Consumer fraud is on the rise. Companies that swindle their customers destroy people’s faith, ruin their finances and can face legal consequences. Here are five examples every business owner should learn from.
Elizabeth Holmes’ blood-testing company, Theranos, promised to detect countless illnesses and medical conditions with just a few drops of blood. No longer would patients have to give several vials of blood to find out if they had cancer or a vitamin deficiency.
The only problem was that it didn’t work. Although Holmes was well aware her idea had flopped, Theranos carried on collecting donations from investors and even charging customers for phony blood tests. In 2018, the U.S. Securities and Exchange Commission (SEC) charged Holmes with fraud, including swindling investors and misdiagnosing patients. The court sentenced her to 11 years in prison.
The lesson here is that if an idea sounds too good to be true, it probably is. Businesses should show investors their product or service works before accepting anyone’s money. Additionally, taking advantage of sick people generally goes over poorly with the public.
2. Grant Bae
Treashonna Graham’s company claimed to give struggling, minority-owned small businesses thousands of dollars in grant money. Graham used fraudulent Paycheck Protection Program loans to start the company, charging fees of over $5,000 to purportedly give loans to the people who needed them most. She lied about the operation’s size and success on social media to build its reputation.
Of course, business owners’ money never materialized. Many had given out their bank account info, employer identification numbers and articles of incorporation, as well as paying hefty fees. Graham tricked almost 100 businesses into paying her for services they never received, leaving them even worse off than before.
The Federal Trade Commission and the State of Florida eventually apprehended Graham in 2022. The scam illustrates how desperate people are often the most susceptible to swindlers but also have the strongest case against them in court.
Charlie Javice founded Frank, a financial aid application assistance program. When she decided to sell her company to JP Morgan Chase (JPMC), Javice inflated its worth by creating a fake database of millions of users — complete with data from real college students who weren’t affiliated with the company. JPMC assumed Frank was bigger than it was and bought it for $175 million.
When it became clear that Javice had paid a data scientist to fudge the numbers, she was arrested, and prosecutors charged her with wire fraud, securities fraud, bank fraud and conspiracy. Her arrest sent a strong message that the court will hold business owners accountable for their lies.
4. Bernard L. Madoff Investment Securities
Bernie Madoff, former chairman of the Nasdaq stock exchange, headed this eponymous company that offered asset management and stock brokerage services. Madoff used the firm to run the largest Ponzi scheme in history, tricking thousands of investors into spending roughly $64.8 billion. The court sentenced him to 150 years in prison for his crimes.
Madoff’s scheme worked because he claimed to use a legitimate strategy, his returns were reasonable and people respected him. He took advantage of people’s trust rather than using their investments to form a legitimate business.
Many forms of consumer fraud use this strategy. For example, phishing scams use social engineering to trick people into giving information, causing $1.7 billion in losses in 2019 alone. However, businesses that exploit people’s trust usually end up losing it altogether.
This German payment processor and financial services provider offered risk management and electronic payment services. When the Financial Times published internal documents and whistleblower complaints against Wirecard, it became apparent that the company had artificially inflated its profits and assets. It went bankrupt, and police arrested CEO Markus Braun.
Wirecard invented vast sums of false revenue to make investors and creditors believe its shares were worth more than they actually were. As a result, the company grew fast but fell hard once its actions were revealed.
Shining a Light on Consumer Fraud
One of the biggest lessons to learn from past consumer fraud cases is that companies should be founded on transparency. Employees must feel empowered to speak up without fear of repercussions when they see something wrong. Taking whistleblowers seriously enables companies to correct problems before they get out of hand.
Devin Partida writes about investor technologies, big data and apps. She is also the Editor-in-Chief of ReHack.com.