Ghostly Insurance
A little more than a month ago, Equity Funding Corp. of America was a rapidly growing conglomerate of financial services with a dazzling record of insurance sales. By last week, Equity and its largest insurance subsidiary were the center of one of the biggest business scandals in history, an unsavory mess that includes charges of false bookkeeping, large numbers of bogus insurance policies and the dumping of huge blocks of soon-to-be-worthless stock by company officers and other investors on the basis of inside information.
As swarms of auditors sift through company records, spreading revelations of fraud indicate losses of many millions. Though dozens of major banks, insurance companies and brokerage houses are involved, the biggest losers are likely to be holders of the company's 8,000,000 shares of outstanding stock, which was once worth $80 a share but is now valued by some brokers at a round, dismal zero. At week's end, after three of Equity's top managers, including President Stanley Goldblum, had resigned, the company began bankruptcy proceedings.
The storm began to break around Equity four weeks ago--in a manner hardly calculated to reassure the expanding roster of investors who are becoming disenchanted with the stock market (see previous story). A former employee, Ronald H. Secrist, decided to blow the whistle. For some reason, Secrist told his story, not to the New York Stock Exchange or the Securities and Exchange Commission, but to Raymond L. Dirks, an insurance specialist with the Wall Street research firm of Delafield Childs. Dirks first warned three of his firm's big clients holding Equity shares. Then Dirks confronted Equity with the charges. After that he got around to mentioning the matter to the SEC. Rumors of the company's difficulties began racing through the financial community, and big shareholders like Bankers Trust, Chemical Bank and Sears Pension Fund are said to have begun unloading. In eight days, the price of the stock was forced down from $25 to about $14. Because of the heavy selling, trading in Equity shares was halted by the New York Stock Exchange on March 27. By then, the SEC, along with insurance regulators from California, Illinois and other states, finally moved in to investigate.
The activities that they have uncovered add up to an astonishingly audacious business flimflam. In dire need of cash because of sagging mutual fund sales, the company's officials in 1969 devised what seemed to be a surefire way to get capital, brighten their balance sheets and keep their stock attractive. They began inventing fictitious insurance policyholders, putting them on the books and selling the phony policies to other companies that were in the business of reinsurance. Under this arrangement, the reinsurer pays the company that sold the policy $1.80 for every $1 it gets in premiums the first year. The buyer hopes to make a profit by later getting most of the premium money while the seller continues to service the policy. To get the money to pay the premiums for phantom policyholders, Equity had to sell greater amounts of fictitious insurance policies every year. That it did.
Eventually the bogus policies became an office joke as knowledge about them spread to an extraordinarily wide range of employees. Often on the eve of an audit by outside accountants, squads of employees would work through the night creating records for nonexisting policyholders. By the end of 1972, Equity carried more than $6.5 billion worth of insurance on its books. Investigators now reckon that up to $1 billion was fake. In Chicago, auditors have been unable to find $24 million in bonds that Equity Funding listed as an asset. At one point they broke into a safe deposit box at the American National Bank and found it empty.
When the blowup came, Equity owed about $55 million to such banks as First National City, Wells Fargo and Franklin National. The banks have a strong claim on corporate assets, and some of this debt is likely to be recovered. Authorities figure that there will also be enough to cover the benefits of the company's real, live policyholders. Less lucky are the reinsuring firms. Ranger National Life Insurance Co. of Houston, for example, could lose as much as $8.7 million. Even such a sophisticated insurer as Hartford's Connecticut General carries about $700,000 in Equity reinsurance policies. Another potential loser is Loews Corp., the big real estate and hotel firm, which bought 217,000 shares of Equity just before the scandal broke. Loews is now contesting its purchase and talking about suing the sellers. According to Wall Street sources, they were mainly clients of John W. Bristol & Co., a subsidiary of Boston Co.--which was one of the firms warned by Dirks.
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