Beruflich Dokumente
Kultur Dokumente
6
CASE
CRAZY EDDIE, INC.
1. This case wu CQ-au tnored by Carol Knapp, assistant professor at the University of Central
Oklahoma.
2. The facts of this case were drawn from numerous ar ti cles publi5hed oyer a period of Sf;yetal
years and several SEC enforcement releases. ~ New York Timl!S and The Wall Slrtel!oUrnJl/, in
particut ~ r, closely followed the colorful saga of Crazy Eddie and its founder. Eddie Antar. One
of the more compn!henslve \nyestigiiltive reports regarding the his tory of CrAZy Eddie, [nc., is
the following artid~ G. Bl.'lsky and P. Furman, "Calculated Madness: The Rise and Fa.1l of
e rny Eddie Anlar,H Crlli,.'s New York Business,S June 1989, 21-33. This article p rovided much
of the background information regarding Eddie Anta r that was includoo in this case.
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Televisions 53%
Audio and audio systems 15%
Portable and personal electronics 10%
Car stereos 5%
Accessoties and tapes 4%
Computers and games 3%
MisceUaneous Items---lncludlng microwaves.
air conditioners, and small appliances 10%
Total 100%
",t
'i!
~
company from manufacturers that had is~'Ued factory warcanties on the products.
As a re!>ult, the company realized a 100 percent profit margin on much of its war
ranty revenue.
As his finn grew rapidly during the late 19705 and early 1980s,Anta r began ex
tracting large price concessions from his suppliers. His ability to purchase elec
tronic products in large quantities and at cut-rate prices enabled him to become a
"transhippcr," or secondary supplier, of these goods to smaller consumer elec
tronics retailers in the New York Oly area. Although m anufacturers frowned on
this p ractice and often threatened to stop selling to him, Anta r continually in
creased the scale of his transhipping operation.
The most important ingredient in Antar's marketing s trategy was large-scale
advertising. Antar created. an advertising "'umbrella" over his company's prine..
pal retail market that included the densely populated area within a l~mile ra·
dius of New York City. Antar blanketed this region with raucous, sometimes
annoying. but always memorable radio and television commercials. In 1972,
Antar hired a local radio personality and parHime actor known as Doctor Jerry
to serve as Crazy Eddie's advertising spokesman. Over the fifteen years that the
bug~yed. Doctor Jerry hawked products for Crazy Eddie, he became more reeog·
nizabJe, according to one survey, than Ed Koch, the longtime mayor of New York
City. Doctor Jerry's series of ear·piercmg television corn.mercials that featured him
screaming "Crazy Eddie-His prices are insane!" brought the company national
notoriety when they were parodied. by Dan Akroyd on Saturday Night Uve.
The focal theme of Crazy Eddie's advertising campaigns was the discounting
policy of the company. The company promised to refund the difference between
the selling price of a product and any lower price for that same item that a cus
tomer found within thirty days of the purchase date. Despite the advertisin g bar·
rage that was intended to convince the p ublic that Crazy Eddie was a
deep-discoun ter, the company's prices on most products were in line with those
of its major competitors. Customers who w ere attracted to Crazy Eddie outlets by
Hadvertised specials" were often diveJ"ted by the company's sales staff to a higher
quality and higher profit margin p roduct.
not a member o f the Anlar family. The underwriter was concerned that investors
would question the competence of the Crazy Eddie's executives who were related
to Anlar. Despite the underwriter's concern, Anlar hired one of his cousins, Sam
E. Anlar- who became known wifuin the company as "Sam the CPA" to distin
guish him from Eddie's father of the same name-to serve as Crazy Eddie's chief
financial officer.
The sale of C razy Eddie's s tock to the public was a tremendous success.
Because the initial public offering was oversubscribed, the cbmpany's under
writer obtained. permission from the SEC to sell 200,000 more shares than origi
nally planned. Following the public offering, Antar worked hard to convince the
investment community, particularly financial analysts, that his firm was finan
cially strong and well managed. At every opportunlty, Antar painted a picture of
continued growth and increased market share for Crazy Eddie.
One tactic Antar ~ to convince financial analysts that the company had a
rosy future was to invite them to a store and demonstrate in person his uncanny
ability to "close" sales. Such tactics worked to perfection as analysts from the
most prominent investment firms wrote glowing reports regarding Crazy Eddie's
management team and the company's bright prospects for the future. One ana
lyst wrote, "Crazy Eddie is a disciplined, competently organized firm with a s0
phisticated management and a well-trained, dedicated staff."3 Another analyst
wrote that Antar was a "brilliant merchant surrounded by a deeply dedicated or
ganization eager to create an important retail business."4 Because of such reports
and continued strong operating results, as reflected by the company's financial
statements for 1984-1987 that are presented in Exhibits 1 and 2, the price of Crazy
Eddie's stock skyrocketed. Many investors who purchased the company's stock
in the initial public offering realized a 1,000 percent increase in the value of their
investments .
3. J. E. Tannenbaum, "How Mounting Woes at Crazy Eddie Sank A Tumaround Effort," Tht
Wall Slrttl ]Ol/nllll, 10 July 1989, Al,A4.
4. C. Belsky and P. Furman, ~Ca !cu!a ted Madness: 1he Rise and Fall of Crilzy Eddie Antar:
Crain's New York BusilltsS, 5 June 1989. 26.
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EXHIBIT 1
1984-1987 Balance
Sheets of Cmzy Eddie
7,701 .
debentures
Unearned r(l\lenue~
_ 60,975
. ~,337 l,e29
, -
635,
Stockholders' equity ,
. t4"t:'"
:,.
Common stock . •.. f',-,.....' 313•
~
280 , 13<\'
AdditiOnal pald ln ; ~ ~7,678 17,668 · " 2,~98
Retained 3S,269 24,673 ,1 1,42Q'
I ~~60 42.621 ,
, .23,86.1
Total .
$~ :~ $1 26,950
The tripling of the company's annual sales volume between 1984 and 1987 and
the more complex responsibilities associated with managing a public company
imposed a huge administrative burden o n Crazy Eddie's executives. Compli
cating matters was the disintegration of Antsr's inner circle of relatives, who had
served as his principal advisers during the first fifteen years of his company's
existence. Antar forced many of his relatives to leave the firm after they sided
with his former wife in a hitter and highly publicized divorce. Even as Crazy
Eddie's internal affairs spiraled into chaos and the fi rm lurched toward fin ancial
di saster, the company's stock was still being touted by Wall Street as a "can't
miss" investment. .
In late 1986, Eddie Antar resigned as company presi dent. althougl-\ he relained
the title of chairman of the board. A few weeks later. he simply dropped ou t of
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76 SECTION ONE COMPREHENSIVe CASES
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EXHIBIT 2
1984-1987 Income
!
Statements 01
1
Crazy Eddie
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sight. By that point, Antar had already realized more than $50 million from the
sale of Crazy Eddie stock. In the absence of Antar, Crazy Eddie's finandal condi
\
tion worsened rapidly. Poor operating results reported in eady 1987 for the fourth (,
quarter of that fiscal year sent the company's stock price into a tailspin from
which it never recovered. In November 1987, a takeover group headed by two
prominent financiers gained control of the company. A companywide physical in
ventory taken by the new owners disdosed a $65 million shortage of inventory,
an amount that easily negated the total profits reported by Crazy Eddie since it
went public in 1984. That inventory shortage would eventually plunge Crazy
Eddje into bankruptcy and send regulatory authorities in pursuit of Eddie Antar
for an explanation.
erating results to maintain the upward trend in the stock's price. An SEC
investigation revealed that within the first six months after the company went
ing in the firm 's gross profit being overstated by the same amount. The following
count sheets for items that did not exist. To overstate accounts payable,' bogus '
debi t memos were prepared and entered in the company's accounting records.
As the economic fortunes of Crazy Eddie began to decline in the late 1980s,
Antar became more desperate in his efforts to enhance the company's reported
revenues and profits. He ordered company employees to include in inventory
consigned merchandise and goods that were being returned. to suppliers. Another
fraudulent lactic Antar used to overstate inventory involved transrupping trans
actions, the large volume transactions between Crazy Eddie and many o f its
smaller competitors.
Antar was aware that a key statistic financial analysts foll ow for retailers is the
annual percen tage change in "same store" sales. Any decline in this percentage is
seen as a negative signal of a retailer's future prospects. As the consumer elec
tronics industry be<:ame increasingly crowded, the revenues of Crazy Eddie', in
dividual stores began to fall, although the finn's total revenues continued to
climb due to new stores being opened each year, To remedy the drop in same
store saJes, Antar instructed his employees to record selected transhipping trans-
actions as retail sales of individual stores. For instance, suppose that Crazy Eddie
sold 100 microwaves costing $180 each to another retailer at a per unit price of
$200. The $20,000 in sales would be recorded as retail sales with a normal gross
profit margin of 30 to 50 percent-meaning that inventory would not be credited
for the total number of microwaves actually sold. This practice killed two birds
with ·the proverbial stone. Same store sales were inflated for selected operating
units, and inventory was overstated with a corresponding increase in gross profit
from sales.
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1
it.
In one year, Main Hurdman charged only $85,000 10 do a complete audit 01 Crazy
Eddie-a business wjth hWldreds of millions of dolJars in reported revenues, dozens of
retail slores, and two large warehouses. At the very same time that Main H urd man was
charging the bargain basement price of $85,000 for supposedly conducting an audit, its
consulting division was charging Crazy Edd ie millions of d ollars to computerize CrilZY
Eddie's inventory system.s
5. M.I. Weiss, NAuditQrs: fk> Watchdog&, Not JUSI ~an Coun le rs,~ ACCOII" , jng TodIlY, 15
November 1993, 41.
6. Ibid. , 42.
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the director of accounts payable. Past experience h as proven tha t a fraud involv
ing the collusion of numerous client executives,'particularly key accounting per
sonnel. is cxtn~ m el y difficult for aud itors to uncover.
E PILOGUE
In June 1989, Crazy Eddie filed a Ch apter 11 bankru ptcy petition after losing its
line of credit. La ler that same year, the company closed its remaining stores and
liquidated its assets because it could not obtain credit from its vendors.
Meanwhile, Ed die Antar was named as a defendant in several lawsuits, including
a large civil suit filed by the SEC and a criminal indicbnent filed by a U.s. district
attorney. In January 1990, a federal judge ordered Antar to repatriate 552 million
that h e had transferred to foreign bank. accou nts in 1987. The following month,
fed eral marshals began searching lqr Antar after he failed to appear in federal
cowt fot a hearing in which he was to account for the funds transferred to over
seas bank accOlU\ts. After surrendering to federal marshals, Antar was found in
contempt and released on his own recognizance. FollOwing this court appear
ance, Antar became a fu gitive. For the next two years, Antar eluded federal au
thorities despite reported sightings of him in Brooklyn. South America, and
Jerusalem. .
On June 25, 1992, Eddie Antar was arrested by Israeli police. At the time, Antar
was living in a sma U town outside Tel Aviv and posing as an Israeli citizen, David
Jacob Levi Coh en . On December 31, 1992, Antar's atto rney announced that an ex
tradition agreement had been reached with the U.S. Justice Department and
Israeli authorities. After being extradited , Antar w as convicted in July ]993 on
seventeen coun ts of fi nancial fra ud including racketeerin g, conspiracy, an d mail
fraud . In May 1994, Antar was sentenced to twelve and one-h alf years in fede ral
p rison "nd ordered to pay restitution o f $121 million to former stockholders and
cred itors.
A federal ap peals court overtu rned the seventeen-count fraud conv iction of
Eddie Antar in April 1995. The appeals court ruled that the judge who presid ed
over Antar's trial had been biased aga inst him . The appeals cou rt ordered that a
n ew trial be held fo r Antar und er a di fferen t judge. In May 1996, Antar' s attor
neys and federal prosecutors arranged a plea bargain agreement to settle the
charges outstanding against him. Under the terms of this agreement, Antar
p leaded guilty to one federal charge o f racketeering and publicly admitted, for
the first time, that he had d efrauded investors b y manipulating his company's ac
counting records. Following his admission of guilt, one of the p rosecuting attor·
n eys conunented that "Crazy Eddie wasn't crazy, h e was crooked:'" Several of
Antar ' s fonner associates have also been convicted o r have pleaded gu ilty to
fraud charges, including C razy Edd ie's fo rmer chief financial officer, Sam E.
Antar.
A federal judge sentenced Eddie Antar to seven years in federal prison in early
1997. An lar, who had remained in prison since being extradited to the U.S. in
7. FA. McMorris, "Clny Eddie 1nc.'s Antill Adm its G uUt in Rl!cketeering COnSplr~,'" Tht
1993, received credit fo r the time he had already spent in p rison. As a result, he
was required. to selve only two years of the seven-year prison sentence.
To date, more than $60 million has been recovered from Aniar, including funds
discovered in bank accounts in Israel, Great Britain, Switzerland, and
Leichtenstein. Federal authorities believe they may be able to recover additional
hmds that are still·concealed in secret bank accounts around the w orld. These au
thorities estimate that Antar may hav~ as milch as $10rniUion hidden away in for
eign bank accounts.8
In March 1993, a $42 million settlement was announced for dozens of lawsuits
filed against Crazy Eddie. Although the contributions of the various defendants
to the settlement pool were not disclosed, among those defendants were Peat
Marwick and the local accoWlting finn used by Crazy Eddie before tbe company
went public.
QUESTIONS
1. Compute key ratios and other fmandal meas ures for Crazy Eddie during the
period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie's fi
nancial statements that suggested the firm posed a higher-than-normallevel of
audit risk.
2. Identify specific audit procedures that might have led to the detection of the
following accounting irregularities p erpetrated by Crazy Eddie p ersonnel: (a) the
falsification of inventory count sheets, (b) the bogus debit memos for accounts
payable, (c) the recording of transhipping transactions as retail sales, and (d) the
inclusion of consigned merchandise in year-end inventory.
3. The retail consumer electronics industry was undergoing rapid and dramatic
changes during the 1980s. Discuss how chan ges in an audit client's ind us try
should affect audit p lanning d ecisions. Relate th is d iscussion to C razy Eddie.
4. Explain what is implied by the term lowballiMg in an audit context. How can
this practice potentially affect the quality of independent audit services?
5. Assume that you were a member of the Crazy Eddie audit team in 1986. You
were assigned to test the client' s year-end inventory cutoff procedures. You se
lected thirty invoices entered in the accounting records near year-end; fifteen in
the few days p rior to the client's fiscal year-end and fifteen in the first few days
of the new year. Assume that client personnel were unable to locate ten of these
invoices. What course of action would have been appropriate at this point and
why?
6. Should companies be allowed. to hire individuals who formerly served as their
independent auditors? Discuss the pros and cons of such a policy.
8. M. Siconolfi, ~ It's Crazy Eddie. So the Idea May Be A Uttle Insane, ~ ~ W~II Siru l IOllr1l~l,
13 June 1996, Al, AlO .
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