There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Greg Kyte: If someone tried to have a business meeting at my funeral, I would haunt the fuck out of that guy forever. Funerals are for closure and for mourning the life of an amazing individual, specifically me in this circumstance. Not for strategic planning or for financial machinations.
Earmark CPE: If you'd like to earn CPE credit for listening to this episode, visit earmark Cpcomm. [00:00:30] Download the app, take a short quiz, and get your CPE certificate. Continuing education has never been so easy. And now on to the episode.
Caleb Newquist: This is Oh My Fraud, a true crime podcast where our bad guys are smart enough to figure out how to get a bunch of life insurance proceeds without killing anyone. I'm Caleb Newquist and.
Greg Kyte: I'm Greg Kite. So, Caleb, today we're talking all about, [00:01:00] uh, insurance salespeople. Uh oh. And I just I just had a great I just, like, literally today on my far side calendar, there was a, there was an old, old Far Side cartoon. Just kind of. I love the far Side. Basically the whole insurance salesman trope that they're horrible people and always trying to back you into a corner and sell you something that you're not interested in. Sure. Yeah, of course. But yeah. So not only are they just stereotypically bad people, we're going to show [00:01:30] how they're specifically bad people today.
Caleb Newquist: Yeah. Very exciting. Which brings something to mind. Greg, do you have a life insurance policy on yourself?
Greg Kyte: Oh, I do, uh, okay, Yeah. And and it's the. Do you.
Caleb Newquist: Um, yes, I do.
Greg Kyte: Okay. How much is your life insurance policy?
Caleb Newquist: I honestly.
Greg Kyte: You don't know. Is it, like, through work? Like you just get it as a person?
Caleb Newquist: Yeah, it's through work. I think I have, I think I have one through our insurance company, but I definitely have another one through work. And I probably [00:02:00] it's it's in the hundreds of thousands of dollars for sure. Gotcha. Yeah. And so, like, I don't think it's I don't think it's more than a million, but it's, it's enough money where, you know, there'd be there'd be a few years there where it'd be. It would be fine, you know. Yeah. Yeah.
Greg Kyte: People, the people that need to get taken care of are gonna be taken care of.
Caleb Newquist: They get taken care of.
Greg Kyte: Yeah, yeah, yeah, yeah. That's right. Chris. Crystal. My fiance. Same thing we were talking about that she has a life insurance policy through her work. Has no idea. Uh oh. How much it is or any [00:02:30] anything about it. I mean, she knows that she filled out the paperwork and there's probably beneficiaries, but. Right. Not you know, it's and likely and they're not you. They're not not me. Not at this point. Um, and maybe they won't be. But, you know, I think I well, it's it's interesting. Yours is hundreds of thousands of dollars because a lot of times the work policy is basically, here's, here's $12,000 to make sure that the casket's nice that. Yeah. Or yeah, that you can afford a casket.
Caleb Newquist: Yeah. Like typically there [00:03:00] is kind of like a standard, uh, benefit, but then you can pay extra to get extra benefit. Gotcha. And I don't remember because I have to do this every year for open enrollment, but I just don't I just don't happen to remember. But it's enough. And it's like, it's so stinking cheap though, okay? Like, it's just like it's it's maybe it might be ten bucks a month for like half a million and benefit.
Greg Kyte: Yeah. That's because you clean living, man. I got half a million on me through the AICPA [00:03:30] insurance, which is supposed to be a really good deal. I've never, like, uh, shopped it around to see if I'm getting taken for a ride by them, but, uh, I did. My premiums just went up like a bunch last year, and they were like, if.
Caleb Newquist: This cuz you turned.
Greg Kyte: 50. Probably. Yeah. And so then they're like, if this if this sucks, you can try to like, petition your way out of it. And, and I couldn't do it because what was. Oh because because one my weight I'm a I'm a big mofo. And [00:04:00] they didn't like my weight because it screws up my. Well you know I don't know. Do you respond.
Caleb Newquist: And tell them that BMI is bullshit.
Greg Kyte: No I didn't, but that's the thing is, I also know Arnold Schwarzenegger won Mr. Universe and I think his BMI was at least overweight, if not obese at the time.
Caleb Newquist: I think he was obese.
Greg Kyte: Yeah. So so there's that. But then the other thing is I was too honest. And they were like, they wanted to know my history of smoking. And I was like, I have like a cigar like once or twice a year. And they're like, oh, we Your [00:04:30] premiums are exact. We will not budge on your premium because you are a smoker. And I'm like, oh, gee. Like, you need to be need to be tobacco free for at least a year to, to qualify for any kind of cut on your proceeds. And I'm like, okay, well next year I'll lie about it. I won't because this is a fraud podcast and we don't we hold ourselves to a higher ethical standard than.
Caleb Newquist: We absolutely do.
Greg Kyte: And honestly. Honestly, no. Like for reals. Yeah. If I did lie about that, I would have so much [00:05:00] guilt and I'd probably go back and be like, hey, hey, I forgot, man, I did, I did, I do smoke a cigar with my mom every year for Mother's Day. So yeah, because this is. I'm so sorry, Greg.
Caleb Newquist: This is this is who Greg Kite is. Ladies and gentlemen, just.
Greg Kyte: If he makes a bad decision, just take a beat, and then the guilt will. The guilt will take over. Yeah. So. Yeah.
Caleb Newquist: Yeah. All right. No, the reason we're talking about this is because today we have a deep cut. My friends, this case spans three different decades, [00:05:30] and it involves one of the fastest growing insurance companies of the 1960s. Equity Funding Corporation of America's roots go back to the late 1950s, starting with a man by the name of Gordon C McCormick. Mccormick had a good operation going in California. He had one company that sold Insurance Equity [00:06:00] Funding Corporation and another that sold mutual funds. Gordon C McCormack, Inc.. Very creative name. Everything was housed in a parent company known as Equity Funding Corporation of America. Now, if you are a very bored person and you are fact checking all these things I'm saying, let me just say right now that there were several name changes in this early history of the company, [00:06:30] but it is very tedious and very boring. So I'm not talking about them here, just acknowledging that those are things that happened. Okay.
Greg Kyte: Yeah, yeah, this isn't okay. This isn't the, uh, the exhaustive, unabridged, uh, history of equity funding at all.
Caleb Newquist: Right? So just want to get that out there.
Greg Kyte: Set expectations.
Caleb Newquist: Right? Yes, exactly. Now then, around this time, McCormick had three key employees. But the most important of these was [00:07:00] Stanley Goldbloom, one of his top salesmen and the guy who trained the sales force. All of McCormick's sales force were licensed to sell insurance and mutual funds, and they were trained to be aggressive. This was kind of like always be closing before there was always be closing. Greg, are you familiar with this?
Greg Kyte: Yeah, I am, yeah. Okay. Uh, wait. Uh, it's the it's that one, uh, gooseberry goose down. What's the name?
Caleb Newquist: Got it. That's the one. Gooseberry goose down by [00:07:30] David. Dammit.
Greg Kyte: No, wait. What is it? What is it really?
Caleb Newquist: No, it's Glengarry Glen Ross by David Mamet.
Greg Kyte: I wasn't fucking around. I couldn't I couldn't remember it, but I knew it had that kind of that kind of, uh, that little rhythm to it. To it. Yeah, yeah yeah yeah, yeah. No.
Caleb Newquist: Very good, very good. Anyway, McCormick's, uh, company was one of the key agents for a company called Keystone Custodian Funds out of Boston. And the keystone salesman who worked with [00:08:00] McCormick was a guy by the name of Michael Robert Reardon. I hope I'm saying Reardon. Right. Reardon was a very, very good salesman. Uh, he had a lot of contacts on Wall Street, and he was going places, like, fast. Reardon was impressed with McCormick's business in California, so he invited him out to New York. And on that trip, the two of them closed more than 50 deals with brokerage firms to supply securities for McCormick's mutual fund operation, and signed up more than [00:08:30] 1000 agents to sell a new insurance mutual fund program concept that McCormick had been working on for a few years, and was starting to show some results. We'll get to that in a minute. But for now, there was one small problem. Mccormick didn't have the capital to make this expansion happen.
Greg Kyte: Okay, so we just brought on a thousand salesmen, but he's like, uh, he's like, yeah, about that.
Caleb Newquist: Yeah, I have no way to pay these people. Yeah. Right. [00:09:00] Right, right. Anyway, yes. So that's the problem. You got a capital problem? Yeah. So Reardon offered to buy into equity funding.
Greg Kyte: Makes sense.
Caleb Newquist: Makes sense? Yeah. Right.
Greg Kyte: Yeah. You don't you don't have the capital, so you get investors, right?
Caleb Newquist: You got it. So in October of 1960, Reardon called McCormick and Goldbloom and two other key employees to New York to discuss the deal. But it didn't [00:09:30] go very well. Okay. Mccormick and Reardon and the other two guys, they confronted McCormick, and they wanted a new deal. They wanted a company that would be split evenly five ways, 20% each. Mccormick refused this. He was not interested. He wanted 51% of anything they came up with.
Greg Kyte: I've seen I've seen this episode of Shark Tank. Yeah. You like for whoever starts, the company is just hell bent on going. I am not going to give up a controlling share of this company.
Caleb Newquist: And Mr. Wonderful is always like, [00:10:00] oh, just give me 1% of every sale in forever and ever and ever until the end of time throughout the universe, right?
Greg Kyte: Right.
Caleb Newquist: Whatever that guy's fucking. Yeah. Anyway, they rejected that counteroffer. So Riordan, Goldbloom et al. They rejected this 51% business. Right? Well, they would have had 49%, but they rejected McCormick and 51%. And then in what I imagine to have been done in an elaborate flourish, [00:10:30] Riordan pulled out a checkbook and offered to buy McCormick's business on the spot. Okay, and this amount is going to sound weird, but I assure you that it came from one of the sources for this episode. He wrote a check for $55,000, $392.14. Now it is 1960.
Greg Kyte: A very specific number. That too. Yes.
Caleb Newquist: No. I mean, by the account that I read, Riordan had like [00:11:00] run the numbers and figured out what the business was.
Greg Kyte: Oh, okay. I thought he was like, hey, hey, McCormick. What what's the mortgage on your sound? No, I think it was like, what's the mortgage on your house? Cool. I'll write you a check for that right now. Right. And that. No, no.
Caleb Newquist: No, the account I read, the account I read is Riordan kind of went in there with this plan.
Greg Kyte: Oh, okay. So he'd done the math ahead of time.
Caleb Newquist: He had done the math.
Greg Kyte: Based on these parameters, your business is worth exactly $55,392.14. Yeah, to.
Caleb Newquist: The fucking penny. [00:11:30]
Greg Kyte: Slams the check down, check down on the counter. And it's like, are you gonna fucking take it or are you not gonna fucking take it? Was it a. Yeah. Aggro and aggressive like that I.
Caleb Newquist: Mean I don't know for the 60s maybe not.
Greg Kyte: So I think in the movie, in the movie version, it's going to be like that, right? When we write the script, we'll do that. Yeah.
Caleb Newquist: Anyway, McCormick was not happy about it, but as it turns out, he had some other prospects. So he took the [00:12:00] deal. And he's officially out of Equity Funding Corporation.
Greg Kyte: Things remain slightly volatile at equity funding. After that, the company was considering going public, but one of Riordan's new partners in his newly acquired business venture became a problem because that guy was a drunk. And, uh, according [00:12:30] to a New York Times article, that partner had, quote, incurred substantial losses at gambling tables in Las Vegas and Lake Tahoe and Southern California racetracks. So apparently an alcoholism problem with a gambling addiction, not a great, uh, portfolio to bring in you to your IPO.
Caleb Newquist: Uh, sounds sounds like a lot of fun, potentially, but not sounds.
Greg Kyte: Like a lot of short term. It sounds like a nightmare to me.
Caleb Newquist: Yeah. That's your [00:13:00] business partner then, right?
Greg Kyte: Hey, not.
Caleb Newquist: So good, right?
Greg Kyte: Let's bring him into the inner fold. Because you know what? He's a loose cannon. Um, so, uh, but. And also that guy, just for good measure, he also apparently, uh, passed some bad checks, so he's he's just a he's just a whole, a whole situation in himself. So because of that, that guy got bought out by Riordan. Uh goldblume. And the other partner.
Caleb Newquist: The third partner.
Greg Kyte: In May of 1963. Um, [00:13:30] but then in November, that guy sued him, saying that they owed him another $550,000, which seems excessive when they just, what, a couple years ago bought the business for one tenth of that. So I mean maybe they'd seen explosive growth. Who knows, but who knows regardless. Um, that guy, uh, they didn't have to pay him because he died of a heart attack. Uh, and, and his widow, who took over the lawsuit, just lost the lawsuit. So, uh, in [00:14:00] my mind.
Caleb Newquist: In my mind, you know what happened there? What's that like? Reardon or Goldbloom? One of them said you can drop dead and maybe he did.
Greg Kyte: Oh yeah, that's right. And that in that would be spooky if they did that and he did, that would give you a lot of control over I'd say uh, contract negotiations going forward. It certainly would. You see what we did to that guy. Maybe you should just agree to this right now. Um, so regardless of voodoo spells, uh, that [00:14:30] whole situation ended up working out pretty good for the remaining equity funding, boys. Um, and then finally in December of that same year, equity funding did go public. They issued 100,000 shares at $6 a piece. And by 1966, the, uh, other unnamed interest in the business, uh, he wanted to get cashed out, and he sold his shares to, uh, Reardon and Goldblume [00:15:00] for $870,000, so not again. Yeah. You're seeing. Because what? That was 1966. When did they buy this from? Uh, McCormick.
Caleb Newquist: 1960.
Greg Kyte: 1960. So in six years, you went from buying the whole thing for 55,000 to cashing out a chunk of it for $870,000. Not a bad business. Not bad.
Caleb Newquist: Not bad.
Greg Kyte: Um, so Mike Reardon and Stanley Goldbloom now had full control [00:15:30] between the two of them of Equity Funding Corporation.
Caleb Newquist: Remember that new insurance mutual fund program concept we just mentioned, Greg?
Greg Kyte: Yeah I.
Caleb Newquist: Do okay. Yeah.
Greg Kyte: Intriguing.
Caleb Newquist: Yes. So we're going to get into that that little piece of financial innovation started by Gordon McCormick and then Mike Reardon and Stan Goldbloom were now capitalizing on worked like this. Okay. Um, step one they sell [00:16:00] mutual funds to regular people. Okay. You with me?
Greg Kyte: Yeah. Not weirdos. Just normal.
Caleb Newquist: People. Regular people? Yeah. Or weirdos. Okay, people. Okay. Those people also wanted to hedge their bets. Okay. By having a term life insurance policy. Okay? A term life insurance policy, if you are unfamiliar with that, is a life insurance policy that is in effect for [00:16:30] a stated period of time. Is that how you understand it, Greg?
Greg Kyte: Yeah, yeah. So it's like if you if you get a ten year term life insurance policy and you live 11 years, you just wasted your money.
Caleb Newquist: I mean, yes, I suppose I mean, that's a gamble that didn't pay off, that is for sure.
Greg Kyte: I mean but but but you had peace of mind, I guess, during those ten years. So probably. So maybe that's what you were buying. Yeah.
Caleb Newquist: Right. Okay. Step three equity funding allowed their mutual fund customers to borrow against their holdings [00:17:00] to pay the premiums on a ten year term life insurance policy. Okay, okay. Yep. Still with me? Yep. Fantastic. The idea was that at the end of the ten years, the value appreciation in the mutual funds would outpace the total amount of the loan. The money that was borrowed to finance the premiums for those term life insurance policies. [00:17:30] Yeah, right. Okay. After ten years. Yeah. The term life insurance policy is over. The loan gets paid back. And by virtue of the appreciation in the mutual fund, the customers have come out ahead. Now, I have to imagine they probably allowed people to, like, maybe make payments back along the way if they wanted to. I mean, there's probably any number of different ways. I mean, who knows? Who knows that? Yeah. You know, the stuff that I read didn't get into those details, but that's the general idea. Yeah.
Greg Kyte: See. And so [00:18:00] the way so so basically, uh, I digested this a little bit. This is how this is how it makes sense in my head is that you got somebody and for whatever reason, hedging or not, somebody wants to invest in a mutual fund and they also want a term life insurance.
Caleb Newquist: They also want life insurance. Yeah.
Greg Kyte: So but and so they got some money. They take that money and they invest in the mutual fund. Yes. And then they so then so they are technically owners of that mutual fund and all of the increases thereof. But then they borrow money back from them, basically from themselves, from their mutual fund to buy the [00:18:30] premium, to pay the premium on the life insurance. And so then they're basically whether it's I mean, I'm assuming that it was just that monthly payments that they had to pay back to the mutual fund, which in effect, those were monthly payments to buy their life insurance premium for the term life insurance. And so but they're still technically owners of the mutual funds. So as the mutual fund just earns money and kicks ass as mutual funds always inevitably do, never fail, just without exception, [00:19:00] then by the time you basically you loan yourself the money and you got everything you wanted and you come out a little bit ahead, a little bit ahead, all this stuff and and life is good because of that. Yeah.
Caleb Newquist: And it's kind of, it's kind of interesting because in this day and age it seems kind of quaint. But at the time this was a big time, like kind of in terms of financial services, it was kind of this innovative thing, like nobody was doing this. And this guy McCormick came up with the idea [00:19:30] and, and Reardon and Goldbloom, they really kind of like exploited it. They really this is really what was the cornerstone of their business early on. Yeah. Yeah.
Greg Kyte: Well and yeah, yeah I mean the 1960s I mean what we're talking 80 years ago now. Wait. No, 60 years ago.
Caleb Newquist: 60 years ago.
Greg Kyte: Well, people will be listening to this in 20 years. Yeah.
Caleb Newquist: So it former former middle school math teacher, ladies and gentlemen, Greg Kite.
Greg Kyte: Everybody has hard time with subtraction. Every now and then. It's all right, [00:20:00] though.
Caleb Newquist: It's all right. It's all.
Greg Kyte: Right. Yeah.
Caleb Newquist: And so, with this clever little product, the remainder of the 1960s were very good for equity funding, and they were especially good for Mike Riordan and Stan Goldbloom. Now, about these two guys. They were kind of this classic study. In contrast, Riordan was born in Rochester, New York, in 1927, and he grew up in New Rochelle, which is just outside of New York City. Big Irish family. He attended Cornell and he quickly became successful. This, you know, successful [00:20:30] Wall Street securities wholesaler After getting into equity funding, he moved to Los Angeles. And he was kind of this man about town. He was well liked. He knew everyone financiers, politicians, celebrities. Apparently, comedian Jonathan Winters was a good friend of his, which I thought was a little fun fact.
Greg Kyte: That's across. What a fun friend to have. Jonathan Winters. Yeah. Would you ever stop laughing? Seems like a blast, right?
Caleb Newquist: Yeah. So, Goldbloom, meanwhile, was born in Pittsburgh in 1927, [00:21:00] middle class Jewish family. And he had one brother. His family moved to Los Angeles in 1942, and Stan was a good student and he had a keen interest in exercise and physical fitness. He initially wanted to be a doctor, and after he went into the army he was on the pre-med track. But then he got married and he ended up working in his wife's family's meat packing business. Uh, but, you know, after five years of being a, you know, kind of a. Well, I don't [00:21:30] know, butcher, I guess. Meat packing. You're not really a butcher. You're like a butcher at scale. Like that's fucking hardcore.
Greg Kyte: You're like, it's more genocidal.
Caleb Newquist: That's like a genocidal butcher.
Greg Kyte: More. More slaughterhouse.
Caleb Newquist: Less slaughterhouse.
Greg Kyte: Yeah. A prime cut for a.
Caleb Newquist: What's my favorite word for slaughterhouse? I think it's a, uh. What is that word for a slaughterhouse? Uh.
Greg Kyte: Vegan conversion center.
Caleb Newquist: That's the one. Never mind. All right. Anyway, [00:22:00] after five years in the meat packing business, Goldbloom decided to try his hand in insurance. And although he claimed to, quote, not know a life insurance policy or a mutual fund from an Apple when he started, he caught on pretty quickly and McCormick hired him in 1958. Now jumping back to when Reardon and Goldbloom were running equity funding together. Goldbloom was definitely more content to keep it to himself. He liked being at home [00:22:30] where he had. Remember, he likes exercise. Yep, He had a $100,000 gym in the back of his house in the 1960s. In the 1960s?
Greg Kyte: Holy crap.
Caleb Newquist: So I don't know what that I can't do the inflation calculation on that right now, but I assume that's $1 billion gym.
Greg Kyte: Yeah. That's a he had an entire Vasa fitness to himself at his maybe.
Caleb Newquist: Yes. Right.
Greg Kyte: Yeah. I don't know what all the person needs with with 40 treadmills just to themselves, but he had 40 treadmills in [00:23:00] his hundred thousand.
Caleb Newquist: Yeah, probably in 1960.
Greg Kyte: Yeah, he.
Caleb Newquist: Probably gave him names, you know, everything anyway. But yeah. Goldbloom kind of cut this imposing figure. You're six feet two. He was noticeably muscular through his suits. And he was also known for quoting Shakespeare which I don't know. That was kind of fun to throw that into the mix. Keeps people guessing. Yeah. Still, Goldbloom liked Reardon, and so he made the effort to get to know people that were kind of around and who Reardon to socialize with, and [00:23:30] that made him kind of well known, too. They were this good team despite their, you know, contrasting personalities. Yeah. Yeah. So in 1967, despite equity fundings growing business, Reardon and Goldbloom started making acquisitions to help turbocharge its expansion. From 1967 through 1969, the company made eight acquisitions that included insurance companies, asset managers and investment advisors, a bank, an oil and gas operation, real estate, and a [00:24:00] cattle breeding operation with 190,000 acres with 27,000 head in ranches in Iowa, South Dakota, Montana, Idaho, Colorado and Texas. Okay, because why not?
Greg Kyte: Diversification, I get it. But also, you can't be awesome at all those things.
Caleb Newquist: I completely agree with you.
Greg Kyte: Like yeah like they but again, I guess they're making acquisitions. So probably part of the acquisition process is keeping existing management in place or something like that to keep those going because that yeah, [00:24:30] that's a lot of what would you say disparate. Desperate. Uh, operations.
Caleb Newquist: So like the, you know, the insurance, I, the insurance and the, like, investment advisors, that kind of stuff.
Greg Kyte: Yeah, that makes sense.
Caleb Newquist: Even the banks, even the banking. Yeah. Right. Yeah. Yeah, sure. Okay.
Greg Kyte: But oil and gas.
Caleb Newquist: But oil and gas, like real estate.
Greg Kyte: Kind of investment. I could see that real estate is fine.
Caleb Newquist: Sure.
Greg Kyte: Yeah. But yeah, the oil and gas and the cattle breeding, that's, uh, that is, uh, that seems like [00:25:00] you're you're setting yourself up for for failure. Uh, biting.
Caleb Newquist: Off a little more than.
Greg Kyte: You can if you're not an expert. Yeah, but but right at the same time, I think that goes to show they must have been doing pretty good if they were acquiring a new, massive business every quarter for two years.
Caleb Newquist: Yep. They were a hot they were a hot stock on Wall Street. And by the end of 1969, Equity Funding Corporation of America was a full blown financial conglomerate. And with all this [00:25:30] massive growth, thanks to its packaged mutual funds and life insurance as well as the acquisitions, it quickly became one of the favorite financial insurance stocks on Wall Street. But before the 1960s came to a close, tragedy struck equity funding and it was an omen of things to come.
Greg Kyte: January 1969 was one of the wettest [00:26:00] months on record in Los Angeles. A. Late in the month, nearly 16in of rain fell in nine days. Bonkers rain that's close to two inches a day now. If you got two inches in one day, that would be, uh, unnerving. But if you got that for a week and a half, that over two weeks, that that's like you're this Noah's flood kind of situation. Yeah. I mean.
Caleb Newquist: As [00:26:30] I understand it, it does rain a lot in Los Angeles in January and February, but it doesn't rain that much.
Greg Kyte: No, that's. Yeah, that's an insane amount of rain. And early on in this monsoon, on the evening, uh, specifically of January 25th, uh, the mudslides that were induced by this rainstorm killed nine people in their homes. And one of those people was Michael Reardon. Goldbloom opened his Beverly [00:27:00] Hills home to Reardon's family. They plan to stay there a few weeks until they could temporarily move to Paul Newman and Joanne Woodward's house. Because, of course, you know, if you can, you should. Uh.
Caleb Newquist: It is Beverly Hills.
Greg Kyte: Yeah. Now, you might think that due to their long and successful relationship, Stan Goldblum may have sat back, you know, thought about what really mattered. The, uh, the important things in life. Take [00:27:30] some time to smell the roses. And maybe he did. Uh, but he clearly didn't take that much time, because after Riordan's funeral, many of the mourners went to Goldblum's Beverly Hills mansion for a reception, and at that reception, Goldblum called an informal meeting of the equity funding board of directors. I mean, lots of people were there at the funeral, right? If they got a fucking quorum, they might [00:28:00] as well have a meeting, right? Why? I mean, why not? They're all fucking.
Caleb Newquist: Quorum.
Greg Kyte: They're probably all wearing suits, too. Probably. Feels pretty cool. I mean, there had to have been a big table somewhere. Yeah, yeah. Just clear. Clear. The, uh, the the the food and then have your board meeting. And anyways, this, this informal meeting, uh, was to discuss how to reassure equity fundings investors. The company was a darling [00:28:30] on Wall Street. Uh, and they couldn't let anyone think that Mike's death was going to, like, torpedo. The good thing that they had going on. So it was it was like a they had a PR planning strategy session, like immediately after this guy's funeral. He's not they haven't even grieve, Greg. They have the only way.
Caleb Newquist: It's the only way to grieve.
Greg Kyte: Right? Right. Let's, uh let's let's be before the dirt ourselves.
Caleb Newquist: Before God and our dead friend, by hatching [00:29:00] a PR strategy about calming the nerves of our investors to.
Greg Kyte: Make sure that our investment stays stable. We don't want to depart with our money in the same way that we that Mike Reardon, Michael.
Caleb Newquist: That Michael has departed this earth. And our presence.
Greg Kyte: In the book titled The Impossible Dream, which was a full account of equity funding, it states that Dick Riordan, Mike's brother, uh, who would later become the mayor of Los Angeles, agreed [00:29:30] that it made sense to, quote, downplay Mike to hold the company together. But then there was the matter of Mike Riordan's equity funding stock. He had 400,000 shares that now went into his estate At this informal meeting, it was decided that the family would see its shares sold over a specified period of time, so as not to flood the market with the company's stock and drive down the price as flooding the market [00:30:00] will inevitably do. Oh, and Goldbloom said that they'd have to get Reardon's name off of the press releases. Uh, because that would be weird if a dead guy's name was still on press releases. Am I right?
Caleb Newquist: Awkward.
Greg Kyte: So, so awkward. But that's just one of those weird details when somebody passes away. Right? But yeah, but apparently that was a very important thing for them. And not everyone was crazy [00:30:30] about how this went down in that book, The Impossible Dream, it says that quote, at least one of the meeting's participants felt that it should have been delayed to another time. Mike had just been buried. It was hardly time to carve up the spoils. Nevertheless, it was done. Stan was now ready to turn his full efforts into building equity funding into a financial colossus.
Caleb Newquist: Now [00:31:00] that he was alone at the top of equity funding. Stan. Goldbloom needed people there that he could trust to do his bidding. He found those two people in Fred Levin and Sam Lowell. Fred, aka Freddie. Levin was born in Chicago and grew up in an Orthodox Jewish family. He attended Roosevelt University in Chicago and got a law degree from DePaul. Well, pretty early in his career. Pretty good.
Greg Kyte: Uh, CV going [00:31:30] on there.
Caleb Newquist: Yeah. Not bad. Uh, early in his career, he worked at the Illinois Department of Insurance from 1961 to 1964, and one of his jobs there was to determine whether an insurance company was inflating its assets. He joined Prudential Life Insurance Company of Chicago in 1964, Presidential was acquired by Equity Funding in 1967, and its offices moved to Los Angeles in 1968. Fred came with the deal, and he became the president of the insurance subsidiary and an executive vice president. [00:32:00] Sam Samuel Lowell was born in New York City in 1939. He attended the University of Florida and got an MBA from NYU in 1964. He started his career as an auditor at Haskins and Sells, which is a predecessor firm of Deloitte, which some of you may or may not know. Yeah, one of his jobs there was to find Embezzlers and clean up a company's operations. Another useful skill. Yeah. He joined equity funding as an assistant treasurer [00:32:30] and comptroller in April 1969. He he became an executive vice president less than a year later, and joined the board of directors in 1971. Goldbloom's approach to running equity funding was very simple. As he told Fred Levin in February 1969, publicly held companies do not lose money, and it was these three guys, Goldbloom at the helm. Levin as the insurance and product expert and Lola as the numbers guy. Who are going to keep building the [00:33:00] equity funding empire and made sure that it never lost money.
Greg Kyte: So Goldbloom, he wanted equity funding to grow quarter after quarter, year after year because capitalism and am I right? Ceo of course publicly traded company. Yeah you got of course you want that. And so do all your investors. He would set targets for growth and revenue, assets and earnings. And along with Levin and Lowell, they demanded their people [00:33:30] to make it happen. So how did they make it happen? Easy. Fake insurance policies. Oh duh duh. That of of course. Well, how does that work? Well, if you're familiar with the insurance industry, uh, you know, but for those of you who don't, there's this thing called reinsurance. And you might be thinking. What? Like insuring something again and. Yeah, basically. Yes. Basically that's [00:34:00] what's kind.
Caleb Newquist: Of what it is.
Greg Kyte: It, it it kind of is. It's, uh, one of those words. That is what it sounds like. Yeah.
Caleb Newquist: And we're going to explain it. Right, Greg. Yeah, yeah. Okay. Cool.
Greg Kyte: Uh, here's a, here's a very simple example of of how reinsurance can work. Uh, say there's two insurance companies, one has a bunch of life insurance policies, but not a ton of cash. And the second insurance company has a lot of cash on hand, but it would like to have more insurance policies in force. So [00:34:30] insurance company number one, who has a lot of policies, sells a block of those policies to insurance company number two. Insurance company number two gives insurance company number one like a buck 90 for every dollar in premiums that it's taking on. Uh, and it will keep 90% of all the future premiums paid on those policies. But company number one would get to keep 10% of those future [00:35:00] policy premiums. Uh, to cover administrative and back office expenses. Which company number one, uh, has agreed to keep doing on behalf.
Caleb Newquist: Like that company. That's part of the deal. Like they say, you can have all these insurance policies, but we'll handle the back office stuff. And we're only going to ask you for 10% of all future premiums.
Greg Kyte: Right. Which seems kind of nice. Somebody else.
Caleb Newquist: Seems fair. It actually seems kind of fair.
Greg Kyte: Yeah. If anything, that. That kind of sounds awesome. [00:35:30] Yeah. Cheap. Where it's like, oh, you're gonna do, you're gonna do all the work and I just get a take the money. Okay, well.
Caleb Newquist: But but remember, remember they're paying them a premium almost. They're paying them a big premium up front. Right. Almost to get them in the first place. So like so insurance company number one is getting that big influx of cash that it wants right up front. Yep. And then they're basically giving up all the future cash flows. I mean they're giving up 90% of the future cash flows right on the premium.
Greg Kyte: Well and again I mean yeah, [00:36:00] I mean I don't know I don't know the insurance back office business, but it would seem like 10% for the back office probably just covering costs probably. So probably. Well I don't know. But these insurance guys, they know if you're an insurance.
Caleb Newquist: If you're one of those insurance people and you're listening to this podcast, set us straight, send us an email.
Greg Kyte: Yeah.
Caleb Newquist: Or fuck off, whatever.
Greg Kyte: But but also also, you know, you know, who knows how to make money doing stuff insurance. Uh, people they have, you know, they've got they, [00:36:30] they crunch numbers like nobody's business. So they do indeed. Likely they were still getting a little. They were They're still getting their beaks wet on that 10% that they were keeping. So now just imagine if insurance company number one didn't actually have those life insurance policies to sell to insurance company number two. Let's say that'd be weird. Let's just say, hypothetically, that insurance company number one just made up a [00:37:00] bunch of those insurance policies that they sold to company number two, phony policies, phony premiums, phony policyholders, phony everything. But also imagine that insurance company number two didn't think to check to see if all these policies were real, because insurance company number one said it would just take care of all the administration. Uh, you know, storage. Et cetera. Et cetera. Back office stuff. Don't worry about it. We got [00:37:30] it covered. These are totally real policies. You don't have to bother doing any of that nasty work involved in, uh, things that are for sure real here. Now, now, also, imagine that company number one didn't just sell those policies to company number two, but they also sold them to a third insurance company and a fourth and a fifth and so on and so on.
Greg Kyte: And now that scenario [00:38:00] that you just imagined was exactly what equity funding was doing that was there, that that became their business model, uh, of how to grow their business. Because again, if you remember, that's what Stan was demanding that happen every month. Aggressive targets, aggressive goals. In 1972, equity funding had 23 reinsurers that were carrying $1.7 billion of coinsurance. [00:38:30] How they managed to do this is really quite amazing. It's also kind of hilarious. Uh, equity fundings. Electronic Data processing department had designed a computer program that would recognize categories of insurance by a code number. For example, code number 65 was for a policy being held by equity fund, by an equity funding employee, or code number 35 was for a union group contract, [00:39:00] but then there was code 99, and code 99 indicated a business that involved no direct billing. It was these blocks of policies, code 99, policies that were then sold to the reinsurers. But the people involved in devising the scheme were smart. They built checks and balances into the system to make things look more realistic. For example, every once in a while, one of these non-existent [00:39:30] policy holders needed to die because that's what people with life insurance do from time to time.
Caleb Newquist: From time to time that happens. Yeah.
Greg Kyte: That's. Yeah. Because it would be it would be suspicious if all you had was these life, these term policies where nobody ever cashed in on them because nobody ever died. So but these phony policies weren't dying all willy nilly. They were dying at a rate comparable to the actual death rate. Thanks, actuaries. [00:40:00] Yeah. Equity funding. Speaking of actuaries, equity funding is chief actuary. A guy by the name of Arthur Stanley Lewis led the charge of this phony policy operation and, along with the help of the company's head of computer programing and IT scores of programmers. Eventually, Lewis, the head actuary, worked with a young programmer named Alan Lewis Green, and together they built these programs to generate bogus life [00:40:30] insurance policies. Uh, Lewis invited green over to his house, and they were walking around the pool, and Lewis casually told green about the phony policies and asked if he wanted to join the phony policy team. And again, this is from the book The Impossible Dream. Alan Green is quoted as saying, quote, the job for me was a great thing because I love programing. He went on to say I was motivated by being able to do work [00:41:00] that I would enjoy, so he wasn't in it for the fraud. He was in it because he loved computers so hard.
Caleb Newquist: Isn't that amazing?
Greg Kyte: He says, I knew I was committing fraud. I really didn't think it would ever blow up. For one thing, it just seemed like a pretty foolproof thing. Uh, that's the words of someone who has never listened to our podcast. The program was constructed, [00:41:30] a green said, to produce as many phony policies as were needed for any period of time. Plus, phony loans had to be created. Remember, because of the policy, holders were borrowing against their mutual fund holdings to pay for their life insurance premiums. And and with every phony policy created, there was also a phony cash receipt trail created and merged in with the real cash receipts. So whenever someone reviewed all of those receipts, [00:42:00] you wouldn't be able to tell the real ones from the phony ones.
Caleb Newquist: Diabolical.
Greg Kyte: It's smart. Super smart. In other bases, these guys know their. They know their business. Um, so they would create records of the phony policies. But as you might be anticipating, what about the auditors? Equity funding was a public company. And, uh, so therefore they had to be audited. What if the auditors pulled some of these policies [00:42:30] to review them? That's where the Maple Drive gang came in. Uh, in a one story brick building on Maple Drive in Beverly Hills, there was an office where a dozen young women unknowingly helped keep the operation going. Uh, auditors would sample some policies, as auditors do. And those coded as 99, those needed to have policy files created. These were created from scratch to look legitimate. The phony [00:43:00] policy files would be included with the real ones and delivered to the auditors for inspection. Most of the year. Maple drive was mostly just a regular party that apparently involved lots of champagne and lots of Quaaludes. But during the busy time, they put down the champagne and the Quaaludes and they became policy manufacturing parties. Sounds like an amazing party. And maybe they didn't actually put down the champagne and Quaaludes while they did that.
Caleb Newquist: To know [00:43:30] you know, though, I think Quaaludes and insurance do those two things mix?
Greg Kyte: Uh, according to Wolf of Wall Street, Quaaludes go with anything to do business.
Caleb Newquist: So in a very calm manner.
Greg Kyte: Right?
Caleb Newquist: Uh, maybe to calm.
Greg Kyte: And Caleb, it was one of these policy manufacturing parties where equity funding's downfall began.
Caleb Newquist: In February [00:44:00] 1973. Ronald Sechrest, a 38 year old vice president in one of equity Funding's banking subsidiaries, flew from new Jersey to Los Angeles for what he expected to be a routine visit to Equity Funding HQ. The morning after he arrived, he was fired. Hmm.
Greg Kyte: So not routine.
Caleb Newquist: Not routine. Unless it was a routine firing.
Greg Kyte: Unless you just got fired all the time.
Caleb Newquist: Yeah. Seacrest had joined equity in 1970, and in early [00:44:30] 1971, he had attended a manufacturing party where he and other equity funding employees made up phony insurance files to fool the company's auditors back to February 1973. Seacrest had dinner with a friend within the company, Pat Hopper, and told him about getting let go, and he also told him about these manufacturing parties that he had been to. Hopper felt that Seacrest needed to get this story out. Yeah. Yep. [00:45:00] So on March 6th, 1973, secrets made two phone calls. One was to the New York Insurance department. The other was to Raymond Dirks, a securities analyst who covered the insurance industry who Pat Hopper was also friends with. Now, Dirks wasn't your typical securities analyst. His clothes were usually out of style. He lived in Greenwich Village, had longish wavy hair.
Greg Kyte: Hippie?
Caleb Newquist: Yeah, maybe a little.
Greg Kyte: That's [00:45:30] that's that's my guess. We're in the. We're in the 60s or early 70s. These are some hangers on. These are, these are folks. Here he is. Oh, there he is. Yeah. Okay. Yeah. Okay. Maybe not a hippie. Maybe just a goofy, goofy looking dude, right?
Caleb Newquist: I'm unsure about this jacket that he has on, but nevertheless, Dirks had started a firm with his brother, who was also an analyst, but covered newspapers while Ray focused on insurance secrets, told the same story that he had told Hopper [00:46:00] to Dirks, the security analyst then started talking to his clients, passing along the story that had been told to him by Seacrest.
Greg Kyte: Oh wait, so he's so he's just he okay, he's telling this story to people who are invested. Yes. In the market. Yeah, likely. Some of whom are invested in equity.
Caleb Newquist: So he is talking specifically to his clients. Yeah. Who are invested in equity funding.
Greg Kyte: Oh okay.
Caleb Newquist: Yep.
Greg Kyte: There's a there's a very clear message there then.
Caleb Newquist: Yes. [00:46:30] He's like I heard this story I would not be doing. He probably had I mean I don't know I don't know enough about rules around analysts and stuff, but there may have been a fiduciary duty in there somewhere.
Greg Kyte: Oh, yeah. Oh, that makes sense.
Caleb Newquist: Anyway, in one meeting, a client said to Dirk's quote, I really don't want to hear any more. We're going to sell the stock.
Greg Kyte: That seems like the right response.
Caleb Newquist: Yeah. Another Dirk's client that held equity funding stock told him in no uncertain terms to get on the next [00:47:00] plane to Los Angeles so that he could meet with Stan Goldbloom, look him straight in the eye and ask him if equity funding had any fake policies. When Dirks demurred, the client said, if you don't go, I'll go myself and ask him. Dirks got on the next flight to Los Angeles. Once in Los Angeles, Dirks met with Frank Majerus, a former controller at Equity Funding. He had reported to Sam Lowell, but due to the stress from the phony scam because the accounting [00:47:30] side had its whole thing, the whole.
Greg Kyte: Thing sounds very stressful to me. Yes.
Caleb Newquist: Yeah. Majerus resigned in 1971. Okay, yeah. In Dirks's hotel room, Majerus confirmed much of his story about the phony policy operation. The next day, Dirks met Goldbloom and Levin for breakfast. And Goldblume told Dirks that Equity's stock price was falling fast. Dirks told them the story he had been told and they denied the whole thing. Despite [00:48:00] Dirks copious notes from interviews with the three former equity employees Seacrest, Hopper and Majerus.
Greg Kyte: And is it proper to assume that the, uh, stock price was falling partly because of dirks? No, no.
Caleb Newquist: So what happened was that, remember, secrets made two phone calls. Yes. One was to the New York Insurance department, and one was to Dirks, New York, called California [00:48:30] and California also informed Illinois because the so equity funding had businesses in all three of these states. Yeah. Right. They were they were uh, I don't remember exactly why they were organized in insurance. I think it had something to do with kind of the origins of the company. But they were they were chartered in like California, Illinois and then New York. Of course, they had some subsidiaries there. So like, they they were they were subject to regulation all [00:49:00] over the place. Okay. And so these regulators are talking to each other and the word is starting to get around. Okay. And so that is why the stock was starting to fall. Word was on the street that something weird was going on. Yeah. And so that's why the stock was falling. Right.
Greg Kyte: And and who had called the New York. Was it Dirksen called New York.
Caleb Newquist: No secret secrets.
Greg Kyte: The guy who got canned.
Caleb Newquist: Yep. The guy. Okay. Yep. Okay. Or let go. Yep. So after breakfast, Goldbloom and Levin invited Dirks over to the equity funding offices when they reached [00:49:30] the executive floor. Levin said, quote, as you can see, we're on the 28th floor. But don't worry, the windows are locked.
Greg Kyte: Nice.
Caleb Newquist: Now, why you would choose to say such a thing, I don't know. Perhaps he was socially awkward. Perhaps he was a sociopath, I don't know.
Greg Kyte: Or he was. Or he was mad and or scared, right? Yeah. You know, scared that he's going to lose all his money. Mad that this guy is the guy making him lose all his money. I would feel if I was Dirk's, [00:50:00] I would definitely be concerned. Yeah.
Caleb Newquist: So on March 23rd, Dirk's changed hotels after an ominous warning from a contact at Haskins and Sells.
Greg Kyte: Which is the auditors, right?
Caleb Newquist: No, Haskins was not. Haskins was not the auditor of Equity Funding Corporation of America. We'll get to that.
Greg Kyte: Okay. Yeah. Okay.
Caleb Newquist: So on March 23rd, Dirks changed hotels after an ominous warning from a contact at Haskins and Sells on Saturday, May 24th, Dirks [00:50:30] talked to a partner at Caedmon and Caedmon. This is a predecessor to BDO for those keeping track of all that. Yeah they were on the this partner was on the equity funding job okay.
Greg Kyte: As the auditor.
Caleb Newquist: Yes okay. The partner asked for dirks's notes on the situation. Apparently he had like 50 pages of notes on this. Okay, okay. Surprisingly, Dirks gave him the notes. The good news was the partner returned the notes. The bad news was that [00:51:00] the Siedman partner had given copies of the notes to Stanley Goldblume the following Monday, oh, on the night of March 26th. A cleaning lady at the equity funding headquarters noticed four men working on the executive floor who she did not recognize. They were still working the next night, and so she called a security guard. The guard walked over to a ladder that was in the middle of the boardroom, climbed up that ladder, poked his head in one of the ceiling panels where he saw two men working and [00:51:30] naturally said, hi. What are you doing? The man said that they had an order for Mr. Goldblum to be working, and since that was good enough for the security guard, the men went back to working.
Greg Kyte: Cool cool.
Caleb Newquist: Cool.
Greg Kyte: Big gulps. Huh? Oh, are you guys supposed to be here? Yep. Nice. And then he walks away. That's a that's a quality security guard. You got.
Caleb Newquist: It. Later that week, the cleaning lady found two tape recorders Fred [00:52:00] Levin had ordered for all the rooms on the executive floor to be bugged because insurance investigators were going to be working on the floor. At their suggestion. Well, this was all going on. 770,000 shares of equity funding stock were traded on March 26th. A couple of weeks prior to that, it was only trading about 10,000 shares a day.
Greg Kyte: Uh, so big, big influx and trading.
Caleb Newquist: Yes. A lot of activity. On [00:52:30] March 27th, the stock hit a low price of $14 and trading was suspended. The company attempted to calm the market fears with press releases, but it didn't help. Caedmon and Caedmon, the company's auditor, was delaying the release of its audit report and expanding its examination. Not good. No. On March 28th, 1973, the SEC suspended trading of all equity funding. Securities, stocks, bonds, everything.
Greg Kyte: Just shut it all down.
Caleb Newquist: Shut it all down. [00:53:00] On March 29th, Stan Goldbloom retained an attorney who had advised him not to give a sworn affidavit to the Securities and Exchange Commission, and this same attorney advised him that if the SEC subpoenaed him, that he should exercise his right to not incriminate himself under the Fifth Amendment to the US Constitution. Sam Lowell told equity Funding's general counsel that he had, quote, played games with numbers but didn't know anything about phony policies. The [00:53:30] SEC, the Illinois and California insurance commissions, and key attorneys within equity funding were all doing investigations into the allegations of phony insurance policies. As these concurrent investigations ran, it became clear that the company would have to be seized and that Goldblum, Levin, and Lowell would all have to resign. An emergency board of directors meeting was called for Sunday, April 1st.
Greg Kyte: The [00:54:00] emergency meeting convened at 415 in the afternoon on April 1st, 1973. The details of that meeting are recounted in the book The Impossible Dream. And let's just say there were lots of people in the room. Uh, people were getting increasingly pissed off at each other. And at the end of it, Goldbloom, Levin and Lowell were all forced to resign. Other fun fraud facts to come out of that meeting. Uh, three auditing firms, Caedmon and [00:54:30] Caedmon, the parent company. Haskins and sells the life insurance subsidiary. And peat Marwick Mitchell at the request of a reinsurance customer, had all missed catching this massive fraud. Caedmon had prepared a report, at the request of one of the directors, to test a sample of life insurance policies. Check this out. Caleb of 82 policies checked, 28 of them had no phone numbers, eight had wrong [00:55:00] numbers, and 11 had no answers when people tried to call them. Of 35 conversations that were actually had, 20 people said that they didn't have a life insurance policy with equity funding. Only six of the 82 policies checked actually had policies with equity funding. Another fact there was a new auditor, Touche Ross and company They were selected to do a new audit of the entire company [00:55:30] because it needed it and because of all these other companies just fucking missed this huge problem. And on top of that, there were six other employees who had refused to participate in any of the investigations, including Art Lewis. That was the chief actuary. And all those six people were terminated immediately. The very next day, April 2nd, the Wall Street Journal broke the story of the equity funding fraud.
Caleb Newquist: On [00:56:00] April 5th, 1973, Equity Funding Corporation of America filed for bankruptcy. At least six lawsuits had been filed by this point, seeking billions of dollars in damages. Fast forward a bit. On November 1st, 1973, indictments against 22 defendants on 105 counts ranging from securities fraud, mail fraud, bank fraud, filing false documents with the SEC, interstate and transportation of counterfeit securities were filed. Goldbloom, Levin, and Lowell were all indicted. [00:56:30] Among the other defendants were the Comptroller and assistant comptrollers that reported to Lowell, along with Art Lewis, the chief actuary who acted on Levin's behest, the partner and manager from Caedmon and Caedmon, the company's audit firm, and Alan Green, the young computer programmer who made the phony policies possible.
Greg Kyte: Right. The guy who was just in it for the love of the game?
Caleb Newquist: That's right. Just loving some coding. By the way, how many fake life insurance policies were there? More than 56,000. Worth approximately [00:57:00] $2 billion.
Greg Kyte: 56,000 fake policies.
Caleb Newquist: 6000 fake policies. And I have to say, you did a lot of research for this. The final number is really hard to pin down, but it's somewhere in the neighborhood of like 56 to like 60,000 fake insurance policies.
Greg Kyte: I mean, we could just say way too many. How many? We could have said, hey, how many you're expecting? Amount of how many were you expecting? It's more than that. We could have just [00:57:30] said that, right?
Caleb Newquist: Right. Of the $117 million in loan receivables booked to finance those bogus policies, 62 million of it was completely non-existent.
Greg Kyte: Wow. So almost half.
Caleb Newquist: Yeah. Uh, 25 million in corporate bonds that were supposed to be held by equity funding didn't exist. There's a whole story behind that, if you care to get into it. Uh, it was those phantom bonds that set off the insurance investigations [00:58:00] from Illinois and California. So fun fact there. On October 8th, 1974, Goldblume pleaded guilty to five counts one of conspiracy to securities fraud and two mail fraud. And he, uh. Uh, maintained his innocence right up to the last minute like he was not it was not he was not going to back down. And then it was it was a big surprise when he decided to plead guilty.
Greg Kyte: Okay. Yeah.
Caleb Newquist: At the [00:58:30] time, The New York Times reported that Goldblum admitted under oath in response to the US attorney's questions, that he had instructed people to artificially inflate the company's assets and income. The U.S. attorney said, quote, the government does not commit itself in any respect to say anything good about Mr. Goldblum. Best quote, best quote I found. I think.
Greg Kyte: That's amazing. Yeah.
Caleb Newquist: On March 18th, 1975, skipping ahead a little bit more, Stanley Goldblum was sentenced to eight years and fined $20,000. Fred [00:59:00] Levin was sentenced to seven years. Quote, equity Equity funding was not conceived as a fraud, Mr. Goldbloom said, quoted in The New York Times, quote, it had proper business objectives, but totally wrong means were used to reach those objectives. He said that after becoming equity funding chairman in 1969, he considered having equity funding file for bankruptcy, but decided instead to hide the concerns problems and to try to salvage it by attracting, quote, talented people. They had some talents. They. [00:59:30]
Greg Kyte: Yeah they did. They were very talented at committing fraud.
Caleb Newquist: Yes. A week later, on March 25th, 1975, Samuel Lowell was sentenced to five years in prison. The times reported that, quote, before he was sentenced, Mr. Lowell told the judge his role in the equity funding fraud had caused him to feel so much guilt. It, quote, destroyed my mental health and forced him to see a psychiatrist. It was weird reading these old times articles, like it was those kinds of things that made me think, oh, it's like, oh yeah, go into a shrink in the 70s was pretty taboo. Like, yeah, it was [01:00:00] like, oh, what's wrong with that guy?
Greg Kyte: Big stigma. Yeah, for.
Caleb Newquist: Sure. Big stigma for sure. It's such a weird. Yeah. The everything's in the show notes. So I invite people who are curious to go check it out because it is it does transport you back in time, right.
Greg Kyte: I see a psychiatrist next week. Yeah. So that's.
Caleb Newquist: Mine. Mine had to cancel for tomorrow.
Greg Kyte: Oh did they. Okay.
Caleb Newquist: But I but but we see her regularly. It's very nice. Yep. Aside [01:00:30] from the main three Goldblum leaving and Lowell, the other people involved were typically sentenced to about three years in some instances. Some. A few people didn't get any, um, prison time at all, but, you know, probation, etc..
Greg Kyte: Yeah, the slap on the wrist. Yeah.
Caleb Newquist: Well, but also when you consider you had 22 people involved, everybody's kind of level of involvement was different. And you know, the, the, the, the pawns, if you will, were maybe [01:01:00] given lighter sentences because they weren't they didn't have a full picture of what was going on.
Greg Kyte: But also based on other frauds that we've looked at. It does seem like they didn't just go after the big names. They went they that if you got 22 people, yeah, you went, you went pretty deep on the bench for this.
Caleb Newquist: So fun little footnote that was mentioned in that same New York Times article, New York Times article about Sam Lowell, Richard Gardenier I think that's how you say it. [01:01:30] This guy, he was a purification supervisor at Equity Funding. He made sure those fake policies were real purification. I'm not kidding. I'm not kidding. That's what it said. Okay, okay.
Greg Kyte: That's a weird ass title. A weird company that's committing fraud.
Caleb Newquist: His job was to make sure those fake policies looked real.
Greg Kyte: Okay, okay.
Caleb Newquist: He was also scheduled to be sentenced the same day as Sam Lowell, but he was allowed to change his plea to conspiracy charges to not guilty. Quote, the [01:02:00] change was permitted, the times story said, because Mr. Gardner's initial guilty plea was made on the recommendation of his lawyer, who has since admitted he is not an attorney. Benjamin Lipscomb, who had acted as Mr. Gardner's Garnier's lawyer, is under a state grand jury indictment on charges of forging court documents and drug prescriptions.
Greg Kyte: Just a just everyone's a winner in this case. Just the best people, the best people.
Caleb Newquist: Best people. In [01:02:30] January 1977, stock and bond owners of equity funding reached a settlement that would repay them $57 million. This was roughly 15 to $0.20 on the dollar of their investments. Most of this money, $39 million, came from three of the audit firms that had failed to detect the fraud. The heirs of Michael Reardon remember him? Yep. They agreed to a $10 million cash settlement to end litigation against the estate.
Greg Kyte: So, [01:03:00] Caleb. Yes. After all that and after the the incredible research that you did, which sounds I'm I'm exhausted thinking about it. Uh, did we learn anything?
Caleb Newquist: I think so. I mean, I mean, or or I don't know, did we. It's not that unusual of a story, right? Like, I mean, I mean, it's an incredible [01:03:30] story, right? Yes. But like but fraud is so fraud is feels. So maybe we've been doing this podcast too long. Have we been doing this podcast too long? It just feels so ordinary to me. The stories are amazing, the stories are amazing, but like the motives and the people and like it just they're different, of course, but everything's kind of the same, right? So in this case, there wasn't a real lack of controls. The only kind of mention about lack of controls [01:04:00] was actually it was it was it was an important piece, don't get me wrong. But at the in those days, in the 70s, when computers were new or relatively new, I found that it said that the the programmer. Remember that guy Alan Green, who did the programing?
Greg Kyte: Yep.
Caleb Newquist: At most places, the programmer and the person who operated the computer were different people.
Greg Kyte: Oh, okay. Interesting.
Caleb Newquist: And so in a lot of instances, it doesn't. It sounds [01:04:30] like that green was the programmer and the operator. So in that case, you've got the person who's creating the program, the fraudulent program, and then running the computer, right? Yeah. And so but those if those were two different people, the operator would maybe look at the results and say, yeah, I don't think this is doing what it's supposed to be doing. Right.
Greg Kyte: That's a separation of duties.
Caleb Newquist: Yes. Right, exactly.
Greg Kyte: But but on a, on a information system. On an.
Caleb Newquist: Information system. Correct. Yeah.
Greg Kyte: Yeah. Yeah.
Caleb Newquist: Right. And [01:05:00] so that was a relatively you know, that was a emerging area of business. And therefore like the auditors at that time, you know, thinking about auditors in the 1970s, I mean, they weren't they were just starting to audit computer systems. Right. And how they worked and what they were and how they were supposed to work.
Greg Kyte: I was surprised during the story how much they relied on computers to help perpetrate the fraud.
Caleb Newquist: Yeah, it's pretty crazy.
Greg Kyte: Just based on the fact that we're talking about the 1960s [01:05:30] and 1970s primarily. Yeah.
Caleb Newquist: Yeah. So and we just I said this a couple times as we kind of went through the, the episode, but we're really just scratching the surface on this, like, so I have to say thanks to Jim Park at UCLA, law, who recommended some books to me to do the research. And, uh, there's three good sized books. These are only two. The other one I have somewhere, but like this is a big deal. [01:06:00] And like the level of detail in these books are pretty impressive and astounding. And so we're really just, you know, the stuff that we had to leave out. It's just a shame because there's so much good stuff in there. Right? Um, and I'll just mention a few other things that I found that I thought were interesting. Um, and this one is Greg's favorite, uh, several lower level equity funding employees diverted to themselves, payments made by the reinsurance companies to the beneficiaries on the allegedly, uh, dead policyholders. Yeah. Uh, when Goldblume and Levin [01:06:30] discovered this scheme, they ordered the individuals involved to continue it on a much larger scale. But instead of keeping the money, they wanted it to go into the corporate bank accounts instead.
Greg Kyte: Right. I love that. It's like it's like, hey, that's knock it off. But great idea. How about we ramp this up? But, uh, not to your own personal right. Keep that as a tip for your, uh, for for coming up with a great idea that's going.
Caleb Newquist: To benefit your holiday bonus right.
Greg Kyte: There. Yeah. That's insane. But but [01:07:00] it did make me think what did happen to those policy proceeds for the, quote, dead people that were on fake policies and that now that question is answered.
Caleb Newquist: Um, also in 1972, several of the Coconspirators they met with Globe Bloom and pleaded with him to report modest earnings for the next several years. Okay. Um, because that would give them a chance to, like, pull back on the fraud. Right. And, um, you know, get it back into legitimate territory And he [01:07:30] refused.
Greg Kyte: Of course.
Caleb Newquist: Because of the stock price. Yeah, right. So classic. And, you know, it's kind of funny is though, is like, this is, you know, this is a story from over 50 years ago. And so when people talk about frauds today, it's like, oh, that's for the stock prices. Like this is like this is it's not OG. Right. Because there were certainly frauds before this. But like yeah, the story is just like I said, they don't they don't change that much. Yeah. In some of, in some of these regards.
Greg Kyte: And whenever any anyone [01:08:00] in management is demanding, you know, very aggressive growth targets and won't, won't tolerate missing those targets, you go, oh, so fraud is going to happen or is already happening. And that's bound to happen. That was very easy to spot that early on.
Caleb Newquist: Um, as we mentioned, equity fundings, independent auditors were unaware of the huge fraud. Equity funding executives went to great lengths to conceal their fraudulent activities from the auditors. And one example, uh, was [01:08:30] on the pretense of lunch at an elegant and busy local restaurant. Company officials rushed several auditors out of their office, hoping that they would leave their files unlocked. And the auditors did, which allowed other equity funding employees to spend the lunch hour copying the insurance policy numbers that had been randomly selected for testing. Um, and that helped them make sure they were clean selections for the sample.
Greg Kyte: Yeah. Again, [01:09:00] I can just I can picture that in my head. It's very. Yeah, yeah, it's very reminiscent. Hey, guys, we just got a call from Spago or wherever we, we got, they got a table for us, but we have to leave right now. Come on, let's go, let's go, let's go. Yeah. We're paying, we're buying. And then. Absolutely. And then the people just descending and quick because again, we're probably not talking photocopy machines at this point in time. Right. So how do they copy the stuff. Yeah I don't know. Maybe they do it. Maybe they were rich enough that they did have the first photocopy [01:09:30] machine in their office.
Caleb Newquist: Raymond Dirks, the analyst who helped blow the whistle on equity funding. He was later accused of insider trading. And this is like a big thing that came out of this case, remember, because he shared the information that he got from Seacrest, right, with his clients and his clients sold the stock. Right. And so he was accused of insider trading. And he fought this case for ten years. It finally got settled, uh, in 1983, [01:10:00] he won at, uh, the Supreme Court. And the case is linked in the show notes. It is Dirks v sec. And yeah, that was another thing. And, uh, also fun fact, uh, Raymond Dirks, he just died, like, last December.
Greg Kyte: Oh, that is fun. Death is really fun. I'm glad you brought that up. Super fun. Fun fact. Let's keep that in mind.
Caleb Newquist: Yeah. Uh, continuing the theme of fun, there's a 1978 TV movie called Billion Dollar Bubble starring James Woods and [01:10:30] costarring Christopher Guest, Sam Wanamaker, Shane Rimmer and William Hootkins, who you may or may not know played Red Six in Star Wars, Major Eaton in Raiders of the Lost Ark, and Detective Eckhart in Tim Burton's Batman. So if you're like me and got real excited about that part of the story, you're welcome.
Greg Kyte: Yeah, so so that's the billion dollar bubble. That's about the equity funding. That's a it is. It was a TV movie.
Caleb Newquist: Uh, it aired [01:11:00] on ABC.
Greg Kyte: Back in 1970.
Caleb Newquist: 1978 and. Wow. And and and I have a copy of it somewhere like it came with one of the books. I'm not even.
Greg Kyte: Kidding. Oh, what a copy of the the movie.
Caleb Newquist: It's on the DVD. I am not even kidding. I have, but I don't have a DVD player anymore, so how the fuck am I going to watch it?
Greg Kyte: Oh, come over to my house. All right.
Caleb Newquist: That's what we'll do. All right. Last but not least, I found a Los Angeles Times story from 1999. The headline reads, man arrested in alleged scam [01:11:30] of OC lender. That man, Stanley Goldbloom.
Greg Kyte: Nice. He's still at it after all these years.
Caleb Newquist: He was 72 at the time and quote was arrested as he was attending a court hearing in Los Angeles on unrelated charges, that he participated in a scheme to operate a number of medical clinics and allegedly bilked the workers compensation system. I could not figure out what happened with that case. Um, but Goldbloom died in 2011, so? [01:12:00]
Greg Kyte: So, yeah, he just, you know, you can he had it in him. He did had to had to keep working the system. Yeah. Amazing. No rehabilitation. Um, the one the one thing that, uh, that actually our producer pointed out to us right before we, we went in to record this, uh, was, uh, was was something that he learned and that is that you can never fire anyone, uh, right from your if you're if your company is involved [01:12:30] in just this deep fraud where so many people are involved in the fraud, you can't ever fire any of those people. Um, so, uh, big takeaway is if you work at a company where there's a major fraud being perpetrated, you need to ask for a raise and just never leave. That's your. That's your golden goose you found.
Caleb Newquist: Move. Yeah. Good career. Move.
Greg Kyte: Okay, well, that's it for this episode. And remember, the best business meetings happen at funerals.
Caleb Newquist: And also remember, if someone invites you to a policy manufacturing party, [01:13:00] at least find out if there will be Quaaludes before agreeing to go.
Greg Kyte: If you want to drop us a line, send us an email at omnifrog at earmarks, Cpcomm and Caleb, where can people find you out there on the internet?
Caleb Newquist: I'm on LinkedIn slash Caleb Norquist. Greg.
Greg Kyte: I also am reluctantly on LinkedIn. Reluctantly. Greg Kite, CPA. That's me.
Caleb Newquist: Oh my fraud is written by Greg Kite and myself. Our producer is Zach Frank. Rate review and subscribe to the show wherever you listen to podcasts. If you listen on an [01:13:30] earmark, you can earn some CPE credit. If that's your thing, join us next time for more average swindlers and scams from stories that will make you say, oh my God.
