5 of History’s Brazen Crooks Who Defrauded Markets

Yasuo Hamanaka picked up an apt nickname as a trader of precious metals for the Japanese trading giant Sumitomo Corp.: “Mr. Copper.” In the early to mid-1990s, he was able to acquire 5% of the world’s supply in the precious metal.

That was enough to put him in a dominant position owing to the cost and difficulty of moving the metal from one country to another to cover shortages. He used his position to keep the price artificially high. Other traders knew he was the big man on the trading floor, but could never outflank him because Sumitomo’s deep pockets could get him out of any short position he’d find himself in. A lack of regulatory oversight didn’t hurt him, either.

It all came crashing down in 1995. More copper entered the market as China’s mining activity increased, causing the manipulated price to fall. Sumitomo was forced to take losses on futures contracts that totaled at least $1.8 billion.

In the end, Sumitomo removed Mr. Copper from his position and then denounced him as a rogue trader. He was convicted of forging the signatures of executives on documents and sentenced to eight years in prison. He was released in 2005, a year early.

2. Kenneth Lay’s Enron Drives Up Power Prices

Cost: $11 billion lost by shareholders

Penalty: Prison time for top execs, including CEO Ken Lay and COO/CEO Jeffrey Skilling; payment of $1.5 billion settlement to power companies

The layers of the Enron scandal were many and throtled investors, allied companies and even the California electricity market.

After years of fabulous profits and a stock price that rose 56% in 1999 alone, things started downward for the company. Unfortunately, it was revealed that a constant focus on the bottom line led the company, which had its start with the merger of two Texas natural-gas pipeline companies, to inflate the value of assets and cash flow while keeping liabilities off the books.

Another aspect of Enron’s wrongdoing involved manipulating prices in the California electricity market in 2000 and 2001. The company saw an opportunity when the Golden State deregulated its power market. By using techniques that included creating phony congestion on the state’s power grid and then falsely claiming to relieve it, Enron was able to drive prices up, costing residents tens of billions of dollars and increasing the company’s profits.

As the practices came to light, the company spiraled into bankruptcy, taking with it top executives (Kenneth Lay, who died less than two months after his trial in 2006, and Jeffrey Skilling, each serving as CEO, received 45 and 24 years in prison, respectively) among nearly two dozen people who were convicted of charges including fraud. The scandal even took down the accounting giant Arthur Andersen, which was effectively put out of business for its role in the scandal.

In 2005, Enron agreed to pay California and other Western states $1.52 billion to settle claims in the power manipulation case.

1. Charles Keating Jr.: Symbol of the S&L Meltdown

Cost: At least $153 billion across the S&L industry

Penalty: 5 years in prison

The U.S. savings & loan industry was going gangbusters in the 1980s. And Charles Keating Jr.’s Lincoln Savings & Loan in Phoenix was at the center of it all when it came crashing down late in the decade. Thrifts across the country had invested in junk bonds, which turned out to be a bad move.

When the investments went south, the investigations and congressional hearings began. Keating ended up in the middle. Evidence of his giving large donations to five U.S. senators, the so-called Keating Five, which included Sen. John McCain, R-Ariz., bolstered the idea that he paid the money to make sure his S&L was not shut down. For a time, it seemed to work, but then Keating’s luck ran out and the S&L was seized in 1989. Lincoln’s failure alone cost the U.S. government over $3 billion and about 23,000 customers were left with nothing.

Congress created the Resolution Trust Corp. to clean up the mess left by the hundreds of S&Ls teetering on the edge of bankruptcy. The overall crash cost $153 billion to fix, with taxpayers forking over $124 billion and what was left of the S&L industry covering the rest.

Keating was sentenced to 12½ years for fraud, racketeering and other charges. He served five years before the convictions were thrown out in 1996 because a judge ruled that the jurors had been contaminated by learning of an earlier conviction. In 1999, he pleaded guilty to wire fraud charges and was sentenced to time served.

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