credibility of their pricing, and they hated crazy Eddie for doing that. No matter what we charge, he's going to beat him. Now, in actual fact, he didn't beat them. Most people didn't want to negotiate. They didn't want to do all that. But nonetheless, that was their image. And they didn't really give customers the lowest prices necessarily.

Most people didn't ask for. But nevertheless, it just really upended the whole. whole world of electronics. Because, you know, in those days, you know, it was very hard to engage in in discounting because of the fair trade laws. And Eddie surmounted them in various ways. He surrendered 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 they, the 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 is 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, you know, home shopping network. We tried to create a crazy 80 home shopping network with IDION for, like, 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. 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. So 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, you know, if the state doesn't care, you know, they were very rarely were their consumer complaints against Crazy Eddie. There was very little on the public record indicating that these were sleaze balls when it came to salesmen, except they just didn't care. You know, they used euphemisms. You know, Eddie used to use euphemisms in describing what they were doing,

educating the consumer rather than, you know, switching the consumer. So they didn't really care. You know, their job was to sell stock. It was to bring in merchandise, meaning stock, being in companies, and sell it. So that was the aim. It wasn't to, you know, to really give, you know, they're supposed to do due diligence. They still are. They're supposed to do due diligence. And they did do diligence, but they were easily misled. And who the hell knows whether they really wanted to be misled because they did not ever determine that 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 take

them on hour-long, 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-old. He didn't like to appear. He didn't like to be interviewing. 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. So they hired a PR guy named Ed Colleton, who was an old-time Wall Street PR guy.

He did a wonderful job for them. And he would set up Eddie with these analysts and he'd take him on tours. Eddie would take him on tours of the store that they got on 57th Street, which was their showcased tour. And go one-on-one on them. But the one-on-ones, as they call 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. You know, Donald Selefkin and Genrette, 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, is a public company, including bloating inventory numbers. And at first, you may wonder, that's not like bloating your sales numbers. So why was it in Eddie's interest? And Sam Antar, Sam E, Antar, excuse me, who's the CFO at the time, why was it in their interest to bloat the amount of inventory they had on the books.

Well, actually, they went public. You know, they had to continue to commit fraud. They had to continue to elevate the stock price because Eddie was the biggest shareholder, and he wanted to get rid of his stock. You don't 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? 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 is 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, you call in the guys from the warehouse. look, we got to boost the value of the profits. We got to boost the value of the warehouses. We 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. 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. Yeah. 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 Antarh sold millions of dollars worth of stock. Yeah.

For investors at the time, because I'm sympathetic, 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 were, they seemed a little suspicious. You know, there was a negative article before the IPO in Barron's. They actually did. One of the very few skeptical articles was in Barron. And they looked at these numbers, and they said, and it was sort of a skeptical article. It said, 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, you know, there were certain red flags that were showing up, like the excessive for the two good to be true numbers. There was also self-dealing. There was constant self-dealing among the Antars, which had to be disclosed in the IPO and in the financial statements, which just didn't look. It was legal. but it didn't look good. And there was a lot of like smoke, but there was no fire. What kind of self-dealing?

Oh, well, for instance, one of the things that Eddie did, you know, he established a medical school in the Caribbean. Oh, yes. As 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 pitch was, you see, if you wanted to get into medical school and 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 medical school venture, he had to disclose it. I mean, he didn't have to disclose it, but it would have been, you know, it was, they couldn't take the risk. That let's disclose everything. They disclosed it. It was in the IPO, and it looked bad.

Barons in their article in 1984, they focused on this very comic, a little medical school in the Caribbean. But it didn't bring down the whole company. It was just a red flag. Yeah. You mentioned that he hired, 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, actually, one of Eddie's pals was a psychologist, was a licensed psychologist. But he wasn't a medical doctor. They didn't have any medical doctors on the faculty. did have one of their guys who was actually a store manager down there in the Caribbean to manage things, and eventually he had to bribe his way out of the country because they wanted to arrest them. Apparently, they arrested people in the Caribbean if you owe money, and they would have thrown him in jail. So he sent Sam E. Antarson, his cousin down to the Caribbean with a whole lot of cash,

and they bribed everybody, and got him out of there. Jeez. One of my favorite lines in the book is, quote, the frauds were like hungry rattlesnakes that needed to be fed lest they strike and kill. You interviewed Sammy Ansar extensively for the book, the CFO of Crazy Eddie. Was there a point where the frauds became 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, you know, because they were growing, you know, investors would look at the sales store by store, you know, are they growing because of expansion or are they growing because more people are 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. Comptor 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, you know, he's going to open the door to competition of electronics. So there are all kinds of stores coming and say, 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 a 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 com 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 put it through Panama, nobody will notice, you know. They don't realize that, you know, bank secrecy isn't what it's all cracked up to be. They were eventually discovered. But anyway, they brought in this money and they threw it into the cash. And they improved their constitutional sales enabling Eddie to cash out his stock. But they couldn't really continue 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, you know. I got to get out of here. What am I going to do? Send his money to Israel.

And he followed. He followed with fake identities. fake passports, and he made the mistake of assuming that Israel would be okay with lying about his identity. Yeah, yeah. Well, he set up, he said he gave a citizenship to a non-existent person, to an alias, which Israel didn't like, you know, sitting up a citizenship for an alias. You know, terrorists could do that. But you see, you know, what got gotten out of overseas, you see, was that he was taken over. He said, 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 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 fraud. And that's exactly what happened with Eddie. You know, they started to get interest, takeover interest, and sure enough. That's what was the catalyst. That was actually the catalyst that got Eddie out of the company and into Israel. He knew that the volume of fraud was such. He was going to go to Jam unless he got out of company.

But he messed up his flight to Israel. As you point out, he violated the law in Israel, too, and the Israelis didn't like that. 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, like, you have no idea what kind of can of worms your opening by trying to, you don't want this company. And yet, even when they found an amount of fraud with inventory levels, when they went in and looked at the books, they were still interested

in taking over this kind of bum company. Well, they didn't really discover the inventory fraud until 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, hey, I'm talking about smart guys. I'm talking to my fellow named Victor Palmieri. He was one of the sharpest takeover people that I did. He was, oh, he had puffed pieces coming out his ears. Believe you, me, and this guy 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. New CFO came in, and they said, what the show what is this going on here? They discovered. that the inventories had been grossly, grossly inflated. And then it was all downhill from there. It was, 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 had been duped by him showed up to testify. Yes. And these were some of the people who were his 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 would recommend the stock. And they said, look, you know, you were victimized. He lied to you. So you relied on those lies, right? So, you know, let's testify. They said, no, no, no, no, no. You don't get it. They said to him.

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 this. We can't testify that none of them would testify for the prosecution. Because the prosecution, well, for a time, naively believed that these guys were victims. They were victims. They were called conspirators.

And they admitted to it. They wouldn't testify. So they got some schlub. They got some little investor to testify that he bought the stock on the bay. Now, they had to get somebody to see to testify. So they got some little guy from New Jersey to testify. You know, I bought, I believed. 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 Yeti. I recommend it. It was a wild ride. I very much enjoyed it. And thank you for joining us on Motley Fool Money, Gary Weiss. Oh, thank you. I enjoy 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.