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Caleb Newquist: In 1992, a professional basketball league folded overnight. It had one rule no other league had no players taller than six feet five inches. Real teams, real arenas, real TV deals. Just no tall people or really tall people. I should say six five is still pretty tall. And then one day in the middle of the season, it was just gone. Not because of bad ratings, not because of poor [00:00:30] attendance, no. It failed because something had gone very, very wrong at a discount drugstore chain headquartered in Youngstown, Ohio. And when it collapsed, it took everything else down with it.

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Caleb Newquist: This [00:01:00] is Oh My Fraud, a true crime podcast where the accounting is basically pick a number between 1 and 10. I'm Caleb Nyquist. Hey there. How's it going? Welcome. Settle in. Get comfortable. Uh, yeah. Whether treadmill or sitting in traffic. Get comfortable. I will accompany you for however long you need. And if you're going at two x speed, [00:01:30] then you know you've got a library of over 100 episodes to get through. So hopefully you're not running that far that you would need all of those. Or even driving that far, to be honest. But who knows? I don't know what you're doing. Anyway, I've got one story to share. Uh, came in from the mailbag. Uh, this was from our past guest, dare I say, friend of the show, Rhianna Pfefferkorn. She's a policy fellow at the Stanford Institute of Human Centered artificial intelligence. Greg [00:02:00] Kite and I talked to her on episode 63. So if you have not heard this name before and you're curious, uh, go check that out because it was a fun conversation. She emailed me a couple days ago and the subject line was, please, please cover this story. So yes, of course I will. Rihanna for you. Um, and here it is. It's, it's a DOJ. She linked to a DOJ press release with the title Santacon organizer charged in wire fraud scheme targeting attendees and host [00:02:30] venues. Now, you may or may not know what Santacon is, but let me just continue.

Caleb Newquist: I'm reading a few excerpts here. Okay. The the the one line or the one sentence summary at the top says Stefan Pildes used Santacon to raise at least $2.7 million for charity from 2019 to 2024, but diverted more than half to a slush fund and spent hundreds of thousands of dollars of the remaining proceeds on personal expenses. United States Attorney for [00:03:00] the Southern District of New York, Jay Clayton, said, quote, no matter how you dress it up, fraud is fraud. We are committed to protecting New Yorkers from those who exploit their enthusiasm and generosity. To call Santacon enthusiastic is, um, uh. Interesting choice of words. I don't know if enthusiasm is what I would say. Debauchery is more like it, but in generosity could go either [00:03:30] way. Anyway, there's another part that says FBI Assistant Director in Charge James C Barnicle Jr. That's a name, isn't it? Barnacle. Barnacle. Barnacle bill allegedly stole Christmas from tens of thousands of victims and deprived local charities of more than $1 million. The FBI continues to root out scrooges that greedily exploit the goodwill of New Yorkers. I bet they had fun writing this one. I mean, they didn't go [00:04:00] really pun heavy, but there's yeah, there's these little hints of, you know, Christmas puns in there. Anyway, pill dis 50 of Hewitt, new Jersey, is charged with one count of wire fraud, which carries a maximum sentence of 20 years in prison. Um, yeah. Rihanna. Thanks for sending that along.

Caleb Newquist: Uh, it's a great it's a great one. Uh, we will be keeping everyone updated on how the case progresses. But I should say, if you're not familiar with Santacon, here's [00:04:30] the here's the gist. And it's been going on a long time. I know it said 2019 to 2024, but like Santacon has been going on for much longer than that. I remember it in the late 2000 when I was in New York. Um, this is like oh, seven, I think, or oh eight was the year I remember first hearing about it. But basically people dress up in Santa suits and they do a bar crawl in Santa suits. And yeah, a lot of money goes, money's supposed to go to charity and whatever. And people like, get in drunk [00:05:00] at these things, insanely drunk, like to the point where I think some of the bars that participated actually regretted, uh, the, um, um, you know, being involved because it would get so out of hand because you'd have these massive just mobs of people in Santa costumes like, you know, and, and things, you know, just when you have that many drunk people in a, in, you know, in close proximity, things [00:05:30] never go right. Bad things happen both seriously bad and hilariously bad. I'll let you imagine. Or uh, uh, yeah, just just think about that. Just think about how bad that would get. Anyway, actually, my favorite Santacon story that I remember seeing over over the years was from several years ago now.

Caleb Newquist: I don't remember exactly what time, but it was at a santacon in San Francisco, I believe, and [00:06:00] it's going through the financial district in San Francisco. And I remember seeing like it was either drone footage or maybe a helicopter footage and, um, someone in a Santa suit with all these Santas, uh, on the streets. Someone walks into a bank, robs the bank in a Santa suit, and then leaves the bank and disappears into the crowd. I [00:06:30] don't know how that story ended up. If you know how that story ended up, if they caught the guy or what, uh, then I would, I would, I'd be curious to know how that resolved itself. But also, and I mean, look, if it was an armed robbery, then that's dangerous. And I, you know, I don't want anyone to get hurt, but there is something kind of ingenious about taking an advantage of a completely made up, uh, drunken, idiotic, uh, event and using it [00:07:00] to commit a crime in a very clever way. So anyway, santacon. But now this guy who knows wire fraud. Gs ripping off the charity. It's a it's a tale as old as time or as Saint Nick. I don't know what am I saying? Too much coffee. All right. If you've got story ideas or feedback, email us at o fraud at earmark cpe.com. All right. That's enough business. Time for some fraud. [00:07:30]

Caleb Newquist: To understand Mickey monies, you first have to understand. Youngstown, Ohio because the two go hand in hand. And Youngstown in the late 1970s and early 1980s, was a city that had just been absolutely gut punched for most of the 20th century. Youngstown was a steel town, a like a real one. Some [00:08:00] of you might not be old enough to even know what that is, but yeah, a steel town, the kind where the mills ran 24 hours a day and the whole economy of the region was basically one giant bet on steel. Staying relevant forever. And you probably know how that bet worked out. Starting in 1977, in a stretch of time Youngstown residents still call Black Monday, the mills started closing [00:08:30] fast. Tens of thousands of jobs suddenly just gone. Within a few years, the city had lost a quarter of its population. Buildings went empty, storefronts dark. The community that had once been a symbol of American industrial muscle, started to feel like a place that America had quietly left behind. The mayor of Youngstown would later describe the city's psychology this way. Quote, you're [00:09:00] always insecure when you lose 5000 jobs. It's kind of a neurosis in a community where people assume the worst. Someone who has been beaten up so much expects to be beaten up again. Into this environment. In 1982 emerged Miki Monis. Monis was a Youngstown native, born into a prominent local family. Educated at Babson College in Massachusetts, he was, by most [00:09:30] accounts, not a charismatic person.

Caleb Newquist: Newsweek would later describe him as someone who, quote, seems to have been born without any natural grace. His large, flesh faced, not particularly warm casual in his dress, but stiff in his manner. A local columnist put it very plain. Unprepossessing. But what Monis did have was an ability to [00:10:00] make people believe in whatever he was doing, which isn't that its own charisma? It's very odd. It's an odd combination. Anyway, when Micky returned to Youngstown, he partnered with a Pittsburgh grocery executive named David Shapiro, who is the heir to the giant Eagle supermarket empire, to launch a new kind of store. They called it far more. Yeah. Far [00:10:30] more. The concept was simple and at the time genuinely novel. A deep discount drug store that sold everything prescription drugs, shampoo, vitamins, household goods, clothing, electronics all at prices so far below normal retail that it almost didn't make sense. This model had a name. Monis called it power buying. The idea was that if you were willing to stockpile, that [00:11:00] is, load up on stuff. When suppliers offered rock bottom deals on massive volume, you could pass those savings directly to customers and undercut everybody else on price. The first far more store opened in 1982. A second followed quickly thereafter. Within a year, there were eight. Because of that, early growth, investors started paying attention. Because of that attention, more [00:11:30] money flowed in. Because of that money, they opened more stores.

Caleb Newquist: So, you know, the flywheel was spinning. And you can just imagine, you know, to attach it to the meme culture. You can see Ron Paul, the Ron Paul it's happening meme, right? That's, that's the same, that's like the modern day flywheel, I think. Is that Ron Paul it's happening meme. Anyway, by 1988, there were [00:12:00] far more, far more stores. Aha. No, seriously, there were there were like 100 stores by this time in 1988. Venture magazine named Mickey Mouse one of its entrepreneurs of the year that year. By 1990, there were 200 stores and more than $2 billion in annual sales. A prestigious New York investment firm called Corporate Partners, backed by Lazard Freres managing money for state and corporate pension funds, put [00:12:30] $200 million into Phar-mor. Westinghouse Credit Corporation also came in, and then there was Sam Walton. Sam Walton, the legendary founder of Walmart, arguably the greatest retailer in the history of American commerce. He publicly stated on the record that McManus and farmer were the only competition he was genuinely worried about. An investor named Anthony Cafaro, who said [00:13:00] on farmer's board would later recall it for a PBS frontline documentary, How to Steal $500 million. Quote. I remember when Sam Walton from Walmart came out and made the announcement that the only company that he fears at all in the expansion of Walmart, his number one competitor is farmer Sam Walton. Sam Walton couldn't figure out how farmers prices were so low.

Caleb Newquist: He could not understand [00:13:30] it well enough to beat it back home in Youngstown. Mcmanus was a civic deity. He moved Far More's headquarters into a crumbling downtown department store that had been sitting vacant just to breathe life back into the city center. He donated to charities. He funded civic projects. He chaired the board of trustees of Youngstown State University. He sponsored an LPGA golf tournament. Cafaro said in [00:14:00] the frontline documentary, quote, he became almost like a cult figure. He really did. He was bigger than life. He could do no wrong. He had the Midas touch. He was a very, very important person for the psyche of the Youngstown area. There's a restaurant in Youngstown called Kim's Cafe, where the Phar-mor executives would go to celebrate. Monus would occasionally stop in and play celebrity bartender. The women from the far more offices had a song they'd [00:14:30] request. The owner of the cafe remembered it for frontline. Quote Mickey. Mickey, you're so fine. You're so fine. You blow my mind, of course, and everyone would sing it. They'd get the whole place singing it. And here's the thing. While the prices were real, the stores were real. The jobs were real. Sam Walton's fear seemed real. Very real. Every external measure pointed to a man, a man McManus, [00:15:00] who had built something genuinely extraordinary. The only problem was that far more had been losing money every single year since it opened, and almost nobody knew that.

Music Singing: Mcmanus. Oh, yeah, oh, yeah.

Caleb Newquist: In the mid 1980s, McManus hired a young accountant named Patrick Finn to serve as farmer's chief financial officer. [00:15:30] Finn was loyal. He was relatively inexperienced at that level of responsibility, and he was, by his own admission, the kind of person who found genuine meaning in the orderliness of accounting. As he later said in testimony, quote, you could see yourself going after problems, challenging yourself, solving problems in accounting. You know, you worked through a problem. There was a right answer and a [00:16:00] wrong answer. Things were black and white, and that's probably part of my personality. Things are either right or wrong. He found the wrong answer pretty quickly. Almost as soon as Finn got into the books, it was clear Phar-mor was not profitable. The power buying strategy was real, but it wasn't enough. The margins couldn't support the operation. Phar-mor was losing money. Not catastrophically at first, but consistently [00:16:30] Year after year, basically from the beginning. One day Finn went to Mona's with the bad news, and Mona's response, as Finn would later testify, was to take the report showing the losses and simply cross out the real numbers with a pen and then write in good numbers. According to Finn, Mona's continued doing this himself, manually editing these internal financial reports for [00:17:00] four months before handing off the job to Finn entirely. Imagine he's like, hey, you know that thing that I do, uh, where I, where I, where I take a pen and I, and I, and I cross out the number I don't like, and then I just write in what I would like it to be.

Caleb Newquist: Yeah. You're going to, you're going to be responsible for that now. It must've been a weird conversation. It was that hand off. That was the moment where Pat Finn went from accountant to Coconspirator, as he later reflected, [00:17:30] quote, you knew you were doing something wrong, but you never understood how wrong. I think he helped me believe that starting it for him was being a team ballplayer. Give him time and he'll fix the problem. So that's what Finn did. He covered. He adjusted. He gave Monis time. The true numbers were kept in a separate set of books, a subledger tracking the company's actual financial position. I [00:18:00] love two sets of books. Story, don't you? Two sets of books? Yeah, literally two sets of books. And Finn brought in another accountant man named Jon Anderson, who'd come straight out of Youngstown State University to help maintain it. Anderson would later recall the atmosphere inside the accounting department. Quote, Pat Finn always had an aggressive approach to accounting and call it aggressive or call it creative. That's the way it was done ever since I remember. For a while [00:18:30] Mona tried to paper over the losses legitimately. His approach was to squeeze what he called exclusivity fees out of vendors, and that was demanding upfront cash payments from suppliers in exchange for exclusive shelf space and not carrying their competitors products.

Caleb Newquist: And it worked up to a point. Coca-cola paid far more $10 million just to keep Pepsi out of the stores for five years. That [00:19:00] is an extraordinary amount of leverage for a retail company to have over a vendor. And this was Coca-Cola. The exclusivity fees weren't enough. The losses kept growing. And because of that, something more serious had to happen. By 1988, the fraud that is the making the numbers up escalated to a different level entirely. And that is the inflation of the [00:19:30] inventory on the balance sheet. Now, this is where we're going to slow down a little bit, because the accounting mechanics here are genuinely quite elegant in a deeply criminal way, and it's worth understanding them. I mean, if you're an accountant, then you're just going to get to appreciate the depraved beauty of this. So here's a setup. When you're a retailer, inventory [00:20:00] is one of your most important assets, right? You have that's the stuff. You sell the merchandise, right? Those are your assets. Okay? It sits on your balance sheet. Investors look at it. Auditors look at it. If your inventory is healthy and growing, your company looks healthy and growing. So long as you know, inventory doesn't get stale. But that's another that's another matter. Anyway, uh, Far More's inventory was not healthy. It was being [00:20:30] systematically overstated, inflated by hundreds of millions of dollars of product that simply did not exist.

Caleb Newquist: The mechanism Finn's team used was something they called bucket accounts at the end of a physical inventory account at any given store. The accounting team would prepare a compilation package that is a record of what was actually on the shelves. They'd make journal entries and the legitimate ones went into the operating general ledger, [00:21:00] the fraudulent ones, the ones inflating the total inventory figure. They went into these bucket accounts. Okay. And those bucket entries had some common characteristics. The entries often featured conspicuously round numbers. Entries had no journal entry numbers. The entries had account names like accounts receivable, inventory, contra, and the entries had no supporting documentation [00:21:30] whatsoever. They were, in hindsight, screaming red flags. Then at year end, right before the auditors came in, the buckets were emptied. The fraudulent entries were quietly distributed back out across individual stores, spread out enough that no single location looked obviously wrong. And so the losses disappeared on paper anyway. [00:22:00] Now, you would think that a professional firm of auditors would maybe notice some of this weird coming and going. And that's where Coopers and Lybrand comes into the story. Coopers and Lybrand was one of the largest and most respected accounting firms in the world. They had won the far more audit engagement by submitting [00:22:30] a very competitive bid that is low bid for the work.

Caleb Newquist: And with that low bid, Coopers was trying to limit its costs wherever possible. Now, again, if you are a accounting professional of some measure or certainly an auditor, this is not unfamiliar to you. You have you've certainly experienced this in some form. But yes, for those of you that don't know anything from anything in the accounting and auditing world, this [00:23:00] is quite a common, uh, circumstance. Okay. So Coopers, instead of auditing inventory at every farm or store, there were more than 300 of them. After all, they checked for four stores out of 300. And so no, you're not wrong. That's not very many. That's [00:23:30] not really an audit. That's kind of a, um, it's kind of like a field trip. Just kind of walking around, looking around, appreciating what we see. But even honestly, that might have been enough to catch this fraud. Except for one thing. Uh, Coopers the audit firm. They told far more management months in advance exactly which stores we're going to be subject [00:24:00] to the inventory count. Okay. Now, again, the accountants, auditors listening. You're here for the CPE or whatever. Yeah. Calm down. Okay. We know you're doing some mental gymnastics right now in order to explain why these procedures that is for stores out of 300 or telling management which stores would be audited. Why this somehow com complies with auditing rules and that audits are done on a test basis, [00:24:30] which means they can't test everything.

Caleb Newquist: There's simply too much. So they test a sample. And that is all fine. And this is how audits work. And that non auditors won't can't and don't understand how all this works. Sure. Fine. Okay. Whatever. But if you think about what this means, kind of on a practical level, if you i.e. management know, if you know that store A is being counted on Tuesday, store B was counted last week, you [00:25:00] load a far more truck with inventory from store B inventory that's already been recorded and counted, and you drive it to store A. The auditor show up on Tuesday. Count a beautifully stocked store. Everything looks great. And then on Wednesday, the truck takes everything back to the other store. Yeah. That's right, the same merchandise was being counted in multiple [00:25:30] locations. Hundreds of millions of farmers reported. Inventory was just merchandise driving around in circles on trucks. By the time the fraud unraveled, $650 million of the total, more than half was attributable to this inventory inflation. And in 1989, three years into the serious fraud with thin. Unable to produce documentation for basically [00:26:00] any of it, Coopers and Lybrand signed off on far more financial statements that reported it had earned a record profit, a record profit. And because of that record profit, more investors believed. More investor belief, more investor money. And with that money, more stores. And meanwhile McManus was spending money.

Caleb Newquist: Okay, [00:26:30] let's pause for a minute, shall we? To see what McManus life looked like from the outside. During this time, because it is instructive for everything that follows. Monis was drawing a salary and bonus package of about $500,000 a year. He was also, according to the [00:27:00] frontline investigation, taking additional money from the company another half million at various points to add a new room to his house to pay off his visa bill and purchase an engagement ring for his new fiancée. Right. Speaking of that fiancée, there was this wedding. Okay. Mickey Monus got married for the second time at the Ritz-Carlton Hotel in Palm Beach, Florida. Poolside. [00:27:30] Of course, the bride's dress was an 18 karat gold mesh gown valued at more than half $1 million, loaned for the occasion by an Absolut vodka distributor who happened to sell a great deal of vodka through far more stores. The dress came with two armed guards, the dress, the person in it totally expendable. The dress a needs arm security. His [00:28:00] associate, Tom Zawistowski, described what traveling with Monus was like to frontline quote. It would be 3:00 in the afternoon and they'd say, let's go to Vegas and we're going now. Just take your wallet and let's go. And we would fly into Las Vegas, and there would be a limo from Caesar's Palace that would meet the plane on the tarmac. And there would be a suite for Mickey 24 hours a day, seven days a week.

Caleb Newquist: It did not matter. When we came there, there [00:28:30] was always a suite. And when asked to reflect on that period, he said, quote, life was a game. Life was just this ride you're on. You've got all this money coming through your hands, whether you own it or not. That's for someone else to decide. That's a wonderful quote, actually. Whether you own it or not, that's for someone else to decide. He said that out loud to [00:29:00] a front line camera. Back in Youngstown, Monus was constructing a 1400 zero square foot mansion on Creekside Drive. I don't know anything about Youngstown, but Creekside Drive must be, you know, the Beverly Hills of Youngstown, Ohio, or the Upper East Side of Youngstown, Ohio. I don't know anyway, but it had a A. The plans had it for a grand curved [00:29:30] staircase, an indoor swimming pool, indoor basketball court, because yeah, living it up, man. Speaking of basketball, are you really are you really living large? Unless you start your own sports league or own a sports team, it's got to be one or the other, right? In this case, in Mickey's case, it's a basketball league. So yes, in 1987, right in [00:30:00] the middle of all this, Mickey Mouse co-founds a professional basketball league. And this is totally where Ice Cube got the idea. He must have. He must have heard of this, right? Anyway, the league is called the World Basketball League, and it has one rule that distinguishes it from every other professional sports league on the planet.

Caleb Newquist: If you are above six feet, five inches tall, you cannot play. Now, [00:30:30] there was kind of a genuine vision behind this. The idea was that capping height would create a league emphasizing speed and skill over raw size. This is before Shaquille O'Neal, though, so I don't know what was happening at that time in professional basketball. So anyway, maybe maybe someone out there listening can can put the proper context. But nevertheless, this was [00:31:00] a league that would emphasize speed and skill over raw size. A place for players that maybe the NBA had overlooked. Bob Cousy, the Basketball Hall of Famer. Boston Celtics legend. Six feet one inches tall, he was a co-founder. The league had a TV deal. There were real teams, real coaches, real fans. It was, in many ways, a real professional sports league. It just didn't make any money. Speaking [00:31:30] of distinguishing features, it didn't make any money. Every game lost an estimated $13,000. Monus had structured the WBL so that the league office, which he controlled, owned 60% of every franchise. A seems a little a little greedy. Like 60% of one franchise would be all right. And he wanted all of them weird. [00:32:00] But what this meant in practice was that he was personally on the hook for the majority of every single team's losses.

Caleb Newquist: At its peak, the league had 14 teams. So on any given night, if all the teams are playing, we're talking seven games, losing $13,000 each. That's $91,000 just going down the toilet. And I don't I don't know what kind of season they were. The WBL was running World Basketball League, whatever. [00:32:30] I don't know what kind of season they were running, but I seriously doubt it was the 82 games that the NBA does, right? Even the NBA is thinking about doing fewer than 82 games. 82 games is like a lot of basketball. But anyway, let's just say it's roughly half that size. Okay, just for fun. Okay. And we'll make it easy and we'll say it's 40 games a season. Okay. You have 14 teams, 40 games each. All right. And he's losing 13 grand on each one. That's a loss of $7.2 million. Okay. That's not good. That's not good. So. [00:33:00] A recap. Far more losing money. The numbers are fake. There are unwitting auditors that are counting the same inventory getting driven around by trucks, and Mickey has a 60% stake in a basketball league with a height restriction that loses $13,000 every time two teams walk on the court, and [00:33:30] far more was bankrolling every bit of it. At some point, this stops being about fixing a struggling business. It starts being about maintaining a version of reality that no longer exists if it ever did.

Caleb Newquist: Bonus team the Youngstown Pride or one of his teams since he had a 60% stake in each of them. Anyway, the Youngstown Pride won back to back WBL Championships in 1989 [00:34:00] and 1990. And of course, Mickey was beloved, and because he apparently had not taken on enough, Monus also became part of the ownership group, pursuing what would become the Colorado Rockies Major League Baseball expansion franchise. He helped choose the name and secure the financing for what would become Coors Field. Their very first stadium, as I best recall, was the [00:34:30] old Mile High Stadium, which would have been a very strange. It would have been very. I mean, plenty of. In those days, the late 80s. There's lots of fields. There are lots of teams that like. They they. They had convertible baseball field and and football fields, but God, they were the shittiest ones. God, they were terrible. But yeah, they played one season at Mile High. But then yeah, Coors Field opened a year later. Anyway, Mickey's dad, Nathan, was also an investor And he would later [00:35:00] reflect on that period simply saying everything was beautiful until all hell broke loose. By 1990, the fraud was no longer a manageable cover up. It had become a full time job for multiple people. Stan Gerolstein, Gerolstein, Cheryl Stein I [00:35:30] think it's the Cha or the Shuh. I don't know if it's Cher.

Caleb Newquist: I don't know, Stan. Cheryl. Stein. Stan. Cheryl Stein. I don't know. Mhm. Anyway, Stan, let's go with Cheryl Stein joined Phar-mor in 1990 and was promoted to comptroller. And if you aren't familiar, the comptroller runs the accounting department and Is de facto in charge of all cash disbursements. He [00:36:00] would later describe the moment he was brought in to the secret. John Anderson, the accounting manager, took him into an office, closed the door, pulled out the subledger and told him that farmers financial statements were currently misstated by approximately $150 million, $150 million. Already, the two books, the two sets of books. Right. And [00:36:30] then Carol Stein, Cheryl Stein, Gerhardstein Cheryl Stein. Like Finn before him, he stayed. He would later explain why, quote, I felt that through exclusivity money, through perhaps raising the prices, I felt that there were some options that Pat and Mickey had available to them to correct the situation. And that's why I stayed on with the company. And that's why I never told another soul. That, coupled with a fear that I believe I had at the time, [00:37:00] that maybe if I did go over their heads, maybe some harm could come to myself. Physical harm from people running a drugstore. I love the irony of this so much. Because of that fear and because of that rationalization. Charleston. Charleston. Charleston. Charleston. He fell in line and the fraud kept growing.

Caleb Newquist: In November of 1990, a secretary at Phar-mor accidentally sent the [00:37:30] wrong financial report to David Shapiro. Remember, that's Mickey's partner is co-founder. And it wasn't the manage report, not the adjusted numbers, the real numbers. Shapiro saw numbers that didn't make any sense. And so he summoned Pat Finn to his Pittsburgh office, and Finn, to his credit or his eternal discredit, depending [00:38:00] on your perspective. He did not crumple into a heap. He did not collapse. He told Shapiro those were just preliminary numbers. They need to make some adjustments. Once the adjustments were made, everything would be fine. Shapiro believed him. So how does the CEO of a $3 billion company hear that and just walk away? I guess when you have that much riding on it, you don't go looking [00:38:30] for problems. You accept the explanation. Meanwhile, the operational strain was becoming impossible to hide. Far more was holding back vendor payments, waiting until the company had enough cash to send them out, which sometimes took months. Cheryl Stein would later describe the scene inside accounts payable. Quote. We had cabinets stuffed with held checks at the company, checks that had been generated [00:39:00] out of the accounts payable system, but we couldn't mail them because if we mailed them, the checks would have bounced. So they kept accumulating and accumulating. By the spring of 1991, Phar-mor was holding back $150 million it owed to vendors. Some vendors started retaliating by halting shipments, which led to shoppers noticing something unusual empty shelves.

Caleb Newquist: For a company whose entire brand promise [00:39:30] was low, prices on everything you needed, empty shelves were a particularly bad look. And yet, because of the money flowing in from corporate partners, because of the mystique, because of the momentum, nobody in a position of authority pressed hard enough on the issues that were staring them in the face. There was one person who tried to sound an alarm, though. Charity [00:40:00] Imbrie Farmers legal counsel, attended a major real estate convention in Las Vegas in 1991. This was the same convention Monus was using to impress the corporate partners investors. While she was there, she heard troubling things. Vendors complained about unpaid bills, suppliers who resented being pressured to support the World Basketball League. She wrote a confidential memo documenting her concerns and sent it to David Shapiro, and Shapiro [00:40:30] told her to rip it up. The frontline investigation found that at the bottom of the memo, Imbrie had noted what Shapiro had said, that he was aware of most of the items on the memo and that it was, quote, particularly important to rip it up now because of pending financing stock sale with CPE meaning corporate partners. The $200 million deal closed four weeks later. Shapiro stood to make more than $2 [00:41:00] million from it. Bonus another million and Pat Finn. Watching the gap between reality and the books widen every week was quietly losing his mind.

Caleb Newquist: He later reflected, quote, my energy and people who work for me was going to cover up a situation, and it really wasn't going towards making far more a better company. And that really hurt. And I think we all longed for the day that we could just kiss this goodbye and just dedicate ourselves to making the company better. That [00:41:30] day was coming, just not the way any of them imagined. What actually brings the house down is an $80,000 check. Edward DeBartolo Senior, the shopping mall developer, one of the wealthiest men in Ohio and a far more investor. He noticed something odd a check. $80,000 [00:42:00] written from a farmer account paid to a travel agency on behalf of the World Basketball League. So DeBartolo tips off the board. The board starts pulling at some threads, and the threads don't stop. What they find with the federal Bankruptcy Examiner would later document in a 1000 page report, is the full architecture of an eight year fraud. The bucket [00:42:30] accounts the two sets of books, the inventory trucks, the World Basketball League. The missing hundreds of millions of dollars. When prosecutors added it all up, every bank loan, every investor dollar that came in on the basis of Fabricated financial statements. The total came to $1.1 billion. And that's not inventory inflation anymore. That's not aggressive accounting. That's one of the largest corporate frauds in American retail history.

Caleb Newquist: And [00:43:00] it finally cracked open because of an $80,000 check to a travel agency. The fallout, as they say, was swift. July 28th, 1992. Mickey Munoz is demoted to vice chairman. The board gave him that title while they figured out what to do. July 31st bonus Pat Finn and two other executives are fired. August 1st. The World Basketball League in the middle of its fifth season [00:43:30] implodes. Players, coaches and staff discover they won't be paid. The Dayton franchise alone claims it's owed $260,000. Every team in the league whose finances were secretly underwritten by far more collapses at once. August 4th, far more publicly announces a $350 million charge against earnings. The company spokeswoman later estimated that she was conducting 70 media interviews a day for three straight days. August [00:44:00] 17th far more files for bankruptcy. 25,000 people lose their jobs in Youngstown. The radio call in lines lit up. A local station ran an open phone segment on McManus, and the division in the community was raw and immediate. One caller quote, Al Capone, Dillinger, McManus. They're all the same. I'll tell you what, he played Youngstown for a bunch of hicks from Mayberry. Another [00:44:30] slightly softer caller quote. I would like to say that the Mona's family has done more good for this valley than any harm to this valley, and Mickey was trying to do the same. Meanwhile, the half finished 14,000 square foot mansion on Creekside Drive sat abandoned.

Caleb Newquist: The construction workers left when the fraud broke. The insulation paper was exposed to the August heat. The birds moved in to the big wooded lot, and the occasional [00:45:00] rubbernecking neighbor would drive past the police barricade to look at what remained of the monument. Mcmanus had built to himself. In January 1993, a grand jury indicted McManus on 129 criminal counts. The first trial began in 1994. Pat Finn had cooperated with federal prosecutors, and he became the government's chief witness. The evidence was extensive, and when the jury deliberated, one [00:45:30] juror refused to convict just one. Every other juror was ready to find Mona's guilty, but this one holdout wouldn't budge. So the judge had no choice but to declare a mistrial. But then investigators started looking at that juror. What they found was that the juror had been bribed by an associate of McManus to hang the jury. Both the juror and Mona's [00:46:00] associate were subsequently charged with jury tampering. And in the course of that investigation, another piece of the puzzle emerged. A college football player at Youngstown State, the starting quarterback on a national championship team, had been receiving substantial benefits from Monus for years. $10,000 in cash. Multiple cars. The NCAA had actually looked into it in the early 90s, but they dropped it. It wasn't until 1998 when the player admitted his own involvement [00:46:30] in the jury tampering scheme, that the full scope of Monus willingness to spend money to make problems disappear became clear.

Caleb Newquist: The second trial took place in May 1995, this time without a compromised juror. The result was different. Mickey Monus was convicted on 109 of the 129 counts. He was sentenced to 19.5 years in federal prison. His sentence was eventually reduced, and he served ten years at Elkton [00:47:00] Correctional Institution, just outside of Lisbon, Ohio. Pat Finn, the man who kept the books and flipped, served 33 months. Jeffrey Walley, a far more vice president who knew about the fraud, got home detention and probation. Stan Gerolstein and John Anderson, who both knew, both stayed and both testified they didn't serve any prison time at all. And the Colorado Rockies, they were established for $95 million and played their first regular season game in April [00:47:30] of 1993, less than two months after Monus was indicted. He was forced to sell his stake in the team. His name doesn't appear anywhere in the franchise's official history. His original business partner, John Antonucci, put it. Lee Monus, unfortunately hurt a lot of people. But the ownership group there was strong enough. Committed enough. Monus himself in a rare interview given in 2007 while living in Florida, was less gentle about his [00:48:00] erasure from the record. Quote. If it wasn't for me, there wouldn't be a baseball team out there. Period. The Rockies current estimated value is $1.6 billion. Mickey, now 78 years old, lives in Florida.

Caleb Newquist: Okay. So did we learn anything? Sure. Sure we did. Why not? First, uh. The auditors. [00:48:30] This is an old, old lesson, a a common lesson. Um, you know, Coopers and Lybrand issued a clean audit opinions on farmers financial statements for many years. Uh, they declared a record profit in 1989 for a company that had never had a profit. They did an inventory count, uh, at four stores out of 300. And, you know, they, they let management [00:49:00] know which four. Um, you know, it's, I don't know, it doesn't make any sense. Right. Like expectations gap. I know the auditors are yelling. Um, but it's not really, it just doesn't seem close. Right. It missed everything. This audit, those audits missed everything that mattered. And, you know, the whole idea is like, if you're going to do an inventory count, if you're going to do some kind of physical count, um, isn't it, you know, better to not tell the client when you're coming or give them very [00:49:30] little notice so they wouldn't be able to do anything right the moment you tell them which stories you're going to do, the inventory is at. Then, whether they're bad actors or not, they still have. There's still the risk. There's still the possibility that they could do what Farmoor did, which is shift some inventory over to whichever store you're doing the counting at. And, I don't know, $650 million.

Caleb Newquist: God, that's just so $650 million is a lot of inventory anyway [00:50:00] from one, you know, kind of procedural failure. When asked about it later, Cooper's associate general counsel said, quote, an accountant is a watchdog but not a bloodhound. An accountant cannot be expected to search out and find every piece of fraud. There's really a big difference between being a bloodhound and a watchdog, and I think that's an important distinction. Sure. Okay, fine. But the real question is, is like, was [00:50:30] the watchdog asleep? Not paying attention at all? You know, far more sued Coopers and Lybrand for gross negligence. Coopers. They countersued, blaming everyone else. Uh, multiple investor lawsuits followed, and eventually the firm settled claims, running into the hundreds of millions of dollars. And the reputational damage, compounded with other audit failures of the same era, contributed [00:51:00] to Coopers eventual merger with Price Waterhouse, which formed PricewaterhouseCoopers on July 1st, 1998. Okay, second, uh, fishy journal entries, the kind that went into the, you know, bucket accounts that these guys made. Uh, you know, those kinds of things are, you know, a red flag, you know, that that's, that's something that auditors do. They, they they, they test journal [00:51:30] entries, right? They look for things like they're supposed to look for things like round numbers or, uh, entries with no, uh, identification, like no entry numbers, no supporting documentation, you know, weird, weird account names. I mean, those, those aren't really quirks.

Caleb Newquist: It's like, that's not the quirks of an accounting department. Those are signs that somebody is making shit up, maybe hiding something. [00:52:00] You know, Pat Finn couldn't produce documentation for a single one of those entries, and the auditors kept signing off on it. That's weird. I mean, that's weird, right? Also, uh, third fraud snowballs. Pat Finn was not hired to commit fraud. He found a problem, uh, and was pressured to cover it up. He made a small adjustment here, a small adjustment there. Then they're bigger and then, you know, then you're [00:52:30] in and then you're inflating an inventory. And then you have the bucket accounts, and then there's hundreds of millions of dollars over eight years that just doesn't exist. You know, no fraud starts at the scale of where it ends. I mean, that's maybe an obvious thing to say, but like, it doesn't start, it starts small and it grows because nobody says, oh, you know, uh, we can't do that. And so we should fix it. Um, you know, each step feels like a slightly, [00:53:00] uh, just slightly larger version of the last one. All right. Um, last, uh, and this is more behavioral than technical watch what, you know, your, your cast of characters are doing with their money. Mickey Monus had a half million dollar salary, a, a half million dollar wedding dress showed up at one point, a sweet, always waiting for him at Caesars [00:53:30] Palace, a 14,000 square foot mansion under construction, a basketball league that was losing money every single game.

Caleb Newquist: I mean, I don't know if people knew it was that bad, but whatever. I mean, these just all these things kind of can't really coexist in a legitimate business empire. People create business empires, okay? And they even sometimes spend a lot of money building these business empires. But, you know, it's [00:54:00] a very difficult, very difficult thing to do. So when somebody's lifestyle is dramatically detached from reality, it's worth questioning that out loud. All right. That's it for this episode. Remember, if Sam Walton thinks your prices are cheap, maybe you should raise them. If you have questions, comments, or suggestions for stories, drop me a line at omnifrog at earmark. Cpe.com. [00:54:30] This episode of Oh My Fraud was written and produced by Zach Frank and me, Caleb Newquist. Oh My fraud is created, written, produced and hosted by me, Caleb Newquist. Zach Frank is my co-producer, audio engineer, and music supervisor. Laura Hobbs designed our logo rate, review and subscribe to the show wherever you listen to podcasts. If you listen on earmark, that's where CPE credit comes in. If that's a thing, you're heavy on the accounting this episode, so should be an easy quiz for those of you that need to [00:55:00] take the quiz. If you don't need to take the quiz, good for you. Enjoy. Join us next time for more average swindlers and scams from stories that will make you say, oh my fraud!