The Crazy Eddie Fraud by Sam E. Antar © Copyright 2009 by Sam E. Antar. All rights reserved. Page 1 of 139
Table of Contents Crazy Eddie Early Years ‐ Page 3 Crazy Eddie’s Relentless Advertising Campaign – Page 6 Crazy Eddie Fraud Summary – Page 10 Crazy Eddie Fraud Tables – Page 20 Fall of Crazy Eddie – Page 23 Crazy Eddie Criminal Trial – Page 28 Results of Criminal Prosecution, Securities and Exchange Litigation, and Other Litigation – Page 38 Crazy Eddie Audit Errors – Page 43 Frequently Asked Questions – Page 46 SEC v Sam M Antar et al Civil Action 93‐3988 – Page 53 SEC and PCAOB Roundtable on Internal Control Reporting ‐ Sam Antar Submission – Page 130 Page 2 of 139
The Early Years The original predecessor company to Crazy Eddie was ERS Electronics, which was founded by Eddie Antar, Sam M. Antar (Eddie's father), and Ronnie Gindi (a first cousin) in 1969. Eddie, Ronnie, and Sam owned equal 1/3 shares of ERS Electronics. The original store was located on 1117 Kings Highway in Brooklyn. The company operated under the name of Sights and Sounds. During the early 1970's, consumer electronics was "fair traded." Manufacturers were allowed to require retailers to sell merchandise at the same price to avoid price competition among retailers for their products. The larger retailers, who had large advertising budgets, were forcing smaller retailers out of business. The smaller retailers, who had lower overheads than the bigger retailers, were not able to compete with larger retailers on price due to fair trade. Therefore, the smaller retailers could not use their cost efficiencies to effectively compete against the larger retailers and pass along better values to consumers. Around 1970‐1971, Sights and Sounds, like many other small retailers was struggling to stay in business. In 1971, Eddie Antar purchased Ronnie Gindi's share or ERS electronics for $25,000 in cash. Eddie Antar now owned 2/3 of Sights and Sounds and his father Sam M. Antar owned 1/3 of Sights and Sounds. To survive in business, Eddie Antar resorted to circumventing fair trade by discounting merchandise to customers. The manufactures retaliated against Eddie Antar by refusing to sell Sights and Sounds any products. Eddie Antar was forced to buy excess merchandise from other retailers and access grey markets (overseas) to purchase merchandise. However, Eddie Antar built up great customer loyalty during the process of circumventing fair trade. In 1971, a co‐worker of Deborah Joyce Rosen, Eddie Antar's first wife, told her about the great buys on electronics that he received from purchasing merchandise from a "guy" he called "Crazy Eddie" at Sights and Sounds. Afterwards, Eddie Antar changed the name of the business to "Crazy Eddie." Around 1972, manufacturers were no longer able to require retailers to sell merchandise at the same price and fair trade was outlawed. Eddie Antar became the hero to the New York metropolitan area consumer because of his major role in abolishing fair trade. For many consumers, Eddie Antar was a "retailing revolutionary" and they rewarded him handsomely, as he opened up more store and his business volume expanded. He ran one of the largest advertising blitzes ever known in the tri‐state area and studies showed that Crazy Eddie had better name recognition than Coca Cola among New York area consumers. The Crazy Eddie "Culture" Eddie Antar was a great leader who inspired intense loyalty from his employees. It was us against them. Them ‐ meaning customers, the government, insurance companies, auditors, and everyone else who did not serve the company's interests. Page 3 of 139
There was a culture at Crazy Eddie that said nothing should go to the government. Cash sales were routinely skimmed to avoid paying income taxes and to steal sales taxes. Customers were considered to be fools to be taken advantage of. Eddie often told me, "People live on hope." The Antar clan ruling Crazy Eddie and top management exploited the hopes and dreams of others in the pursuit of money and power. Eddie Antar developed a tight knit loyal company culture to insure that crimes went undetected and unreported. In the early years, a person was required to be a relative, a friend of the family, or a friend of a friend of the family, to work for the company. There were no so‐called "employees." Rather, we were called "Crazy Eddie people." There were no "punch clocks." Everyone working at Crazy Eddie was considered part of the extended family. Eddie Antar was readily accessible to all of his employees. If you had a problem, you went to Eddie and he took care of it. After the Christmas holiday season ended, Eddie Antar routinely doled out large cash bonuses to key employees. He developed a cult leader type status. Everyone looked up to him. Securities litigator Howard Sirota described Eddie Antar as a "larger than life Brooklyn Fonz type figure." Sirota knew Eddie in his youth and eventually represented victims of Crazy Eddie's frauds as Chairman of the Class Action Litigation. Crazy Eddie even developed its own internal language which was a combination of Arabic, pig Latin, and other retailing slang, handed down from the Antar family's multigenerational merchant roots. Eddie Antar was a very aggressive sales person and his sales people learned fast from him. It was not uncommon for Eddie to follow customers out of the store in order to talk them into buying merchandise. The motto was to make every sale or "beha" and that "nobody walks." How Crazy Eddie was able to discount consumer electronics Eddie Antar, the "retailing revolutionary," was a ruthless competitor. Eddie Antar knew that his business could not survive in the long run, if it constantly offered steep discounts to consumers. Therefore, Eddie Antar resorted to a combination of income tax evasion, stealing sales taxes, and "bait and switch" practices to make Crazy Eddie profitable. Cash skimming and paying employees "off the books" Some of the cash skimming was used to pay employees "off the books" to avoid paying payroll taxes. In addition, employees paid "off the books" did not pay income taxes and social security taxes. Therefore, Crazy Eddie used tax evasion to reduce labor costs and make the company more competitive against other retailers. If a customer paid in cash, Crazy Eddie stole the sales taxes and the company made a gross profit of about 8%, even if it sold merchandise to consumers at cost. That gave Crazy Eddie a great competitive advantage against competitors who conducted their businesses legitimately. "Bait and Switch" sales practices Page 4 of 139
Crazy Eddie sales persons used "bait and switch" high pressure sales tactics to "steer" customers to higher profit margin merchandise after being baited into the stores by our "beat any price" policy. The first sales person main job was to "switch the customer" or "SW" the customer to higher margin products and services such as selling them alternative products for "better value" and high margin extended warranty plans. If the first sales person did not succeed in "switching the customer" to higher margin products and services, a second sales person was assigned to "take over" or "T.O." the customer in an effort to make a bigger profit. If the second sales person was unsuccessful in swaying in swaying the customer to purchase higher margin products, a third sales person known as the "nail at door" person or "NAD" person made the final effort to convince the customer to purchase higher margin products and services. Selling used and defective merchandise as brand new products Sometimes, Crazy Eddie did not have a particular product in stock at the time it was sold to a customer. In such cases, if a floor item or customer returned merchandise (known as "reeps") was available, we repackaged (known as "lunching") such merchandise as brand new and sold them to unsuspecting customers. Page 5 of 139
Crazy Eddie’s Relentless Advertising Campaign Crazy Eddie's advertising campaign was nothing short of revolutionary. For almost 17 years the northeast was blanketed with its ads. Among New York metropolitan area consumers, Crazy Eddie had better name recognition than Coca Cola. The message was: Shop around. Get the best prices you can find. Then go to Crazy Eddie's and he'll beat it! Crazy Eddie. His Prices are Insaane!!!!!!!!!! It is often said that imitation is the sincerest form of flattery. Crazy Eddie's advertisements have appeared in many movies such as Splash! and parodies of its ads appeared on such shows as Saturday Night Live. Around 1971, WCBS‐FM account representative Norm Golden talked Eddie Antar into purchasing radio advertising for $5 a spot. In 1972, Jerry Carroll, known as "Dr. Jerry" adlibbed some Crazy Eddie ads and Eddie Antar liked his antics. Soon afterwards, Jerry Carroll became the official face of Crazy Eddie and was later immortalized as one of the greatest spokesmen in advertising history. Crazy Eddie's original Advertising Director was Larry Weiss. He deserves great credit for the genius and success of Crazy Eddie's advertising campaign. There were many others who contributed to this great advertising campaign as well. Today, the words "Crazy Eddie" are synonymously used to describe price discounting, predatory pricing, etc. and that is a measure of credit to the success of its brilliant and historic advertising campaign. In a post on the MusicRadio77.com Message Board on March 5, 2005, Larry Weiss wrote the following insightful story about the history of Crazy Eddie's famous advertising campaign: The recent thread about the Court TV documentary on Crazy Eddie got me reminiscing. As the man responsible for developing Crazy Eddie’s advertising and managing that campaign from 1974 through 1983, it still amazes me that 30 years after that work began it is still so highly talked about and remembered. I was asked to participate in the Court TV documentary, but other than providing a few photographs, I declined. So instead, as long as I was reminiscing I thought I’d share with you here some Crazy Eddie history and trivia that few people talk about, or even know about … Crazy Eddie (or Sights and Sounds as it was named back then) was one of the very early regular advertisers on FM radio. The corporate name then was ERS Electronics (ERS stood for Eddie, Rose and Sam – Eddie’s parents). Page 6 of 139
The first station Eddie advertised on was WCBS‐FM. The rate was $5 a spot, buy one get one free. To top that, Eddie never paid the bill, and CBS‐FM kept the spots on the air anyway. Norm Golden was the CBS‐FM account executive who first talked Eddie into radio advertising. Eddie told Norm the only way he could get the order was if he first went outside on Kings Highway and urinated on a bus. Norm did. The original “free price quote” line was a pay phone on the wall at 1117 Kings Highway. Nobody expected it to ring. They were wrong. In that recent thread, George Kowal said he remembered an account exec at WKHK‐FM who “claimed he was the one who introduced Jerry to Eddie and started the whole thing”. That account exec was probably Jeff Coleman. Jeff was working at WPIX‐FM at the time. Back then stations were each producing their own Crazy Eddie commercials, and at WPIX the chore was generally divided between Dennis Quinn and Jerry Carrol (and occasionally Howard Hoffman when he joined PIX). It was Jeff who introduced me to Eddie, and it was I who eventually narrowed the talent down to using Jerry exclusively – although Howard was close. Among the other personalities who were seriously considered and were almost hired to be the Crazy Eddie spokesman was TV sitcom actor Jay Thomas, who at the time was doing morning drive on 99X. He called me almost every day asking for a chance, and he nearly got it. Good thing for his career he didn’t. Mork and Mindy was a better deal. Also in the running was none other than James Brown – who also called me nearly every day trying to talk me into it. We hired a small production company called Neshobe Films to produce the first television commercials. They had recently completed the series of “Did You Hear What He Said This Morning?” spots for Don Imus and WNBC. Their Cameraman was Jay Dubin – who went on to direct hundreds of Crazy Eddie commercials and then to MTV fame (Billy Joel and others) – eventually producing and directing the Beekmans World television series (shot in very much the same format as Crazy Eddie commercials). We initially had trouble deciding what direction to take the television advertising. We knew it would have to be outrageous, satirical and tongue in cheek, but we couldn’t decide whether to go with a pitchman or with creative satire. So we decided to do both. Having watched Jerry voice our radio spots for some time, it was clear he should be the TV pitchman. I proposed it to him while doing radio spots in the WPIX production room – and he accepted immediately. The first TV spots we shot were the “Boys in the Bathroom” spot and a Jerry Carrol “Hard Sell. They were shot on the same day. The “Bathroom was the mens room near the Cafeteria at Pratt Institute. The lyrics to the “When You Think You’re Ready, Come Down to Crazy Eddie” song were written by a grateful Crazy Eddie customer – initially as a folk song. The acapella singing was written and Page 7 of 139
performed by myself and my friends Jeff Gottschalk and John Russo, and was vaguely inspired by Dion’s “A Sunday Kind of Love”. Jeff went on to write songs for Dianna Ross and Cher, and currently performs with the Rascals. John teaches music in a public school district on Long Island. The first TV spots with Jerry Carrol were shot in the Village store, overnight after the store was closed. I initially proposed ending the spots with the line, “Crazy Eddie – the MAN is Insane!” Eddie actually took personal offense at this. We eventually settled on, “Crazy Eddie, his prices are insane!” I hired unemployed, former Korvettes ad manager Larry Miller to buy our television time. He had just started his own little one man media buying company out of his apartment in the East 60’s. It wasn’t long before his Corinthian Communications became one of the largest media buying services in the world. The first TV spots aired on Mary Hartman, Mary Hartman. Crazy Eddie persuaded many New York television stations to stay on the air overnight, by offering to buy advertising (usually $10 a spot or less). We also started sponsoring local movies, including Casablanca, filling the commercial breaks with spots and our spoofs of the movies. For many years Crazy Eddie was the largest volume buyer of radio time in New York City. Among the account executives calling on me regularly were Mel Karmazin, Judy Ellis, Steve Dinitz, Mike Kakayonis and others. Crazy Eddie never ever bought any advertising on 77‐WABC. The chicken costume (it was a chicken, not an ape, Tom) was spposed to be a turkey for a Thanksgiving spot. Rubies Costumes delivered the wrong outfit. We shot it as a goof. But, then again, so were most of the spots. Every radio station had a stand‐by spot carted up and ready to go called Crazy Eddie’s Blizzard Blitz. Whenever winter weather got extremely severe I would call directly in to each studio and authorize the on‐air personalities to run those spots, which claimed, “if you’re crazy enough to come out in this weather, Crazy Eddie is crazy enough to give you the most unheard of crazy deal …” Once Eddie and I had lunch with Don Imus at the Swiss Center in Rockefeller Center. The Swiss Center was the restaurant run by the Swiss Embassy featuring fine Swiss cuisine. Eddie ordered a cheeseburger. Imus ordered an AMERICAN Cheese sandwich. The waiters were flabbergasted, but they brought the food. Page 8 of 139
The major dealer for Cerwin‐Vega speakers, Crazy Eddie had the honor of dispensing with those giant subwoofers that had been used to create “Sensoround” in theaters all over the country for the movie Earthquake. Many of those subwoofers were installed in major clubs around the City, most notably ‐ Studio 54. I made arrangements with the producers of Saturday Night Fever to shoot a scene in the Crazy Eddie Record and Tape Asylum on Kings Highway. Eddie’s brother in law Bennie shot it down. He was appalled that I would want to shut the store down for a day to shoot a movie. Such was the mentality of that place. I did, however get a Crazy Eddie commercial featured in the movie Splash. Carson productions also featured Crazy Eddie commercials in their TV’s Greatest Commercials special with Dick Clark and Ed McMahon. The Crazy Eddie spoof of Saturday Night Fever was shot at the 2001 Odyssey House, same as the movie. It was easy to duplicate the lighting – each of the lights from original movie shoot had melted holes in the ceiling. Our spoof of Superman got Warner Brothers mad and they sued us. The NY Post headline read, “It Takes Superman to Stop Crazy Eddie”. Eddie countered with threats of halting all sales of Warner owned Atari video games (we were the largest dealer), and we settled. Crazy Eddie was responsible for the demise of what was then known as the “Fair Trade Laws”, where manufactures dictated the prices at which retailers could sell their products. Crazy Eddie was primarily responsible for the demise of Blue Laws (that prevented retailers from opening on Sunday, by being one of the first major retailers to open on Sundays, not to mention Christmas, New years and Thanksgiving. Paramus was the only regional location where blue laws remain today. Once a Crazy Eddie manager was arrested for going into the Paramus store on a Sunday. He was only there to retrieve his wallet, accidentally left there the day before. I remember the first time we decided to open on Christmas Day. We all looked at each other and thought, “hey we’re all Jewish – why not”. Was one of the highest grossing days of the year. After his release from jail, Eddie contacted me and asked me to get involved in rebuilding the company. We gave it a quick shot. A lot of old timers came back to work and we produced a new series of hilarious radio and TV spots. But potential investors were unable to see Eddie Antar other than as the convicted felon he was – and I don’t blame them. Eddie refused to bow out ‐ dooming the new venture. There were a lot of hard feelings and, sadly, a whole lot of the original players are no longer talking to each other. There’s much, much more – hardly enough bandwidth for it all. Hope you all enjoyed reading this as much as I enjoyed typing out these great memories. Page 9 of 139
The Crazy Eddie Fraud Compared to today’s frauds in the billions of dollars, Crazy Eddie’s fraud was smaller in size. However, the Crazy Eddie fraud was much more outrageous than most frauds committed because of its time span (18 years), its use of a combination of multiple methods, and the sheer audacity of its perpetrators. As I will detail below, were three main phases to the Crazy Eddie fraud spanning from 1969 to 1987. (1) 1969‐1979: Skimming and under reporting of income (tax fraud) prior to planning to go public (2) 1980‐1984: Gradual reduction of skimming to increase profit growth in preparation for initial public offering, known as committing securities fraud by going legit (3) 1984‐1987: As a public company, overstatement of income to help insiders sell stock at inflated prices by the following means: • Money laundering to increase revenues and reported profits, known as the "Panama Pump" • Fraudulent asset valuations to increase reported profits (inflating inventories) • Timing differences to increase reported profits (accounts payable cut‐off fraud) • Concealed liabilities and expenses to increase reported profits (debit memo fraud) • Improper financial statement disclosures to cover up crimes (changing disclosures to cover up fraud) Phase 1: From 1969 to 1979, our primary fraud was income tax evasion and stealing sales tax through skimming cash sales from customers. In 1971, at the age of fourteen, I began my employment at Crazy Eddie as a stock boy. From the very beginning of my employment at Crazy Eddie, I was involved in cash skimming and overstating insurance loss claims. From 1975 to 1980, I attended Bernard M. Baruch College and majored in public accounting. Eddie Antar and other family members believed that my formal college education in public accounting would help them execute more sophisticated financial crimes in the future. Therefore, the Antar family paid my tuition and paid me a full time salary while attending college. I continued working at Crazy Eddie at nights, weekends, holiday breaks, and summer vacation. In 1980, I graduated Bernard M. Baruch College Magna Cum Laude and was on the Dean’s List. The Antar’s were ready to take full advantage of my accounting education as the de facto Chief Financial Officer of the company to execute even more sophisticated crimes on behalf of the family. Phase 2: Around 1980, we planned to make Crazy Eddie into a public company so the Antar’s could sell their stock at inflated values to unsuspecting victims. Gross up "on the books" payroll to compensate employees previously paid "off the books" Page 10 of 139
To prepare for the future as a potential public company, we needed to “legitimize” the business. All employees who were paid fully “off the books” or partially "off the books" in cash had to be paid “on the books.” We grossed up those employee’s "on the books" compensation to help them avoid a drop in net payroll income. Both external audit firms (Penn and Horowitz 1980‐83 and Main Hurdman in 1984) noticed that many employees, who were previously paid what seemed to be extremely low wages (considering their positions and responsibilities at Crazy Eddie), had received raises in multiples of ten to twenty times their previously reported salaries. For example, a district manager who was paid $5,200 per year "on the books" and $50,000 per year "off the books" was now paid "on the books" over $75,000 per year on the books, instead of receiving any "off the books" compensation. Therefore, according to Crazy Eddie's books and records such a person's annual salary suddenly went from $5,200 per year to $75,000 per year. The auditors did not know that Crazy Eddie management was "grossing up" the employee's total compensation to make up for the loss of "off the books" compensation and higher payroll and income taxes. The auditors accepted our silly explanation that such employees had sacrificed many years working at below average wages for the opportunity to be part of what they hoped might become a growing public company. Around 1980, I helped devise a plan to gradually reduce our skimming to artificially increase the growth of Crazy Eddie's reported profits to create the appearance that it was a thriving growing company. In effect, we planned a "securities fraud by going legit." That same year, I passed the CPA examination with a 90% and scored in the top 1% in the country. From 1980 to 1983, while working “off the books” as the de facto CFO of Crazy Eddie, I also worked Penn & Horowitz, the accounting firm that audited Crazy Eddie’s books and records. I worked at Penn & Horowitz for two purposes: (1) To fulfill my auditing experience requirement necessary to obtain my CPA license (2) To learn how to take advantage of auditors, especially if Crazy Eddie became a public company as planned. In 1984, I left Penn & Horowitz and officially began working for Crazy Eddie again, "on the books." Around the same time, Crazy Eddie replaced Penn & Horowitz with a Main Hurdman, a major accounting firm. (Note: In 1986, Main Hurdman merged with Peat Marwick Mitchell to become Peat Marwick Main. In 1987, that accounting firm became known as KPMG, after another merger). In 1985, I finally obtained my CPA license. From 1980 to 1984, Crazy Eddie gradually reduced its skimming from approximately $3 million per year in starting in fiscal year 1979 to near zero in fiscal year 1984. As a result of the gradual reduction in skimming, Crazy Eddie’s reported pro forma annual profits grew from $1.709 million in fiscal year 1980 Page 11 of 139
to $7.975 million in fiscal year 1984. If we factor in new store openings during the same period, Crazy Eddie’s pro forma profit per store grew from $219,975.14 per unit in fiscal year 1980 to $617,737.92 per unit in fiscal year 1984. Without the gradual reduction in skimming, Crazy Eddie’s pro forma profits only grew from $4.709 million in fiscal year 1980 to $7.975 million in fiscal year 1984. Most importantly, Crazy Eddie’s pro form profit per store only grew from $606,122.25 per unit in fiscal year 1980 to $617,737.92 in fiscal year 1984. Therefore, Crazy Eddie's real per unit profitability was hardly growing at all, except in the minds of unsuspecting investors who were unaware that we gradually reduced our skimming to skew our growth. (See table 1 below). Phase 3: On September 13, 1984, Crazy Eddie had its initial public offering. As a public company our primary fraud shifted from under‐reporting income (as a private company to avoid paying taxes) to over‐reporting income to help Antar family members to sell millions of dollars of stock at inflated prices to unsuspecting investors. In fiscal year’s 1984 to 1987, we inflated inventories and under‐reported accounts payable to increase reported profits. In addition, we artificially increased our reported sales volume and profits by laundering previous skimmed funds back into Crazy Eddie in a scheme known as the “Panama Pump.” (See table 2 below). During that same period, Antar family members sold almost $90 million of common stock to unsuspecting investors at inflated prices due to our over‐reporting of income in financial reports files with the SEC. The auditors simply did not observe the inventory counts in all of the Crazy Eddie stores at fiscal year‐
end. In fiscal year 1986 and 1987, the auditors observed the inventory counts in roughly 50% of the stores. We inflated inventory counts in all stores (including both store counts observed by auditors and store counts not observed by the auditors at year end). Regarding store inventories that the auditors observed, they failed to take copies of the entire store inventory counts with them after leaving the store premises. The auditors only took their "test counts" with them and not copies of the entire store inventory. We monitored their test counts. Therefore, we knew which inventory counts to falsify. We were nice to our friends and nicer to our enemies. When boxes were stacked really high and deep, we were very courteous to those young kids just out of college who felt that it was beneath their dignity to do physical work. We climbed and counted the inventory for our lazy auditors. The process continued through the night. We gained our auditors trust by buying them coffee during their breaks or we performed small errands for them. For example, we volunteered to make copies of their audit test counts. The unsuspecting auditors were very happy to have us make copies for them. Afterwards, we inflated inventories in even greater amounts, since we knew what items to inflate and what items to avoid. Page 12 of 139
By 1987, the warehouse inventory was automated and it was no longer possible inflate those inventories. Therefore, we needed to be more aggressive in inflating the store inventories in greater proportions than in previous years. We gained access to all of the auditors work papers. The audit work papers were left behind in locked boxes on Crazy Eddie premises during the audits. We knew that the audit manager had left the keys in a small 2" paper clip box and hid it in an unsecured desk. As a result, it was relatively easy for us to falsify store inventories and larger amounts compared to prior years. Fiscal year 1986: The "Panama Pump" By fiscal year 1986, the effect on our growth in sales and profits from reducing our prior skimming had run its course and was no longer beneficial. Antar family members wanted to sell even more stock to unsuspecting investors and of course make millions, more. In the first month (December 2005) of the last quarter of fiscal year 1986, same store sales increased 20% over the previous December. However, in January and February 1986, same store sales only increased 4% over the previous fiscal year period. The analysts, who followed Crazy Eddie, expected at least a 10% increase in same store sales during the January ‐ February 1986 period over the previous year's period. Eddie Antar and his father Sam M. Antar wanted to sell over $30 million in stock by the first week of March 1986 at the highest possible price. Therefore, to meet analysts' sales expectations, we conceived of a plan known as the "Panama Pump." Eddie Antar and other family members advanced $1,500,000 to Crazy Eddie from their secret bank accounts in Israel which contained funds skimmed while Crazy Eddie was a private company. Those funds were first wired from Bank Leumi Israel to Bank Leumi Panama (both countries were bank secrecy jurisdictions). After the funds were transferred to Panama, another family member withdrew those funds from Bank Leumi in the form of drafts or non‐negotiable instruments, to avoid violating disclosure laws on the movement of funds into the country. The bank drafts were issued in amounts ranging from $25,000 to $100,000 in order to make it easier to deposit such drafts in each comparable store bank account and conceal the phony sales. On Sunday, March 2, 1986, Crazy Eddie’s fiscal year ended. However, I received those bank drafts a day later. Those bank drafts were deposited into each comparable store's bank account after the last day of the fiscal year, which was on Monday March 3, 1986 and no invoices were generated to backup those deposits. Since Crazy Eddie’s weekend checks from sales to customers were deposited on Monday anyway, there was no problem including such bank drafts with the weekend sales proceeds. The bank drafts were dated before the fiscal year ended. Page 13 of 139
Also, another $500,000 in currency from Antar family mattresses that did not make its way to Israel was deposited in the same store sales. Finally, a sale of $200,000 to another retailer called “trans‐shipping” was counted as a retail sale and included in same store sales. The sum total of $1.5 million in bank drafts, $500k in currency, and $200k from counting a trans‐
shipping sale as a same store sale, artificially increased same store sales in total by $2,200,000 for fiscal year 1986 and reported profits by $2 million. In Q4 1986, Crazy Eddie reported a 14% same store sales increase, instead of a 9% same store sales increase, due to the "Panama Pump" and other schemes described above. Likewise, Crazy Eddie reported a 10% same store sales increase for January and February 1986, instead of the 4% same store sales increase due to the “Panama Pump.” As a result of the “Panama Pump” fraud, Crazy Eddie’s reported same store sales for January February 1986, met analysts’ expectations for that period. Why the auditors failed to find the “Panama Pump” The auditors failed to test internal controls for sales and conduct a sales cutoff test at year end. If the auditors had conducted such a sales cut‐off test, they could have noticed unusually large deposits in transit on the bank reconciliations since the drafts did not clear the bank before fiscal year end. These large deposits in transit of $25,000 to $100,000 from bank drafts were listed next to normal deposits in transit from legitimate sales ranging from $10 to $1,000 on the bank reconciliations. The auditors did not trace any monies from deposits in transit to actual sales invoice. In addition, the auditors failed to notice that same store sales increased 75 ‐100% for no apparent reason in the last week of the fiscal year. Eddie Antar and Sam M. Antar sell $30 million of common stock based on hyped same store sales On March 7, 1986 Eddie and his father sold over $30 million dollars of stock at inflated prices and I was a hero. The press release issued by Crazy Eddie reported a same store sales increase of 14% for Q4 1986 and everybody was happy with the news. However, the same store sales report did not include any information about Crazy Eddie’s reported profits. The audited financial statements for fiscal year 1986 were yet to be issued and Eddie Antar and his father wanted no earnings surprises in fiscal year 1986 after they cashed out $30 million in stock to unsuspecting investors at inflated prices. Fiscal year 1986: inventory inflation We already artificially inflated our earnings by $2,000,000 from fictitious sales resulting from laundering previously skimmed funds back into Crazy Eddie ($1.5 million from bank drafts and $500k in currency). The $200k trans‐shipping sale did not increase profits, since the merchandise was sold at cost to the non‐end user. Page 14 of 139
I helped Eddie Antar and other family member plan and execute overstatement inventories and understatement of accounts payable that taken together with the fictitious sales fraud initial overstated net income by approximately $15 ‐ $18 million. Inflation of store inventories was particularly easy since the auditors did not supervise the counting of more than 40% of the store units or store inventory values. In addition, it was quite easy in a company where the family controlled everything to receive merchandise weeks before the auditors arrived without any records or audit trail on Crazy Eddie books and then receive postdated invoices weeks after the auditors concluded their audit. In the warehouse, our conspirators were very accommodating to audit personnel in helping them count merchandise by volunteering to climb over huge stacks of boxes and count all of the units. In addition, they helped the audit manager make copies of his test count work papers. That same trick was also done in stores in which the auditors supervised the inventory counts. In effect, we committed fraud by accommodation. Fiscal year 1986: Inclusion of consignment merchandise in year‐end inventory or accounts payable cut‐off fraud A certain vendor from whom we purchased over 10% of our merchandise and whose volume with us was over 35% of their business shipped us merchandise prior to year end. After our external auditors completed their audit, that vendor invoiced Crazy Eddie as if the merchandise was shipped after year end. That scheme resulted in Crazy Eddie's inventories being overstated by another $3 to $4 million in 1986 or accounts payable being understated by a likewise amount. Why the auditors failed to uncover accounts payable cut‐off fraud The auditors failed to adequately examine internal control procedures for receiving merchandise and paying bills. Too much earnings inflation in fiscal year 1986 We were so successful in overstating inventory and understating accounts payable that our auditors believed that Crazy Eddie had substantially understated its profits during fiscal year 1986. Crazy Eddie’s gross margins for the year had been computed at close to 40% when historically it never exceeded 25%. Our gross margins for the last quarter exceeded 60%. Eddie and I had discussions with the auditors regarding this so called dilemma. The issue of accounting fraud never came up. The auditors felt we were the kind of client they could work with. The partner said, “Nobody got sued for under reporting earnings.” To solve the problem, he set up artificial cushions that he would call “rainy day funds” or “accountants liability insurance.” Therefore, he arbitrarily set up non‐GAAP Page 15 of 139
allowances of $8 million to offset his perceived $16 million understatement of earnings, not knowing the con job that Eddie and I pulled over him. We rewarded Main Hurdman very dearly after the 1986 audit. We awarded them various contracts for computer system implementation, employee benefit compliance, and other work totaling in excess of $1 million per year. However, the annual audit fee was only approximately $150,000. There is a saying, “Keep your friends close and keep your enemies closer.” Fiscal year 1987: channel switching Eddie Antar and Sam M. Antar wanted to continue inflating same store or comparable store sales in fiscal year 1987 to prevent any revenue surprises after selling about $30 million in common stock at inflated prices, as detailed above. To continue the same store sales inflation, we devised a scheme to sell (trans‐ship) merchandise to non‐retail customers who were not end users, such as other retailers and wholesalers, and count such sales as if they originated from those comparable stores. That scheme is known as "channel switching." Those trans‐shipping sales originated from the main office. However, such sales were counted as if they originated from comparable stores as retail end user sales. The trans‐shipper issued a series of checks in small denominations for their purchase of merchandise from Crazy Eddie instead of issuing one large check per order. The small checks (usually in denominations of $10,000 ‐ $20,000) were deposited into the bank accounts of the comparable store sales and treated as a regular “off the street” customer retail channel sale. In Q1 1987 (March to May), Crazy Eddie reported a same store sales increase of 10% instead of 8% due to $680,000 of trans‐shipping sales improperly included in same store sales. In Q2 1987 (June to August), Crazy Eddie reported a sale store sales increase of 15% instead of 5% due to $4.5 million of trans‐
shipping sales improperly included in same store sales. In Q3 1987 (September to November), Crazy Eddie reported a sale store sales increase of 5% instead of negative 10% due to $7.9 million of trans‐
shipping sales improperly included in same store sales. Why the auditors missed the "channel switching scheme" The auditors failed to test internal controls for sales, failed to examine deposits in transit, failed to examine actual invoices underlying deposits, and failed to make sales cutoff tests for interim periods. Payments from such sales must be examined and merchandised should be traced. Fiscal year 1987: inventory inflation From the early 1970’s to 1986, Crazy Eddie was a profitable company. Prior to Crazy Eddie’s initial public offering in 1984, we understated profits to commit income tax evasion and steal sales taxes. From 1984 to 1986, we inflated Crazy Eddie’s reported profits to help Antar family members sell stock at inflated prices. However, in 1987, Crazy Eddie started losing money and our efforts were focused on reducing reported losses. We made desperate attempts to cover past frauds and continue the current fraud. Page 16 of 139
In the previous fiscal year, we had falsified our store level inventories by $3 to $4 million. However, in fiscal year 1987, Crazy Eddie's store level inventories were estimated to have been falsified by $15 to $20 million. In stores that existed in both 1986 and 1987, where the auditors observed inventory counts, those gross inventory levels increased from $21.950 million to $37.470 million or about 71%. Meanwhile, in stores that existed in both 1986 and 1987, where the auditors did not observe the inventory counts, gross inventories grew from $7.972 million to $23.530 million or about 195%. Therefore, inventory growth in stores where the auditors failed to supervise the year‐end physical inventory counts were more than double in comparison to stores where the auditors did supervise the counting of year‐end inventory. (See table 3 below). Why the auditors failed to find the 1987 inventory inflation The auditor's left their work papers at Crazy Eddie’s premises overnight until the audit was completed in supposedly secured locked metal trunks. However, the audit manager dutifully left the key to these locked metal trunks in a small 2 inch paper clip box on Crazy Eddie premises. Therefore, we were able to falsify inventories that the auditors observed at year end in an effort to make the growth in inventory levels in such stores similar to the inventory levels in stores where they were not present to witness the inventory counts. However, due to our desperate attempt to reduce reported losses, the growth in inventories in unobserved stores almost doubled the growth in inventories of stores observed by the auditors. The auditors never questioned this red flag. Fiscal year 1987: Debit Memo Fraud In fiscal year 1987, we could not rely mainly on inflating inventory levels to reduce our reported losses. Instead, we artificially reduced amounts owed to vendors or accounts payable to reduce our cost of goods sold, increase gross profits, and reduce losses. We conceived of a plan to use phony debit memos or charge backs to reduce our losses. However, up to fiscal year 1986, Crazy Eddies' accounting policy for “purchase discounts and trade allowances” as disclosed in the company’s footnotes to the financial statements were: "Purchase discounts and trade allowances are recognized when received." Crazy Eddie did not reduce its accounts payable (thereby increase its profits) until a credit memo was received from a vendor. Crazy Eddie's accounting principles for trade discounts and allowances was conservative since "earned" discounts and allowances were not recognized as income until the credit memo was received from a vendor. Page 17 of 139
Therefore, we were unable to use phony debit memos to reduce our accounts payable, since the vendors could not recognize them as legitimate deductions. Unless a vendor recognized a debit memo or charge back to them as legitimate in the form of a vendor’s credit memo, and such charge backs could not be reflected in our reported income. To enable the use of phony debit memos in fiscal year 1987, Crazy Eddie's accounting policy for purchase discounts and trade allowances was changed and disclosed in the footnotes to the financial statements as follows: "Purchase discounts and trade allowances are recognized when earned." As soon as purchase discounts and allowances were earned, regardless of whether or not Crazy Eddie received the credit memo from the vendor, they were recognized and accrued as deductions from accounts payable. Therefore, we could generate phony debit memos and use them to reduce our accounts payable and reported losses, since we did not have to wait for a vendor’s corresponding debit memo. The change in accounting policy for purchase discounts and allowances gave us the opportunity to generate $20 million in phony debit memos and $8 million in legitimate debit memos to offset almost $78 million in accounts payable. Why the auditors missed the phony debit memo scam In previous years, we generated an accounts payable aging schedule for our auditors. For fiscal year 1987, no accounts payable aging analysis was generated for our auditors. Since the accounts payable aging schedule was not generated in 1987, the auditors were unable to determine the true volume of collectable debit memos. In some cases, Crazy Eddie had negative accounts payable balances for certain vendors. In other cases, there were large amounts of debit memos offsetting gross accounts payable balances. However, the auditors conducted no analytical tests to determine the collectability of debit memos. The auditors believed our false rationale that the reason that accounts payable was lower in relation to inventory compared to previous years was due to Crazy Eddie using short term commercial paper to pay its vendors more promptly. However, the real reason for the relative percentage reduction in accounts payable in relation to inventory was due to the large volume of non‐reconciled bogus debit memos. The true accounts payable excluding those bogus debit memos was about $71 million. Furthermore, the auditors reconciled the accounts payable of only three major vendors. Each vendor had significant amounts of reconciling items, resulting from the bogus debit memos. For a certain vendor, that had claimed that Crazy Eddie owed them $17 million, we said they were owed them $7 million. A significant factor in the gap between the differing amounts claimed by the vendor and Crazy Eddie was the bogus debit memos. Page 18 of 139
The auditors never contacted any of the companies they reconciled concerning any discrepancies. The audit staff member responsible for the accounts payable audit had no retail accounts payable audit experience and only six months experience in other audit areas. He first learned about debit memos during the Crazy Eddie audit. The audit partner approved the so‐called audited financial statements for a press release at a board meeting before the accounts payable audit was completed. The inexperienced audit staff member began his test work on Sony (which contained over $4 million of the $20 million in phony debit memos) on April 28, 1987, the same day our auditors signed off on the audit according to his testimony in a deposition. In his sworn testimony, he said that his work continued for more than one day. The audit opinion was signed as of April 28, 1987. The partner had approved the release of Crazy Eddie's financial reports to the Board of Directors on the previous day. An excerpt from the work papers said, "...PMM traced all debit memos into A/P status report as of 03/01/87. No further work necessary." An A/P Status report simply lists all invoices and debit memos. Therefore, the debit memos were traced to a report listing the phony debit memos and no further work was necessary ‐ garbage in, garbage out. No efforts were made to contact Sony about the discrepancies in its confirmation of accounts payable. The senior staff member did conduct an interview of Crazy Eddie's Accounts Payable Manager (a co‐
conspirator) after the staff auditor finished his testing and after the partner signed off on the audit. His work paper is dated May 22, 1987. There was a similar lack of follow through with other confirming vendors regarding any discrepancies. In addition, the change in the accounting policy relating to the cash discounts and trade allowances required additional computations under Accounting Principal Bulletin 20. No such computations were contemplated or done by the auditors. Fiscal year 1987: Inclusion of consignment merchandise in year‐end inventory or accounts payable cut‐off fraud In fiscal year 1987, we continued to use a certain vendor to ship Crazy Eddie merchandise prior to year end and after the audit was completed, invoice the company as if the merchandise was shipped after year end. That scheme resulted in Crazy Eddie's inventories being overstated by another $5 to $7 million in 1987 or accounts payable being understated by a likewise amount. Page 19 of 139
See the tables below for a summary of Crazy Eddie's frauds and their impact on reported financial results. Table 1: The effect of the gradual reduction on skimming had a substantial effect on pro forma earnings growth and store unit productivity: Effect of gradual reduction in skimming on reported pro forma income Fiscal year ended 05/31/1980 Fiscal year ended 05/31/1981 Fiscal year ended 05/31/1982 Fiscal year ended 05/31/1983 Fiscal year ended 05/31/1984 Reported income before pension contribution & income taxes $1,709,000 $2,273,000 $3,404,000 $4,637,000 $7,975,000 Skimming $3,000,000 $2,500,000 $1,500,000 $750,000 $0 Adjusted income before pension contribution & income taxes $4,709,000 $4,773,000 $4,904,000 $5,387,000 $7,975,000 Reported growth in income before pension contribution & income taxes from previous year ‐ 33.0% 49.8% 36.2% 72.0% Adjusted growth in income before pension contribution & income taxes from previous year ‐ 1.4% 2.7% 9.8% 48.0% Number of stores open at end of period 9 10 10 12 13 7.77 9.22 10.30 11.27 12.91 Reported income before pension contribution & income taxes (Per average number of stores opened during period) $219,975.14 $246,600.43 $330,609.93 $411,521.99 $617,737.92 Adjusted income before pension contribution & income taxes (Per average number of stores opened during period) $606,122.25 $517,828.35 $476,295.85 $478,082.59 $617,737.92 Reported growth in income before pension contribution & income taxes from previous year (Per average number of stores opened during period) ‐ 12.1% 34.1% 24.5% 50.1% Adjusted growth in income before pension contribution & income taxes from previous year (Per average number of stores opened during period) ‐ ‐14.6% ‐8.0% 0.4% 29.2% Average number of stores open during period Note: Average number of stores opened during period takes into account new store openings and store closings during the year and the average number of days the stores were operating. Page 20 of 139
Table 2: Crazy Eddie earnings inflation fraud Pre‐tax (in $ millions) Reported pre‐tax earnings Fiscal year ended 02/29/1984 Fiscal year ended 03/03/1985 Fiscal year ended 03/02/1986 (low range) Fiscal year ended 03/02/1986 (high range) Fiscal year ended 03/01/1987 (low range) Fiscal year ended 03/01/1987 (high range) 6,582 13,343 26,512 26,512 20,597 20,597 Warehouse inventory inflation 0 ‐3,000 ‐6,000 ‐6,000 0 0 Defective merchandise (reeps) inventory inflation 0 0 ‐1,000 ‐2,000 ‐7,500 ‐8,000 Store inventory inflation 0 0 ‐3,000 ‐4,000 ‐15,000 ‐20,000 Accounts payable cut‐off fraud 0 0 ‐3,000 ‐4,000 ‐5,000 ‐7,000 Reeps cut‐off fraud 0 0 0 0 ‐1,000 ‐2,000 Phony debit memos 0 0 0 0 ‐20,000 ‐20,000 Cash infusion from previously skimmed funds used to inflate same store sales 0 0 ‐2,000 ‐2,000 0 0 Annual total earnings inflation 0 ‐3,000 ‐15,000 ‐18,000 ‐48,500 ‐57,000 Less: cumulative effect of previous year's fraud 0 0 3,000 3,000 15,000 18,000 Effect of fraud on current year's pre‐tax income before audit adjustments 0 ‐3,000 ‐12,000 ‐15,000 ‐33,500 ‐39,000 Excess reserves approved by auditors to smooth reported earnings 0 0 8,000 8,000 8,000 8,000 Effect of fraud on current year's pre‐tax income after audit adjustments 0 ‐3,000 ‐4,000 ‐7,000 ‐25,000 ‐31,000 Cumulative shortage claimed by new management in 87’ ‐ ‐ ‐ ‐ ‐70,000 ‐70,000 Page 21 of 139
Table 3: Analysis of reported store inventories (stores included in included in comparable sales) for fiscal year 1987 Gross inventory before adjustments (in $ thousands) Fiscal year ended 03/02/1986 Fiscal year ended 03/01/1987 Percentage increase Gross inventory of comparable stores not observed by auditors 7,972 23,530 195.16% DNS Audio (closed FYE 1987) 1,758 0 ‐
Gross inventory of comparable stores observed by auditors 21,950 37,470 70.71% Gross inventory of comparable stores 31,480 61,000 93.77% Page 22 of 139
The Fall of Crazy Eddie Eddie Antar's success brings jealousy among immediate family members Crazy Eddie was tightly controlled by Eddie Antar and his immediate family (his father Sam M. Antar, his brothers Mitchell and Allen Antar and brother‐in‐law Ben Kuszer). The demise of the company was a direct result of the infighting between them. When Eddie bought out his cousin Ronnie Gindi and now owned 2/3 of what was known as Sights and Sounds (the predecessor to Crazy Eddie in 1971), it ultimately set the stage for later conflict between Eddie, his father, and his brothers. During the early years, Sam M. Antar, was looked upon as the patriarch of the Antar family. However, as Crazy Eddie became a major success, Eddie Antar soon assumed the mantle as the leader of the family. Jealousy grew among family members at Eddie Antar’s relative success. He owned 2/3 of a now highly successful business versus the father’s 1/3 interest. Brothers Mitchell and Allen Antar, and his sister Ellen Kuszer received generous salaries and other benefits, but shared no ownership of the company. December 31, 1983: New Year's Eve massacre Eddie Antar was not faithful to his first wife Debbie Rosen Antar (known as Debbie # 1). In an effort exploit Eddie’s marital infidelity and reassume the mantle of the patriarch of the Antar family, on December 31, 1983, Sam M. Antar sent his daughter Ellen Kuszer and daughter‐in‐law Robin Antar (Mitchell Antar’s wife) to confront Eddie with his girlfriend and future wife Deborah Ehrlich (known as Debbie # 2) in was called the New Year’s Eve massacre. The prospect of huge potential profits from committing securities fraud, kept the Antar's together This act initially caused deep rifts within the Antar family. However, the Crazy Eddie was only months away from its initial public offering and the family had been committing a massive fraud for almost fifteen years. The Antar’s had bigger fish to fry: unsuspecting and gullible investors willing to purchase Crazy Eddie stock without knowing of the underlying frauds. Therefore, cooler heads prevailed and they cooperated in taking the company public on September 13, 1984. The prospect of dumping huge amounts of stock at inflated prices on unsuspecting investors kept the Antar family together to commit more crimes, despite the “New Year’s Eve massacre.” Sam M. Antar gifted some of his stock to Mitchell Antar, Allen Antar, and Ben Kuszer (husband of daughter Ellen Kuszer). Therefore, even if Eddie Antar’s other family members did not share in his wealth, they had the economic incentive to cooperate with him and Sam M. Antar in committing securities fraud through their ownership of gifted stock from their father Sam. Eddie Antar and Debbie Rosen Antar (known as Debbie # 1) divorced shortly after the famed New Year’s Eve massacre and Eddie married his former mistress, Deborah Ehrlich (known as Debbie # 2). By 1987 long dormant rifts among Antar family members come to the surface again Page 23 of 139
By early 1987, Eddie Antar and his immediate family sold most of their Crazy Eddie stock and pocketed approximately $90 million in proceeds. At that time, Crazy Eddie was losing money and the fraud focused on reducing reporting losses. The value of Crazy Eddie stock tanked from a split adjusted price of $80 per share to around $5 per share. With little value in their remaining holdings of Crazy Eddie stock, the economic ties that kept the Antar family together despite their past differences, started to fade. The family split into two factions: Eddie Antar faction and Sam M. Antar faction In April 1987, Debbie Rosen Antar, supported by Sam M. Antar, sued Eddie Antar and her former matrimonial attorney for fraud seeking to overturn her divorce settlement. Unlike 1984, where the family worked out its differences and cooperated for the sake of the business, Eddie purged his father Sam M. Antar, his brothers Mitchell and Allen, brother‐in‐law Ben Kuszer, and their allies (other family and nonfamily criminal co‐conspirators such as Arnold Spindler and Abe Grinberg) from the business. While investors did not know about the fraud, the family infighting was partially blamed for Crazy Eddie’s weak financial performance in 1987. Therefore, rumors of a hostile takeover surfaced about parties interested in purchasing Crazy Eddie at a low price by taking advantage of the family infighting. Eddie Antar makes a defensive move to take Crazy Eddie private In May 1987, Eddie Antar and the Belzberg Family, with my help, attempted to take Crazy Eddie private as a defensive move. We believed that the unsuspecting Belzberg family would give us full latitude to run the business and to cover up the previous frauds. We were hoping to later merge Crazy Eddie with another consumer electronics retailer and perhaps blame any eventual shortfalls on them, months after such a merger. However, about a week later, Elias Zinn countered with a takeover offer at a higher price that was not anticipated by us. Eddie Antar and I feared a hostile takeover of the company and we began a "scorched earth" policy to shred just about every possible document we could find. Sam M. Antar faction sends Arnold Spindler to SEC to rat out Eddie Antar faction In July 1987, Arnold Spindler, a friend of Allen Antar who was fired, went to the Securities and Exchange Commission after consulting with Sam M. Antar, Mitchell Antar, and Allen Antar. Spindler informed the SEC of the massive fraud at Crazy Eddie. However, Spindler covered up the involvement of Sam M. Antar, Mitchell Antar, Allen Antar, and other members of their faction in the frauds at Crazy Eddie. Arnold Spindler did not tell the SEC about any the frauds committed at Crazy Eddie as a private company prior to its initial public offering on September 13, 1984 such as the cash skimming at Crazy Eddie prior to going public and the gradual reduction of cash skimming, since it could bring down both warring Antar family factions. He left out Sam M. Antar, Allen Antar, Mitchell Antar and their ally’s role in the Page 24 of 139
securities frauds committed after Crazy Eddie's initial public offering and only told the SEC primarily about Eddie's role and my role in committing securities fraud. The faction allied with Sam M. Antar was obviously hedging their bets for the potentiality of new management taking over Crazy Eddie and uncovering a massive fraud. They wanted all fingers to point at those allied with Eddie Antar. Eventually another witness, Abe Grinberg, like Arnold Spindler, came forward and covered up the involvement of Sam M. Antar and his faction of the family. New management takes over Crazy Eddie in a proxy fight and finds inventory shortages On November 6, 1987, Elias Zinn, his company Entertainment Marketing, in an alliance with famed turnaround artist Victor H. Palmieri and the Oppenheimer‐Palmieri Fund, took over Crazy Eddie and dislodged the remaining faction of the Antar family from power at the company. Sam M. Antar even voted his shares in support of the Zinn‐Palmieri Group who took over Crazy Eddie. For a while it seemed to be the perfect cover up. Investigations gain steam About two weeks after taking over Crazy Eddie, new management took over Crazy Eddie and took a physical inventory that initially revealed over a $40 million shortage. The allegations of both Spindler and Grinberg about a major fraud conducted by Eddie Antar and me (excluding members of the Sam M. Antar faction of the family) seemed verified. Problems faced by government investigators The government, the civil plaintiff’s lawyers, and new management had a difficult time sorting out the true facts during the investigation as almost every witness was lying. Two key “cooperating” witnesses were lying under oath. The initial targets of the investigation (the faction of the Antar family allied with Eddie Antar) chose to further stonewall the investigation by lying to the government investigators in depositions and interviews. The government and civil plaintiff investigators faced a "perfect storm" of problems caused by document destruction, poor company records, poor audit documentation, lying immunized witnesses, lying "target" witnesses, and foreign bank secrecy jurisdictions. The Antar family, who ruled Crazy Eddie for almost 18 years, regularly destroyed potentially incriminating documents. Sales register tapes, internal documents for merchandise purchased with cash, "off the books" payroll records, etc. were routinely destroyed. Copies of year‐end inventories observed by the auditors were never saved. In fact, the auditors never kept copies of the full inventories themselves. Some investigators had their doubts about Spindler and Grinberg, before I was "flipped" to cooperate with the government. However, they had difficulty investigating such doubts in the absence of other witnesses and enough documents. Page 25 of 139
I throw in the towel and cooperate with investigators In early 1989, I learned from subpoenaed documents in the civil litigation that Sam M. Antar (Eddie Antar's father), Mitchell and Allen Antar (Eddie's brothers) were setting up Eddie and me to take the fall. I passed along that information to Eddie Antar and he started to distance himself from me. He told me, "Sammy, you are on your own!" I knew that Eddie Antar had transferred most of his assets overseas and had already obtained several phony passports. He was preparing to leave the country for good. I tried to keep track of Eddie through other sources but was unsuccessful. With Eddie Antar abandoning me and his father and brothers out to set me up, I decided to seek a new attorney and have him contact the government investigators. On March 8, 1989, my criminal attorney, Anthony Mautone contacted the US Attorney's office in Newark in an effort to negotiate a plea bargain agreement. However, the prosecutors were very distrustful of me and would not negotiate an acceptable plea bargain agreement. The government was initially distrustful of me The government did not want to give me any plea bargain agreement because I perjured myself in various depositions taken by the SEC. Therefore, my attorney Jonathan Warner took depositions of Arnold Spindler and Abe Grinberg in the various civil actions brought by defrauded investors. The cover up unraveled as Abe Grinberg and Arnold Spindler, when confronted in depositions, gave conflicting testimony and were forced to recant key aspects of their stories when confronted with damning documents. Both Spindler and Grinberg eventually admitted to receiving from Sam M. Antar's faction to lie to government investigators. Grinberg eventually pled guilty to perjury. Spindler was never used as a witness at the future criminal and civil trials. My criminal lawyer Anthony Mautone does a legal "Hail Mary" In February 1990, Eddie Antar skipped town altogether, rather than comply with a Court order. In a bold legal "hail Mary" move, my attorney, Anthony Mautone, advised me to assist the government investigators without the benefit of any plea bargain agreement. I began having frequent face to face meetings, without the presence of my attorney, with the FBI agents investigating the Crazy Eddie frauds. Based on my information, the government ultimately gained access to key documents in Israel of secret Antar family bank accounts through as treaty known as the Hague Convention. One bank account at Bank Leumi in Tel Aviv showed Eddie Antar, Sam M. Antar, Rose Antar (Sam M.'s wife), Mitchell Antar, Ben Kuszer (Eddie's the brother in law), and Debbie Rosen Antar as owners with almost $8 million in cash deposits from 1979 to 1983. This account was never disclosed on their tax returns and all deposits came from skimmed funds from Crazy Eddie. Page 26 of 139
Worst yet, Sam M., Mitchell, Allen, Debbie Rosen Antar's could not explain away their actions in light of key bank documents obtained from Israel in pre‐trial civil depositions. Their lies were very transparent. My cooperation with investigators For almost two years, I had assisted the government and civil investigations without the benefit of any legal agreement protecting me or limiting my criminal and overall civil liability. Everything I said to the government investigators and civil plaintiff's attorneys could be used against me. In addition, I testified in over 50 civil depositions and disclosed my crimes without the benefit of any agreement limiting my criminal liability and overall civil liability. I was available to the US Attorney, FBI, SEC, civil plaintiffs full time (day and night) and testified truthfully under oath about my crimes. Except for my pre‐trial deposition testimony, I had no attorney present during my meetings with government investigators and civil plaintiff's attorneys where I had incriminated myself and provided evidence about the Crazy Eddie frauds. I had several hundred meetings and thousands of telephone conversations with the government investigators and civil plaintiff's attorneys and testified over 50 times in pre‐trial depositions under oath. I finally signed my plea agreement in August 1991. In October 1992, at the request of the US Attorney, my plea agreement was amended to increase my criminal liability in order to assist the government. Fugitive Eddie Antar captured in Yavne, Israel In 1992, Eddie Antar was captured in Yavne, Israel. That same day, FBI agents arrested Mitchell and Allen Antar. There was not enough evidence to bring criminal charges against Sam M. Antar, Ben Kuszer, and other family members due to massive document destruction and statute of limitations issues. Instead, the SEC brought civil actions against them seeking to recover ill‐gotten gains. Page 27 of 139
The Crazy Eddie Trial: Summer 1993 Almost six years after the last remaining members of the Antar family were removed from Crazy Eddie's, the criminal trial began in Newark, New Jersey. The court room was packed with reporters and supporters of Eddie Antar, Mitchell Antar, and Allen Antar. It was a family reunion of sorts, since Eddie and his previously feuding brothers were forced to join forces and in a bold effort to proclaim innocence. The atmosphere was tense as defense lawyers desperately tried to discredit my testimony and the testimony of other cooperating witnesses. At times, the court room burst into laughter as defense lawyers and I exchanged sarcasms. Eddie, Mitchell, and Allen tried to lay the entire blame for the Crazy Eddie fraud on me, despite them and other immediate family members pocketing over $90 million of ill‐gotten proceeds from selling Crazy Eddie stock at inflated values to defrauded investors and millions of dollars uncovered in secret foreign bank accounts. For about a month, US Marshals guarded my safety. They even escorted me into the court house rest rooms. It was a "pisser." The US Marshals called it "babysitting the witness," just in case.... The trial is best described through the press accounts below: June 26, 1993: The Associated Press ‐ Antar Doctored Books, Jury Told Cousin Tells of Profit Skimming (excerpts below): Crazy Eddie founder Eddie Antar and his brothers slowly stopped skimming profits and doctored inventory values to dupe investors into buying the discount electronics chain’s stocks, their cousin and former comptroller told a federal jury Friday. The testimony of Sam E. Antar, which is to continue next week, has bolstered the government’s contention that Eddie Antar, along with his brothers Mitchell and Allen, bilked stockholders of $80 million before the chain collapsed in the late 1980s. Sam E. Antar, 36, also spoke of how he grew up in Brooklyn a few blocks from the Antar brothers. The defendants’ father, Sam M. Antar, was the patriarch of the extended clan, Sam E. Antar said. "In a lot of ways, they were closer to me than my own family," Sam E. Antar said. Sam E. Antar began working for his cousin as a 14‐year‐old stock boy at his electronics store in Brooklyn called Sights and Sound. It later became Crazy Eddie; Eddie Antar and his father built a 43‐store chain in the New York metropolitan area. Sales reached $350 million, driven by loud commercials. Unopposed dissident stockholders took over Crazy Eddie Inc. in November 1987, and discovered evidence of fraud. Two years later, Crazy Eddie Inc. filed for Chapter 11 bankruptcy. Page 28 of 139
Sam E. Antar learned quickly how his uncle and cousins operated their then‐private company. He testified that all workers were paid in cash ‐ "off the books" ‐ and each night they divided tens of thousands of dollars taken from the cash registers. The “skim” reached a peak of $3 million in 1979 and was reduced until by 1983, the only cash being taken was for "off‐the‐books payroll" that augmented the recently instituted concept of paychecks, Sam E. Antar testified. The reason: The Antars were getting ready to sell stock. "To go public, you have to show profits. And because of the skim, it wasn’t showing any profits,” Sam E. Antar said. But the financial information shown to stock analysts and potential investors was flawed, he noted. "It showed the company was growing a lot faster than it was in terms of profits," Sam E. Antar said. Crazy Eddie stock was issued in September 1984. In early 1986, Sam E. Antar said Sam M. Antar and his sons told him how they had inflated the inventory by $2 million the year before. To meet Wall Street expectations, even more numbers had to be fabricated, Sam E. Antar said. This was done “to deliberately manipulate financial information" so that Sam M. Antar and Eddie Antar could "sell stock at the highest price," Sam E. Antar said. June 29, 1993: The Bergen Record ‐ Cousin: Antar had a 'Scorched Earth Policy' on Documents (excerpts below): The government's star witness in the Crazy Eddie stock fraud trial told a federal jury Monday how the weight of inflated sales figures and inventory eventually caused the schemes devised by himself and his cousins to collapse upon itself. Former chief financial officer Sam E. Antar also related how Eddie Antar, founder of the discount electronics chain, had him lie to federal investigators as the company foundered in the late 1980s. Eddie Antar, who is on trial with his brothers Mitchell and Allen, also instructed his younger cousin to destroy all incriminating documents in a "scorched earth" policy when it became apparent the Antar family would lose control of Crazy Eddie to dissident stockholders in late 1987, Sam E. Antar said. His second day in the witness box also brought emotional testimony of how he finally decided in 1989 to plead guilty and cooperate in the civil and criminal proceedings against his cousins, who he grew up with in Brooklyn. "I just turned 30 years old and felt the weight of the world on my shoulders,” Sam E. Antar said. "I decided I had a wife and children and they were more important than all this garbage I'd been doing for 16 years." Page 29 of 139
Sam E. Antar faces 10 years in prison for admitting to obstructing justice and conspiring to commit mail and stock fraud. He has settled a $160,000 fine with the U.S. Securities and Exchange Commission for $20,000. His income has shrunk from $200,000 a year to $15,000 and he testified he is deeply in debt. Sam E. Antar started as a 14‐year‐old stock boy at an electronics store in Brooklyn in 1971 that later became the first of 43 Crazy Eddie stores covering the New York metropolitan area. Sales reached $350 million, driven by loud commercials in which a pitchman touted "INSAAAAAAAANE" prices. Nearly all members of the extended Antar clan worked for the company, dominated by Eddie Antar and his father, Sam M. Antar, according to witnesses in the trial, now in its third week. But the familial ties began to unravel toward the end of 1986 as more and more deceptions were used to present bogus profit figures to Wall Street, Sam E. Antar said. At the same time, Eddie Antar withdrew from hands‐on management, communicating by phone to Sam E. Antar at the new headquarters in Edison. Complicating matters were the splits that deepened after family members learned of Eddie Antar's infidelity, setting his brothers and father against him, Sam E. Antar said. Eddie Antar fired his former mother‐in‐law, accusing her of taking a bonus she wasn't due. "It was getting harder to get them to work together," he said. "I became a Henry Kissinger, going from one faction to another, making sure things got done." The thing that Eddie Antar wanted done, above all, was to keep profits pumped up, Sam E. Antar said. Since 1985, that was done through a growing web of deceit: inventory figures bloated through borrowed goods and doctored figures; invoices for goods dated a month after the shipment was received; "debit memos" fabricated to show that manufacturers owed Crazy Eddie tens of millions of dollars for rebates and promotions; and cash infused that the family had skimmed before taking the company public in 1984. An added element that made Sam E. Antar feel he was in a "pressure cooker" was a $20 million stock sale by Eddie Antar. Sam E. Antar said he feared stockholder and SEC litigation if profits fell following an insider stock sale. Eventually "the gap" between the company's actual performance and what it told the public reached $45 million, according to records Sam E. Antar made in March 1987, following the end of fiscal year 1987: Crazy Eddie reported a profit of $20.7 million; it actually had a loss of about $25 million. Several groups of investors began making inquiries about taking over Crazy Eddie. Eddie Antar directed his cousin to deal with them, while they explored the possibility of taking the company Page 30 of 139
private. Those plans were abandoned amid the realization that worsening sales wouldn't merit financing. Instead, Eddie Antar instructed his cousin to destroy documents, lie to SEC investigators, and have everybody else do the same. "The scorched earth policy was to make the company as unmanageable as possible for the new management," Sam E. Antar said. He and others on the Board of directors approved lucrative "golden parachute" employment contracts for themselves. June 30, 1993: The Associated Press ‐ Money Was Antar Family's 'Glue' Thrived Even After Blowup, Cousin Testifies, describes how I explained in Sam M and Eddie Antar's family that money ruled (excerpts below): The founder of Crazy Eddie still did business with his relatives after they exposed his marital infidelity in the "New Year's Eve" massacre, his cousin told a federal jury Tuesday in the stock fraud case. The cousin, Sam E. Antar ‐ the government's key witness ‐ spent his third day in the witness box. It was the first session under cross‐examination and produced several sharp exchanges. No direct challenges to his testimony were scored, but the defense questioning is likely to continue for days. In his first two days in court, Sam E. Antar has laid out much of the government's case against three brothers: Crazy Eddie founder Eddie Antar, and Mitchell and Allen Antar. They are accused of pocketing $80 million by selling inflated stock in their discount electronics chain. Sam E. Antar, who was the company's chief financial officer, has described a web of deceit that included pumping up inventory numbers, deferring accounts payable, and falsely billing vendors. It had the effect of making the company look as if it was growing faster, with bigger profits, than it really was. Sam E. Antar acknowledged Tuesday that the booming company did not have formal budgets or monetary controls: "The financial plan was to make more money every year and commit more fraud," he said. The chain started in Brooklyn in 1971 and grew to 43 Crazy Eddie stores covering the New York metropolitan area. Sales reached $350 million, driven by loud commercials in which a pitchman touted "insane" prices. It collapsed in the late 1980s when the extended Antar clan could no longer support the weight of the fraud amid government inquiries, Sam E. Antar has said. Page 31 of 139
On Tuesday, he described what he knew of the 1983 New Year's Eve massacre events. Eddie Antar was getting into a limousine in Manhattan with his girlfriend, whom he since has married, Deborah Ehrlich. He was confronted by his wife, Deborah Rosen Antar, his sister, Ellen Kuszer, and a sister‐in‐law, "and a fight ensued," Sam E. Antar said. Eddie Antar believed his father, Sam M. Antar, told the women where to find him, Sam E. Antar testified. The father, who founded the chain with Eddie, had already been at odds with his eldest son over his life style, Sam E. Antar said. Mitchell and Allen Antar blamed Eddie Antar for a heart attack suffered by their father several months later, he said. In court Tuesday, the father and Deborah Ehrlich Antar sat next to each other, as they have since the trial started June 15. Eddie Antar, 45, remained impassive as one of his lawyers had his arm around his back. The father also remains close to the first wife, who still lives across the street from him in Brooklyn, Sam E. Antar said. The rift apparently did not prevent the father and brothers from working together. "Money was the glue that held these people together. When it came to money, they knew how to cooperate," Sam E. Antar said. Eddie Antar's defense lawyer, Jack Arseneault, opened his questioning with a stern question: "You're an admitted liar, aren't you?" Sam E. Antar, 36, agreed, and reiterated he is testifying under a bargain after pleading guilty to obstructing justice and conspiracy to commit stock and mail fraud. He faces up to 10 years in prison. Throughout the day the pair sparred about whether Arseneault was speaking loudly enough and whether the lawyer was interrupting Sam E. Antar's responses. After finishing a response, Sam E. Antar would say, "Go ahead." Arseneault would sarcastically reply, "Oh, thank you." At one point the lawyer was discussing a promotion Sam E. Antar got, and asked, "You stepped in a bigger size set of shoes and kept walking?" "I've always worn the same size shoes," Sam E. Antar said. The defense is contending that Eddie Antar didn't participate in company activities toward the end, unsettled by drink and the reopening of his divorce. Page 32 of 139
But when Arseneault asked if Sam E. Antar was aware his cousin's first wife had hired prominent divorce lawyer Raoul Lionel Felder, the witness responded, "Eddie always thought he was a moron." July 1, 1993: The Associated Press ‐ Antars' Lawyers Attack Credibility of Key Witness but are Unable to Shake Cousin's Testimony" by Jeffrey Gold entitled (excerpts below): Lawyers for the founder of Crazy Eddie and his brothers on Wednesday challenged the credibility of the government's key witness in the stock fraud case. However, they were unable to topple the basic assertions of the witness, Sam E. Antar, a cousin of the defendants who also was an executive in the failed discount electronics chain. During his four days in the witness box, Sam E. Antar has laid out much of the government's case against Crazy Eddie founder Eddie Antar and his brothers, Mitchell and Allen. They are accused of bilking stockholders in the chain of $80 million by inflating the value of Crazy Eddie stock through a series of schemes, including exaggerating inventory and deferring invoices. .... during two days of cross‐examination, they have sparred with Sam E. Antar, who succeeded his father in the mid‐1980s as chief financial officer of the booming company. The witness has complained that the lawyers wouldn't let him finish his answers. The witness has often finished his responses by telling the lawyers, "Go ahead.” "Don't give me instructions," shot back Jack Ford, lawyer for Mitchell Antar. "Judge Politan gives me instructions.” Sam E. Antar continued the practice anyway. When Gerald Krovatin, lawyer for Allen Antar, suggested that Sam E. Antar was being evasive, the witness replied that the question wasn't specific: "Ask a proper question and you'll get the answer you want." Sam E. Antar reiterated how he has already made a deal with the U.S. attorney, pleading guilty to obstruction of justice and conspiracy to commit stock and mail fraud. He could be sentenced to 10 years in prison, as opposed to hundreds if he had been convicted on all charges. He also has settled suits with the U.S. Securities and Exchange Commission, and Howard Sirota, lawyer for 10,000 Crazy Eddie stockholders. Ford asked Sam E. Antar whether he hopes the Antar brothers are convicted so he might get a lighter sentence. "I wouldn't care either way," Sam E. Antar said. "Right now, it's the truth that's important." Page 33 of 139
Ford pressed the issue. He noted that Sam E. Antar has testified to about 100 meetings and more than 1,600 phone calls with government lawyers and other investigators opposing the Antar brothers. Ford reported that Sam E. Antar has cheerfully greeted Sirota and Richard Simpson, lawyer for the SEC, outside the courtroom. Aren't you on their team? Ford said. "I'm not part of any team against anyone," Sam E. Antar replied. "This is not a game, sir. This is real life. "The witness also denied his motive for testifying was revenge because his attempt to gain control of Crazy Eddie with an outside investor failed in late 1987. July 4, 1993: The Philadelphia Inquirer ‐ Sex, Stock, Fraud Star in Brothers’ Trial ‘Dallas’ ‐ Crazy Eddie Style – Captivates a Courtroom Crowd in Newark N.J. (excerpts below): Cousin Sam E. Antar was on the witness stand, talking about the greed and treachery he claims were behind the multimillion‐dollar fraud that turned the Crazy Eddie discount electronics chain into a cash cow for the Antar family. Fifty feet away, his uncle ‐ also named Sam ‐ sat in the second row of the crowded courtroom, listening stone‐faced to the allegations. Sam M. Antar, the family patriarch, his wavy white hair coifed against a deep tan, clearly was not pleased with what his nephew was telling the jury. Next to Sam M. was Deborah Ehrlich Antar ‐ the second Mrs. Eddie Antar, repeatedly referred to during the trial as "Debbie Two." Occasionally rolling her eyes and murmuring in disbelief, she, too, seemed less than impressed with some of cousin Sam's testimony. Her husband sat at the defense table….He whispered in his lawyer's ear and scribbled notes on a yellow legal pad as his cousin, former business associate and onetime friend laid the blame for the massive fraud at his feet. Skims and scams. Lies and deceit. Money stashed in suitcases and hidden in ceilings. Secret foreign bank accounts. Phony passports and fake identities. Family feuds and marital infidelities. They are all a part of the story that has been spilling out through the mouths of a half‐dozen government witnesses. Three weeks into the trial that often attracts capacity crowds to the fifth‐ floor courtroom in U.S. District Court, this much is clear: The Ewings of Dallas had nothing on the Antars of Brooklyn. "You couldn't make this stuff up," one observer said during a break in the testimony last week. Mitchell and Allen don't talk to Eddie, even though they are all in this together and could end up doing serious jail time. Sam M. Antar, the father of the three defendants, has been estranged Page 34 of 139
from Eddie for several years ‐ although his position next to Eddie's second wife in the courtroom has some wags speculating about reconciliation. But all of this is subject to change, say several sources who have followed the saga of the close‐
knit clan over the years. "Uncle Eddy" Antar ‐ Sam M.'s brother and Sam E.'s father ‐ has testified for the government under a grant of immunity. He detailed one insider scheme in which he said hundreds of thousands of dollars in cash was taken "off the top" by family members. Another cousin and employee, Eddie Gindi, was indicted with the Antar brothers but now is a government witness. Gindi, in poor health, has been living in Florida. His testimony was videotaped, and prosecutors began playing the tape for jurors on Friday. Then there is Deborah Rosen Antar, the first Mrs. Eddie Antar ‐ "Debbie One." While not necessarily the most important government witness ‐ Sam E. Antar clearly provided the most‐detailed account of the fraud ‐ Debbie One brings the sizzle. If and when she takes the stand, the courtroom is expected to be packed. She has already told much of her story to the Securities and Exchange Commission and in depositions taken in a messy divorce dispute. She has described the lavish lifestyle her former husband provided in the mid‐1980s, before and shortly after taking the company public. She has talked of bundles of cash her husband used to bring home from work, of money stuffed in attaché cases and hidden under the bed, of funds secretly taken out of the country and stashed in bank accounts in Israel. And she has described her husband's infidelity. According to earlier trial testimony, it was on New Year's Eve 1983 that Deborah Rosen Antar and several other family members found her husband with another woman. At the time, court records indicate, Sam M. and most other members of the family sided with Debbie One in what became a protracted divorce battle. Eventually, Eddie Antar married that other woman, Debbie Two. The ebb and flow of events over the last nine years ‐ government investigations, civil suits, grand‐jury indictments ‐ have resulted in ever ‐ shifting familial alliances, a real‐life soap opera. There were the two years that Eddie Antar spent on the run, hopscotching across three continents with phony passports, fake identities and, the government alleges, bank accounts loaded with millions of dollars. Last week, Sam E. Antar provided the most‐detailed account of the fraud, as well as a personal view of what he called the "family friction." Most observers described Sam E.'s testimony as devastating. Page 35 of 139
Neither the defense attorneys nor prosecutors have been permitted to comment because of a gag order imposed by Judge Nicholas Politan. This came after Jack Arseneault, Eddie Antar's defense attorney, told two reporters before the trial that the case would be a tale of "jealousy, infidelity and greed." Meanwhile, Debbie Two sits with Sam M., while Debbie One waits in the wings to testify for Uncle Sam. July 6, 1993: Newsday ‐ A Family's Deceit and Drama Laid Bare by Edward R. Silverman (excerpts below): Nastiness set in when their cousin, Sam E. Antar, 36, took the stand and revealed the intricate and intimate details of how the Antars schemed, cajoled, lied and warred with one another while making millions that were counted at kitchen tables. His recollection of feuds and frauds was dizzying. Eddie's father ostracized Eddie for having an affair. Eddie was angry at his father and brothers for siding with his first wife. The brothers were mad for not receiving more stock and blamed Eddie for their father's subsequent heart attack. "It's like the Addams family went public and ended up in court," said one spectator at the trial. Money was the glue that held these people together," said Sam Antar, a short, intense man who frequently interrupted his testimony to visit the bathroom and, during breaks, munched on ka'ak, a Middle Eastern cookie. Despite bickering, "when it came to money, they knew how to cooperate." He went on to relate meetings, phone calls and family trivia. To laughter, he told how Eddie thought that Raoul Felder, his first wife's divorce lawyer, is a "moron," and how Eddie once warned him not to tell lawyers the truth, "because they'll just plead for you and not fight hard enough." Defense attorneys attacked his credibility by charging that he cut a deal, because he faces 10 years in jail for his role in the fraud. And the fraud, they said, was all his doing. But they were often frustrated. Prompting indignant grunts from relatives, Sam Antar insisted Eddie orchestrated everything. Twice he chastised his cousin for fleeing the country in 1990. "He skipped town. He had to run away, with his phony passports. I stayed here and faced these responsibilities," he said angrily. Moments later, sounding contrite, he said, "I don't care what happens to Eddie Antar." July 16, 1993: Newark Star Ledger ‐ Antar Sheds Tears and Prosecutor Pounds Podium as Jury Gets Case by Robert Rudolf (excerpts below): Chertoff told jurors, "They say that blood is thicker than water. In this family money is thicker than blood." Page 36 of 139
Page 37 of 139
Results of Criminal Prosecution, Securities and Exchange Litigation, and Other Litigation Criminal case Many of the co‐conspirators pleaded guilty to various crimes, cooperated with the government investigations of Crazy Eddie, and testified at trial. On July 20, 1993, the criminal trial resulted in the conviction of Eddie Antar and his brother Mitchell Antar. Allen Antar was acquitted. On April 12, 1995, the convictions were overturned on appeal. However, both Eddie and Mitchell later pleaded guilty to criminal charges and served time in prison, rather than face a re‐trial. Eddie Antar served over 6 years in prison and Mitchell Antar served approximately 2 years. The government and various civil litigants recovered over $75 million from Eddie and $2 million from Mitchell. SEC civil action and other litigations by defrauded investors seeking to recover ill‐gotten gains Allen Antar, his father Sam M. Antar, and brother‐in‐law Benjamin Kuszer were found guilty of civil charges when the Securities and Exchange Commission prevailed in its civil case in Newark, New Jersey Federal Court on July 15, 1998. The Court found that the defendants artificially inflated the prices of their Crazy Eddie stock holdings by engaging in an extensive, multifaceted fraud beginning in the 1970s and continuing through 1987. (SEC vs. Sam M. Antar et. al 93‐3988 July 16, 1998). Judge Ackerman wrote in his Opinion: There is perhaps no more insidious drain on the overall welfare of society than greed unchecked. The saga of the Antar family and their operation of a major retail consumer electronics business is but a manifestation of that tenet. In this and related cases, it has become evident that various members of the Antar family engaged in a pattern of fraud and deceit in their attempt to enrich themselves by selling securities, the price of which had been artificially inflated through a multitude of schemes. This appears to be the last chapter in a story of a family and its deception of the public.... The Court explicitly rejected the defendants' trial testimony that they were unaware of the frauds that were committed at the company, finding that all three defendants lacked credibility. Judge Ackerman noted specifically with respect to Sam M. Antar, who testified for six days at trial: Over that time, this court obtained a rather clear sense of him as hardworking, ambitious, and highly intelligent. I also found him to be a skillful and inveterate liar. Other family members, including Eddie Antar's current and former wives, and non‐family members settled litigation issues with the SEC and other civil litigants rather than risk trials. Various civil judgments against members of the Antar family exceed $500 million. Page 38 of 139
To date the government and various civil litigants have collected approximately $100 million Eddie Antar, Sam M. Antar (his father) Mitchell Antar and Allen Antar (Eddie's brothers) and other members of the Antar family. Other parties such as Crazy Eddie's auditors paid about $50 million to settle lawsuits rather than risk going to trial. Over $150 million in litigation recoveries has been collected to date. It is estimated that shareholders recovered over $0.35 per dollar lost on their Crazy Eddie stock. Government and civil litigants are still seeking to recover ill‐gotten gains Despite all of the above, according to testimony by Stephen M. Cutler, Director, Division of Enforcement, U.S. Securities and Exchange Commission, before the House Subcommittee on Capital Markets, Insurance, Government Sponsored Enterprises, Committee on Financial Services on February 26, 2003: ....the staff conducted a worldwide search for, and extensive litigation over, Eddie Antar's assets. Even though the Commission and Crazy Eddie's trustee brought actions in six countries...., millions of dollars remain unaccounted for. The government is still vigilant today in its efforts to collect money on behalf of defrauded victims. On June 22, 2004 Justin Feldman, former attorney for Eddie Antar, in an interview at the SEC Historical Society commented on SEC attorney Richard Simpson: Rick Simpson. Tenacity, I'm telling you! When he wanted every dollar bank we had to fight with him to get ten cents on the dollar on our fees. The SEC and other civil litigants actually recovered more money in the aggregate from the Antar family than profits they made by selling their Crazy Eddie stock! However, all ill‐gotten gains have not been paid back. Millions of dollars were skimmed. Income taxes were never paid on income made "off the books." Sales taxes were stolen. Insurance companies were defrauded with false claims. The list goes on and on. Summary of my Sentencing Guilty Plea (Felonies): 
Conspiracy to Commit Securities Fraud 
Conspiracy to Commit Mail Fraud 
Obstruction of Justice Criminal Action Sentence by Judge Politan (Major items): 
Six months house arrest including costs of monitoring 
1,200 hours of community service 
Three years of probation Page 39 of 139

$10,100 fines and fees 
My criminal sentencing did not limit my civil liability to other government entities and civil litigants Securities and Exchange Commission Litigation Settlement (Major items): 
$80,000 disgorgement for insider trading (while I had lost approximately $8,000 from selling my Crazy Eddie stock, it was determined that I cut my losses by trading on insider information) 
Requirement to pay $20,000 of the $80,000 disgorgement based on inability to pay at time of settlement 
Lifetime prohibition from employment as an officer or director of a public company 
Lifetime prohibition from violating securities laws 
The above agreement did not limit my criminal liability and any civil liability to other government entities and civil litigants Other: My plea agreement included a waiver from the federal sentencing guidelines which permitted my sentencing Judge, Nicholas H. Politan, to decide either on an upward or lower departure from the range of incarceration, as suggested under the federal sentencing guidelines. The range of imprisonment suggested under the federal sentencing guidelines based on my sentencing report was 41 to 51 months. About my Cooperation When new management took over Crazy Eddie on November 6, 1987, I originally stonewalled and obstructed the government's investigation. I lied to my own attorney, to the government (under oath) in investigative and pretrial depositions and interviews, and helped Eddie Antar get other witnesses to lie. In early 1989, I learned from subpoenaed documents in the civil litigation that Sam M. Antar, Eddie Antar's father, and his children Mitchell and Allen Antar were setting up Eddie and me to take the fall. I passed along that information to Eddie Antar and he started to distance himself from me. He told me, "Sammy, you are on your own!" I knew that Eddie Antar had transferred most of his assets overseas and had already obtained several phony passports. He was preparing to leave the country for good. I tried to keep track of Eddie through other sources. Eddie Antar sometimes disappeared for weeks and months to parts unknown, only to reappear again. During his long unexplained absences, I was unsure if Eddie ran away for good. With Eddie Antar abandoning me and his father and brothers out to set me up, I decided to seek a new attorney and have him contact the government investigators. On March 8, 1989, my new attorney, Anthony Mautone contacted the US Attorney's office in Newark in an effort to negotiate a plea bargain Page 40 of 139
agreement. I changed my attorney since I had lied about my criminal actions to my previous attorney. However, the prosecutors were very distrustful of me and would not negotiate an acceptable plea bargain agreement. Eventually, in February 1990, Eddie Antar skipped town altogether rather than comply with a Court order. In a bold move, my attorney, Anthony Mautone, advised me to assist the government investigators without the benefit of any plea bargain agreement. I began having frequent face to face meetings, without the presence of my attorney, with the FBI agents investigating the Crazy Eddie frauds. For almost two years, I had assisted the government and civil investigations without the benefit of any legal agreement protecting me or limiting my criminal and overall civil liability. Everything I said to the government investigators and civil plaintiff's attorneys could be used against me. In addition, I testified in over 50 civil depositions and disclosed my crimes without the benefit of any agreement limiting my criminal liability and overall civil liability. I was available to the US Attorney, FBI, SEC, civil plaintiffs full time (day and night) and testified truthfully under oath about my crimes. Except for my pre‐trial deposition testimony, I had no attorney present during my meetings with government investigators and civil plaintiff's attorneys where I had incriminated myself and provided evidence about the Crazy Eddie frauds. I had several hundred meetings and thousands of telephone conversations with the government investigators and civil plaintiff's attorneys and testified over 50 times in pre‐trial depositions under oath. I finally signed my plea agreement in August 1991. In October 1992, at the request of the US Attorney, my plea agreement was amended to increase my criminal liability in order to assist the government. The only letters sent to Judge Politan, my sentencing Judge, were from the US Attorney (10b ‐5 Letter), The Securities and Exchange Commission, the Chairman of the Shareholder's Class Action Litigation, attorneys for the Oppenheimer‐Palmieri Group (who took over Crazy Eddie in a hostile takeover and lost millions of dollars), the attorney for Elias Zinn and Entertainment Marketing (who were partners with the Oppenheimer ‐ Palmieri Group), the attorneys representing the Crazy Eddie Bankruptcy Trustee, and a letter from the Trustee appointed by the Federal Court in Newark to find Antar family hidden assets. Altogether only seven letters were sent to Judge Politan (mostly from the attorneys representing the shareholders who lost millions of dollars). They all detailed my outstanding cooperation in the Crazy Eddie investigation after I began to assist the government and civil litigants in March 1989. There were no letters sent on my behalf from any family members, friends, and my community. I did not seek any such letters from them since they were irrelevant. The federal sentencing guidelines recommendation for incarceration for my crimes was 41 to 51 months. However, Judge Politan was permitted an upward or downward departure from the federal sentencing guidelines, based on my plea agreement. My reason for cooperating with the government and civil litigants after stonewalling the investigation for almost two years was selfish. After almost nineteen years of doing Eddie Antar and his family's bidding, I decided to think purely in terms of my own self‐interest, which meant avoiding spending up to Page 41 of 139
fifteen years in prison. My fear of serving a long prison term was my primary motivation and no sense of morality was involved in my decision to cooperate with the government and civil litigants. Any sense of morality that followed later, resulted initially from the rude awaking caused by the fear of a very long prison term. Had I never gotten caught, I would not have cooperated with the government and civil litigants and I would probably still be a criminal today. At sentencing, the US Attorney while noting my exceptional cooperation, recommended jail time for me. I did deserve jail time for my offenses and feel the recommendation for incarceration by the US Attorney was justified and relatively lenient. My cooperation with the government and others deserves no praise from them since I was only doing what was required of a felon who got caught and turned himself in ‐ I told the truth. My sins are unforgivable. I have not paid the full cost of my crimes to my victims and society. For example, I did not pay any income taxes on the monies that I received "off the books." My fines were minimal ($10,000). I did not pay any damages in the class action litigation and other civil litigation (except for the $20,000 I paid to the Securities and Exchange Commission in disgorgement of proceeds from my sale of Crazy Eddie stock). I never went to prison. The American Institute of Certified Public Accountants (AICPA) and the New York State Society of Certified Public Accountants terminated my membership after I pleaded guilty to certain crimes. However, it took New York State almost 15 years to begin a disciplinary action against me for professional misconduct to revoke my CPA license. I am grateful to the US Attorney, the SEC, the civil plaintiff’s attorneys and their clients, and others for recognizing my exceptional cooperation. In addition, I am thankful and indebted to the Court and for taking into account my cooperation and not sending me to prison. I am thankful for their undeserved leniency. Page 42 of 139
Some of the Biggest Crazy Eddie Audit Errors Assuming a proper audit can be conducted in the absence of credible internal controls. Under educated, under skilled, and under experienced audit staff. Over using audits as training grounds for inexperienced audit staff. Lack of investigative or forensic accounting skills by auditors. Failure to ask proper questions. Failure to know who to ask proper questions of. Assuming the answers to good questions is correct. Failure to ask follow up questions. Failure to verify answers to questions. Lack of professional skepticism. Allowing company staff to distract auditors from doing filed work by engaging in social conversations, thereby wasting time during audits. Failure to simultaneously observe inventory counts in all locations. From 1984 to 1987, the auditors did not observe all store inventories or inventories at all locations. Failure to take copies of full inventories taken when leaving the premises. Failure to conduct proper test counts of inventories by relying on company staff to count boxes. Allowing company staff to take possession of test counts to make copies on behalf of auditors. Failure to follow through on analytical test issues. Failure to conduct all required analytical testing. Failure to conduct sales cut off testing at year end. Failure to examine items listed as deposits in transit at year end. Failure to age accounts payable. Failure to conduct adequate verification of accounts payable balances. Failure to contact vendors when major discrepancies were identified as vendors sent back verification requests. Page 43 of 139
Failure to secure audit work papers left on premises during the audit by leaving keys to trunks containing audit documents on company premises. Allowing company personnel to view audit work papers in process. Allowing company personnel to distract audit staff conducting the audit to slow them down and thereby have to rush their work in the end to meet the audit deadline. Auditors signed off on financial reports to outside directors and allowed the issuance of financial statements before the fiscal year 1987 audit was completed and backed into the numbers. Auditors made misrepresentations to the outside directors about certain questionable practices and directions from the outside directors to investigate them. Auditors made misrepresentations to the SEC about directions from the audit committee to investigate questionable accounting practices. The auditors failed to follow up on recommendations of Crazy Eddie’s outside counsel law firm Paul, Weiss, Rifkind to investigate irregularities concerning sales to a trans‐shipper in 1987. The auditors disagreed with recommendations by Crazy Eddie’s outside counsel law firm Paul, Weiss, Rifkind to provide more detailed disclosure on Crazy Eddie sales to trans‐shippers and other issues. Some Crazy Eddie Red Flags The tight knit Antar family ruling Crazy Eddie had virtual absolute control over all aspects of the business. Crazy Eddie had very poor internal controls. Crazy Eddie management had virtually unchecked override of internal controls. Very poor audit trails and documentation. Major self‐dealing transactions and related party transactions by family members. Substantial increases in wages from below market wages before the company went public. In 1985, an attempt was made to falsify certain store inventories which was uncovered by the auditors. The auditors accepted an excuse that it was not sanctioned by management and our explanation that a vindictive employee must have changed the numbers. Substantial increases in gross margins, profits, inventories, debit memos etc. from prior periods for no logical reason. Significant volume of outstanding deposits in transit at fiscal year‐end. Individual deposits in transit extremely high in relation to normal amounts at fiscal year‐end. Page 44 of 139
Unusually high inventory volumes in stores where physical counts were not observed by outside auditors. Inventories in many individual stores were in excess of space capacity. Major differences between amounts confirmed from vendors for accounts payable and amounts reported on Crazy Eddie's books and records. Use of "gross margin method" to value inventories during interim periods instead of taking interim inventory counts. Change of accounting methods for purchase discounts and trade allowances in 1987 from cash basis to accrual basis noted in footnotes with no accounting adjustments. Small CPA firm that conducted Crazy Eddie audits before (then big eight firm took over audits) had a significant revenue base from Crazy Eddie. Controller and later CFO for Crazy Eddie (Sam E. Antar) worked for small CPA firm that audited Crazy Eddie books. Insiders were unloading major amounts of their stock holdings. Crazy Eddie Auditors: 1976 to 1983: Penn & Horowitz (Small Firm). 1984 to 1986: Main Hurdman (Ninth Largest Accounting Firm at that Time). 1987: Peat Marwick (Main Hurdman had merged with Peat Marwick ‐ part of the "Big Eight" accounting firms). Today Peat Marwick is part of KPMG (It is part of the "Big Four" accounting firms). Page 45 of 139
Frequently Asked Questions Who were the major people involved in investigating and prosecuting the Crazy Eddie frauds? In alphabetical order below: Samuel A. Alito (United States Attorney and predecessor to Michael Chertoff) ‐ His office initiated the Crazy Eddie criminal investigation and was replaced by Michael Chertoff. Jayne K. Blumberg (Assistant United States Attorney) ‐ Assisted Paul Weissman who replaced Dan Gibbons. Michael Chertoff (United States Attorney) ‐ He replaced Samuel A. Alito and was the chief criminal trial counsel. Oversaw Justice Department efforts to prosecute Crazy Eddie fraud case. Patrick Cicchetti (Justice Department Investigator) ‐ Department liaison to the Internal Revenue Service for the Crazy Eddie investigation. Dan Gibbons (Assistant United States Attorney) ‐ Handled the initial Crazy Eddie investigation for the Justice Department and was replaced by Paul Weissman and Jayne K. Blumberg. Max Folkenflik (Attorney from Folkenflik & McGerity) ‐Represented Elias Zinn & Entertainment Marketing, one of the major shareholders who took over Crazy Eddie in a hostile takeover. Howard Hawkins (Attorney from Cadwalader, Wickersham, & Taft) ‐ Law firm was Trustee in Bankruptcy for Crazy Eddie. Paul Hayes (Special Agent, Federal Bureau of Investigation) ‐ Led the criminal investigation of the Crazy Eddie fraud for the FBI. Stephen Howard (Attorney from Milbank, Tweed, Hadley, & McCloy) ‐ Attorney for the Oppenheimer‐
Palmieri Fund, L.P. one of the major shareholders who took over Crazy Eddie in a hostile takeover. Barbara Katron (Attorney for Securities and Exchange Commission) ‐ Began the Crazy Eddie investigation for the SEC. She was replaced by Richard Simpson. Robert A. Marmon (replaced me as the CFO of Crazy Eddie on behalf of the Oppenheimer‐Palmieri Fund, L.P./Entertainment Marketing & Elias Zinn Group after Antar family lost control of company) ‐ led internal company investigation into Crazy Eddie fraud by Antar family. Richard Ross (Attorney from Carella, Byrne et al) ‐ Court Appointed Receiver for Antar assets. Richard Simpson (Attorney for Securities and Exchange Commission) ‐ Chief trial and litigation counsel for the SEC in its civil cases and investigation against the Antar family and other defendants. After replacing Barbara Katron, he led SEC investigation into Crazy Eddie fraud. Page 46 of 139
Howard Sirota (Attorney from Sirota & Sirota and Chairman of the Shareholder’s Class Action Committee) ‐ Oversaw civil litigation plaintiff's efforts to prosecute Crazy Eddie case. Richard Wallace (Attorney for Securities and Exchange Commission) ‐ Assisted Richard Simpson in SEC investigation of the Crazy Eddie fraud. Paul Weissman (Assistant United States Attorney) ‐ Co‐trial counsel with Michael Chertoff in criminal trial. After replacing Dan Gibbons, he led the US Attorney's office investigation of the Crazy Eddie fraud. Please note that white collar criminal and civil investigations can be very complex and take years to complete. The SEC began investigating Crazy Eddie in July 1987. The criminal trial (tried by the US Attorney) began in June 1993. The SEC civil trial was in July 1998. The effort to find Eddie Antar while a fugitive involved the Securities and Exchange Commission, The US Marshals Service, the FBI, Interpol, the Israel National Police, other government agencies (domestic and foreign), civil litigants, and the work of many other individuals. Who were my attorneys? Criminal Attorney: Anthony Mautone in East Orange, NJ and now also a part time Federal Magistrate in Newark, NJ Civil Attorney for SEC and Class Action Litigation: Jonathan D. Warner from Warner & Scheuerman in New York, NY. Note: Both Anthony Mautone and Jonathan D. Warner started representing me in March 1989, after I decided to cooperate with the various government and civil lawsuit investigations into Crazy Eddie's frauds. After my employment was terminated from Crazy Eddie by new management in November 1987, I hired Bruce Kaplan to defend me. However, while I was lying to government investigators and civil litigants, I was also lying to Bruce Kaplan about the crimes committed at Crazy Eddie by proclaiming my innocence. Other Attorney: J. Michael Nolan, now retired, formerly of Pitney, Hardin, Kipp, and Szuch gave me crucial advice to cooperate with the various investigations after Kaplan stopped representing me and referred me to Anthony Mautone. Did you destroy documents to obstruct the criminal and civil investigations? Yes. Crazy Eddie's document retention policy was to destroy all evidence of wrongdoing as soon as possible. When the government began its investigation of Crazy Eddie in 1987, we were asked for copies of our year‐end inventory count records for the fiscal years ended March 3, 1985 through March 1, 1987. The auditors never made copies of the inventory counts that supported their audit. Page 47 of 139
I later testified that Crazy Eddie had a "scorched earth" policy in the criminal and civil trials as a government witness. We would destroy copies of all falsified documents (to the extent possible) to cover up our crimes. When I was initially asked by the S.E.C. under oath (at such time I was not a cooperating witness) about obtaining copies of the suspected falsified inventory counts, I simply answered that Crazy Eddie had no formal document retention policy. With regards to the inventory documents, they were thrown away after the audits since they served us no useful purposes. My rationale at the time was that I could not be criminally prosecuted for stupidity. Since there were no subpoenas issued against Crazy Eddie at the "supposed time" that we destroyed such documents the worst thing I could be accused of was that I was negligent. Can any amount of audit procedures make up for a lack of internal controls? No! For example, (as noted in the 1986 fraud above) we inflated our sales and cash balance by $2,000,000 by depositing previously skimmed funds into the Crazy Eddie bank balances. The bank accounts were reconciled. However, there were no controls over sales invoices, inventory, and cash by Crazy Eddie. The auditors did not perform sales and cut‐off testing and they did not review deposits in transit. Crazy Eddie's comparable store sales, earnings, and cash were overstated in 1986. The money was in the bank and the auditors assumed that it came from legitimate sales. However, the auditors never considered that even if the company had such money in its accounts, there was a possibility that such funds could come from sources used to manipulate earnings. A credible audit cannot be made in the absence good internal controls. A so called strong audit and strong internal controls are not mutually exclusive. What other techniques did you use to prevent the auditors from performing an effective audit? We committed "obstruction by distraction." We always appeared cooperative with the auditors. However, from the day our auditors set forth on Crazy Eddie premises until the day the audit was completed, we did our best to distract them from their field work. For example, we constantly engaged in "small talk" while our auditors were doing their field work. We knew that audits were boring and our auditors did not mind minor distractions. We constantly invited them out for coffee and lunch. Our goal was to make our auditors fall behind in their scheduled field work, in order for them the cram their work towards the end of the scheduled audit in a rush to make up for lost time. How did the government find Eddie Antar? Page 48 of 139
When Eddie Antar fled the United States he carried at least a dozen phony passports and all of his money had been shifted to bank accounts in what is known as "foreign bank secrecy jurisdictions." His secret foreign accounts were mainly accessible through secret passwords and code names. In order to conceal those accounts, Eddie routinely transferred moneys from one account to a new account. It was during the course of those transfers that the SEC and the Court appointed receiver picked up his trail. The SEC froze an account in Switzerland containing over $30 million. Eddie attempted to get the money unfrozen by appearing at the bank under one of his false identities. The government tracked Eddie to Israel. What were some of the documents the government found when they arrested him in Israel that enabled them to recover his ill‐gotten gains? Documents seized from Eddie Antar's apartment revealed that he controlled over 30 offshore bank accounts in 10 different companies. Nearly all of those accounts were in the names of Eddie Antar's nominees; one or another of Eddie Antar's false identities; or Liberian and Gibraltarian shell entities controlled by Eddie Antar under one or another of his assumed names. Deborah Ehrlich Antar (Eddie's second wife) was identified as the signatory or as having power of attorney of at least three overseas accounts Eddie Antar controlled. (Source: US Government Documents) How was the Crazy Eddie fraud uncovered? The Securities and Exchange Commission seriously began investigating financial statement fraud at Crazy Eddie when Arnold Spindler (a former employee) tipped them off about the fraud in July 1987 four months before the hostile takeover of the company by a group led by Victor H. Palmieri and Elias Zinn. The collapse of the Antar family's control over Crazy Eddie was due to infighting, rivalries, and jealousy among Eddie Antar and his family. Did you ever make money on your Crazy Eddie stock? I actually lost about $8,000 after having a one‐time "paper" gain of over $1.6 million including my stock options. The SEC determined that I wrongfully cut my losses by $20,000 when I sold my stock. They assessed me treble damages of an additional $60,000 in disgorgement. Therefore, the SEC assessed me for a total of $80,000 in fines, penalties, etc. Do you keep in contact with Eddie Antar? No. The last time I spoke with him after leaving Crazy Eddie and before he ran way to Israel was around 1989. The next time I saw him was at the criminal trial in 1993. After the criminal trial, the only time I met Eddie Antar was during a joint interview by Herb Greenberg that was broadcast on CBNC's Business Nation in June 1987. I have run into other members of his family but they do not speak to me. Did any of the Antar family members involved in the fraud including your ever a discussion about the morality of the frauds? Page 49 of 139
No. We never cared. In the early days when we were skimming the attitude was that the government was not entitled to tax our earnings. The government was considered an adversary. Customers were considered adversaries. Anyone outside the interests of the Antar clan ruling Crazy Eddie was an adversary. We always knew what we were doing was wrong. There were no debates in terms of morality. However, there were debates in terms of risk. One secret bank account in Israel with over $8 million in deposits from skimmed funds from Crazy Eddie listed Eddie Antar, Debbie Rosen Antar (Eddie's first wife), Sam M. Antar (Eddie's father), Rose Antar (Eddie's mother), Mitchell Antar (Eddie's brother), and Ben Kuszer (Eddie's brother in law, husband of his sister Ellen) as owners. Why was Allen Antar excluded from the foreign secret bank accounts? In the mid 1970's, Allen divorced his wife Jill and married a person who was not Jewish. He was excluded from all family interests during most of that period. He eventually left his second wife and remarried Jill again. Since he was in the family's good graces, he came back to work for Crazy Eddie. However, they never put his name on the secret Israel bank accounts. The family did not trust Allen's judgment on certain money matters. Perhaps the lack of Allen's signature on the secret Israel bank accounts, was the reason for the jury acquitting him in the criminal trial in 1993. However, he was later convicted of fraud in the later S.E.C. civil trial in 1998. What was the main defense argument of Eddie Antar, Sam M. Antar, Allen Antar, Mitchell Antar, Ben Kuszer, and others in the criminal and civil cases? They argued in general that there was too much family infighting for them to be able to cooperate in committing such a massive fraud. Judge Ackerman, ruling in favor of the SEC in the civil fraud case wrote in part: This court agrees with defendants that a family feud did exist, with Eddie and Sam M. as the main protagonists. This court does not agree, however, that the feud made it impossible for members of the Antar family, including the defendants herein, to cooperate in conducting the frauds at Crazy Eddie. The evidence reveals that the intensity of the family dispute waxed and waned over time, and it was not until late 1987 that it had any significant effects on the Crazy Eddie business. Prior to that time, the family feud did not prevent the Antars from operating Crazy Eddie, engaging in other business ventures, or indeed, perpetrating the extensive frauds at the company. With respect to the relationship between Sam M. and Eddie, it does not appear to have been as fractured as the defendants would now have this court believe. Why did you cooperate with the government and civil plaintiffs after stonewalling the investigation for almost two years? Page 50 of 139
First and foremost, I did not cooperate with the government and civil plaintiffs for altruistic reasons. Fear of a very long prison sentence prison was my primary motivator. No sense of morality played a role in my decision to cooperate. It was purely a selfish decision motivated by fear. I had found out that Sam M. Antar (Eddie Antar's father) and the faction of the Antar family allied with him were setting Eddie and I up to take the fall. Upon relaying the information to Eddie, he distanced himself from me, too. I knew that Eddie had shifted his assets overseas (including proceeds from the sales of inflated stock) and he had millions of dollars of his skimmed cash from Crazy Eddie was already overseas. I learned that Eddie had obtained many phony passports prior to his flight from justice. Therefore, I was worried that I would be left "holding the bag." When I began cooperating, I warned the government about Eddie Antar's possible flight from justice. However, they were legally powerless to prevent him from fleeing at the time. How was your relationship with the government and civil plaintiffs after you decided to cooperate? The government employees and civil plaintiff's attorneys I encountered were both professional and ethical. Even though the government did recommend a jail sentence for me, (I was never sentenced to prison by Judge Politan), I respected their recommendation and did not take it personally. They treated me with respect, even though I did not deserve it. They used a "do not trust, just verify" approach with me which was completely justified. The government, civil plaintiff's attorneys, and others (excluding conspirators or so‐called "cooperating witnesses") who assisted them are the true heroes of the Crazy Eddie saga. With poor internal controls, how did you keep your employees honest? We relied on polygraph tests (lie detector tests). New employees had to take a polygraph examination and such polygraph examinations were administered randomly. In later years, random drug testing was administered. In addition, in the last couple of years we tried using handwriting analysis to screen new employees. Did you ever fear getting caught and going to prison while committing your crimes? No. The only time I feared about going to prison was after the SEC notified us of its "informal inquiry" into Crazy Eddie's financial statements around August 1987 (after Arnie Spindler came forward to them and disclosed some the frauds). What was your biggest threat to you while you were committing your crimes? The biggest threat to me as a criminal was that someone (whether the external auditors, Wall Street analysts, journalists, etc.) would ask good questions and seriously seek truthful answers from us. What is your opinion of ethics courses? Page 51 of 139
I believe that an ethics course do not turn a criminal into a law abiding citizen. Ethics courses help people who are not criminals make more ethical choices. I believe that most people have a true sense of what is right and wrong and what behavior gives rise to criminality. Ethics courses help people (who are not criminals) make the proper choices in decisions which may not be criminal but are legal and unethical. In other words, an action may be legal but not ethical and such courses help people decide their ethical dilemmas. Do you blame the auditors for your crimes? No one is to blame for my crimes except me. I hope the accounting profession learns from my input on white collar crime about how to prevent such crimes in the future. If you never got caught would you still be a criminal today? Probably yes, since my only reason for cooperating with the government and victims was to avoid a long prison sentence. Page 52 of 139
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SAM M. ANTAR,
ALLEN ANTAR, and BENJAMIN KUSZER, Defendants, --and-- RORI ANTAR, SAM
A. ANTAR, MICHELLE ANTAR, ADAM KUSZER, SAM KUSZER, SIMON
KUSZER, ROSE ANTAR, and SAM M. ANTAR, Relief Defendants.
Civil Action No. 93-3988 (HAA)
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY
15 F. Supp. 2d 477; 1998 U.S. Dist.
July 16, 1998, Decided
OPINION
ACKERMAN, District Judge:
I. INTRODUCTION
There is perhaps no more insidious drain on the overall welfare of society than greed
unchecked. The saga of the Antar family and their operation of a major retail consumer
electronics business is but a manifestation of that tenet. In this and related cases, it has
become evident that various members of the Antar family engaged in a pattern of fraud
and deceit in their attempt to enrich themselves by selling securities, the price of which
had been artificially inflated through a multitude of schemes. This appears to be the last
chapter in a story of a family and its deception of the public.
This matter concerns allegations of insider trading in the stock of Crazy Eddie, Inc.
("Crazy Eddie"), a defunct electronics retailer which, during the relevant time period,
operated stores in New York, New Jersey, and Connecticut. At the heart of this case are
allegations that defendants Sam M. Antar, Allen Antar, and Benjamin Kuszer, along with
others not part of this action, engaged in an extensive, multifaceted fraud which consisted
of cash skimming, falsification of inventory counts, and the inflation of sales figures of
certain key stores, for the purpose, according to the plaintiff Securities and Exchange
Commission (the "SEC"), of artificially inflating the price of Crazy Eddie stock. The
SEC further contends that the defendants, having artificially and fraudulently inflated the
price of the stock, then sold their substantial stockholdings to an unwitting public, while
profiting in excess of $ 20 million.
On September 8, 1993, the SEC initiated this civil enforcement action. The SEC filed an
Amended Complaint on April 24, 1997, alleging insider trading in violation of § 17(a) of
the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77q(a); § 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b); and Rule
10b-5, 17 C.F.R. § 240.10b-5. Specifically, the SEC alleges that in violation of federal
securities laws, the defendants sold Crazy Eddie stock when they knew or were reckless
in not knowing that:
(a) Crazy Eddie had materially misstated its earnings growth in the years prior to its
initial public offering in 1984 ("IPO") by systematically and gradually scaling back an
alleged cash skimming scheme so as to skim from the Company's proceeds $ 3 million in
Page 53 of 139
1980, $ 2.5 to 2 million in 1981, $ 1.5 million in 1982 and less than $ 1 million in 1983,
see Amended Complaint, PP 3, 28;
(b) in the years subsequent to the IPO, Crazy Eddie had fraudulently overstated its pretax
income by engaging in a series of inventory inflation schemes and related frauds, id. at
PP 3, 33-44, 57-67; and
(c) subsequent to the IPO, Crazy Eddie had implemented a series of schemes designed to
artificially inflate the sales growth figures reported for certain key stores whose
performance was closely monitored by the investing public, id. at PP 3, 45-56.
In addition, the SEC alleges that Eddie Antar ("Eddie"), the son of defendant Sam M.
Antar and a co-founder of Crazy Eddie, sold certain shares of Crazy Eddie stock on
behalf of the children of Allen Antar and Benjamin Kuszer when he knew or was reckless
in not knowing that the company's earnings growth prior to the IPO had been materially
misstated. Id. at P 5.
Based on these alleged instances of insider trading in violation of the federal securities
laws, the SEC seeks an order:
(a) enjoining Sam M. Antar, Allen Antar, and Benjamin Kuszer from engaging in future
violations of the securities laws; and
(b) requiring Sam M. Antar, Allen Antar, Benjamin Kuszer, along with the Relief
Defendants, to disgorge the illegal profits allegedly made and losses allegedly avoided as
a result of their trading.
See Final Pretrial Order, § 13.
This court has jurisdiction over this matter pursuant to §§ 20(b) and 22(a) of the
Securities Act and §§ 21(d)(1) and 27 of the Exchange Act. 15 U.S.C. §§ 77t(b), 77v(a),
78u(d)(1), 78aa. n1 Venue is proper in this district pursuant to § 22 of the Securities Act
and § 27 of the Exchange Act. 15 U.S.C. §§ 77v, 78aa. The SEC has the burden of
proving its allegations by a preponderance of the evidence. See SEC v. C.M. Joiner
Leasing Corp., 320 U.S. 344, 355, 88 L. Ed. 88, 64 S. Ct. 120 (1943) (establishing
preponderance of evidence standard for actions involving § 17(a) of Securities Act);
Herman & MacLean v. Huddleston, 459 U.S. 375, 389-90, 74 L. Ed. 2d 548, 103 S. Ct.
683 (1983) (establishing preponderance of evidence standard for actions involving §
10(b) of Exchange Act).
n1 The Exchange Act permits the SEC to bring an action in federal court "whenever it
shall appear . . . that any person is engaged or is about to engage in acts or practices
constituting a violation of any provision of this chapter." 15 U.S.C. § 78u(d)(1). The
Exchange Act also provides federal courts with "exclusive jurisdiction of . . . all suits in
equity and actions at law brought to enforce any liability or duty created by this chapter."
Id. at § 78aa. The Securities Act provides substantially similar grounds for federal subject
matter jurisdiction.
Page 54 of 139
II. PRIOR CRIMINAL ACTIONS
To better comprehend the nature of the present action, it is important to take note of the
prior criminal action against two central figures in the alleged fraud at Crazy Eddie:
Eddie and Mitchell Antar ("Mitchell"). n2
n2 Mitchell, son of Sam M. Antar, was an employee of Crazy Eddie from 1971 to 1987,
when he resigned from the company. In May, 1984, Mitchell became a member of the
Board of Directors of Crazy Eddie. In December, 1986, he was appointed Chief
Operating Officer and a member of its three-member Office of the President. The
defendants in this action have alleged, and the SEC does not dispute, that throughout the
relevant time period, Mitchell was one of the principal forces driving the fraudulent
schemes giving rise to this litigation.
As will be discussed later in this opinion, the Antars' hegemony over Crazy Eddie came
to an end in 1987. In September of that year, the SEC initiated an investigation into
alleged violations of the federal securities laws by certain Crazy Eddie officers and
employees. In February, 1987, the United States Attorneys' Office for the District of New
Jersey commenced a federal grand jury investigation into the activities at the company.
Both investigations focused on, among others, Eddie and Mitchell.
By this time, Eddie had begun to liquidate his assets in the United States and move them
offshore. He also began to assume numerous other identities and obtain a variety of
passports under those assumed names. In September, 1989, Eddie was sued by the SEC
for, among other things, disgorgement of illegally gained proceeds from the sale of his
Crazy Eddie stock. See SEC v. Eddie Antar et al., Civ. No. 89-3773 (D.N.J.) (JCL). In
February, 1990, the court entered an order directing Eddie, among other things, to
surrender over $ 52 million in funds he had previously transferred to Bank Leumi leIsrael, B.M. ("Bank Leumi") in Israel and held him in civil contempt for failing to appear
before the court as previously ordered. He was ordered by the court to appear and purge
himself of the civil contempt order. Eddie failed to appear and the court issued a warrant
for his arrest.
Eddie remained at large, a fugitive from justice for approximately twenty-eight months.
Using the many falsified passports and multiple aliases, Eddie traveled as a fugitive to
Israel, the United Kingdom, France, Canada, Switzerland, Brazil, and the Cayman
Islands. After a two-year international manhunt by the United States Marshals Service, in
cooperation with the SEC, the Federal Bureau of Investigation, the United States
Attorneys' Office, Interpol, the Israeli National Police, and other agencies, Eddie was
finally located and arrested in Israel on June 24, 1992. After contesting extradition for
some months in the Israeli courts, Eddie was extradited to the United States in January,
1993.
Page 55 of 139
On August 10, 1993, a federal grand jury sitting in Newark returned a Superseding
Indictment against Eddie, Mitchell, Allen Antar, and Eddie Gindi, n3 a cousin of the
other three defendants who worked with them at Crazy Eddie. Count 1 of the
Superseding Indictment charged all four defendants with conspiracy to conduct or
participate in the affairs of Crazy Eddie through a pattern of racketeering activity in
violation of 18 U.S.C. § 1962(d). The alleged racketeering acts consisted of multiple acts
of securities fraud and mail fraud arising from a scheme to falsify Crazy Eddie's books
and records with the purpose of fraudulently inflating the market price of the company's
securities. Counts 2 through 4 charged the defendants therein with causing false and
misleading statements to be made in documents and reports Crazy Eddie filed with the
SEC, in violation of 15 U.S.C. §§ 78m and 78ff(a). Count 5 charged the defendants
therein with mail fraud in violation of 18 U.S.C. § 1341 arising from the mailing of a
falsified SEC filing to a Crazy Eddie shareholder. Counts 6 through 16 charged Eddie
with securities fraud arising from the sale of Crazy Eddie stock, in violation of 15 U.S.C.
§§ 78j(b) and 78ff(a) and 17 C.F.R. § 240.10b-5. Counts 17 and 18 charged Mitchell with
similar fraud offenses. Count 19 charged the defendants therein with conspiracy to
commit securities fraud and mail fraud in violation of 18 U.S.C. § 371.
n3 In June, 1993, Eddie Gindi's case was severed, and he thereafter became a government
witness at trial.
All four defendants in the criminal action pled not guilty to the Superseding Indictment
and proceeded to trial. On June 20, 1993, Eddie was found guilty on all counts charged
against him, i.e., Counts 1 through 16 and 19. Mitchell was found guilty on Counts 1
through 5 and 19, and acquitted on Counts 17 and 18. Allen Antar was acquitted of all
charges. The convictions of Eddie and Mitchell, however, were overturned by the United
States Court of Appeals for the Third Circuit, and the matter, as to them, was remanded
and assigned to this court.
Thereafter, on May 8, 1996, Eddie pled guilty to one count of conspiracy to commit
racketeering in connection with his activities at Crazy Eddie. In his allocution, Eddie
admitted, among other things, the following:
1. prior to Crazy Eddie's initial public offering in September, 1984, and continuing
through 1987, he and others agreed to carry out various schemes to falsify Crazy Eddie's
books and records to make the company appear financially healthier than it actually was;
2. in 1985, he caused the value of Crazy Eddie's inventory to be overstated by
approximately $ 2 million;
3. he caused the falsification of Crazy Eddie inventory count sheets, thereby overstating
Crazy Eddie's 1986 fiscal year-end inventory by approximately $ 10 million;
4. he arranged for the delivery of approximately $ 2 million in merchandise to Crazy
Eddie shortly prior to year-end 1986 and simultaneously arranged for post-dated invoices
Page 56 of 139
for this merchandise to be issued after the start of the next fiscal year;
5. he caused an infusion of approximately $ 2 million into bank accounts of Crazy Eddie
comparable stores to inflate the reported sales in those stores;
6. in fiscal year-end 1987, he caused the falsification of Crazy Eddie inventory count
sheets, thereby inflating inventory by millions of dollars;
7. the primary purpose of these schemes was to defraud the investing public by
artificially inflating the price of Crazy Eddie stock; and
8. he urged Crazy Eddie employees to destroy business records to conceal the
falsification of the company's business records from the SEC and others.
This court sentenced Eddie on February 10, 1997, inter alia, to eighty-two months
imprisonment. See United States v. Antar, Criminal Action No. 92-347 (D.N.J.) (HAA).
In total, between 1984 and 1987, Eddie sold approximately 6.5 million shares of Crazy
Eddie stock for proceeds in excess of $ 74 million.
On October 10, 1996, Mitchell followed suit and pled guilty to one count of causing false
and misleading statements to be made in documents and reports Crazy Eddie filed with
the SEC and one count of conspiracy to commit securities and mail fraud. In his
allocution, Mitchell admitted, among other things, the following:
1. in 1986 and 1987, he and others connected with Crazy Eddie agreed to carry out
various schemes to falsify Crazy Eddie's books and records to make the company appear
financially healthier that it actually was;
2. during the company's fiscal year 1987, he and others fraudulently inflated comparable
store sales;
3. he and others caused the falsification of inventory sheets for fiscal year-end 1987 to
inflate reported inventory by $ 16 to $ 18 million;
4. he and others executed the approximately $ 20 million phony debit memo fraud at
Crazy Eddie's 1987 fiscal year-end;
5. he was aware as of year-end 1987 that Crazy Eddie's reported inventory had been
inflated by approximately an additional $ 25 million because temporarily borrowed
merchandise had been included in the year-end inventory count;
6. he and others arranged for the delivery of merchandise to Crazy Eddie shortly prior to
year-end 1987 and simultaneously arranged for post-dated invoices for most of the
merchandise to be issued after the start of the next fiscal year; and
7. the primary purpose of these schemes was to increase the price of Crazy Eddie stock to
public investors.
Page 57 of 139
Mitchell was sentenced by this court on June 13, 1997, inter alia, to thirty months
imprisonment. See United States v. Antar, Criminal Action No. 92-347 (D.N.J.) (HAA).
The case at bar followed on the heels of the criminal action against Eddie, Mitchell, and
Allen Antar. In light of the past history of this case, the defendants herein, in large
measure, do not dispute that various frauds were indeed perpetrated at Crazy Eddie. The
predominant questions before this court, therefore, are what the extent of those frauds
were, who was involved and to what degree, who had knowledge or was aware of the
frauds occurring at Crazy Eddie, and who, if anyone, traded their Crazy Eddie stock on
the strength of material, non-public information in violation of the federal securities laws.
A trial without a jury was conducted before this court from September 9, 1997 to October
27, 1997. This court heard twenty-two days of testimony from fifteen witnesses, and
nearly two hundred exhibits were admitted into evidence. What follows are this court's
conclusions of fact and law pursuant to Federal Rule of Civil Procedure 52.
III. CONCLUSIONS OF FACT
A. The Parties and Credibility Determinations
(1) Sam M. Antar
Defendant Sam M. Antar ("Sam M."), a resident of West End, New Jersey, co-founded
and co-owned Crazy Eddie. n4 At the time of Crazy Eddie's IPO in September, 1984, and
until late 1987, Sam M. was the Executive Vice President and a member of the Board of
Directors of Crazy Eddie.
n4 Crazy Eddie was a Delaware corporation, with a principal place of business originally
in Brooklyn, New York. In October, 1986, its headquarters were moved to Edison, New
Jersey.
Together, Sam M. and his son Eddie built Crazy Eddie. As Sam M. testified at trial:
THE WITNESS: . . . Oh, before any trouble, we were the greatest combination in the
world. I had an idea, and he was a fantastic executor. I can come up with beautiful ideas,
but I never was able to execute them, but Eddie was able to execute them.
Testimony of Sam M. Antar, Vol. 10.120. According to Sam M. and the other
defendants, however, there was trouble within the tightly-knit family, with the main
protagonists being Sam M. and Eddie. The defendants have attempted to persuade this
court that a bitter and divisive family dispute, which began in the early 1980's and
culminated in a near-complete fracture of the family in late 1983, made it nearly
impossible for the members of the Antar family, particularly Sam M. and Eddie, to
cooperate with each other in devising and executing the various fraudulent schemes
alleged by the SEC. This dispute, the defendants contend, made it impossible for the
Page 58 of 139
Antars not only to carry out the cash skimming scheme prior to the IPO, but also to
cooperate in the multitude of frauds perpetrated at Crazy Eddie between 1983 and 1987.
By all accounts, the relationship between Eddie and Sam M. was sound and stable during
the early Crazy Eddie years of the 1970's. By the early 1980's, however, their relationship
began to become strained as Sam M. voiced opposition to Eddie's personal lifestyle,
including his heavy drinking and indiscrete extramarital affairs. Sam M. testified at trial
on this point as follows:
Q. What was the nature of your relationship with Eddie Antar in 1983 before we get to
New Year's Eve?
***
A. It was fair. It was all right. We got along very, very well, but something seemed to be
brewing.
***
Q. Let me be more precise to you.
What was the status of his marital relationship in 1983?
A. That it was starting to -- I would say starting to dwindle because he was running
around, and I really did not go for that lifestyle because we live in a very tight-knit
community.
***
Q. Did you tell your son what you thought?
A. Oh, yes.
Q. Did he welcome your views?
A. No, I don't think so.
***
Q. What did he say, if you remember?
A. What did he say?
"I am a big boy, I am over 21, you know."
You know, I can't tell him what to do.
Testimony of Sam M. Antar, Vol. 10.108-109. Eddie, for his part, felt that Sam M. was
jealous of his success and resented Sam M.'s interference in his personal affairs.
Page 59 of 139
The simmering feud erupted on the night of December 31, 1983. On that date, Eddie's
wife, Debbie ("Debbie I"), arrived at Sam M.'s house in Brooklyn visibly upset over an
argument with her husband. Apparently, Eddie had committed to celebrate New Year's
Eve with Debbie I, but subsequently broke the engagement. Debbie I learned, however,
that Eddie intended to celebrate the holiday with another woman, Debbie Erlich ("Debbie
II"). Upon arriving at Sam M.'s house that evening, Debbie I advised Sam M. and his
wife, Rose, that she intended to drive to Manhattan and confront her husband and his
mistress. She was accompanied on this trip by Robin Antar, Mitchell's wife, and Ellen
Kuszer, Eddie's sister and Benjamin Kuszer's wife. Debbie I ultimately confronted Eddie
and Debbie II that evening, and the near-melee that broke out between them has been
referred to by the family as the "New Year's Eve Massacre".
The next day, a visibly angry Eddie, who apparently blamed Sam M. for his marital
difficulties, went to Sam M.'s house to confront him. Sam M. was not at home that day.
Eddie, however, had a verbal dispute with his mother, Rose, who passed out from the
stress. Sam M. apparently became so upset by Eddie's hostile response and treatment of
Rose that in early January, 1984, he suffered a heart attack.
After the so-called New Year's Eve Massacre, the defendants contend that the family rift
became far more pronounced, with family members taking sides. Sam E. Antar, Eddie's
cousin, testified as to which family members sided with whom:
THE COURT: And some members of the Antar family took [Debbie I's] side, is that
correct?
THE WITNESS: That is correct, sir.
THE COURT: And they were Sam M. Antar?
THE WITNESS: That is correct, sir.
THE COURT: Allen Antar?
THE WITNESS: Yes.
THE COURT: Who else?
THE WITNESS: Mitchell Antar.
THE COURT: Mitchell Antar, who else?
THE WITNESS: And Ben Kuszer.
Testimony of Sam E. Antar, Vol. 4.14-15. It appears that Sam E. Antar was one of the
few who supported Eddie in this family dispute.
This court agrees with defendants that a family feud did exist, with Eddie and Sam M. as
the main protagonists. This court does not agree, however, that the feud made it
impossible for members of the Antar family, including the defendants herein, to
cooperate in conducting the frauds at Crazy Eddie. The evidence reveals that the intensity
of the family dispute waxed and waned over time, and it was not until late 1987 that it
had any significant effects on the Crazy Eddie business. Prior to that time, the family
feud did not prevent the Antars from operating Crazy Eddie, engaging in other business
ventures, or indeed, perpetrating the extensive frauds at the company.
Page 60 of 139
With respect to the relationship between Sam M. and Eddie, it does not appear to have
been as fractured as the defendants would now have this court believe. For instance, after
his heart attack in January, 1984, Sam M. recuperated for some time at Eddie's house in
Oakhurst, New Jersey. Indeed, on his tax return for 1984, Sam M. listed Eddie's residence
as his own "present home address." At the time, Eddie visited Sam M. and said, "you
know, we are going public, Dad, we're going to be friends and all that. Everything is
forgiven, everything is forgotten." Deposition Testimony of Sam M. Antar, January 24,
1992 at 2197-98.
In fact, by May, 1984, Sam M. and Eddie were working together on Crazy Eddie's IPO,
and it appeared that the anger between them was subsiding. See Testimony of Sam E.
Antar, Vol. 6.49 ("I recall sometime around when they were working together on the
public offering that the anger was subsiding and that they were cooperating with one
another. . . ."). The defendants' characterizations of the relationship between the two men
notwithstanding, Eddie and Sam M. were certainly cooperating to a sufficient degree that
both went on the "road show" together to promote the IPO. There was no indication on
the road show of a feud between the two, see id. at Vol. 2.34, and according to Sam M.,
by the time of the IPO, he and Eddie "were on very nice terms," Testimony of Sam M.
Antar, Vol. 11.89-90. n5
n5 In March, 1985, Sam M. also signed over a power of attorney to Eddie with respect to
Sam M.'s sale of 150,000 shares of Crazy Eddie stock pursuant to a secondary public
offering.
Sam M.'s position in this case that the New Year's Eve Massacre represented a clean
fracturing of his relationship with Eddie is belied by his own testimony given in a
previous deposition, in which he testified that significant strains in their relationship did
not appear until August, 1986:
A. . . . They were nice to me and stuff like that, and everything was hunky-dory, and
Eddie was very civil to Debbie and he treated her very, very well and he gave her his
whole salary every week, and everything like that. Everything was very, very nice.
Deposition Testimony of Sam M. Antar, January 24, 1992 at 2202. It is clear to this court
that whatever strains affected the personal relationship between Eddie and Sam M., they
were able for quite some time to insulate their business relationship from these tensions.
As Sam M. himself testified at trial:
Q. Isn't it a fact between January and May of 1984 you had a conversation with Eddie in
which Eddie said to you, in words or substance, quote: "Everything is forgiven"?
A. Yeah. We had that -- quite a few times we had that. . . . Everything was forgiven for,
let's see, for the next couple of years, everything was forgiven. But down in the heart, it
wasn't forgiven. It was forgiven because we had to be in business. I can't stop the
business just like that, but I didn't like what he was doing. I didn't like his morals.
Page 61 of 139
Testimony of Sam M. Antar, Vol. 16.46.
Thus, even if this court were to accept the defendants' theory of a divisive family dispute
between Sam M., Allen Antar, and Benjamin Kuszer, on the one hand, and Eddie, on the
other, the evidence presented at trial reveals that the tensions were not so great--at least
before late 1986--that they were unable to cooperate in operating Crazy Eddie and
perpetrating extensive frauds at the company. For example, Mitchell sided with Sam M.
in the alleged family dispute. But Mitchell also admitted to conspiring with Eddie to
commit fraud at Crazy Eddie. In his allocution, Mitchell admitted that he had participated
in and was aware of the multitude of frauds perpetrated at the company. Mitchell carried
out these schemes despite the defendants' contention of a "bitter and deeply divisive"
family dispute which supposedly made the level of cooperation necessary to carry out
such scams impossible. Of significance is the fact that many of the frauds to which
Mitchell admitted were perpetrated in 1986 and 1987, the time period when the family
dispute was supposedly at its most bitter.
Moreover, despite the lingering family dispute, members of the Antar family engaged in
new business ventures together. For instance, on or about April 15, 1985, Sam M., Eddie,
Allen Antar, Benjamin Kuszer, among others, invested together in two real estate
partnerships known as Deal-Rite Realty Associates and Rising Tide Real Estate
Associates.
Upon close examination, there is no doubt that from the early 1980's forward, there was a
lingering source of tension between Eddie and Sam M., with various family members
taking sides in the dispute. What is also clear from the evidence, however, is that the
family dispute was not so deeply divisive that the family members, no matter which side
each chose to take, were unable to cooperate with each other to perpetrate the frauds at
Crazy Eddie from 1979 through 1987. It is evident that the familial bad blood, while
always simmering just beneath the surface, did not have a truly significant impact on the
business until about April, 1987. As Sam M. himself testified at trial, the "familial war
broke out after [Eddie] was served with the summons by" Debbie I in April, 1987
reopening the divorce action. Testimony of Sam M. Antar, Vol. 10.122. As will be
discussed later in this opinion, after April, 1987, the family dispute was a factor in the
eventual end of the Antars' run at Crazy Eddie, but even then it was not the sole factor.
Indeed, the ability of the members of the Antar family to segregate their personal
differences from their business and other interests is clearly exemplified by their conduct
in connection with the government's criminal prosecution for the frauds perpetrated at
Crazy Eddie. With Eddie facing federal criminal charges, Sam M. was able to put their
differences aside:
A. . . . I said, look, he is my son. I don't want you to think that I am that hard or anything,
but all he had to do -- all he has to do is pick up the phone and say Ma, Pa, help me. He is
my son, still my flesh and blood.
Page 62 of 139
Testimony of Sam M. Antar, Vol. 15.42. Sam M. forgave Eddie and paid for his legal
bills, which ultimately came to between $ 1.5 million and $ 1.7 million. Id. at 16.38.
Time and again, the closely knit Antar family, and particularly Sam M. and Eddie, was
able to put aside their personal differences for the greater common good, whether that be
operating the Crazy Eddie business, joining forces in other business ventures, defending
against federal criminal prosecutions, or getting rich off Crazy Eddie stock.
Sam M. testified for six days at trial. Over that time, this court obtained a rather clear
sense of him as hardworking, ambitious, and highly intelligent. I also found him to be a
skillful and inveterate liar. Sam M.'s evident strategy in this and related litigation appears
to have been this: concede not one inch and admit to nothing; when confronted with prior
conflicting testimony or evidence, be evasive; if boxed into an inescapable position,
simply admit you lied then but now you are telling the truth. The record in this case is
replete with instances where Sam M. has given inconsistent, contradictory testimony.
Sam M.'s credibility, or lack thereof, becomes quite evident upon a review of his
testimony concerning his role at Crazy Eddie.
In a deposition taken in 1992 in connection with a civil matter then-pending in the
Eastern District of New York, entitled In re Crazy Eddie, Inc. Securities Litigation, Civ.
No. 87-0033 (E.D.N.Y.), Sam M. provided what he admitted at trial in this case to have
been false testimony concerning his secret bank accounts in Israel. Sam M. lied when he
stated under oath that he had only one account at Bank Leumi in Israel:
Q. Sir, have you ever had any bank accounts in Israel?
A. I have had bank accounts in Israel.
Q. One or more than one?
A. One.
Q. Are you sure?
A. Almost sure.
Q. What does that mean?
A. I really don't know. . . .
Q. Didn't you open more than one bank account at Bank Leumi in Tel Aviv?
A. Not that I know of.
Q. What's your recollection as to how many bank accounts you opened at Bank Leumi in
Tel Aviv?
Page 63 of 139
A. One account.
Deposition Testimony of Sam M. Antar, January 22, 1992 at 1875-76. In fact, and as will
be discussed in more detail later in this opinion, Sam M. had opened three accounts at
Bank Leumi in Israel. Sam M.'s testimony in the securities litigation concerning the
secret Israeli accounts was continually molded and adapted depending upon what
information was already available to the opposing side:
Q. What was it that caused you to change your testimony?
A. Oh, what caused me to change my testimony was the amount of information that . . .
Mr. Sirota [plaintiff's counsel in In re Crazy Eddie, Inc. Securities Litigation], who was
cooperating with you and with Solomon Antar, and because that information could have
never been known unless Solomon Antar had to tell you, because nobody knew, not even
Sam E., not even Uncle Eddy -Testimony of Sam M. Antar, Vol. 15.13. Upon questioning by this court, Sam M. further
testified:
A. . . . Your Honor, I hate to say this, but the reason that I am here right now is because
of the man, Solomon Antar, who is -- who was the attorney of the corporation, who was
so devious and so -- I cannot find the words to explain what happened.
***
-- in essence, once he told them, I had no other alternative but to tell the truth. Id. at Vol.
15.15. Sam M. repeatedly made clear to this court that he told the "truth" only when he
was backed into a corner:
A. . . . I remember the main thing is this: That I was deposed; that I got the deposition
back; that I realized that they had all of the information -- they had all of the goods on
me, and I had to do something.
So now, the best thing to do is either try to lie your way out of it, or tell the truth about it,
so I decided I have to tell the truth about it. There is no way out, and that is exactly what I
did.
***
But when I found out that I was dead -- dead in the woods, let's use that expression, that
they found out about my -- they had all of the information, they knew everything that was
going on, what I had in Israel, there was no sense for me to kid around anymore, so I had
to come back and tell the truth the best that I could remember.
Id. at Vol. 15.47-48; Vol. 16.9.
Sam M. also gave conflicting testimony concerning the opening of his second account
with Bank Leumi in Israel. In June, 1983, Sam M. withdrew approximately $ 2.8 million
from his existing account and deposited the money into a second account at the bank. At
his deposition in January, 1992, however, he denied that he ever made the transfers in the
first place and stated that there was no reason for him to make such transfers. Deposition
Testimony of Sam M. Antar, January 24, 1992 at 2179-80. Then in a May, 1992
deposition, Sam M. testified that he made the transfers--which he finally admitted-because Eddie had asked him to:
Page 64 of 139
Q. What was there about those transfers that jogged your memory?
A. Yes. My wife and I were going to Israel and before we left -***
Before we left we saw Eddie. Eddie said, when you get to Israel, transfer some money
from the account to you and my mother because of problems Eddie has been having with
his wife Debbie, that that money should belong to me.
Deposition Testimony of Sam M. Antar, May 21, 1992 at 57-58. Yet, at trial, Sam M.
denied that he made the transfers at Eddie's request and testified unequivocally that Eddie
"certainly did not" ask him to make the transfers. Testimony of Sam M. Antar, Vol.
16.10.
At trial, Sam M. also claimed that he never signed a document authorizing the transfer of
any money at Bank Leumi: "As a matter of fact, if you look at all your papers, I never
signed a document transferring any money at all. Solomon and Eddie did, but I didn't."
Testimony of Sam M. Antar, Vol. 14.56. Upon questioning by this court, Sam M.
immediately retracted this blanket statement:
THE COURT: Didn't you transfer money out of one of the accounts which-THE WITNESS: In 1993? 1983? No, 1983, right.
THE COURT: Well, I thought you just said you didn't transfer any money out of any
accounts. Did you or didn't you?
THE WITNESS: I didn't transfer any -- at that time only that one time.
Id. On the following day of trial, Sam M. conceded that he made two more transfers from
his bank accounts in Israel:
A. Yes. Matter of fact, I made two transfers.
Yes. That is the transfer that Mr. Shiv did -- and then the transferring was transferring
12245 into 13459.
Id. at Vol. 15.7.
Sam M. also provided conflicting testimony concerning his son Allen Antar. At trial Sam
M. testified that he fired Allen Antar from a business called "Sound Machine," in which
he had a one-half ownership interest. Sam M. testified, "I threw him out myself," and on
the question of whether Allen Antar left Sound Machine on good terms, he stated flatly,
"no way." Testimony of Sam M. Antar, Vol. 10.102-103; Vol. 13.3. At his January, 1992
deposition, however, Sam M. provided a very different description:
Q. Do you recall a time when you threw your son Allen out of Sound Machine?
A. I didn't throw him out.
Q. Do you recall when he left Sound Machine?
A. Yes.
Page 65 of 139
Q. When was that?
A. I don't remember.
Q. Did he leave on good terms?
A. Yes.
Deposition Testimony of Sam M. Antar, January 23, 1992 at 2015. At trial, Sam M.
attempted to explain the inconsistency: "If I lied in the past, when I talk about -- you talk
about my son, I maybe like to cover certain things up, you know what I mean?"
Testimony of Sam M. Antar, Vol. 13.35.
Unfortunately, this court does know what Sam M. means. It is evident that Sam M.
provided inconsistent, intentionally erroneous information and testimony to protect his
interests and the interests of his family members who have remained loyal to him. Sam
M.'s credibility may be summed up nicely with his own testimony provided at trial:
A. . . . You are 1000 percent right, you can show me 29 books of depositions. I did lie, I
did lie, but I am not lying now.
***
So I lied the next day, and I lied the next day and I lied the next day, but eventually I
changed my testimony, and today I am telling you the truth.
***
I thought I just answered it, yeah. How many times do I hear it? I lied, I lied, I lied, I lied,
I lied, I lied, but then I rescinded the lies and told them the truth. That is all I did.
Testimony of Sam M. Antar, Vol. 11.114; Vol. 11.119; Vol. 11.121.
Simply stated, this court cannot, as a general matter, accept Sam M.'s most recent
pronouncements of his honesty.
(2) Allen Antar
Defendant Allen Antar ("Allen"), a resident of Oakhurst, New Jersey, is one of Sam M.'s
three sons, and the brother of Eddie and Mitchell. From 1986 to 1987, Allen was the
Director of Corporate Sales at Crazy Eddie. Prior to that time, Allen held various other
positions in the company, including salesman and manager.
Allen testified for three days at trial. From his testimony as well as other evidence
presented in this case, it is clear to this court that in relation to his brothers and his father,
Allen was cut from a slightly different cloth. Indeed, the picture presented of Allen is of a
man not quite as ambitious or driven as his brothers or father. The evidence shows that
Allen was not as instrumental as Eddie or his father in developing and implementing the
schemes perpetrated at Crazy Eddie, nor was he as intricately involved in carrying out
those schemes as Mitchell. But as a member of the family, Allen occupied a position of
trust, and thus, he was in the unique position of not only being aware of what was
happening at the company, but also sharing in the wealth.
Page 66 of 139
At trial, however, Allen attempted to paint a wholly different picture. He attempted to
show that because of various personal tensions between him and the family, he could not
have been aware of, let alone involved in, the fraudulent schemes perpetrated at the
company. Allen contends that in or about 1975, he was essentially banished form the
family when he left his wife for another woman. For several years thereafter, he was
persona non grata as far as his family was concerned. Allen ultimately returned to his
wife and began working at Crazy Eddie in 1979. Allen contends that although back with
the family, he was never brought into the inner circle of the family's business at Crazy
Eddie, and thus, never participated in or was aware of the fraudulent schemes at Crazy
Eddie. He contends that he was employed at the company as a low level salesman and a
store manager until 1985, when he was fired by Eddie. When he returned to the company
in 1986, he was given only the "nominal" position of overseeing the company's "modest"
wholesale operations.
In addition to this ostracism from his family for his personal life, Allen also took Sam
M.'s side after the New Year's Even Massacre. He contends that this further deepened the
rift between him and Eddie, the main architect of the frauds at Crazy Eddie. He was
therefore not included in the frauds perpetrated at the company.
The evidence presented in this case reveals that Allen has overstated the extent and
severity of the tension between him and his family, particularly Eddie. What must be
remembered is that the Antars' business activities were founded on their strong family
bond. Thus, the interrelationship of members of the Antar family, as far as their business
was concerned, was far more subtle, nuanced, and complex than what would ordinarily
be found at other companies where business and family were not inextricably
intertwined. Whatever transgressions were made by Allen, the fact remained that he was
a member of the family, and thus, could be trusted like no outsider could ever be. This
was particularly important as Crazy Eddie became more successful and opened new
stores throughout the tri-state area. The sheer breadth of Crazy Eddie's business
operations necessitated Allen's involvement, for the Antar family would not and could
not easily trust anybody outside the family. That was simply not their makeup.
It is true that Allen did take Sam M.'s side after the New Year's Eve Massacre. But as
with Sam M., this fact did not preclude his involvement in or his awareness of the frauds
engineered by Eddie, for the Antars could and did set aside their personal differences for
the good of the business. Indeed, the tension described by Allen is belied by the fact that
Eddie approved a large raise for him in 1985. Allen's 1984 salary from Crazy Eddie, as
reported to the Internal Revenue Service, was $ 21,000. In 1985, Eddie approved Allen's
salary of $ 176,000, plus $ 295,558 from what Allen claims was the exercise of Crazy
Eddie stock options.
As for his contention that he was fired from Crazy Eddie in 1985 after a heated
disagreement with Eddie, there is a question as to whether this constituted a formal
termination or simply a period when he stayed away from Eddie. There is, for example,
evidence to suggest that he continued to get paid during this time, and that he attended a
consumer electronics show in Las Vegas, Nevada along with other Crazy Eddie
Page 67 of 139
employees. Whatever the true nature of this episode stemming from his disagreement
with Eddie, by 1986, Allen had become the Director of Corporate Sales at the company.
This was not simply a "nominal" position as Allen would have this court believe.
As the discussion above suggests, Allen's apparent defense strategy was to downplay his
role in the family's business. For instance, at trial, Allen attempted to conceal his use of
luxury cars paid for by Crazy Eddie:
Q. By the way, in this trial there has been testimony that Crazy Eddie furnished you with
a luxury car as an employee of Crazy Eddie. Is that so?
A. No.
***
Q. Now, isn't it a fact, Mr. Antar, that Crazy Eddie provided you with a Jaguar?
A. No, sir.
Q. Well, did you drive a Jaguar?
A. Yes, sir.
Q. Where did you get it?
A. I leased it myself.
Testimony of Allen Antar, Vol. 18.8; Vol. 19.38-39. In a 1992 deposition, however,
Allen provided the following testimony:
Q. On an income of $ 21,000 a year, how did you come to be driving a Jaguar?
***
A. I think the company paid for my car at that time. I guess so.
Deposition Testimony of Allen Antar, January 21, 1992 at 158.
Under cross-examination at trial, Allen also conceded that he was driven to and from
work in a chauffeur-driven limousine "a couple of times." Testimony of Allen Antar, Vol.
19.42. When pressed, Allen stated that he rode in the limousine for "maybe one year," but
not a couple of years. Id. at Vol. 19.43. In his January, 1992 deposition, however, Allen
testified that he was driven around in Crazy Eddie's limousine, "I would say a couple of
years." Deposition Testimony of Allen Antar, January 22, 1992 at 218.
Allen further testified at trial that he never received any off-the-books compensation
while at Crazy Eddie. He claimed that his entire compensation in 1984 when he worked
as a store manager, was a weekly paycheck of $ 300 or $ 400, and an annual salary of $
21,000. Yet he drove a Jaguar (which he may or may not have leased himself), and was
married with three children, two of whom were in private school with a tuition of
approximately $ 25,000. Moreover, on a purported $ 21,000 annual salary, Allen was also
Page 68 of 139
able to take a three-day trip to Las Vegas where he proceeded to lose $ 19,000 playing
keno. Allen's denial of off-the-books compensation is unequivocal, and that is his right.
The facts, however, suggest otherwise.
(3) Benjamin Kuszer
Defendant Benjamin Kuszer ("Kuszer"), a resident of Brooklyn, New York, is Sam M.'s
son-in-law. Kuszer owned and operated Benel Distributors, Inc. ("Benel Distributors"),
an outfit which sold records and tapes through outlets located inside Crazy Eddie stores
under the trade name "Crazy Eddie Record and Tape Asylum". All of its record stores
were located inside Crazy Eddie stores, and its corporate offices were located within
Crazy Eddie's offices, both in Brooklyn and later in Edison, New Jersey. Benel
Distributors paid a portion of the rent and gave Crazy Eddie a percentage of its record
sales.
Kuszer's operation of Benel Distributors was symbolic of his position in the Antar family.
Benel Distributors was technically distinct from, yet inextricably intertwined with, Crazy
Eddie. In a similar vein, Kuszer was technically distinct from the Antar family, as he
became a part of the family only through marriage. Yet, the evidence shows that in
substance, Kuszer was considered a trusted member of the family. He was, for all intents
and purposes, an Antar, and he was permitted to participate in and profit from the
business.
Kuszer, like Sam M. and Allen, also contends that his relationship with Eddie nosedived
after the New Year's Eve Massacre. Indeed, Kuszer testified that Eddie vowed to
"destroy" him for his and his wife's involvement in that episode. Based on this personal
enmity, Kuszer contends that he could not have cooperated with Eddie to carry out the
schemes. As with Sam M. and Allen, this court finds that any tension between Eddie and
Kuszer was not such that it precluded the latter's participation in or awareness of the
frauds perpetrated at Crazy Eddie.
There is evidence that in September, 1984, Eddie paid off the debts of Educators
International, Inc., a company owned entirely by Kuszer. Educators International
provided recruiting and other services to Eddie's for-profit medical school in the
Caribbean, the University of St. Lucia School of Medicine. Although Kuszer assumed
that Eddie was the real owner of the company, the fact remained that Kuszer owned all of
the company's stock. As of May 31, 1984, Educators International and the medical school
owed Crazy Eddie approximately $ 1 million. Although Eddie could have left Kuszer
liable for Educators International's debt, Eddie repaid all of the company's debt
personally out of his proceeds from Crazy Eddie's IPO, almost nine months after the
supposed beginning of the family feud.
Kuszer testified for two days at trial. He came across to this court as a mild-mannered
person who worked hard at gaining the trust and respect of the Antars. To gain that trust,
Kuszer did what he was told, and he was willing to break the law. As will be discussed
further below, Kuszer made two trips to Israel at Sam M.'s request to deposit cash. In
Page 69 of 139
1980, Kuszer transported $ 600,000 to Israel and deposited the money into Sam M.'s
account at Bank Leumi. n6 In 1983, Kuszer deposited $ 1 million into the Israeli account.
He did so while knowing that he was required to report to United States Customs the fact
that he was carrying more than $ 10,000 in cash. He was willing to break the law
"because my father-in-law asked me to." Testimony of Benjamin Kuszer, Vol. 17.36.
Under questioning by the court, Kuszer admitted that he would act in the very same
manner today:
THE COURT: If your father-in-law asked you to violate the law in any other way, would
you do that?
THE WITNESS: No, sir.
THE COURT: Why the change of heart?
***
THE WITNESS: Well, the best answer I could give you, sir, if this was his money and I
was just carrying his money. I didn't look at it as an active part of doing something that I
shouldn't have. Regrettably that was probably where I was coming from.
THE COURT: If your father-in-law asked you to keep something to yourself in
transactions involving himself with respect to his money, would you act in the very same
way as you did on those two occasions when you transported money surreptitiously to
Israel?
THE WITNESS: If it was his money, yes, sir.
Id. at Vol. 17.36-37.
n6 As will be discussed further below, Sam M. opened other secret accounts at Bank
Leumi in Israel.
The trust placed in Kuszer by the Antars was well-founded, as his testimony at trial and
in prior depositions revealed that he has attempted to protect other members of the Antar
family. For instance, when Kuszer traveled to Israel in 1980 to deposit the $ 600,000 into
the account controlled by Sam M. at Bank Leumi in Israel, he was accompanied by
Mitchell and Solomon Antar. At his deposition (which occurred shortly before Mitchell
was to be sentenced), and again at trial, Kuszer testified that he did not know whether
Mitchell or Solomon Antar knew he was carrying $ 600,000 and that he could not recall
any discussion with them concerning the money or where it was to be deposited. It is
implausible, however, that Mitchell and Solomon Antar did not know Kuszer was
transporting $ 600,000 on their trip to Israel. The money belonged to and was being
deposited at the request of Sam M., Mitchell's father, who paid for the trip. Mitchell was
also a key participant in the Crazy Eddie frauds. It is equally implausible that Kuszer
would have concealed the $ 600,000 from Solomon Antar, who himself made two cash
deposits totaling $ 1 million into the very same account.
Kuszer gave similarly implausible and evasive testimony about his second trip to Israel in
May, 1983, when he deposited $ 1 million in cash. Kuszer was accompanied on this trip
again by Mitchell. At his March, 1994 deposition, Kuszer testified that he did not know
Page 70 of 139
whether Mitchell knew that he was transporting $ 1 million in cash. At trial, Kuszer
backtracked slightly and testified that Mitchell "might have helped him carry the $ 1
million:
Q. Now, on your million-dollar trip, Mr. Kuszer, only Mitchell Antar went with you, isn't
that true?
A. Yes, sir.
Q. And the million dollars of cash that you were carrying, that wouldn't fit all in one
suitcase, would it?
A. I don't recall.
Q. Isn't it a fact that Mitchell helped you carry the million dollars in cash on that trip?
A. I don't know if it was a fact or not, but he might have.
Q. He might have?
A. Yes.
Testimony of Benjamin Kuszer, Vol. 17.38.
Kuszer was also evasive about the cash skimming at Crazy Eddie. At trial, Kuszer denied
that he was aware that cash was being skimmed at Crazy Eddie from 1974 to 1978.
However, as his co-defendant Sam M. testified, Kuszer "must have known that we did
skim money prior to '76." Testimony of Sam M. Antar, Vol. 11.103.
Unlike Allen, who gained trust within the family because of birthright, Kuszer earned his
trust because he was hard working and reliable. Ultimately, this trust placed in him by the
Antars may not have been in Kuszer's best interest.
(4) The Relief Defendants
Relief defendants Rori Antar, Sam A. Antar, and Michelle Antar are Allen's children.
Relief defendants Adam Kuszer, Sam Kuszer, and Simon Kuszer are Kuszer's children.
All are the grandchildren of Sam M. (hereinafter referred collectively as "Relief
Defendants"). It is undisputed that the Relief Defendants received the monetary proceeds
from the sale of Crazy Eddie common stock sold on their behalf by Eddie Antar in
March, 1985. n7
n7 As discussed more fully below, what is disputed is whether Allen and Kuszer-- who
maintain that they knew nothing of the alleged frauds which occurred at Crazy Eddie-directed the sale of that stock or whether the entire transaction was orchestrated by Eddie.
Page 71 of 139
The Relief Defendants neither participated in nor were aware of the frauds perpetrated at
Crazy Eddie. Their only connection to this case is based on the sale of stock held on their
behalf by Eddie pursuant to the Uniform Gifts to Minors Act.
(5) Other Key Players
While not parties to this action, certain other individuals, who played varying roles in
both Crazy Eddie and the allegedly fraudulently schemes perpetrated in that organization,
must be mentioned.
Eddy Antar ("Uncle Eddy") was Sam M.'s brother. At the time of Crazy Eddie's IPO,
Uncle Eddy was a member of the company's Board of Directors and Treasurer. Uncle
Eddy received a grant of immunity from prosection pursuant to an agreement with the
United States Attorney for the District of New Jersey.
While I found Uncle Eddy to have been a generally credible witness at trial, I also had the
impression that he was not as closely involved in the operations at Crazy Eddie during
the relevant time period as some of the others. First, while Uncle Eddy admitted that he,
Sam M., and others skimmed cash from Crazy Eddie in the 1970's, his testimony reveals
that he cut back on his participation sometime around 1978, when he suffered a heart
attack. Second, Uncle Eddy also had another business in Bridgeport, Connecticut, to
which he attended, particularly during the busy Christmas season. As will be discussed
further below, much of the cash skimming at Crazy Eddie occurred during the Christmas
season. And third, Uncle Eddy's testimony was limited specifically to cash skimming
prior to the company's IPO in 1984. He did not testify as to the various frauds which
allegedly took place after 1984. In sum, I found Uncle Eddy to be a generally honest
man, who did his job as he was told, primarily by Eddie and Sam M., and kept himself
out of much of the personal tensions within the family. That being said, it is also clear to
this court that Uncle Eddy was simply not a major player in the numerous schemes
perpetrated at Crazy Eddie, and his testimony must be assessed accordingly.
Sam E. Antar ("Sam E."), Uncle Eddy's son and Sam M.'s nephew, testified extensively
at trial about the roles played by Sam M., Allen, and Kuszer in the alleged fraudulent
schemes, as well as their awareness thereof, at Crazy Eddie. Growing up, Sam E. lived
approximately one mile from Sam M.'s house and was close to all three of Sam M.'s sons.
When he was twelve years old, Sam M. gave Sam E. his first job. Sam M. and Eddie also
provided Sam E. with financial support to attend college, and in 1979, Sam E. graduated
from Baruch College with a bachelor's degree in business administration and public
accounting. He then became a Certified Public Accountant. Sam E. began working fulltime at Crazy Eddie in June, 1984 as comptroller and head accountant. He was then
promoted to Chief Financial Officer and Executive Vice President in August, 1986, and
was elected to the Board of Directors in December, 1986. His employment at Crazy
Eddie was terminated on November 6, 1987.
In August, 1991, Sam E. entered into an agreement with the United States Attorney to
plead guilty to a criminal information in connection with his activities at Crazy Eddie. He
Page 72 of 139
subsequently pled guilty to charges of conspiracy to commit securities fraud, conspiracy
to commit mail fraud, and obstruction of justice. He was sentenced to six months home
detention, 1,200 hours of community service, and fined $ 10,000. Sam E. completed his
sentence, and in June, 1997, completed his period of supervised release. As part of his
plea agreement, Sam E. agreed to testify about the allegedly fraudulent activities
perpetrated at Crazy Eddie and to cooperate with the SEC in its investigation and
prosecution of this and other cases involving Crazy Eddie.
As noted above, Sam E. testified extensively at trial, and as far as live testimonial
evidence is concerned, the SEC relied heavily on Sam E. He is not, however, without his
credibility problems. He has, for instance, admitted to lying to the SEC in depositions.
Moreover, in 1987, when Eddie was locked in a bitter matrimonial dispute with his first
wife, he and Sam E. swore out a complaint against Lillian Rosen, Eddie's mother-in-law,
charging her with stealing approximately $ 7,500 from Crazy Eddie. In testifying before
the grand jury investigating the charge, Sam E. intentionally misled the panel upon
Eddie's instruction. Not to be overlooked in assessing Sam E.'s credibility is the fact that
he was a major player in developing and carrying out the web of fraudulent activities at
Crazy Eddie.
Thus, this court is not blind to Sam E.'s checkered history in this affair. Yet, this court
was also able to assess Sam E.'s demeanor and credibility, as it pertains to this case, over
the seven days he testified at trial. I found him to be intelligent and articulate, and for the
most part, he provided a coherent explanation of what occurred at Crazy Eddie. His
evident intelligence allowed him to grasp what was occurring at the company even at a
relatively young age. And by the time he had finished college, Sam E. was armed with
sufficient skills in both business and accounting to rise swiftly through the Crazy Eddie
hierarchy once he began to work there. There is no doubt that Sam E. was right in the
thick of things as far as the frauds perpetrated at Crazy Eddie are concerned. While this
may arguably be germane in assessing his credibility, it also reveals that Sam E. was in a
position to know what was happening and who was involved. Such is the nature of
conspiracies. In short, I found Sam E.'s testimony provided at trial to have been truthful.
As noted previously, Eddie and Mitchell pled guilty in the criminal action in 1996 and are
currently incarcerated. They were not called to testify in this case. The defendants make
much of this fact, as well as the fact that the SEC did not call many other potential
witnesses who, based on their participation in various phases of the fraudulent activities
at Crazy Eddie, presumably possessed knowledge of relevant facts. The defendants
therefore ask this court to draw the conclusion that by failing to call these witnesses, the
SEC knew or strongly suspected that these individuals would not implicate Sam M.,
Allen, or Kuszer in the frauds.
This court will not draw such an adverse inference against the SEC. I note that the
defendants themselves did not call these witnesses, even though they had the same
subpoena power to compel their testimony. Just as this court would not infer from this
that these witnesses, if called by the defendants, would have implicated them in these
frauds, I cannot draw the opposite conclusion. The SEC's case must stand or fall on the
Page 73 of 139
strength or weakness of the evidence actually presented by them. This court will not
engage in speculative interpretation of the SEC's trial strategy to divine what a potential
witness's testimony might have been and how that presumed evidence might have
impacted on this case.
(6) Sales of Stock
At issue in this case are allegations that the defendants sold Crazy Eddie stock while in
possession of material, nonpublic information in violation of the federal insider trading
laws. The stock transactions at issue in this case are provided below.
Sam M.
Date
Number of Shares Price/Share Gross Proceeds
Sept., 1984 (IPO) 300,000
$ 8.00
$ 2.4 million
March, 1985
150,000
$ 21.00
$ 3.15 million
Oct., 1985 n8
450,000
$ 12.00
$ 5.4 million
Feb., 1986
60,000
$ 26.00
$ 1.56 million
March, 1986
200,000
$ 26.375
$ 5.275 million
Sept., 1986
25,000
$ 33.75
$ 843,750
July, 1987
150,000
$ 6.02 n9
$ 903,125
TOTALS
1,335,000
-$ 19,531,875
Allen
Date
Number of Shares Price/Share Gross Proceeds
March, 1985 50,000
$ 21.00
$ 1.05 million
Feb., 1986 20,500
$ 22.00
$ 451,000
Dec., 1986 200,000
$ 12.00
$ 2.4 million
TOTALS
270,500
-$ 3,901,000
Kuszer
Date
Number of Shares Price/Share Gross Proceeds
March, 1985 50,000
$ 21.00
$ 1.05 million
Relief
Defendants
Date
March, 1985
Number of Shares Price/Share Gross Proceeds
150,000
$ 21.00
$ 3.15 million
n8 The October, 1985 sale was a private transaction in which Sam M. sold the 450,000
shares to Bear, Stearns & Company.
n9 The July, 1987 stock transaction actually represents a number of individual
transactions by Sam M. over a one week period beginning on July 2, 1987 and ending on
July 9, 1987. During this period, the price per share of Crazy Eddie stock fluctuated
Page 74 of 139
between $ 6.125 and $ 6.00. The $ 6.02 per share price is therefore a composite figure,
which takes into consideration the price fluctuation and the fact that Sam M. sold varying
numbers of shares throughout the one week period. The $ 6.02 per share figure should
therefore not be considered the actual price of the shares sold by Sam M. during this
period.
B. Crazy Eddie: Background
Crazy Eddie, which had become a major retail consumer electronics outfit in the tri-state
area, had relatively modest beginnings. In 1969, Sam M., Eddie, and Aaron Gindi, Sam
M.'s nephew, opened "Sights and Sounds," a retail audio equipment store, on Kings
Highway in Brooklyn, New York. The business was incorporated as ERS Electronics,
Inc. Eddie eventually bought out Aaron Gindi's interest in Sights and Sounds and thereby
acquired a two-thirds interest in the business, with Sam M. owning the remaining onethird.
There is some dispute as to how well the business performed. While all parties
acknowledge that business at Sights and Sounds was at first marginal, they disagree as to
whether it continued to be marginal throughout its life. Sam M. testified at trial that the
business did grow when it began to sell merchandise at prices below that charged by
competitors and when it began to advertise. The SEC disputes this. What is clear through
Sam M.'s own testimony, however, is that by the end of 1972, Sights and Sounds became
unable to pay back its creditors--owing, for example, $ 400,000 to trade creditors alone-and by December, 1972, had ceased operations.
Sam M. decided then to take advantage of the bankruptcy laws. He testified at his
deposition that he had "read the bankruptcy laws" and "found the greatest loophole in the
world." Deposition Testimony of Sam M. Antar, November 22, 1988 at 33. n10 This
"loophole" was that "any creditor that gets paid within a period of 120 days is considered
a preferential credit." Id. Thus, "if I went bankrupt today, anybody that I paid money in
the last four months now has to throw it back to the pot." Testimony of Sam M. Antar,
Vol. 13.51.
n10 This deposition testimony was taken in the matrimonial action initiated by Debbie I
against Eddie in the Supreme Court of New York.
Accordingly, Sam M. formed a new corporation, "Ultralinear Sound Corporation," to
succeed ERS Electronics and operate the Sights and Sounds business. In 1974, Sights and
Sounds changed its name and began doing business as "Crazy Eddie". The business
expanded from one store in 1973 to three stores in 1976. The second Crazy Eddie store
opened in Syosset, New York, and the third opened in Manhattan in 1975. In 1975, Crazy
Eddie, Inc., was incorporated to be the parent company of the three Crazy Eddie stores.
Page 75 of 139
In 1976, a fourth Crazy Eddie store opened on Fordham Road in the Bronx, New York.
The opening of the Fordham Road store was simply the first in a period of rapid
expansion throughout the tri-state region. By 1984, there were thirteen Crazy Eddie stores
scattered throughout New York, New Jersey, and Connecticut. n11
n11 In 1977, a store was opened in Paramus, New Jersey. Another Crazy Eddie store was
opened the following year in East Brunswick, New Jersey. In 1979, two stores, located in
Union, New Jersey and Hartsdale, New York, respectively, were opened. Between 1980
and 1981, two additional Manhattan stores were opened. In 1983, the expansion
continued with two new stores, one in Norwalk, Connecticut and the other in Totowa,
New Jersey. Finally, in 1984, a Crazy Eddie store was opened in Nesconset, New York.
(1) Cash Skimming: The Early Years
Rapid expansion was not the only business strategy carried out by the Antars. As early as
1971, Sam M. and Eddie began skimming cash n12 from Sights and Sounds. Sam E.
testified at trial that Sam M. and Eddie discussed "that some money was put aside for
them that was not going to be reported to the Government; that would not be deposited in
the store's receipts for that day." Testimony of Sam E. Antar, Vol. 1.73, 1.75. He also
testified that in accordance with their interests in the business, Eddie and Sam M.
received two-thirds and one-thirds, respectively, of the skimmed cash. This cash was
used for personal n13 use and to pay employees "off the books" in cash.
n12 The term "skimming" refers to a process by which cash proceeds of sales are not
deposited or recorded on the company's books and records, but instead are either used for
the company's off-the-books payroll or taken for personal use.
n13 For instance, Sam M. was apparently a gambler and frequented Caesars Palace in Las
Vegas, Nevada. His wife had a line of credit at Caesars Palace between $ 30,000 and $
100,000. Upon the instructions of Sam M., Eddie, Mitchell, and Kuszer, cash was also
distributed to various family members, including Eddie's wife, his mother-in-law Lillian
Rosen, Allen, and Mitchell. Some of the cash was used to renovate the homes of Allen,
Kuszer, and Mitchell.
In 1974, Sam M. hired Uncle Eddy to work at Sights and Sounds. His duties were to
receive daily store receipts, make deposits, pay creditors, handle the payroll, and maintain
the company's books. These books included records of cash skimmed to pay employees,
enrich various members of the Antar clan, and avoid paying taxes. For the first few
months on the job, Uncle Eddy worked out of Sam M.'s house in Brooklyn, where he
would receive the day's receipts--checks, charges, and cash--from Sights and Sounds.
These receipts were delivered by Kuszer, Mitchell, or Eddie. Based upon the instructions
given to him by Sam M. or Eddie, Uncle Eddy would then deposit only as much money
as was needed to cover any outstanding checks. He used a portion of the remaining cash
for payroll, which in part, was paid out in cash. n14 The rest of the cash would then be
Page 76 of 139
placed in a file cabinet in Sam M.'s house. Uncle Eddy testified that in 1974, he was
skimming between $ 5,000 and $ 10,000 a week. Uncle Eddy understood that cash was
held back and not deposited to avoid paying taxes. When Uncle Eddy was away, the
responsibility for maintaining the books was given to Kuszer.
n14 Evidence was presented that only a portion of each employee's salary was reflected
on the company's books. At first, Uncle Eddy paid the employees entirely in cash on a
weekly basis. Later, employees received a paycheck plus an off-the-books cash payment.
Sam M., Eddie, or Mitchell instructed Uncle Eddy how much to pay the employees.
The cash-skimming procedure described above changed somewhat when Crazy Eddie
opened an office in Brooklyn in 1974. From that time until 1978, Uncle Eddy would
receive the daily receipts at his own home in Brooklyn after the stores closed. Beginning
from approximately 10:30 p.m. and continuing to midnight, store managers from each
store dropped off a bag with the day's checks, charges, cash, and a register receipt. In
1974, Uncle Eddy would receive the daily receipts from only the Sights and Sounds store,
but by 1978, he was receiving receipts from the six Crazy Eddie stores then in existence.
Each day, Uncle Eddy took the checks and charges to the office, gave them to the
bookkeepers, deposited whatever cash was needed to cover outstanding checks, put the
skimmed cash in an attache case and brought it home. When the attache case became full,
Uncle Eddy put the cash under the radiator of his house. Uncle Eddy testified that on one
occasion, he had approximately $ 200,000 to $ 250,000 of skimmed cash under his
radiator. When the cash accumulated under the radiator, Uncle Eddy brought it to Sam
M.'s house and gave him the cash. At times when Sam M. was not at home, Uncle Eddy
gave the cash to either Kuszer or Mitchell. On some occasions, Eddie had Uncle Eddy
deliver the cash directly to him.
Sam M. and Eddie closely monitored the cash skimming scheme. Eddie called Uncle
Eddy on almost a daily basis, and sometimes twice a day, to ask him how well they were
doing, how much cash they had at the time, or who Uncle Eddy had paid. Sam M., while
maintaining that he did not have any responsibilities for day-to-day operations, focusing
instead on his numerous other businesses, does not dispute that he was involved in the
cash skimming at Sights and Sounds from as early as 1971. However, Sam M. contends
that he stopped skimming cash from Crazy Eddie in 1976, and that from that time
forward, he neither participated in nor was aware of any cash skimming at Crazy Eddie.
His assertions on this point will be addressed later in this opinion.
Uncle Eddy also handled the finances for Benel Distributors, including its off-the-books
payroll. With the cash left over, he recorded the excess amount in a book and mingled the
money with the cash skimmed from Crazy Eddie. Before Crazy Eddie went public in
1984, Sam M. and Eddie instructed Uncle Eddy to destroy the Benel Distributors cashskimming records, which he did.
(2) Sam M.'s Secret Bank Accounts in Israel
Page 77 of 139
In June or July, 1978, Sam M. and Uncle Eddy, along with their wives, traveled to Israel.
Uncle Eddy testified that on that trip, Sam M. went to a seminar sponsored by Bank
Leumi in Tel Aviv, Israel, in which he learned that the bank offered secret bank accounts
that would not be reported to the United States Internal Revenue Service. Thereafter, on
October 28, 1979, Sam M. opened a secret bank account, number 31332, at Bank Leumi
in Israel. The names on the account were Sam M., his wife Rose Antar, Eddie, and
Mitchell. As an added precaution to guard against any disclosure of information
concerning this account, Sam M. instructed Bank Leumi not to send him any account
statements or other mail.
Sam M.'s opening deposit into the new secret account was $ 25, 100 in cash, which he
transported to Israel with four relatives. Each relative carried $ 5,000 to avoid the
reporting requirement for the foreign transport of currency.
After the 1979 Christmas season, Sam M. and members of his family began depositing
skimmed cash into the secret account in Israel. These deposits continued until June, 1983.
In April, 1980, Kuszer transported $ 600,000 in cash to Israel and deposited the sum into
account number 31332. Kuszer was accompanied on this trip by Mitchell and Solomon
Antar, the general counsel of Crazy Eddie. Kuszer suspected that the bank account was
an "illegal account" that was "not to be reported to the Government," and believed that at
least some of the money came from Crazy Eddie.
In June, 1980, Sam M. traveled to Israel, again with Uncle Eddy and their wives, and
deposited $ 400,000 in cash into account number 31332. Based upon Sam M.'s
instructions, Uncle Eddy took approximately $ 215,000 ($ 200,000 of which came from
underneath his radiator) in one hundred dollar bills. Uncle Eddy testified at trial that all of
the money had come from Crazy Eddie stores. n15
n15 Under cover letter dated January 27, 1998, the defendants submitted various
documents from the Israeli government which purportedly showed that Uncle Eddy did
not travel to Israel in June, 1980, but only in October, 1980. The defendants moved to
admit these documents, which are in Hebrew, as well as purported translations of these
documents, into evidence. This court denies the defendants' motion.
First, the foreign documents are unauthenticated and uncertified, in violation of Rules
901 and 902(3) of the Federal Rules of Evidence. Moreover, there is no indication from
the defendants as to who may have prepared the purported translation of the documents
into English, or whether the translator is qualified. See Federal Rule of Evidence 604.
Second, according to the purported translation, it appears that the defendants did not
request the documents from the Israeli Border Control until January 11, 1998,
approximately one year after the parties were required by this court to identify all of their
trial exhibits in the Final Pretrial Order. The date of the request was also two and a half
months after the trial in this matter was concluded, and over a month after the parties had
submitted their proposed findings of fact and conclusions of law. Clearly, the plaintiff
Page 78 of 139
had no opportunity to investigate either the authenticity or veracity of the documents in
question, and thus, admitting them at this late date would severely prejudice the plaintiff.
And third, even if this court were to admit this evidence, it would be of little relevance to
the important substantive issues in this case. The defendants seek to admit this evidence
to undermine Uncle Eddy's credibility. However, the documents show, if anything, that
both Sam M. and Uncle Eddy were mistaken as to precisely when they traveled to Israel
together to deposit funds into the secret account. Sam M. testified that Uncle Eddy
accompanied him in April, 1981, while Uncle Eddy testified that it was June, 1980. The
Israeli Border Control documents suggest, however, that Sam M. and Uncle Eddy were
both in Israel between October 6 and October 23, 1980, which would correspond to a
deposit made by Sam M. on October 7, 1980. The precise date on which they may have
been in Israel at the same time is not as significant as the fact that it happened. Moreover,
there is no dispute that in June, 1980, $ 400,000 in cash was deposited into the secret
account at Bank Leumi in Tel Aviv.
On August 29, 1980, Solomon Antar deposited $ 400,000 in cash into account 31332.
This money came from Sam M. On October 7, 1980, Sam M. himself deposited the sum
of $ 225,000 into the account, and on April 24, 1981, he deposited an additional $
605,010 in cash into the account. On September 10, 1981, Solomon Antar deposited $
600,000 into the account. On April 20, 1982, Sam M. deposited $ 1,060,000 in cash into
the account. Solomon Antar accompanied Sam M. on this trip because, as Sam M. put it,
"[a] million dollars is too much in one suitcase."
In May, 1982, Sam M. added Kuszer and Debbie I as signatories to the account, and as
such they had the right to withdraw money out of the account.
On May 12, 1983, Kuszer deposited $ 1 million into the account. The trip to Israel was
paid for by Sam M. Soon thereafter, on May 29, 1983, Eddie made a $ 600,000 cash
deposit into the account.
In total, Sam M. and his family deposited the sum of $ 6,145,110 in skimmed cash into
their secret accounts in Israel. By himself, Sam M. deposited skimmed cash totaling $
2,945,110.
(3) Account 12245
On June 29, 1983, Sam M. and his wife opened account number 12245 at Bank Leumi in
Tel Aviv and immediately transferred $ 2,813,677 from account number 31332 into the
new account. In addition to this transfer, Sam M. deposited $ 600,000 into the new
account. Account 12245 was also a secret account, the existence of which was not
reported to the United States Internal Revenue Service.
On or about February 6, 1984, Eddie learned about Sam M.'s transfer of the $ 2.8 million.
According to the testimony of Sam M., Eddie became very angry because he believed
Page 79 of 139
that Sam M. had transferred too much money into the new account. See Testimony of
Sam M. Antar, Vol. 11.71. Sam E. testified that the money in account 31332 was to be
divided according to their respective interest in Crazy Eddie; that is, Sam M. was to
transfer one-third of the funds and Eddie was to retain two-thirds. Accordingly, on
August 21, 1984, Sam M. transferred $ 964,884 from account number 12245 to a new
account opened by Eddie at Bank Leumi, account number 13299. With this adjustment,
Sam M. was left with $ 2,802,222 in account number 12245, which reflected his onethird share of the $ 8,409,289 in principal and interest earned on the skimmed cash in
Israel. Only Sam M. and his wife Rose were signatories to account number 12245, and
thus, the transfer of $ 964,884 from that account certainly could not have been
accomplished without their approval.
C. The 3-2-1 Theory of Cash Skimming
The discussion above regarding the cash skimming that went on at Crazy Eddie and its
predecessor corporations is more properly viewed as a prelude to what is at the heart of
this case. Indeed, this case is not simply about cash skimming, and the defendants, for
their part, do not dispute that extensive cash skimming occurred at Crazy Eddie, at least
prior to 1976. At the heart of the SEC's case--as it relates to Crazy Eddie's IPO in 1984-are allegations that beginning in 1979, both Eddie and Sam M. developed a goal of taking
the company public sometime in the future. To achieve this goal, the SEC alleges that
between 1979 and 1984 less and less cash was skimmed each year from Crazy Eddie. By
reducing the skim each year, this "3-2-1" theory of cash skimming would provide the
appearance to the public that Crazy Eddie was growing in profitability, thereby making
its stock much more attractive. The defendants contend that they neither participated in
nor had any knowledge of such a scheme. Indeed, they deny that they even knew that
cash skimming was occurring at Crazy Eddie after 1976.
The evidence in this case shows that beginning in or about 1979, Sam M. and Eddie had a
long-term goal of making Crazy Eddie a publicly held company. They believed that to
make Crazy Eddie stock ultimately appear more valuable to the public, they would need
to show growth and not simply a healthy profit margin. Accordingly, Sam M. and Eddie
devised a scheme, first implemented during the Christmas season of 1979, whereby they
would create artificial growth in the company's pre-IPO earnings by skimming less cash
each year. At trial, Sam E. testified extensively about the "3-2-1" theory of cash
skimming between 1979 and 1984:
Q. Mr. Antar, focusing your attention on the fiscal year 1980, can you tell the Court the
amount of cash that was represented to you that was skimmed from the Crazy Eddie
stores in fiscal year 1980?
***
A. I learned from at least Sam M. Antar that we skimmed over $ 3 million in cash from
Crazy Eddie that fiscal year ended May 31st, 1980.
Q. Who told you that?
Page 80 of 139
A. Sam M. Antar and it was discussed with other people also.
Q. And can you describe how you were present during these discussions?
A. I lived right next door to Sam M. Antar's house. Ben Kuszer, who lived upstairs would
be there; Mitchell Antar would be there; Allen Antar would be there, their wives would
be there. It would not be in just one discussion. It would be during the year it would come
up from time to time. Not everybody would be there during every single discussion.
Sometimes one person will not be there, sometimes two would not be there. But it was a
subject that came up from time to time, if they skimmed over $ 3 million from Crazy
Eddie for that fiscal year, that was the amount of money taken out of Crazy Eddie and
skimmed.
Q. Where did these conversations take place?
A. In Sam M. Antar's house.
***
Q. And did you learn the amount that was skimmed in fiscal year 1981?
A. Yes, I did.
Q. And how did you learn that?
A. Again, I was over the house. I was constantly over their house.
THE COURT: Whose house?
THE WITNESS: Sam M. Antar's house, various members of his house were present, like
Mitchell, Sam M. Antar, Eddie Antar, Ben Kuszer, their wives were present. I learned
two and a half million dollars was skimmed approximately during that fiscal year ending
May 1981.
Q. Who told you?
A. Sam M. Antar was the primary person that told me. However, I heard it from time to
time form the various other individuals like Ben Kuszer, Mitchell Antar and Eddie Antar,
and also in the previous year I heard it from those various individuals also.
Testimony of Sam E. Antar, Vol. 1.143-145. Sam E. provided similar testimony for fiscal
years 1982, in which $ 1.5 million was skimmed from Crazy Eddie, and 1983, in which $
750,000 was skimmed.
Upon questioning by this court, Sam E. provided the reasoning behind the skimming.
THE COURT: Was there any reason given to you by any of the individuals as to why a
lesser amount had been allegedly skimmed?
THE WITNESS: Yes.
Page 81 of 139
THE COURT: What was that reason and who said it -- first of all, who said it to you?
Who gave you that explanation?
THE WITNESS: I received the information from more than one individual, at least two.
THE COURT: Give me the two.
THE WITNESS: Sam M. Antar and Eddie Antar, his son.
THE COURT: What did the two gentlemen tell you?
THE WITNESS: In the late 1970's, '79, early 1980, they had a goal of taking Crazy Eddie
public one day.
THE COURT: An IPO?
THE WITNESS: They wanted the company to grow and eventually became a public
corporation. They didn't know it was going to become a public corporation in '79 or '80.
It was only a goal, only a dream, but that is what they wanted to ultimately do.
It was represented to me by them that they wanted to skim money each year towards
getting ready to become a public company, the main reason that was represented to me by
Eddie and Sam M. Antar -- in fact, I participated in discussions. My input was included
in those discussions regarding these matters, that by skimming less money each year,
what you are doing also is you are helping your earnings grow by skimming less money
each year.
So what you are doing is in preparation for going public, you are skewing your earnings
and giving yourself an extra advantage of earnings. Not only would you be growing if
you do more business, but your earnings would also grow as a result of skimming less
money, so you have that added advantage.
THE COURT: And the strategy, if adopted, based on what I hear you saying, would
improve the image of this company as an attractive company to go public?
THE WITNESS: Yes.
Growth companies and this was discussed at these discussions -- growth companies is
what get premium prices on Wall Street.
Id. at Vol. 1.147-148. I found Sam E.'s testimony to have been credible on this point.
Accordingly, the "3-2-1" process of cash skimming resulted in the Crazy Eddie net
income n16 figures showing growth rather than stable profitability:
Fiscal Year Amount of Skim Reported Net Income/True Net Income
(Approximately)
1980
$ 3 million
$ 1.7 million/$ 4.7 million
1981
$ 2.5 million
$ 2.3 million/$ 4.8 million
1982
$ 1.5 million
$ 3.4 million/$ 4.9 million
1983
$ 750,000
$ 4.6 million/$ 5.35 million
Thus, by reducing the skim each year, the members of the Antar family involved in this
scheme created the appearance that Crazy Eddie was not only profitable, but that it also
grew in profitability each year.
Page 82 of 139
n16 The net income figures were calculated before pension contribution and income taxes
were included.
The defendants dispute the "3-2-1" theory of cash skimming in several respects. They
deny that cash skimming occurred at Crazy Eddie after 1976. The defendants also
characterize as utterly incredible the SEC's theory that Eddie and Sam M., a full three to
four years prior to the IPO, could envision taking the company public and then
implement a highly disciplined scheme through which they, and members of their family,
gradually reduced their cash skimming over the time period. And third, the defendants
contend that even if cash skimming under the "3-2-1" theory did occur, they neither
participated in nor were aware of the scheme. This court is unpersuaded by the
defendants' contentions.
(1) Cash Skimming After 1976
The defendants first contend that the SEC has failed to prove by a preponderance of the
evidence that cash skimming occurred after 1976. In support, they point to the testimony
of Uncle Eddy, who as the family member responsible for maintaining the internal
financial and accounting controls at Crazy Eddie, testified that with one exception he
never found the type of discrepancy in the records which would have been evident had
cash skimming occurred.
At trial, Sam E. n17 testified that on the instructions of Eddie, Kuszer, Mitchell, and Sam
M., he went to the various Crazy Eddie stores to pick up the daily store receipts during
the Christmas season and brought the money back to the homes of Sam M., Mitchell, or
Kuszer. It is here that the specific cash skimming mechanism is significant and where the
defendants focus their primary attack on the testimony of Sam E. Sam E. testified that
when he visited a store during the Christmas season to pick up the daily receipts, the store
manager would count the cash in his presence. The amount of cash counted would then
be memorialized on a document called a "summary sheet". He would then take the cash,
the summary sheet, and the store register tape, called a "Z-out sheet," along with the
checks and charges, to Sam M.'s home. The Z-out sheet automatically recorded every
sale which was rung up on that register for that day. Sam E. acknowledged that as a
general matter, the Z-out sheet, which was automatically generated by the cash register,
should reconcile with the summary sheet with respect to the amount of cash sales at the
store.
n17 Evidence concerning the fact and extent of cash skimming at Crazy Eddie post-1979-as it relates to the "3-2-1" theory of skimming--is derived primarily from the testimony
of Sam E. As noted above, prior to 1978, Uncle Eddy was intricately involved in the cash
skimming process. In that year, however, Uncle Eddy suffered a heart attack which
prevented him from performing most of his previous duties. From the 1979 Christmas
season onward, Sam E., Uncle Eddy's son, stepped into his father's role.
Page 83 of 139
The skim actually took place after Sam E. brought the daily receipts to Sam M.'s house,
where the summary sheets were altered to show less cash being generated for that day.
Sam E. acknowledged that once the summary sheets were altered, a discrepancy would
arise between it and the Z-out sheet. Sam E. further testified that Uncle Eddy had the
responsibility of supervising the reconciliation of the Z-out sheets and summary sheets as
part of Crazy Eddie's internal controls designed to detect employee theft. Accordingly, if
there were a discrepancy between the Z-out sheet and the summary sheet, Uncle Eddy
was charged with detecting such inconsistencies. Uncle Eddy testified at trial, however,
that he never discovered, with one exception, a major discrepancy between the summary
sheets and the Z-out sheets. That one exception was when he discovered that $ 10,000 or
$ 15,000 was not accounted for. Uncle Eddy testified that apart from this one episode he
never discovered any major discrepancy between the Z-out sheets and the summary
sheets, particularly discrepancies of $ 50,000 or more.
While Uncle Eddy's testimony facially seems at odds with the testimony of Sam E., it
does not provide a basis for this court to reject Sam E.'s testimony that extensive cash
skimming occurred at Crazy Eddie from the 1979 Christmas season forward. It must be
remembered that Uncle Eddy had his own children's wear business in Connecticut. He
worked at that store between ten and twelve days during each Christmas season.
Accordingly, he would not be present for a number of days to detect any discrepancies.
During his absence, Kuszer conducted the reconciliations between the Z-out sheets and
the summary sheets. Kuszer also denied that there was ever a large discrepancy when he
was responsible for the reconciliations. Kuszer's credibility, however, is in grave doubt.
Moreover, it is evident to this court that the system of internal controls at Crazy Eddie,
ostensibly supervised by Uncle Eddy, left much to be desired. Uncle Eddy himself
testified that Z-out sheets were not entirely accurate, and thus, any reconciliation done
with the use of such Z-out sheets was very difficult. Even if it is assumed that the Z-out
sheets and the summary sheets could be used to accurately reconcile the cash receipts, the
primary purpose of this process was to ensure that other employees of the company were
not stealing money. It was not used to guard against cash skimming by Eddie, Sam M.,
and other close family members. Thus, as Sam E. testified, the value of utilizing this
reconciliation process was extremely limited in revealing cash skimming done by
members of the Antar family since any such controls could be and were customarily
overridden by either Eddie or Sam M.:
A. . . . this was not a big public corporation where there was a bureaucracy with checks
and balances. It was a close-knit control, Eddie and his father. If they wanted to
circumvent procedures and this is how they wanted, that is how things were done. No
questions asked.
Testimony of Sam E. Antar, Vol. 5.106. n18
n18 In their further efforts to undermine the credibility of Sam E. with respect to his
testimony concerning cash skimming from 1979 through 1984, the defendants introduced
the testimony of Mitch Pinto and Barry Borris, store managers at Crazy Eddie. They
testified that Sam E. never approached them and requested cash from their stores. These
Page 84 of 139
testimonies do not possess any persuasive authority, however. First, the SEC never took
the position that Sam E. did in fact remove cash from stores managed by either Pinto or
Borris. Thus, Sam E.'s testimony is not necessarily contradicted by them. Second, Pinto
and Borris were certainly not members of the Antar family nor part of their inner circle,
and thus, would have no basis to know one way or another whether or to what extent
frauds were perpetrated. Third, neither Pinto nor Borris knew that in 1975 or 1976, Sam
M. had, by his own account, skimmed approximately $ 3.5 million from Crazy Eddie
stores, or for that matter that any other frauds were perpetrated at the company. And
fourth, Sam E.'s testimony concerning cash skimming is corroborated by Edmond Levy, a
general manager of a Crazy Eddie store in Paramus, New Jersey and later the district
manager for New Jersey. He testified at trial that he also participated in the Christmas
cash-skimming from 1977 through 1983. Levy testified that at various times, Uncle Eddy
and Kuszer instructed him to separate cash from specified New Jersey stores and bring it
to them. Levy then brought the cash to Kuszer, Mitchell, or Sam E. at a Crazy Eddie store
in New Jersey or at their homes. Levy testified that he also delivered cash to Sam M. at
his home.
Uncle Eddy's testimony in this regard must also be placed in its proper context. Uncle
Eddy testified that from 1979 through 1984, he participated in the cash skimming, albeit
only from two stores. His cash skimming participation was limited due to his heart attack
in 1978. Uncle Eddy testified that he received the checks, charges, and bank deposit slips
from the Crazy Eddie stores in his office on Coney Island Avenue, along with a
"reconciliation form" prepared by the store managers. He continued to receive cash from
the two stores, $ 3,000 a day from the Paramus store for six days a week, and $ 2,000 a
day from East Brunswick for seven days a week, for a total of $ 32,000 a week. Thus, the
fact that Uncle Eddy testified that he did not recall discovering a major discrepancy
between the Z-out sheets and the summary sheets must be viewed within the context of
his admitted participation in the cash skimming process. The reconciliation process was
simply not implemented to discover incidents of cash skimming, which was occurring
throughout this time period by, among others, Uncle Eddy.
Perhaps the most damaging evidence against the defendants, however, is the enormous
amounts of money which were being transported to Israel and deposited in various secret
bank accounts at Bank Leumi during the relevant time period. As noted previously, by
the end of 1983, Sam M. and other members of the Antar family deposited over $ 6
million into their secret accounts, and this is amply supported by the bank records
obtained from Bank Leumi. With the exception of an opening deposit of $ 25,100 in
October, 1979, all other deposits were made after the 1979 Christmas season and up
through 1983.
Sam M.'s answer to this is that the money deposited into the secret accounts came not
from the cash skimming at Crazy Eddie between 1979 and 1984, but from cash skimming
at the company prior to 1976 and his other businesses. It is simply not credible, however,
that all of the money deposited into the Israeli secret accounts, a sum totaling over $ 6
Page 85 of 139
million, was accumulated by Sam M. prior to 1976. As such, the defendants' contention
that no cash skimming occurred at Crazy Eddie after 1976 is equally not credible.
With respect to Sam M.'s contention that he skimmed a large amount of cash from his
other businesses, this court finds Sam M.'s testimony to be unworthy of credit. It is
beyond dispute that Sam M. has been running some type of business since he was
nineteen years old, when he opened his first retail store in Ocean City, New Jersey. Over
the years, Sam M. engaged in various other businesses, including a retail children's wear
store, a store specializing in costume jewelry, and a window-trimming business.
Throughout this litigation, however, Sam M. has faithfully provided inconsistent and
evasive testimony on the topic of cash skimming from these establishments, and in many
instances, he simply lied. His inconsistent testimony throughout this and related litigation
renders Sam M.'s present contentions before this court unworthy of belief.
Sam M.'s position--that the money deposited into the secret bank accounts in Israel came
solely from Crazy Eddie prior to 1976 and his other far-flung businesses--appears to be of
more recent vintage. In a deposition conducted in January, 1992 in connection with a
shareholders' derivative class action suit against, among others, Sam M., he denied that
he ever skimmed cash from Crazy Eddie at any time:
Q. Did you ever receive any currency from Crazy Eddie or any of its predecessors?
***
A. In what amount?
Q. What's the largest amount of currency that you recall ever receiving on one occasion
from Crazy Eddie or any of its predecessors?
A. There's no large amount that I ever remember receiving from Crazy Eddie or its
predecessors.
Q. What is the largest dollar amount you do recall?
A. I don't know. Could be 100, $ 50, expenses for something.
Deposition Testimony of Sam M. Antar, January 22, 1992 at 1886. Sam M. also
protested: "I never handled any cash. I know nothing about cash. I never went into any
store or went to a cash register. I never had anything to do with all these things." Id. at
1888-89. He testified to the effect that he did not have "the slightest idea" whether there
had been an off-the-books payroll at Crazy Eddie. Id. at 1887.
Sam M.'s testimony concerning the amount of cash skimmed from his other businesses
and its connection to the amounts deposited into the secret Israeli accounts is equally
unworthy of belief. Sam M. testified at trial that by 1970, he had accumulated
approximately $ 500,000 in cash from his various business interests, and by 1976, when
he contends he stopped skimming from Crazy Eddie, the total amount of cash skimmed
from Crazy Eddie and his other businesses was $ 5 million. Of this amount $ 1.5 million
was skimmed from his non-Crazy Eddie businesses. Sam M.'s self-serving testimony on
these points, however, is belied by the evidence presented in this case.
Page 86 of 139
For example, in 1966, Sam M. opened the "Nogales Discount Center" in Nogales,
Arizona, which is located on the United States-Mexican border. This store catered to the
large Mexican population and apparently sold a wide array of merchandise. Sam M.
testified that the Nogales store was a strictly cash business, and that on every Sunday
throughout the year, and on most days during the busy Christmas season, all of the cash
receipts at the Nogales store were set aside for his personal use. According to Sam M., he
skimmed $ 300,000 annually from the Nogales store between 1970 and 1976.
Sam M., however, previously provided contradictory testimony on this very subject. In a
January, 1992 deposition, Sam M. testified under oath that other than an annual salary, he
did not receive any other significant sums of money from the Nogales store:
Q. Do you recall receiving any other significant sums of money from Nogales Discount
Center?
A. No.
Deposition Testimony of Sam M. Antar, January 23, 1992 at 2083-84. Sam M. admitted
at trial that at his deposition, he made no mention of skimming cash at all from the
Nogales store:
Q. When you were asked if you received any other significant sums of money from the
Nogales Discount Center, isn't it a fact that you did not mention one word about
skimming operations at the Nogales Discount Center?
A. No, I didn't.
Testimony of Sam E. Antar, Vol. 14.12. In addition, despite his testimony that he had
skimmed $ 300,000 annually between 1970 and 1976, he admitted at trial that he closed
the Nogales business because he could lease out the space for more money than he was
making from the business.
Sam M. also provided inconsistent testimony concerning another business he owned
called "Ray's Discount Center," located in Augusta, Georgia:
Q. And the profits from Ray's Discount generally ran about 5,000 or 6,000 a year, right?
A. On one deposition I said that, that is not correct.
Q. What is the correct number?
A. What is it?
Q. Yeah.
A. My share, maybe 10 or 15,000.
Q. When you said 5 or $ 6000 in your prior deposition, were you trying to sort of reduce
the amount that you were testifying about?
Page 87 of 139
A. Yes.
Testimony of Sam M. Antar, Vol. 13.20-21.
Despite Sam M.'s testimony concerning the enormous amounts of money skimmed from
his non-Crazy Eddie businesses, the truth of the matter appears to be that they were not as
profitable as he would have this court believe. In his January, 1992 deposition, Sam M.
acknowledged with respect to the Nogales store and his other businesses, "they weren't
tremendous successes, but they made a living." Deposition Testimony of Sam M. Antar,
January 23, 1992 at 2103-04. This was confirmed in part by the testimony of Uncle Eddy
who, referring to the Nogales store, testified as follows:
THE WITNESS: The store was a store that would -- and I guess on a big day would do 4
or 5,000 business. It was not anything like the Crazy Eddie store.
***
THE WITNESS: So, I think he told me one time something about 10 or $ 15,000 or $
20,000, something like that, that he pulled out of there Christmas time.
Testimony of Uncle Eddy, n19 Vol. 8.74. With respect to Sam M.'s business in Charlotte,
North Carolina, Uncle Eddy testified that it was a small store that did not do much
business. When asked what happened to Sam M.'s other businesses, Uncle Eddy testified
that "most of them went out of business." Id. at Vol. 8.58.
n19 For purposes of clarity, when quoting from Uncle Eddy's testimony, this court will
utilize the somewhat colloquial citation form "Testimony of Uncle Eddy".
The most troubling aspect of Sam M.'s testimony that the enormous amounts of cash he
had accumulated were all from his non-Crazy Eddie stores and from Crazy Eddie prior to
1976 is that during the relevant time period, he did not act like a man in possession of
such sums of cash. For instance, he testified that by 1970, he had accumulated
approximately $ 500,000 in cash from his non-Crazy Eddie businesses. Yet, in 1969, Sam
M. had to borrow money from his sister-in-law to operate ERS Electronics. He further
testified that they "borrowed from a lot of people," and "some were repaid and some were
not." Deposition Testimony of Sam M. Antar, November 22, 1988 at 28-29.
Sam M. further testified that by 1976, he had accumulated a total of $ 5 million in cash in
his Brooklyn home, $ 3.5 million of which represented cash skimmed from Crazy Eddie
prior to 1976. This cash, he testified, was stored in a false ceiling in his home. In his
January, 1994 deposition, however, Sam M. testified that by 1976, he had accumulated
approximately $ 3.5 million total from Crazy Eddie and his other businesses. Ultimately,
Sam M. conceded that he "never knew how much the real total amount of cash was."
Testimony of Sam M. Antar, Vol. 11.166.
Moreover, by 1976 Crazy Eddie was operating only three stores. By contrast, by the end
of 1979, there was a total of eight Crazy Eddie stores, including the stores in Paramus and
Page 88 of 139
East Brunswick, which had the highest sales figures of all Crazy Eddie stores. It is
unlikely that Sam M. could have skimmed approximately $ 3.5 million from the Crazy
Eddie stores by 1976. It is far more plausible that he skimmed the millions of dollars of
cash from the eight to ten Crazy Eddie stores existing in the late 1970's and early 1980's.
Sam M.'s testimony that he had accumulated approximately $ 5 million by 1976 is also
belied by the fact that he had to borrow money from the company. In an amendment to its
Form S-1 Registration Statement filed with the SEC on September 12, 1984 in
connection with an attempted IPO of Crazy Eddie common stock, the company noted that
"since its inception, [Crazy Eddie] frequently made loans on an interest-free basis to
Eddie Antar, Sam Antar and members of their family to meet family needs." Plaintiff's
Exhibit 6, at 32. Taking interest-free loans from Crazy Eddie is clearly not consistent for
a man who claims to have had approximately $ 5 million in cash stashed away in his
ceiling. n20
n20 It is also doubtful that the false ceiling in Sam M.'s Brooklyn home could have held $
5 million in cash. Sam M. testified at his deposition that the false ceiling consisted
principally of small area between two Celotex ceiling tiles and a plasterboard ceiling
located above the Celotex. According to Sam M., the cash was stored directly on top of
the two Celotex tiles. He admitted, however, that the vertical space between the tiles and
the plasterboard ceiling was so small that he could not set the purported packets of cash
on top of each other.
At the heart of Sam M.'s defense is that by 1976, he had stopped skimming altogether
from Crazy Eddie. According to Sam M., he simply believed that it was time to stop the
skimming. In that regard, he testified that in 1976 he proposed that Crazy Eddie
implement a pension and profit sharing plan pursuant to which twenty-five percent of a
qualified employee's income was contributed to the plan. Sam M. viewed the pension
plan as a means of legitimizing the company's operations and bringing it into compliance
with the tax laws. Sam M. further testified that by 1976, he had enough money to take
care of his family for generations and thus, no longer needed to skim cash from Crazy
Eddie. This is simply not believable.
First, Sam M.'s testimony that he proposed the implementation of the pension plan to end
the cash skimming at Crazy Eddie does not ring true. If he wanted to end the skimming,
he could have simply stopped skimming cash, without bothering with pension and profit
sharing plans. Second, while the company's contributions to the pension plan were at
times substantial--$ 2.4 million in 1982 and $ 2.3 million in 1983--these contributions
were partially offset by forfeitures caused by employees leaving the company.
Accordingly, in 1984 Crazy Eddie was not required to make any contribution to the plan
"because required contributions were offset by employee forfeitures in the amount of
approximately $ 2,000,000 which occurred during the years 1980 through 1983."
Plaintiff's Exhibit 6, at 48. This is not to say that the cash skimming and the pension
contributions left the company in any great financial shape. Indeed, the company suffered
a working capital deficiency for fiscal years 1980 through 1984, caused in some measure
Page 89 of 139
by the cash skimming. However, Sam M. testified that the working capital deficiency did
not have a significant impact on the company's operations since the cash flow was more
than enough to offset any such deficiency.
Third, with almost forty years of skimming cash from his businesses behind him, Sam
M.'s testimony that he suddenly became concerned with Crazy Eddie's compliance with
the tax laws strains this court's credulity.
Fourth, Sam M.'s testimony that he stopped skimming because he concluded in 1976 that
he had accumulated enough money to take care of his family for generations strikes this
court as particularly hollow. Apparently, he did not feel the same way about his other
businesses since Sam M. admitted at trial that he continued to skim cash from his other
far-flung businesses. Moreover, it is difficult for this court to believe that having
skimmed money from his businesses for approximately forty years, Sam M. would have
suddenly stopped skimming from a business which has been described as the "Golden
Goose" of retail stores:
Q. Did you ever have any discussions or conversations with Sam M. concerning
skimming with his other businesses like Sound Machine, like skimming from Crazy
Eddie?
A. It was represented to me that the most money they made was from Crazy Eddie's,
nothing could compare.
THE COURT: Who represented that to you?
THE WITNESS: Sam M. Antar. Nothing compared in relation to the money they were
making at Crazy Eddie's. Crazy Eddie's was the goose that laid the golden egg.
THE COURT: Is that your statement or somebody else's?
THE WITNESS: Used to call it the Golden Goose.
THE COURT: What?
THE WITNESS: Golden Goose.
THE COURT: The Golden Goose.
Testimony of Sam E. Antar, Vol. 1.133.
Fifth, Sam M.'s contention that he stopped skimming in 1976 is undermined by the
testimony of Uncle Eddy. At trial, Uncle Eddy testified as follows:
THE COURT: -- your relationship at the time with your brother, Sam M., when you were
bringing money from the Crazy Eddie managers to his home, would I be fair in
concluding that it was a friendly relationship?
THE WITNESS: Absolutely.
THE COURT: And you certainly knew, did you not, that the money that you were
bringing was skimmed money, is that correct?
THE WITNESS: Yes, sir.
THE COURT: And based on what your brother said and did, is it fair to conclude or not
fair to conclude, that he knew it was skimmed money when you brought it to his house.
Page 90 of 139
THE WITNESS: Of course, he did.
THE COURT: What is the basis of the answer?
THE WITNESS: I gave it to him. He knew where I was getting it from. I didn't have any
money of my own. I didn't have a store that produced that kind of money. My store did a
couple hundred dollars a year in business, so I couldn't give him any money from
anything I had. Why would I give him so much money at all?
I would give it to myself if it was mine.
THE COURT: So your answer is yes, he knew?
THE WITNESS: He must have known.
THE COURT: Did he discuss the fact that it was Crazy Eddie money with you?
THE WITNESS: We talked about it many times.
THE COURT: Many times.
All right. So the concept of skimming was a subject for discussion many times, is that a
fair statement?
THE WITNESS: Yes, sir.
Testimony of Uncle Eddy, Vol. 8.72-73.
In addition, Uncle Eddy testified that in early 1984, he was instructed by Sam M. and
Eddie to destroy the diaries he had saved showing Crazy Eddie's actual cash receipts and
the amounts he had distributed to the members of the Antar family. Sam M. told Uncle
Eddy that he wanted the diaries destroyed because the company was going public and he
did not want to risk exposure of any evidence of cash skimming. Such conduct is not
consistent for a person who asserts that his cash skimming days ended in 1976.
This court is therefore unpersuaded by defendants' contention that cash skimming did not
occur at Crazy Eddie after 1976. Rather, the preponderance of the evidence leads this
court to conclude otherwise.
(2) The Gradual Reduction Of Cash Skimming Leading Up To 1984
The defendants also contend that the SEC has failed to prove its "3-2-1" theory of cash
skimming from 1979 to the time of the company's IPO in 1984, and that even if there
were such a scheme, they neither participated in nor were aware of its existence. They
argue that it is simply unbelievable that Eddie and Sam M., a full three to four years prior
to the IPO, could envision taking the company public and then implement a highly
disciplined scheme through which they, and members of their family, gradually reduced
their cash skimming over the time period. In support, the defendants contend that the
issue of taking Crazy Eddie public was not discussed until sometime in 1982 or 1983.
Contrary to the defendants' assertions, this court does not find Sam E.'s testimony on this
point to be inherently preposterous. Sam E.'s testimony on this point to be inherently
preposterous. Sam E. did not testify, as the defendants seem to imply, that the goal of
taking Crazy Eddie public was formal plan or strategy. Rather, he testified as follows:
THE WITNESS: They wanted the company to grow and eventually become a public
Page 91 of 139
corporation. They didn't know it was going to become a public corporation in 79 or 80. It
was only a goal, only a dream, but that is what they wanted to ultimately do.
Testimony of San E.Antar, Vol. 1 147-148. Indeed, not only did I find Sam E's testimony
concerning the gradual diminishment of cash skimming leading up to the Craz Eddie IPO
to be credible, I found it to have been a coherent and lucid explanation of what occurred
at Crazy Eddie between 1979 and 1984. It is clear to this court that Eddie and Sam M. in
particular had the intellect and ambition to formulate such a goal, the discipline to work
towards it, and the power over family members to align their interests.
Moreover, this court does not find preposterous, as argued by the defendants, that senior
members of the Antar family freely discussed sensitive details of their business with Sam
E., whom they claim had no stature either within the family or in the business. As noted
previously, this was a close knit family where notions of trust ran very deep. Sam E., as
Sam M.'s nephew and the cousin of Eddie, Mitchell, and Allen, was clearly a member of
the inner circle. He grew up with Sam M.'s family, and felt as comfortable in their home
as in his, which was nearby. He was also an extremely bright young person. It is clear
that Sam M. took his nephew under his wing at a tender age. Sam M. gave Sam E. his
first job when he was twelve years old. Sam M. and Eddie also provided Sam E. with
financial support to attend college, and in 1979, Sam E. graduated from Baruch College
with a bachelor's degree in business administration and public accounting. His closeness
with Sam M.'s family is further evidenced by his meteoric rise at Crazy Eddie, from
comptroller and head accountant in 1984, to Chief Financial Officer and Executive Vice
President in August, 1986, and finally to a seat on the company's Board of Directors in
December, 1986. It is therefore not surprising at all that Sam M., Eddie, and other
members of their family would discuss sensitive matters in the presence of Sam E.
While the above discussion necessarily focused on the role and awareness of Sam M.,
this court also finds that both Kuszer and Allen were both, at the very least, aware of the
"3-2-1" process of cash skimming at Crazy Eddie from 1979 through 1984. Admittedly,
neither Kuszer nor Allen were as instrumental as Sam M. in developing and executing the
scheme. There was, however, sufficient credible evidence presented by the SEC to
establish by a preponderance of the evidence that Kuszer and Allen were aware of the
scheme, and in some respects, participated in it.
The evidence showed that between Kuszer and Allen, the former was more involved in
the fraudulent scheme than the latter. Evidence was presented, for instance, that Kuszer
traveled to Israel in April, 1980 and deposited the sum of $ 600,000 in cash into account
number 31332. Kuszer was accompanied by Mitchell and Solomon Antar, and the trip
was paid for by Sam M. Again, in May, 1983, Sam M. paid for Kuszer's trip to Israel
where he deposited $ 1 million in cash into the secret account. Indeed, in May, 1982, Sam
M. added Kuszer, among others, as signatories to account 31332, which Sam M. would
unlikely have done had Kuszer not been intimately involved with Sam M. in the cash
skimming at Crazy Eddie.
In light of his conduct in connection with the secret accounts in Israel, Kuszer's testimony
that he merely suspected that some of the money being deposited in Israel came from
Page 92 of 139
Crazy Eddie is not credible. Rather, the evidence shows that not only was Kuszer
involved in the cash skimming process, but both he and Allen were fully aware of the of
the "3-2-1" process and its intended effect. Sam E. specifically placed both Kuszer and
Allen at meetings among family members, primarily at Sam M.'s house, in which the "32-1" skimming process was discussed.
(3) Sales of Stock by the Defendants
By the end of 1983, Sam M. and Eddie had taken substantial steps to launch an IPO of
Crazy Eddie stock. They first attempted to take the company public with a "red herring"
issued in May, 1984. Sam M., Eddie, Sam E., Mitchell, and representatives of the
underwriting firm of Oppenheimer & Company went on a "road show" in June, 1984 to
promote the IPO to prospective investors. Although the defendants have argued that
Eddie and Sam M. were by this time locked in a bitter family feud, both participated in
the "road shows". During these road shows, Sam M. told investors of the positive aspects
of Crazy Eddie, including its growth during the previous five-year period. The May, 1984
public offering, however, was unsuccessful.
On September 13, 1984, Crazy Eddie did effect an IPO of its common stock. The
company filed a registration statement on Form S-1 with the SEC. Among other things,
the registration statement reported Crazy Eddie's income before pension contribution and
income taxes for its fiscal years 1980 through 1984. Professor Robert J. Sack, an expert
witness in the areas of public accounting and securities offerings of public corporations,
testified on behalf of the SEC that as a result of year-to-year variations in tax expenses
and significant changes in the pension plans during the years in question, that measure of
income provided a more realistic method of evaluating how well the company was
operating from year to year as well as comparing it with other retail electronics firms.
As a result of the cash skimming, however, Crazy Eddie's reported income figures were
materially false and misleading. The cash skimming which occurred at Crazy Eddie
between 1979 and 1984 artificially reduced the company's reported income on a dollarfor-dollar basis. Under general accounting practice, materiality is defined as an error or
misstatement of five to ten percent or more. In each of Crazy Eddie's fiscal years 1980
through 1983, the cash skimming materially altered the reported income figures for those
years.
Moreover, the skimming materially altered the trend of Crazy Eddie's reported income
for those four years. The income trend is especially important to investors deciding to
buy or sell securities of a company, since they consider earnings in both the current year
and the prior years to extrapolate what they expect the company to earn in the reasonably
foreseeable future. Indeed, two analysts' reports concerning Crazy Eddie, issued in
January and May, 1985, utilized the false and misleading income figures reported for
1983 to predict the company's income for 1985 and 1986. Professor Sack testified that
Crazy Eddie's "trend line in the reported net income, as it was in the prospectus, would be
much more attractive than the trend line would have been had the cash skimming not
taken place." Testimony of Robert J. Sack, Vol. 9.29. The actual trend line would have
Page 93 of 139
shown a stable business rather than one with a growth trend. An average investor would
have been less likely to invest in the company had the cash skimming been reported.
Crazy Eddie's then-current liabilities as stated in the registration statement were also false
and misleading because they did not account for the cumulative tax liability that had
arisen as a result of the cash skimming.
Two million shares of Crazy Eddie stock were offered to the public in the IPO. Of these,
the company sold 1.4 million shares, and Sam M. sold 300,000 shares. At $ 8.00 a share,
Sam M. obtained gross proceeds of $ 2.4 million.
In March, 1985, Crazy Eddie conducted a secondary public offering. A "secondary"
offering occurs when a company sells additional shares of stock to the public after its
IPO. In furtherance of this secondary offering, Crazy Eddie filed with the SEC a
registration statement on Form S-1 which contained the same materially false and
misleading income and earnings growth data as the September, 1984 registration
statement.
Of the 1.2 million shares of Crazy Eddie stock offered to the public, members of the
Antar family sold 1 million shares and the company sold 200,000 shares, at $ 21.00 a
share. Specifically, Sam M. sold 150,000 shares for gross proceeds of $ 3,150,000. Allen
and his wife sold 50,000 shares for $ 1,050,000. Kuszer and his wife sold 50,000 shares
for $ 1,050,000.
On October 10, 1985, Sam M. sold 450,000 to Bear, Stearns & Company in a private
transaction, for gross proceeds of $ 5.4 million.
Sam M. also sold 60,000 shares of Crazy Eddie stock on the open market on February 19
and 20, 1986. On February 20, 1986, Allen sold 20,500 shares and received gross
proceeds of $ 451,000.
When the defendants made the above-mentioned sales of stock, they knew that cash
skimming had occurred at Crazy Eddie between 1979 and 1984. They also knew that the
skimmed cash was not included in the reported incomes for the five years prior to Crazy
Eddie's IPO. Accordingly, when these trades were conducted, the defendants knew that
the income figures for the time period between 1979 and 1984, and thus, the earnings
growth trend, were false and misleading as a result of the cash skimming.
(2) Sales of Stock on Behalf of the Relief Defendants
In connection with the March, 1985 secondary offering, Eddie, in his capacity as
custodian under the Uniform Gifts to Minors Act, sold 25,000 shares of Crazy Eddie
stock on behalf of each Relief Defendant, for a total of 150,000 shares. As a result of
Eddie's sale, the Relief Defendants received aggregate proceeds of $ 3,150,000. Eddie
sold this stock as custodian with knowledge of the cash skimming fraud which occurred
Page 94 of 139
between 1979 and 1984 as well as the warehouse inventory fraud perpetrated
immediately prior to the secondary offering, as described below.
In February or March, 1985, after the IPO had already taken place, Eddie engaged in
conduct to fraudulently inflate the company's warehouse inventory by $ 2 million. The
fraudulent inflation of inventory counts increased Crazy Eddie's reported pre-tax income
on a dollar-for-dollar basis; that is, it went directly to the company's bottom line. Under
generally accepted accounting principles, Crazy Eddie's gross profit on sales for any
fiscal year was calculated as equal to net sales receipts for that year less the cost of goods
sold. The cost of goods sold, in turn, was equal to the value of the company's inventory at
the start of the year, plus the cost of new merchandise purchased during the year, less the
value of the inventory at year-end. By artificially inflating the company's inventory at the
end of the fiscal year, Eddie artificially decreased the company's cost of goods sold by an
identical amount, and thus, artificially increased Crazy Eddie's earnings by that amount.
Shortly prior to the taking of inventory for the 1985 fiscal year-end, Eddie instructed
David Neiderbach and Arnold Spindler, employees of Crazy Eddie, to inflate the
warehouse inventory by $ 2 million. At trial, Neiderbach provided substantial evidence
concerning this fraud. Moreover, in his allocution in connection with his guilty plea in the
criminal matter, Eddie admitted that he caused the value of Crazy Eddie's inventory to be
overstated by approximately $ 2 million, thus corroborating the testimony of Neiderbach.
For the 1985 fiscal year, Crazy Eddie filed with the SEC an annual report on Form 10-K.
In that filing, Crazy Eddie reported that it earned pretax income of $ 12.6 million. This
figure, however, was fraudulently inflated by $ 2 million, or almost twenty percent, as a
result of the warehouse inventory inflations. When Eddie sold the stock on behalf of the
Relief Defendants, he was fully aware of the fraudulent inventory inflation and its effect
on Crazy Eddie's pretax income.
The Relief Defendants contend that they were not unjustly enriched from this sale of
stock. They contend that although custodian of the stock, Eddie was not the ultimate
decisionmaker. Rather, they contend that Kuszer and Allen made the decisions to sell the
stock held on behalf of their children. Kuszer and Allen assert that they were not aware of
either the cash skimming between 1979 and 1984 or the $ 2 million inventory inflation.
Thus, they conclude, the stock held on behalf of the Relief Defendants was not sold on
the strength of material, non-public information.
As an initial matter, this court finds that the decision to sell the stock on behalf of the
Relief Defendants was made by Eddie. I note that the contentions made by the Relief
Defendants that the decisions were made by their respective fathers were based solely on
the testimonies of Allen and Kuszer, both of which I find to be not credible. Indeed,
Allen gave conflicting testimony on this issue, testifying at one point that Eddie made the
decision to sell the stock:
Q. Was the decision -- the initial decision to sell the stock in December of 1986, as well
as the decision in March of 1985 to have your children's stock sold as part of the
Page 95 of 139
secondary offering, was that initially your decision or Eddie's decision?
A. No. That was, I think, Eddie's decision. I think, like you say, it was a secondary
offering. I don't know really what it is, but they just sold the stock themselves. I didn't
sell it.
Testimony of Allen Antar, Vol. 18.68-69.
With that said, the determination of whether the decision to sell the stock on behalf of the
Relief Defendants was made by Eddie, Allen, and/or Kuszer is not entirely significant.
The defendants and the Relief Defendants clearly pushed this point based on the
assumption that this court would find that neither Kuszer nor Allen were aware of the
cash skimming at Crazy Eddie between 1979 and 1984 or the $ 2 million inventory
inflation immediately prior to the March, 1985 secondary offering. With respect to the
second prong of this argument, this court does agree with the defendants and Relief
Defendants that the SEC has failed to prove by a preponderance of the evidence that
either Kuszer or Allen were aware of the inventory inflation carried out by Eddie,
Neiderbach, and Spindler in February or March, 1985. n21 However, as determined by
this court previously in this opinion, both Kuszer and Allen, like Eddie, were fully aware
of the "3-2-1" process of cash skimming between 1979 and 1984 leading up to the IPO
and the first secondary public offering in March, 1985. Thus, even if Allen and Kuszer
did direct Eddie to sell the stock on behalf of the Relief Defendants in March, 1985, the
Relief Defendants would nevertheless be unjustly enriched since both Allen and Kuszer,
at that time, possessed material, non-public information.
n21 According to the evidence presented, the earliest the defendants could have been
informed of the 1985 inventory inflation was in January or February, 1986 at a meeting
among Eddie, Sam M., Allen, Mitchell, Kuszer, and Sam E. There was no evidence
presented of an earlier meeting or discussion among the group concerning the inventory
inflation.
D. Fiscal Year 1986 Frauds
The evidence presented by the SEC shows by a preponderance of the evidence that in
January or February, 1986, Sam M., Eddie, Allen, Kuszer, Mitchell, and Sam E. met in
Eddie's office and planned a series of other frauds to increase profits and maintain the
appearance of growth at Crazy Eddie. I found Sam E.'s testimony on this point to be
credible.
Q. Mr. Antar, let me turn your attention to another topic now.
Do you recall attending a meeting in the time frame of January or February of 1986?
A. Yes, I do.
Q. And who else attended that meeting that you first recall?
Page 96 of 139
A. Myself, of course, Sam M. Antar, Ben Kuszer, Allen Antar, Eddie Antar and Mitchell
Antar.
Q. Where did this meeting take place?
A. In Eddie's office at Crazy Eddie at 2845 Coney Island Avenue, the offices of Crazy
Eddie's.
Q. And at this meeting who did most of the talking, if anybody?
A. Mostly it was Eddie.
Q. And what did the other participants in the meeting do?
A. They had participated in the discussion relating to the subject matter of the meeting
and asked questions.
Testimony of Sam E. Antar, Vol. 2.58-59.
The purpose of the meeting was to discuss and develop various other schemes to augment
the appearance of Crazy Eddie as a profitable and growing company. This was important
because Sam M. and Eddie were contemplating another secondary public offering for
March, 1986, in which they planned to sell $ 20 million worth of their private holdings of
Crazy Eddie stock. At the meeting, Eddie expressed concern about two events that could
adversely affect the March, 1986 offering: the comparable store sales results, which were
scheduled to be publicly announced prior to the offering, and Crazy Eddie's earnings for
fiscal year 1986.
A. [Eddie] was concerned about the comparable sales store report that would be issued
prior to that public offering that was being planned, and also about the earnings for the
fiscal year ending May 2nd, 1986. That report would be -- that report would be issued
after the public offering would be planned. He was concerned about both situations.
Q. And did Eddie say why he was concerned about earnings that would be released after
the public offering?
A. He was considering with his father selling a significant amount of shares of stock of
Crazy Eddie's pursuant to the planned public offering. It was over $ 20 million in stock,
and they didn't want any earning surprises after the public offering that could involve
litigation.
Q. And-A. In other words, they didn't want to have a public offering, and then have something
that Wall Street wasn't expecting on the earnings, negative earnings, negatively received
earnings report.
Page 97 of 139
Q. And these were things that Eddie himself said?
A. Not only Eddie, no.
Q. Who else said such things, and if you can specify what a particular person said, that
would be fine.
A. Sam M. Antar also expressed concerns.
THE COURT: Where did he express these concerns?
THE WITNESS: Again, this meeting that I am testifying to now, your Honor, the entire
meeting occurred in Eddie's office at Crazy Eddie's.
***
THE COURT: Anybody else present other than Sam M. Antar and yourself?
THE WITNESS: Eddie Antar, Mitchell Antar, Allen Antar and Ben Kuszer. Nobody else
was present.
Testimony of Sam E. Antar, Vol. 2.61-62.
Accordingly, based on the discussion held among select members of the Antar family in
January or February of 1986, various schemes to artificially inflate profits and earnings
were conceived and executed.
(1) Comparable Store Sales
In assessing the comparable store sales fraud, this court begins with Eddie's allocution, in
which he admitted that he caused an infusion of approximately $ 2 million into bank
accounts of Crazy Eddie comparable stores to inflate the reported sales in those stores.
The money was transferred from Eddie's secret account in Bank Leumi in Israel through
a branch located in Panama City, Panama. The transfer was effectuated in the name of a
fictitious Panamanian corporation.
Comparable stores are retail stores that have been open for at least the prior twelve
months which provide a basis for comparing how well a certain store is doing year to
year. The sales increases of Crazy Eddie's comparable stores were of particular interest to
the securities analysts who followed the company's stock. The purpose of infusing cash
into the comparable stores was described by Sam E. at trial:
Q. Can you describe for the Court how depositing cash or drafts into the comparable
stores would also have an impact of increasing the sales and income of the company?
A. Because first, you're counting the money as if you got it from a customer, but in this
case the customer is not getting anything in return, so it is like a pure profit to the
company.
You are getting $ 2 million, between a half a million in cash and a million and a half in
Panama, and you are giving back nothing in return, so it is a pure two million or a million
980 in income before taxes.
Testimony of Sam E. Antar, Vol. 2.96.
Page 98 of 139
Both Eddie and Sam M. wanted the fourth quarter comparable store sales figures for
fiscal year 1986 to increase at a sufficiently high level to enable them to obtain an
advantageous price on the stock they planned to sell in the offering. Specifically, they
wanted comparable stores sales for the quarter to reach 14%. At the time, comparable
store sales figures were running at only 4% to 5%.
The evidence presented in this case shows that to increase the comparable store sales,
Sam M. and Eddie proposed to inflate the figures to the target 14% by transferring $ 1.5
million from their secret bank accounts in Israel directly into the bank accounts of the
comparable stores. On February 27, 1986, Eddie transferred $ 1.5 million from one of his
accounts at Bank Leumi in Israel to an account maintained at Bank Leumi's branch in
Panama City, Panama. The transfer was effectuated in the name of a Panamanian
corporation called "Aeronautics Traders Corporation". The next day, Bank Leumi
Panama issued ten bank drafts, totaling $ 1.5 million to Crazy Eddie. Solomon Antar flew
to Panama and picked up the drafts, which were ultimately deposited in the stores' bank
accounts to reflect comparable store sales for the fourth quarter of the 1986 fiscal year.
To preserve the fiction that the $ 1.5 million reflected retail sales by the comparable
stores, Crazy Eddie paid sales tax on the money.
The evidence shows that Sam M. knew that the Panama drafts were deposited to inflate
the comparable store sales figures. In addition to evidence showing that Sam M.
participated in the meeting held in January or February, 1986 and discussed the scheme
with Sam E. and others, other evidence revealed that Sam M. bought Solomon Antar's $
1,503 round-trip plane ticket to Panama with an American Express card in the name of
"Sam Antar, Moore Industries, Corp." Moore Industries was a corporation formed by
Sam M. in the 1950's which was later used as the holding company for the Crazy Eddie
store located in Paramus, New Jersey. The only persons who had an American Express
card in the name of "Moore Industries" were Sam M., Eddie, and Mitchell. Indeed, even
if Sam M. was not aware of Solomon Antar's trip to Panama when the airline ticket was
purchased, he certainly learned about it a short time afterward when he received his
American Express bill. The American Express billing statement was addressed and sent
to him. Sam M. testified that he was in charge of monitoring expenses paid with the
American Express/Moore Industries card. n22
n22 There is also other circumstantial evidence of Sam M.'s awareness of the scheme.
Approximately one month after the Panama drafts were retrieved and deposited into the
comparable stores, Sam M. used the Aeronautics Traders Corporation--the same
corporate shell used to transfer the $ 1.5 million from Israel to the United States--as a
vehicle for making a substantial personal investment. The investment opportunity was
available only to nonresidents of the United States. Thus, on March 28, 1986, Sam M.
transferred $ 250,000 from Israel to Panama to invest in the venture.
While not directly related to the use of $ 1.5 million to pump up comparable store sales,
Sam M.'s use of the Panama branch of Bank Leumi as a conduit in transferring money
from his secret account in Israel shows his awareness of the procedure by which money
could be transferred from Israel without leaving a paper trail. Certainly, his awareness
Page 99 of 139
provides foundational support for the SEC's allegations that Sam M. was aware of the
transfer of $ 1.5 million from Israel, through Panama, to increase the comparable store
sales.
At a second meeting held in January or February, 1986, Sam M., Eddie, Allen, Mitchell,
Kuszer, and Sam E. decided that in addition to the $ 1.5 million that was to be transferred
from Israel to the comparable stores, an additional $ 500,000 would be infused into the
comparable stores. According to the testimony of Sam E., which I found to be credible,
Sam M. initially agreed to provide the $ 500,000. As it turned out, however, Sam M.
provided only $ 250,000, with Kuszer coming up with the other half. The total $ 500,000
in cash was delivered by Kuszer to Sam E. and Allen. The deposits into the comparable
stores' bank accounts were made by Allen.
Also at the second meeting, Sam M., Eddie, Allen, Kuszer, Sam E., and Mitchell agreed
to generate an additional $ 200,000 for the comparable stores by making a wholesale sale
to Gateway Marketing, Inc. A sale made to wholesale customers would not ordinarily be
credited to any particular store since the sale was executed by the wholesale department
situated in the company's main office. The $ 200,000 proceeds from the sale were
deposited into the bank account for the Crazy Eddie store in the Bronx, New York, one of
the comparable stores. Sam E.'s testimony on this point was revealing:
A. It was decided that -- well, the first meeting I previously testified that about a million
and a half dollars was contemplated to being put into the comp stores, the first meeting
amongst the six people describing the meeting at Eddie's office.
I also previously testified there was another $ 500,000 discussed at the second meeting.
With that 500,000, additional sale to Gateway was discussed to further increase the comp
store sales of Crazy Eddie without doing a cash infusion.
Gateway was a wholesaler of merchandise and we would try to sell approximately $
200,000 of merchandise to Gateway for the purpose of further inflating comp store sales
to get in the target figure to report what we wanted to -- prior to that meeting where Sam
and Eddie would sell stock -***
Q. To the best of your recollection, Mr. Antar, who spoke about the proposed sale to
Gateway at the second meeting?
A. Allen had done some of the talking because he was going to handle the sale to
Gateway.
Eddie had done some of the talking about the sale to Gateway, and I had done some
talking about the sale to Gateway.
Q. And do you recall what, if anything -- do you recall what Eddie said about the sale of
Gateway?
A. That we wanted additional -- approximately $ 200,000, maybe even more was
Page 100 of 139
discussed to be sold to a wholesaler or wholesalers to be pumped into the comp store
sales.
Q. And what do you recall Allen saying about the proposed sale to Gateway?
A. That he would take care of contacting Gateway and making the sale.
Q. What did you say about the sale of Gateway?
A. I said that -- make sure he gets booked into one of the comp stores, you know, in sum
and substance, of course.
***
Q. Was the sale actually made by the Bronx store?
A. No, it was not. It was made out of the office.
Q. And to your understanding what was the purpose of the sale to Gateway?
A. To inflate the comp store sales of Crazy Eddie's, to sell the stock.
Testimony of Sam E. Antar, Vol. 2.99-102.
Accordingly, with the Panama drafts, the $ 500,000 cash deposit, and the sale to Gateway
Marketing--and taking into account the sales tax paid on these revenues--approximately $
2 million from outside sources was deposited into the comparable stores bank accounts,
and the money was booked as proceeds of comparable store sales. This made up the
potential $ 2 million shortfall resulting from the previous year's inventory inflation.
Sam M. and Eddie achieved their targeted 14% increase in comparable store sales for the
fourth quarter of fiscal year 1986, and they duly announced this inflated result in a press
release on March 6, 1986. The actual increase in comp store sales for that quarter was
only 9.8%.
Crazy Eddie's reported 14% increase was materially false and misleading. Comparable
store sales are important in assisting investors to project future sales and earnings, and
they were relied upon by securities analysts who followed Crazy Eddie stock. Professor
Sack testified that to an average investor or professional investment adviser, the actual
9.8% increase, if reported, would have suggested a company that is growing by adding
stores as opposed to increasing sales in the existing stores. Such a condition, if known,
would have had an adverse effect on the price of Crazy Eddie stock sold to the public.
Shortly after the press release was issued, Crazy Eddie conducted a secondary public
offering in which Sam M. sold 200,000 shares of his personal holdings of the company's
stock, and Eddie sold 600,000 shares. With a per-share price of $ 26.375, Sam M. made
gross proceeds of $ 5,275,000.
Page 101 of 139
(2) Inflation of Inventories
Having sold a substantial portion of their holdings in Crazy Eddie stock, both Sam M.
and Eddie could not afford any earnings surprises. To ensure that earnings for the quarter
would be favorable, Sam M. and Eddie developed a plan to inflate Crazy Eddie's
inventories at the meeting held in early 1986. Specifically, the scheme was intended to
comprehensively inflate the inventories in the warehouse, the stores, and the returns
department. The three-pronged scheme would be executed by three groups. First,
Neiderbach and Spindler were to again inflate the warehouse inventories. Second,
Mitchell, Allen, and Kuszer were to inflate the store inventories. And third, David Panoff,
another employee of the company, was to inflate the returns inventory.
An inflation of Crazy Eddie's store inventories took place on March 2, 1986 in Sam E.'s
office at Crazy Eddie's corporate headquarters in Brooklyn. Present to carry out this store
inventory inflation scheme were Sam E., Allen, Kuszer, Mitchell, and Eddie Gindi, a
nephew of Sam M. On Sam E.'s instructions, the store managers brought the count sheets
that had been prepared in the physical inventory to corporate headquarters. The count
sheets were then altered to falsify the merchandise quantities listed on them.
On March 2, 1986, Neiderbach and Spindler--as they had done the previous year-falsified the warehouse inventories by changing the quantity figures on inventory count
sheets. Neiderbach testified at trial as follows:
Q. And what, if anything, did Eddie Antar say to you at that time about the upcoming
inventory for Crazy Eddie?
A. He had asked if I would be able to do the same thing I did the year before.
Q. And what did you say to him?
A. Again, I said I would see if I could do it, and that it depended on what the
circumstances were, when we were taking the inventory.
Q. And prior to the commencement of the inventory for the 1986 fiscal year, did you
have any subsequent conversation with Eddie Antar about the subject matter?
A. I only recall one conversation actually.
Q. Did there come a time when you were given a target to shoot for in inflating the
inventory for the 1986 fiscal year?
A. Yes. I believe that was at the conversation that we just spoke about.
Q. What did Mr. Antar say to you? What did Eddie Antar say to you?
A. The number that they were looking for was approximately 6 million at this time.
Page 102 of 139
***
THE COURT: Six million over and above what you would normally find?
THE WITNESS: Yes.
***
Q. And was, in fact, that the end result -- let me rephrase it.
As a result of the inventory that was conducted for fiscal year 1986, was the inventory
overstated by approximately $ 6 million?
A. Yes, it was.
Testimony of David Neiderbach, Vol. 19.130-132.
Neiderbach testified, however, that he did not know whether Sam M., Allen, or Kuszer
played any role in the warehouse inventory inflation scheme or even whether they knew
of the scheme. There is no indication, however, that Neiderbach would know one way or
another. Neiderbach was not a member of the Antar family. He was simply an employee
used by Eddie and the other Antar family members to execute one particular aspect of the
fraudulent schemes perpetrated at the company. He received his marching orders from
Eddie, and there would have been no need on his part to discuss the matter with anyone
else. Accordingly, the fact that Neiderbach was unable to testify as to the defendants'
participation in this particular scheme is not dispositive of the issue. Far more probative
of this issue is the testimony of Sam E. who, as discussed above, specifically placed Sam
M., Allen, and Kuszer at the meeting held in January or February, 1986 in which the
details of the frauds perpetrated that year were discussed. Therefore, while this court
agrees that Sam M., Allen, and Kuszer did not personally participate in the inflation of
the warehouse inventories, this court finds that they were fully aware of the nature and
extent of this particular scheme.
Another aspect of inventory inflation involved "reeps," which were defective
merchandise that was to be returned to the manufacturers for credit. David Panoff, upon
the instructions of Eddie and Sam E., inflated the "reeps" inventory. At trial, Panoff
described how he inflated the inventory cards for returns, as well as some "overflow"
merchandise that was stored in the warehouse:
A. I followed -- well, pursuant to the instructions that Sam E. gave me, I proceeded to
change the counts on the inventory cards by increasing the numbers on the cards which
hadn't been audited, and Sam E. told me how to follow around the certifiers of the
inventory, to make a note of the cards that they were checking because they only could
spot check the cards for counts.
So by keeping track of which numbers -- every inventory card had a unique number, so
by keeping track of which numbers of the cards they had checked, I could exclude those
from any changes, from any cards which I did change, and I did do that. I changed the
cards and the numbers -- I mean the numbers on the cards.
***
Q. Now, let me move to a different subject matter and that relates to the subject matter of
Page 103 of 139
overflow inventory. The period of time which I am referring to is the time again when the
1986 inventory was conducted and ask you to begin with, if you would, tell us what the
term "overflow inventory" means. What is it?
A. Overflow inventory was either bulk merchandise, very large size merchandise, or
merchandise which had been purchased in very large quantities, such that in both cases,
keeping that merchandise in the regular warehouse for distribution didn't make sense.
They didn't have enough space for that, so there was an auxiliary warehouse which was
on Colliers Lane in East Brunswick, and that housed both the overflow inventory and a
portion of the reeps inventory.
Q. Can you tell us whether or not you engaged -- you had a conversation with Eddie
Antar and Sam E. Antar concerning the inventory in this warehouse that you just
described?
A. Yes.
Q. Can you tell us what was said in that conversation?
A. Well, I don't recall the specifics of the conversation, but the outcome was that I agreed
to change the counts on the inventory and the overflowing warehouse.
Q. When you say you agreed to change the counts, does that mean you agreed to inflate
the counts?
A. Yes.
Q. Make it larger than it really was?
A. Right. Increase the value of the inventory.
Q. Can you tell us whether or not there was a target that you were expected to reach in
inflating the inventory?
A. I think that for the reeps department it was $ 3 million, and I think it was the same for
the overflow.
Testimony of David Panoff, Vol. 20.57-59.
Panoff also perpetrated a $ 3 million cut-off scam by creating debit memos falsely
reflecting that returns merchandise had been shipped back to the manufacturers when, in
fact, it had been left to be "double-counted" in the physical inventory. Panoff testified
that in 1986, he increased the returned inventory figures by approximately $ 7 million.
Panoff, like Neiderbach, testified that he did not know whether Sam M., Allen, or Kuszer
were involved in or were aware of this scheme. But like Neiderbach, Panoff was not in a
position to know. Sam E. was in a position to know, and he testified credibly that the
Page 104 of 139
defendants were certainly aware of this scheme as it was detailed in the meeting held in
either January or February, 1986. Accordingly, this court finds that Sam M., Allen, and
Kuszer were fully aware of the nature and extent of this particular scheme.
(3) The Wren Cut-Off Scam
It was also decided among the participants to conduct an inventory cut-off scam with a
Crazy Eddie vendor named Wren Distributors. In this scam, Wren delivered $ 2 million
worth of merchandise in February, 1986, before the close of the 1986 fiscal year. As the
defendants had arranged, however, Wren did not send any invoices for the merchandise
until after the March 2, 1986 fiscal year-end. n23 Thus, the Wren merchandise was
counted in the physical inventory taken on March 2, 1986, and because Wren had delayed
sending the invoices, the transaction was not recorded as a purchase on Crazy Eddie's
books and records. Sam E. succinctly testified as to the methodology and purpose of this
scheme:
A. Just to clarify, Wren sold Crazy Eddie merchandise. What happened was that Wren
would ship Crazy Eddie approximately a million and a half to $ 2 million in merchandise.
That merchandise would be counted as part of our year-end inventory, thereby inflating
the profits of Crazy Eddie.
The reason that it would inflate the profits of Crazy Eddie would be that the money that
we owed Wren pursuant to that shipment would not be reported until after the year ended
into the next year, so therefore, for 1986, we would only show the inventory that came
and resulted from the transaction with Wren, but not the liability that we owed Wren, not
the money we owed them for the merchandise we received from them.
Testimony of Sam E. Antar, Vol.2.129. This scheme, according to Sam E.'s testimony
and Eddie's allocution, resulted in an artificial reduction of Crazy Eddie's accounts
payable by $ 2 million.
n23 When the shipments from Wren arrived, Neiderbach removed the packing lists from
the Wren shipments and gave them directly to Eddie, rather than having them go through
the regular procedure of being entered at the warehouse. Neiderbach was instructed by
Eddie to do so to prevent the auditors from detecting the shipment from Wren.
(4) Crazy Eddie's 1986 Annual Report Filed with SEC
In fiscal year 1986, the gross total of the defendants' inventory inflations, the artificial
reduction in accounts payable, and cash infusions from outside sources was $ 16.5 to $ 20
million. After deducting $ 2 to $ 3 million for the 1985 fraud and $ 7 million for the
excessive reserves that were taken, the net amount of the inflations was $ 7.5 to $ 10
million. n24
n24 This figure incorporates certain adjustments made during the course of committing
the schemes described above. Sam E. testified that during a meeting held in March or
April 1986, Eddie decided to increase the target amounts of the inventory falsifications
Page 105 of 139
that were underway to ensure that the earnings and sales figures were on target. In
attendance at this meeting were Eddie, Sam E., Mitchell, and Kuszer. Sam E. did not
recall whether Sam M. or Allen were present. After the meeting, Sam E. continued
inflating the store inventories with Eddie Gindi until they reached the increased target of
$ 4 million. Sam E. also told Neiderbach and Panoff about the increased goals for the
warehouse and returns inventories.
Crazy Eddie's inventories, however, were inflated more than was necessary.
Consequently, Eddie and Sam E. reduced the total amount of the 1986 fraud by asking
the auditors to establish excessive reserves. Eddie and Sam E. told the auditors that they
wanted to be very conservative in reporting the financial results and to save earnings for a
rainy day. The dollar amount of the excessive reserves was $ 7 million.
Crazy Eddie filed with the SEC its annual report on Form 10-K for the 1986 fiscal year
and reported a pretax income of $ 27.3 million. This income figure was materially false
and misleading because, as a result of the falsifications described above, it was overstated
by $ 7.5 to $ 10 million.
Sam M., Eddie, Allen, Kuszer, Sam E., and Mitchell held a meeting in June, 1986 where
they reviewed what had been accomplished in the fraud. At this meeting, Sam M. voiced
his concern about retaining documents which could incriminate them in the future.
Accordingly, Sam E. saw to it that the falsified inventory count sheets and other
incriminating documents were all destroyed.
E. Fiscal Year 1987 Frauds
(1) Zazy International
Fiscal year 1987 presented Crazy Eddie with increased pressures to maintain the
appearance that the company remained a strong, growing company. Having "built" the
company on layers of fraud and deception, the Antars had long crossed the point of no
return. From their perspective, the frauds had to continue not only to show increased
profitability, but also to cover the previous years' frauds. In 1987, the Antars did not
necessarily develop new schemes to artificially raise the price of its stock; rather, they
merely applied slight variations to some old tricks. The frauds perpetrated at Crazy Eddie
during fiscal year 1987 involved mainly a scheme with a company called Zazy
International.
In May, 1986, Sam M., Eddie, Allen, Sam E., and Mitchell held a meeting where they
discussed an inflation of Crazy Eddie's comparable store sales for the first quarter of the
1987 fiscal year. At that time, the company and its underwriters were preparing a public
offering of convertible debentures. At the meeting, Eddie stated that he wanted to make
certain that the first quarter's comparable store sales figures achieved at least 10% growth
over the previous year even though actual comparable store sales were running
significantly below that level. According to Sam E.'s testimony, Eddie voiced his belief
Page 106 of 139
that hitting the 10% growth rate would enhance the benefits of the convertible bond
offering. Allen suggested that to make up the shortfall, Crazy Eddie could sell
merchandise to a transshipper named Zazy International and deposit multiple checks
from the sale into the bank accounts of the comparable stores. Zazy International was
peculiarly suited for this scheme because, as Sam E. testified at trial, it "could do a lot of
volume . . . and we could take his checks and also deposit them into the comp stores
whenever we needed to report the comp store results that we wanted to." Testimony of
Sam E. Antar, Vol. 2.159-160.
The sale to Zazy International went ahead as planned. Crazy Eddie obtained $ 650,000
worth of checks from Zazy International and deposited them into the bank accounts of the
comparable stores. The company then issued a press release reporting that comparable
store sales in the first quarter of fiscal year 1987 increased by 10%, a figure which was
false and misleading because it included the $ 650,000 worth of Zazy International
checks. The actual comparable store sales growth for the quarter was 8.5%. Following the
press release, the public offering of convertible debentures went forward as planned.
The scheme with Zazy International did not end with the convertible debentures offering,
however. Crazy Eddie sold large quantities of merchandise to Zazy International after the
first quarter of fiscal year 1987, and Allen, who was in charge of the wholesale
department, was responsible for dealing with Sasson Cohen, Zazy International's owner.
Indeed, Cohen went to Crazy Eddie's warehouse almost every day and placed orders with
Allen. Pursuant to Allen's instructions, Cohen paid for the merchandise with multiple,
undated checks in denominations ranging from $ 20,000 to $ 50,000. As Cohen testified
in the criminal case, Allen "explained" to him that Crazy Eddie was
a company that only sells to consumers and they can't show -- from a public perspective
they can't show they're selling wholesale. And if the checks are small, they could put it
through the stores of Crazy Eddie afterwards. No one would know that they're selling
wholesale.
Plaintiff's Exhibit 184, at 12.150. n25
n25 Sasson Cohen's testimony provided at the criminal trial of Eddie, Mitchell, and Allen
was admitted into evidence by this court under Federal Rule of Evidence 804.
From June, 1986 through April, 1987, Cohen delivered $ 20 million worth of Zazy
International checks to Allen. Under the arrangement they had, Cohen had to give Allen $
1 million worth of checks before Zazy International could pick up merchandise from
Crazy Eddie. Both Allen and Abraham Grinberg, the recently hired director of marketing
for Crazy Eddie, received Zazy International checks from Cohen and delivered them to
Sam E., who in turn, caused the Zazy International checks to be deposited into the bank
accounts of the comparable stores. Before depositing them, Crazy Eddie accounting
personnel back-dated the checks, usually to dates at the end of the fiscal quarters. As
Eddie Gindi testified at a deposition conducted in connection with the criminal against
Eddie, Mitchell, and Allen:
Page 107 of 139
Q. And I think you told us that . . . Sam E. would give you checks from wholesale sales,
correct?
A. Correct.
Q. Specifically from Zazy?
A. Correct.
Q. And that you can recall one instance where Allen gave you some checks, correct?
A. Correct.
Q. And that wasn't -- I mean, that wasn't out of the ordinary because you were a
bookkeeper, right?
***
A. It was -- no.
I would -- I would get the checks, but what was out of the ordinary was that they were all
Zazy checks.
Q. . . . Zazy was a wholesaler, correct?
A. Right.
Q. And that was one of Allen's wholesale accounts, correct?
A. Right.
But what was different than . . . a regular wholesale sale was that there were a bunch of
checks that weren't dated.
Q. Okay. And you took those checks then and gave them to who, Uncle Eddy?
A. No.
Q. Who?
A. I took those checks, dated them -- or me or some other people dating them -- and then
giving them to the bookkeepers.
***
Q. . . . And then, you took those checks and did what with them after you dated them?
A. After I dated them, I separated into which stores -- whatever stores that Sam E. wanted
me to deposit them into. . . . So, you know, I got four checks for Syosset, three checks for
Hartsdale, and then gave them to the bookkeepers to deposit them.
Page 108 of 139
Testimony of Eddie Gindi, May 13, 1993 at 14-16. Allen told Cohen in advance when the
checks were to be deposited.
As admitted by both Eddie and Mitchell in their allocutions, the comparable store sales
were overstated as a result of millions of dollars worth of Zazy International checks being
falsely entered as receipts from retail sales. Sam E. testified that for fiscal year 1987,
approximately $ 10 million worth of Zazy International checks were deposited into the
bank accounts of the comparable stores. n26 Of this amount, approximately $ 600,000
worth of checks alone were infused into the comparable stores during the first quarter of
the 1987 fiscal year.
n26 Although $ 10 million was infused into the comparable stores for fiscal year 1987,
the comparable store sales increased by only $ 8 million. This is so, as Sam E. testified,
because the $ 2 million inflation from the previous year had to be included in determining
the net gain of the comparable store sales.
(2) Second Quarter: Sale of Stock
In the second quarter of fiscal year 1987, the defendants inflated Crazy Eddie's
comparable store sales with $ 3.2 million worth of Zazy International checks. The
company issued a press release stating that the comparable store sales for the quarter
increased by 15% over the prior year. In reality, the sales increased by only 6.8%. A few
weeks after the press release, Sam M. sold 25,000 shares of Crazy Eddie stock at a price
of $ 33.75 a share.
(3) Third Quarter
In the third quarter, Sam E. made a troubling finding:
Q. And did you have occasion to calculate how the comparable store sales were running
that quarter?
A. Yes.
Q. What was your conclusion?
A. That for the first time that I knew about we were having negative comparable store
sales results. In other words, the comp store sales were actually declining. We have less
comparable store sales in total than we had in the previous year, and that was the first
time I could recall that happening.
Testimony of Sam E. Antar, Vol. 2.172. Sam E. feared that following public release of
the adverse comparable store sales information, the past sales of Crazy Eddie stock by
members of the Antar family would form the predicate for shareholder lawsuits alleging
insider trading. He therefore discussed the negative comparable store sales with Sam M.,
Page 109 of 139
Eddie, Allen, Kuszer, and Mitchell. Negative comparable store sales placed an enormous
amount of pressure on what was already a delicate situation at Crazy Eddie:
A. What had happened was historically Crazy Eddie, since going public, and even the
financial statements that were presented previous to going public from at least 1979,
historically Crazy Eddie had been reporting better results every year. For the first time in
our history, as far back as I can recall at that time, Crazy Eddie was having a negative
comp store sales quarter, a real negative comp sales quarter, and it just wasn't negative by
an amount that I could rectify by having more sales sold to Zazy. It was an amount too
big to be rectified, and as a result, the comp store sales would have to be reported with a
negative sales result.
Q. And at the same time period were you also concerned about insider sales and stock?
***
A. I was not only concerned about current insider sales -- insider sales of stock at that
time and into the future, but also previous insider sales of stock that had been made.
Remember when I testified yesterday that we had committed inventory fraud for the
fiscal year ending March 2nd, 1986. There was a comp store sales fraud for that same
fiscal year.
However, before that public offering on March 7th, the comp store sales figures were
released but not the profitability figures of Crazy Eddie. They were released two months
later.
Again, I was worried about not only the current sales, but also -- that it would be reported
after the fact of the previous insider sales of stock.
Testimony of Sam E. Antar, Vol. 3.6-8.
Despite these concerns held by Sam E., Eddie proceeded to sell approximately $ 20
million worth of Crazy Eddie stock on November 6, 1986. Afterwards, Eddie began
pressuring Sam E. to increase the comparable store sales to a profitable margin. Eddie
wanted the sales to increase by 5% for the third quarter. Pursuant to these instructions,
Sam E. launched a plan to "borrow" $ 5 to $ 6 million worth of checks from Zazy
International for the purpose of inflating the comparable store sales. The scheme was
cogently explained by Sam E. at trial:
A. . . . . We couldn't sell Zazy the merchandise because we couldn't take the merchandise
and we needed 5 to $ 6 million worth of sales to be deposited into the comp stores. So
what we did was, we had Zazy issue 5 to $ 6 million of checks in small denominations. I
think the lowest denomination maybe $ 10,000, and maybe the highest was 25, 35, 40,
maybe $ 50,000.
These $ 5 million worth of checks would be booked in the bookkeepers journals as if they
received these checks for that quarter. However, the depositing of the specific checks
would be held back until the -- until we actually shipped Zazy the merchandise, so, in
effect, we were borrowing his checks to book a sale, and when we later made the sale
after the quarter, we actually deposited those checks.
So what would happen would be is when you did get -- when you did the bank
reconciliation, your books would show that you have a check from Zazy for $ 50,000,
Page 110 of 139
and the bank would show it doesn't have that $ 50,000. It would be considered a
reconciling item, deposit in transit, so to speak.
Testimony of Sam E. Antar, Vol. 3.16-17. Sam E. further testified that although he
developed the idea, he discussed the scheme with Sam M., Eddie, Kuszer, Allen,
Mitchell, Abe Grinberg, and Sasson Cohen, the owner of Zazy International
In executing this scheme, Cohen, the owner of Zazy International, gave the checks to
Allen, and he and Abraham Grinberg delivered them to Sam E. Before the close of the
third quarter, Sam E. booked the checks as deposits-in-transit credited to the comparable
stores.
On December 4, 1986, Crazy Eddie issued a press release reporting that its comparable
store sales for the third quarter of fiscal year 1987 increased by 5%. This figure was false
and misleading because the comparable store sales had been inflated with $ 5.7 million
worth of Zazy checks. In reality, the sales decreased by 8 percent. The defendants herein
knew that the 5% increase in comparable store sales figure was false and misleading. n27
n27 With respect specifically to Kuszer, Sam E. testified as follows:
Q. Did Ben Kuszer also know about the 5 or $ 6 million worth of Zazy checks, to your
recollection?
A. Yes, he did.
Q. How do you know that he knew about it?
A. I had discussions with him.
Q. And where did those discussions take place?
A. At the offices of Crazy Eddie, Inc. and also at his apartment and also at Sam M.
Antar's house.
Q. And were other people present for these conversations?
A. At his apartment I don't recall anybody being present. Maybe his wife could have been
present. I don't recall particularly now, or his kids may have been present.
At Sam M. Antar's house I recall Sam M. Antar being present at least during one
conversation. At the offices I recall Mitchell present during one conversation. I know I
had several private discussions about him. From time to time he would ask how things
were doing and I would let him know how I was doing at the company.
Q. Approximately when did these conversations take place?
A. Regarding the 5 to $ 6 million increase, they took place during about November 1986.
Page 111 of 139
Testimony of Sam E. Antar, Vol. 3.28-29.
Armed with this knowledge, on December 22 and 24, 1986, Allen sold 200,000 shares of
Crazy Eddie for total gross proceeds of nearly $ 2.4 million.
(4) Fourth Quarter
By the fourth quarter of the 1987 fiscal year, the cumulative effect of the frauds
perpetrated at Crazy Eddie began to catch up with the Antar family. Sam E. informed the
other members of the Antar family involved in the frauds at Crazy Eddie that the scheme
concerning the comparable store sales had become untenable. There were several reasons
for this. First, the cumulative effect of the previous year's comparable store sales--which
had been inflated by a net amount of $ 2.1 million--required that comparable store sales
for the fourth quarter of the 1987 fiscal year be inflated to astronomical numbers. That is,
due to the previous year's inflation, Crazy Eddie had to beat the previous year's figure by
an additional $ 2.1 million to compensate for the prior inflation. Second, Crazy Eddie's
actual comparable store sales in the fourth quarter of fiscal year 1987 continued to
decline. Third, the company could not inflate the sales with Zazy International checks
because it already owed that company $ 5 to $ 6 million, which had to be "repaid" with
the delivery of merchandise.
Because of these problems, the Antars did not make a substantial effort to inflate the
comparable store sales in the fourth quarter. The sales were inflated with only $ 500,000
worth of Zazy International checks. Lacking other available means of pumping up the
figures, Crazy Eddie reported a decrease in comparable store sales of 17% to 20% at the
end of the fourth quarter.
(5) The "Gap"
In connection with an upcoming audit for fiscal year 1987, Sam E. had occasion in
November, 1986 to calculate the cumulative inflation at Crazy Eddie. Based on his
calculations, Sam E. determined that from fiscal year 1985 to fiscal year 1987, the total
amount of fraudulent inflations perpetrated at Crazy Eddie was $ 14.5 to $ 18 million.
This was referred to as the "gap". Put another way, the "gap" was the difference between
the true status of Crazy Eddie's financial situation and the fiction that was created due to
the cumulative effect of the frauds. If no additional frauds were committed by the close of
the 1987 fiscal year, Crazy Eddie would have had to absorb a $ 14.5 to $ 18 million
reduction in pretax income. In November, 1986, Sam E. spoke about the "gap" with Sam
M., Eddie, Allen, Kuszer, Mitchell, and others.
To deal with the "gap" in Crazy Eddie's financial condition, Sam E. made a three-part
proposal to Sam M. and Eddie. The first part of the plan was to have Sam M. and Eddie
secretly transfer a total of $ 5 million cash into Crazy Eddie. The second part of the
scheme was to generate an additional $ 5 million through fraudulent debit memos. n28
And third, Crazy Eddie would absorb a $ 5 million loss in earnings.
Page 112 of 139
n28 A debit memo is a document used by a retailer to charge an amount back to a vendor,
and it reduces both the account payable owed to that vendor and, for purposes of
determining the cost of goods sold, the amount of purchases for that fiscal year. The debit
memo scam was described by Sam E. as follows:
A. The company will purchase merchandise from a vendor like television sets and we
will get billed for it. So if I purchase 500 T.V.s I will get billed, say, $ 500,000 for T.V.s,
and I will have an invoice of $ 500,000 that I have to receive from the vendor and post on
the books as owing that vendor $ 500,000 until I pay for it.
A debit memo reverses out part of the money that I will owe the vendor. In other words,
maybe some of those T.V.s came in broken, and we should get a credit against that $
500,000 that we owe the vendor, so a $ 10,000 debit memo may get issued.
Maybe they overcharged us on merchandise and should have billed us for $ 490,000, and
a 10,000 debit memo might get issued. That is some of the examples of what it is. It is a
reduction of what you owe somebody.
Testimony of Sam E. Antar, Vol. 3.58-59. This description was corroborated by
Professor Sack in his testimony at trial.
The debit memos that were contemplated for the Crazy Eddie fraud in November, 1986
correlated to nonexistent discounts, such as fictitious rebate programs and fictitious co-op
advertising programs. Many of the debit memos admitted into evidence showed debit
charges for "Volume Incentive" or "Volume Program".
Throughout November, 1986, Sam E. had discussions with Sam M. and Eddie about
putting up the $ 5 million, but neither ultimately put up any money. When it became clear
that neither Sam M. nor Eddie was going to contribute his share of the $ 5 million, Sam
E. increased the target amount of the debit memo fraud to $ 10 million. Sam E. later
decided to create even more phony debit memos after his computations indicated that the
gap had grown to $ 20 million. With respect to the phony debit memo scheme, Sam E.'s
testimony was refreshingly to the point:
Q. And was there any basis and legitimate business practice for these debit memos?
A. For the phony debit memos, no. Taking a slight truth -- you are taking a slight truth
and building a falsehood on a slight truth; the slight truth being that we were very
aggressive dealing with our vendors and trying to get the best pricing we can on
merchandise; the falsehood being this was not being aggressive. This was just making
things up.
Testimony of Sam E. Antar, Vol. 3.62.
The total amount of the debit memo fraud was $ 20 million, which artificially increased
Crazy Eddie's pretax income on a dollar-for-dollar basis. This conclusion is supported not
only by the testimony of Sam E. and the actual debit memos admitted into evidence, but
also by the statements made by both Eddie and Mitchell at their respective allocutions.
Eddie admitted that "Crazy Eddie's accounts payable as of year end 1987 were
Page 113 of 139
significantly understated as a result of the creation of false documents, including false
Crazy Eddie debit memos. . . ." Allocution of Eddie Antar, May 8, 1996 at 27. For his
part, Mitchell likewise admitted that he and others executed the $ 20 million phony debit
memo fraud at Crazy Eddie's 1987 fiscal year-end. Allocution of Mitchell Antar, October
10, 1996 at 19. The effect of the debit memo scam was to reduce accounts payable from $
70 million to $ 50 million and to inflate the pretax income for the 1987 fiscal year by $
20 million.
Another scheme developed to address the "gap" was an inventory cut-off scam with
respect to merchandise delivered by Wren Distributors and Zazy International. This
scheme was conceived by Sam E., Eddie, and Mitchell, and worked as follows. At Crazy
Eddie's request, in February, 1987, Wren shipped $ 5 to $ 6 million worth of
merchandise. Crazy Eddie counted the merchandise in its year-end physical inventory on
March 1, 1987. Wren did not send any invoices for the merchandise until after March 1.
As had been done previously, the invoices were counted into the following year's
purchases, resulting in an inflation of earnings for fiscal year 1987 of $ 5 to $ 6 million.
Sasson Cohen testified at the criminal trial of Eddie, Mitchell, and Allen that in February,
1987, he was instructed by Allen and Grinberg "to bring as much merchandise as I could
until the end of the month." Plaintiff's Exhibit 184, at 12.167. Pursuant to this scheme-referred to as a "borrowing arrangement"--Zazy International delivered $ 2.5 million
worth of merchandise which was counted in Crazy Eddie's year-end physical inventory.
The invoices for this merchandise, however, were not sent. After the fiscal year, Zazy
International picked up $ 2.5 million worth of merchandise, including some of the same
merchandise originally sent to Crazy Eddie and other "like kind" merchandise.
The existence and extent of this borrowing arrangement was corroborated by the
testimonies of Sam E. at this trial and Sasson Cohen, who provided testimony under a
grant of immunity at the criminal trial of Eddie, Mitchell, and Allen. Their testimonies
are corroborated in part by the admissions made by Mitchell at his allocution. This
evidence reveals not only the existence and extent of the borrowing arrangement, but that
Allen, with the aid of Grinberg, was instrumental in implementing this scheme.
Allen, for his part, does not deny that he had a business relationship with Zazy
International. However, he denies that he was ever aware that the transactions with Zazy
International were fraudulent in any way. In essence, Allen attempts to portray himself as
nothing more than a dupe, unaware of anything and just going about his business without
any clue as to what was happening all around him. His defense amounts to nothing more
than the good soldier defense: he was just following orders and he never asked about nor
was he ever interested in the significance of the activities which he was ordered to carry
out. This is simply not credible. Allen was in charge of the wholesale operations, and in
that position, he was more than a mere dupe lacking any awareness of the extensive
frauds perpetrated at Crazy Eddie. With respect specifically to the Zazy International
borrowing scheme, Allen, along with Grinberg, was responsible for making the pricing
arrangements on the buy and send-back of merchandise, determining how Zazy
International would price the merchandise delivered to Crazy Eddie and how Crazy Eddie
Page 114 of 139
would price merchandise going back to Zazy. Allen clearly understood that the
borrowing arrangement, which he handled on behalf of Crazy Eddie, was part of a
fraudulent scheme to increase the company's inventory without a corresponding increase
in its accounts payable. Allen's blanket denials are simply unworthy of belief.
In total, the Wren cut-off scam and the Zazy International borrowing arrangement
artificially reduced Crazy Eddie's accounts payable by $ 7.5 to $ 8.5 million.
As the scams concerning Wren and Zazy International were being perpetrated, Sam E.,
Eddie, and Mitchell were also inflating the returns and store inventories. The store
inventory inflations began shortly after the March 1 physical inventory. For example, on
the afternoon of Saturday, March 7, 1987, Sam E., Mitchell, Grinberg, and Eddie Gindi
met to falsify the store inventories. According to the testimony of Sam E., Allen was
aware of the falsifications
because he would leave the office a lot with Abe Grinberg and Mitchell Antar, and
sometimes Abe Grinberg and Mitchell Antar would help or would supervise the inflation
of the store inventories to make sure that the inflations were going along according to
plan, and he would sometimes witness it.
Testimony of Sam E. Antar, Vol. 3.86. The store inventories were inflated by $ 15 to $ 20
million.
Sam E. also approached Panoff and eventually convinced him to inflate the returns
inventories. Panoff enlisted the aid of Eddie Gindi, Spindler, and Grinberg, and in one
particular instance, Mitchell. In total, Panoff enhanced the returns inventories by $ 6 to $
7 million.
(6) Total Dollar Amount of Frauds for Fiscal Year 1987
The extensive frauds perpetrated in the 1987 fiscal year had the net effect of inflating
Crazy Eddie's pretax income by $ 40.5 to $ 43 million. In its 1987 annual report on Form
10-K, the company reported income of $ 21.1 million. In reality, the company suffered a
$ 20 million loss. The reported income was materially false and misleading. The effect of
this materially false and misleading information on the investing public was explained by
Professor Sack at trial:
Q. And to your knowledge, sir, were these figures followed by any analysts who tracked
Crazy Eddie's performance?
A. Yes, sir.
Q. And what effect, in your opinion, did the income overstatement have on their
conclusions?
A. Again, they used the reported amounts to build projections for the following years and
to . . . say that the company looked like it was increasingly profitable and, therefore, a
Page 115 of 139
worthwhile investment.
Q. Now, in these two years did the company show that it was increasingly profitable?
A. 1986 is more profitable than 1985 was. 1986 is more profitable than '85 and '84 and
'83.
1987, of course, is not, but it still is a substantial profit especially when prepared to the
loss which otherwise would have been shown.
Testimony of Robert J. Sack, Vol. 9.42. In sum, securities analysts who followed Crazy
Eddie stock used the 1987 reported income to build projections for the following years
and, based on the fraudulent figures, concluded that Crazy Eddie looked like it was
increasingly profitable and therefore a worthwhile investment. The average investor
would certainly have been less inclined to invest in Crazy Eddie if the $ 20 million loss
had been reported.
The evidence also shows that Sam E. kept Sam M., Allen, and Kuszer informed as to
various aspects of the frauds perpetrated in 1987. In particular, Sam E.'s testimony
concerning Sam M.'s awareness of the frauds perpetrated in 1987 was clear and
unwavering:
THE COURT: How about conversations with Sam M. Antar? What was his mindset in
'87? Was he around?
THE WITNESS: Yes, he was around.
THE COURT: Did you speak to him?
THE WITNESS: Yes.
THE COURT: And -THE WITNESS: I told him what was going on.
***
THE COURT: How often?
THE WITNESS: Once or twice a week, or three times a week, to let him know what was
going on.
THE COURT: Where would you see Mr. Sam M. Antar?
THE WITNESS: Either at the office of Crazy Eddie, Inc., either at his home. Sometimes
I would drive him in my car.
THE COURT: Did you tell him about these various frauds, or did he acknowledge he
knew about them?
THE WITNESS: I always let him know. There will be times that I will testify to later,
that certain things I kept from him.
THE COURT: You told him about the accounts payable?
THE WITNESS: Yes.
THE COURT: Are you saying he knew about it?
THE WITNESS: He knew about it because I told him about it.
THE COURT: You told him about it?
THE WITNESS: Yes.
THE COURT: The Wren deal?
Page 116 of 139
THE WITNESS: Yes.
THE COURT: The Zazy deal?
THE WITNESS: Yes.
THE COURT: Store inventory?
THE WITNESS: Yes.
THE COURT: And the reeps cut-off deal?
THE WITNESS: Yes.
THE COURT: All of those deals he knew about because you told him about it?
THE WITNESS: From time to time I would keep him informed as to the nature of the
fraud and inform him as to various specifics as to what was going on.
Testimony of Sam E. Antar, Vol. 3.94-96.
Between July 2 through July 9, 1987, Sam M. sold 150,000 shares of Crazy Eddie stock
for gross proceeds of $ 903,125. When he did so, Sam M. knew of the fraudulent
activities which had been perpetrated at Crazy Eddie during the 1987 fiscal year and prior
thereto.
E. The Unraveling
The end of Crazy Eddie was not as much a sudden, traumatic event than a slow, lingering
death. Over a period of time, with the mounting pressures of the cumulative effect of the
frauds perpetrated at the company along with the ever-present family tension, Crazy
Eddie simply unraveled.
By all accounts, the old family tensions began to resurface sometime in late 1986. Sam
E.'s testimony on this point, which is not contested by any of the parties, is revealing:
Q. Mr. Antar in December of 1986, did you perceive that there were problems within the
Antar family itself?
A. Yes. Problems were starting to surface again.
Q. And can you describe what those problems were?
A. There started to be increasing tensions between Eddie and his brothers and Eddie and
his father.
***
Q. Did Eddie tell you why he was drifting apart from his father and his brothers?
A. He felt his father was jealous of his success because his father was considered like the
patriarch of the family, and he also felt that his father was dividing him with his brothers;
that his father wanted him to take care of his brothers with the stock.
Eddie felt as long as he took care of his own daughters, that was his obligation. Eddie had
stock when the company went public and gifted some to his daughters, and Eddie told me
that his father wanted him to give stock to Mitchell and Allen.
Page 117 of 139
Eddie told me that he told his father that is his business to give the stock to Mitchell and
Allen. He took care of his kids. "Dad, you take care of your kids," to paraphrase what
Eddie told me.
Q. Did you perceive Eddie was having problems with his first wife?
A. Yes.
Q. And did he tell you what those problems were?
A. I am not sure if that specific time he told me he was having problems with his first
wife. I know he had previous problems with his first wife. I know that the family was
upset about his life style, vis-a-vis his first wife, but I don't know if he was having a
specific problem.
I know they didn't like the fact she was separated from him, but I don't know at that
specific time if he was having any dispute with her.
Testimony of Sam E. Antar, Vol. 3.50-51. Based on these tensions, Eddie began to
physically withdraw from the affairs of Crazy Eddie. In December, 1986, he resigned as
president of the company, and in the following month, he resigned as chief executive
officer.
This is not to say that Eddie abdicated all influence and control at the company. Eddie
remained on as Chairman of the Board of Directors, and in December, 1986, he ordered
the creation of an Office of the President through which he could continue to manage the
company despite his physical absence. The Office of the President was comprised of Sam
E., Mitchell, and Isaac Kairey. While not completely withdrawing from the company,
Eddie's resignations from two key positions at the company created a new source of
tension. This fact was revealed in Sam E.'s testimony concerning Mitchell's ambivalence
towards ascending to the position of the president after Eddie's resignations:
A. Mitchell initially did not want to be the president of the company. He did not like the
fact that Eddie was leaving and leaving us with all of the work to clean up, and that Eddie
was like taking a walk and taking a hike and leaving us with the fraud and everything else
to handle, and Mitchell was upset about it.
Testimony of Sam E. Antar, Vol. 3.54.
As has been recounted above, Crazy Eddie was also experiencing mounting financial
difficulties by late 1986. These difficulties attracted the attention of shareholders, and by
January, 1987, the first of a series of shareholder suits was commenced.
In March, 1987, Sam M. resigned from the board of directors, frustrated at how the
company was being run and his strained relations with Eddie. Sam M., however,
continued to hold the position of Executive Vice-President, with an annual salary of $
200,000.
Page 118 of 139
In April, 1987, however, the situation at Crazy Eddie became far more untenable. The
impetus for the turmoil was the initiation of a lawsuit by Eddie's first wife contesting the
terms of their previous divorce agreement. The tensions within the family over Eddie's
relationship with his first wife, which had long been simmering, now came to a full boil.
Eddie fired Allen, who had originally sided with Eddie's first wife. Sam M. was also
fired. n29 Moreover, Eddie ousted his ex-wife's mother from the company and went so
far as to attempt to have her indicted for theft.
n29 Both Sam M. and Allen make much of the fact that they were fired by Eddie in April,
1987. They argue that such conduct on the part of Eddie would have been "patently
implausible" if, as the SEC alleges, Allen and Sam M. possessed damaging information
regarding the fraudulent schemes perpetrated at Crazy Eddie. This court is unconvinced
by this assertion. First, other individuals who admittedly were involved in the frauds were
also terminated. Arnold Spindler, who participated in the warehouse inventory inflations
with Neiderbach, was also terminated. Arthur Grinberg, who along with Allen,
participated in the scheme involving Zazy International, was also terminated. Indeed,
Mitchell, who pled guilty to charges involving many if not all of the fraudulent schemes
at Crazy Eddie, was also forced out by Eddie for his support of Eddie's first wife.
Moreover, it was not "patently implausible" that Eddie would fire Allen and Sam M. even
if they possessed damaging information. Indeed, there was little risk, from Eddie's
perspective, that Allen, Sam M., and the others he terminated, would divulge any
information since by doing so, they would necessarily implicate themselves in many of
the frauds.
In May, 1987, Crazy Eddie received an unsolicited offer from the Belzberg family to
purchase all outstanding shares of the company. Later that same month, a competing
offer, again unsolicited, was made by Elias Zinn, a Texas retailer, to purchase all of the
outstanding shares. Neither was successful, and the offers were ultimately withdrawn. In
September, 1987, however, Zinn, this time in partnership with a New York businessman
named Victor Palmieri, instituted a proxy fight for control of Crazy Eddie.
On November 6, 1987, Crazy Eddie's shareholders voted to remove the company's
existing management backed by Eddie. A new management installed by Zinn and
Palmieri took control of the company. n30 Soon thereafter, it discovered a $ 40 million
inventory shortfall. This estimate was subsequently increased to $ 60 million. Zinn and
Palmieri ultimately disclosed this inventory shortfall to the public.
n30 At the time the new management team took control of the company, Sam M. held
approximately 376,000 shares of Crazy Eddie stock. He argues that this demonstrates his
unawareness of the frauds at the company. It is simply implausible, he argues, that a
person with knowledge of the fraudulent schemes would hold onto his stock despite the
fact that discovery of the frauds by the new management team would send the value of
that stock plummeting. I do not find it as implausible as Sam M. contends. First, Sam E.,
who has admitted his knowledge of and participation in the frauds at the company, also
Page 119 of 139
held onto his stock until he was compelled to sell it in a margin call in October, 1987. At
the time of his termination from the company, Sam E. also held 35,000 stock options,
which he could have exercised and sold at a profit in the summary of 1987.
Second, and more importantly, holding onto this stock provided Sam M., from his
perspective, with something far more valuable than the money he could have received
from selling the stock: evidence tending to demonstrate his innocence in the frauds which
occurred at Crazy Eddie. While there is evidence to show that Sam M. did confer with the
company's attorney about selling his shares, holding onto the shares was a far more
prudent move in light of the inevitable discovery of the fraudulent activities perpetrated
at Crazy Eddie. Indeed, he had already made approximately $ 18 million from his prior
stock sales. By selling all of his shares, he would certainly have made some money, but it
would also have indicated a consciousness of guilt on his part.
Public disclosure of the inventory shortfall accelerated the civil litigation already pending
against the company. The disclosure also coincided with an investigation by the SEC,
which culminated in the present action against the defendants. The United States
Attorney's office also launched a criminal investigation into the company's business
affairs, which, as described above, ultimately resulted in the guilty pleas of Eddie and
Mitchell.
IV. CONCLUSIONS OF LAW
In its complaint, the SEC has alleged that the defendants engaged in insider trading in
violation of § 17(a) of the Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5.
Section 17(a) of the Securities Act provides as follows:
It shall be unlawful for any person in the offer or sale of any securities by the use of any
means or instruments of transportation or communication in interstate commerce or by
the use of the mails, directly or indirectly--
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make the statements made, not
misleading, or
(3) to engage in any transaction, practice, or course of business which operates or would
operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a). As a general matter, § 17(a), and indeed the Securities Act as a
Page 120 of 139
whole, "was designed to provide investors with full disclosure of material information
concerning public offerings of securities in commerce, to protect investors against fraud
and, through the imposition of specified civil liabilities, to promote ethical standards of
honesty and fair dealing." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 47 L. Ed. 2d
668, 96 S. Ct. 1375 (1976). Section 17(a) has been broadly construed to encompass a
wide range of conduct. See, e.g., SEC v. Benson, 657 F. Supp. 1122, 1130 (S.D.N.Y.
1987) (holding that omissions and misstatements about a corporation's income in
securities registration statements violated § 17(a)).
Section 10(b) of the Exchange Act provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce or of the mails, or of any facility of any national
securities exchange . . . to use or employ, in connection with the purchase or sale of any
security registered on a national securities exchange or any security not so registered, any
manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
15 U.S.C. § 78j(b). Stated simply, this provision proscribes (1) the use of any deceptive
device (2) in connection with the purchase or sale of securities, in contravention of the
rules prescribed by the SEC. The specific purpose of § 10(b) was "to protect investors
against manipulation of stock prices." Basic Inc. v. Levinson, 485 U.S. 224, 230, 99 L.
Ed. 2d 194, 108 S. Ct. 978 (1988); see also In re Phillips Petroleum Sec. Litig., 881 F.2d
1236, 1243 (3d Cir. 1989).
Pursuant to the rulemaking authority provided by § 10(b), the SEC adopted Rule 10(b),
which provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of any national
securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b-5.
Page 121 of 139
As noted by one court, § 10(b) and Rule 10b-5 have "always been acknowledged as
catchalls" to prevent manipulation and misrepresentation. SEC v. Texas Gulf Sulphur
Co., 401 F.2d 833, 859 (2d Cir. 1968) (en banc). The Supreme Court has recently
reaffirmed that under what has been termed as the "traditional" or "classical" theory of
insider trading liability,
§ 10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of
his corporation on the basis of material, nonpublic information. Trading on such
information qualifies as a "deceptive device" under § 10(b), we have affirmed, because "a
relationship of trust and confidence [exists] between the shareholders of a corporation
and those insiders who have obtained confidential information by reason of their position
with the corporation."
United States v. O'Hagan, 521 U.S. 642, 117 S. Ct. 2199, 2207, 138 L. Ed. 2d 724 (1997)
(quoting Chiarella v. United States, 445 U.S. 222, 228, 63 L. Ed. 2d 348, 100 S. Ct. 1108
(1980)); see also SEC v. Cherif, 933 F.2d 403, 408-09 (7th Cir. 1991). Section 10(b) and
Rule 10b-5 liability may also flow from "misstatements and omissions in press releases,
news articles, and quarterly and annual public filings." In re Ames Dep't Stores, Inc.
Stock Litig., 991 F.2d 953, 962 (2d Cir. 1993). As recognized by the Third Circuit Court
of Appeals, "Rule 10b-5 claims typically involve alleged misrepresentations with respect
to the merits of a particular security." Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d
939, 942 (3d Cir. 1985). Liability under § 10(b) and Rule 10b-5 is predicated on a
showing of some "'causal connection between the alleged fraud and the purchase or sale'"
of a security. Id. at 943 (quoting Tully v. Mott Supermarkets, Inc., 540 F.2d 187, 194 (3d
Cir. 1976)).
In short, the provisions discussed above prohibit a person from selling securities while in
possession of material, nonpublic information. See O'Hagan, 117 S. Ct. at 2207 (1997);
Angelastro, 764 F.2d at 942; Texas Gulf Sulphur, 401 F.2d at 848. The information that
the seller possesses while trading must be material. See Elkind v. Liggett & Myers, Inc.,
635 F.2d 156, 167 (2d Cir. 1980). Information is material if there is a substantial
likelihood that a reasonable investor would consider the information important in making
an investment decision. See Levinson, 485 U.S. at 231 (relying on TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976)); see also San
Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 810
(2d Cir. 1996) ("Material facts include not only information disclosing the earnings and
distributions of a company but also those facts which affect the probable future of the
company and those which may affect the desire of investors to buy, sell, or hold the
company's securities.").
The SEC must prove that the defendant acted with scienter. Aaron v. SEC, 446 U.S. 680,
691, 64 L. Ed. 2d 611, 100 S. Ct. 1945 (1980). To prove scienter, it must be shown that
the defendants lacked "'a genuine belief that the information disclosed was accurate and
Page 122 of 139
complete in all material respects.'" Phillips Petroleum, 881 F.2d at 1244 (quoting McLean
v. Alexander, 599 F.2d 1190, 1198 (3d Cir. 1979)). The term "scienter" includes both
knowing and reckless n31 misconduct. Hochfelder, 425 U.S. at 193-94 n.12 (noting that
scienter "refers to a mental state embracing intent to deceive, manipulate, or defraud");
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996) ("Scienter, as used in
connection with the securities fraud statutes, means . . . at least knowing misconduct."),
cert. denied, U.S. , 118 S. Ct. 57 (1997); Phillips Petroleum, 881 F.2d at 1244
("Recklessness on the part of a defendant meets the scienter requirement of Section 10(b)
and Rule 10b-5.").
n31 Recklessness, in this context, has been defined as
"an extreme departure from the standards of ordinary care . . . which presents a danger of
misleading . . . that is either known to the defendant or is so obvious that the actor must
be aware of it."
Phillips Petroleum, 881 F.2d at 1244 (quoting Sundstrand Corp. v. Sun Chemical Corp.,
553 F.2d 1033, 1045 (7th Cir. 1977)).
A. The Defendants' Sale of Crazy Eddie Stock
(1) Between September, 1984 and February, 1986, the defendants made the following
sales of Crazy Eddie stock:
Sam M.
Number of Shares Price/Share Gross Proceeds
Sept., 1984 (IPO) 300,000
$ 8.00
$ 2.4 million
March, 1985
150,000
$ 21.00
$ 3.15 million
Oct., 1985 n32 450,000
$ 12.00
$ 5.4 million
Feb., 1986
60,000
$ 26.00
$ 1.56 million
TOTALS
960,000
--
Allen
Number of Shares Price/Share Gross Proceeds
March, 1985
Feb., 1986
50,000
20,500
$ 21.00
$ 22.00
$ 1.05 million
$ 451,000
TOTALS
70,500
--
$ 1,501,000
Kuszer
Number of Shares Price/Share Gross Proceeds
March, 1985
50,000
$ 21.00
Page 123 of 139
$ 12.51 million
$ 1.05 million
n32 The October, 1985 sale was a private transaction in which Sam M. sold the 450,000
shares to Bear, Stearns & Company.
When they made the above-described sales of Crazy Eddie stock, the defendants knew
that: (a) Sam M., Eddie, and other members of the company's senior management had
engaged in a cash-skimming scheme dating back to the company's predecessors in the
early 1970's; (b) the skimmed cash was not included in the reported income for the five
years prior to the IPO; and (c) the prior five-year income figures and, consequently, the
earnings growth trend for that five-year time period were false and misleading as a result
of the cash skimming.
This information was material in that it is substantially likely that a reasonable investor
would have considered these facts important in making an investment decision.
(2) In a March, 1986 secondary public offering, Sam M. sold 200,000 shares of Crazy
Eddie stock at $ 26.375 per share, for gross proceeds of $ 5,275,000. When he sold the
stock, Sam M. knew of the pervasive level of fraudulent activity at Crazy Eddie.
Specifically, and in addition to the facts discussed in subsection (1) above, Sam M. knew
that: (a) Crazy Eddie's stated pretax income was overstated by $ 2 million as a result of
the 1985 warehouse inventory inflations; and (b) Crazy Eddie had publicly announced
comparable store sales for the fourth quarter of the 1986 fiscal year that were inflated by
$ 2.1 million.
This information was material in that it is substantially likely that a reasonable investor
would have considered these facts important in making an investment decision.
(3) On September 30, 1986, Sam M. sold 25,000 shares of Crazy Eddie stock at a price of
$ 33.75 per share, for gross proceeds of $ 843,750. When he did so, Sam M. knew the
true state of facts as described in subsections (1) and (2) above. In addition, Sam M.
knew that the company's inventories had been inflated and its accounts payable
artificially reduced in the 1986 fiscal year and that its comparable store sales in the first
and second quarters of fiscal year 1987 had been inflated through the deposit of Zazy
International checks.
This information was material in that it is substantially likely that a reasonable investor
would have considered these facts important in making an investment decision.
(4) In December, 1986, Allen sold 200,000 shares of Crazy Eddie stock for gross
proceeds of nearly $ 2.4 million. When he did so, Allen knew the true state of facts as
they existed at Crazy Eddie as described in subsections (1), (2), and (3) above. In
addition, Allen knew that Crazy Eddie's comparable store sales in the third quarter of
fiscal year 1987 had been inflated through the deposit of Zazy International checks and
that company employees had begun implementing a fraud for the close of the fiscal year
by preparing phony debit memos.
Page 124 of 139
This information was material in that it is substantially likely that a reasonable investor
would have considered these facts important in making an investment decision.
(5) In the one-week period from July 2 through July 9, 1987, Sam M. sold 150,000 shares
of Crazy Eddie stock for gross proceeds of $ 903,125. When he did so, Sam M. knew of
the fraudulent activities which had been perpetrated at Crazy Eddie as described in
subsections (1), (2), (3), and (4) above. In addition, Sam M. knew that Crazy Eddie's
inventories had been inflated and its accounts payable artificially reduced in a massive
and systematic fraud, the existence and extent of which he was informed during the
spring of 1987.
This information was material in that it is substantially likely that a reasonable investor
would have considered these facts important in making an investment decision.
(6) In sum, as a result of all of his sales of Crazy Eddie stock, Sam M. obtained gross
proceeds of $ 19,531,875. As for Allen, he obtained gross proceeds totaling $ 3,901,000.
Kuszer obtained total gross proceeds of $ 1,050,000.
(7) In the March, 1985 secondary public offering, Eddie sold an aggregate of 150,000
shares of Crazy Eddie stock on behalf of Relief Defendants Rori Antar, Sam A. Antar,
Michelle Antar, Adam Kuszer, Sam Kuszer, and Simon Kuszer, for gross proceeds of $
3,150,000. When he did so, Eddie knew of the fraudulent activities perpetrated at Crazy
Eddie and, in addition, knew that the warehouse inventories had been inflated on March
3, 1985, and that the company's inflated financial results would be publicly announced in
April 1985.
B. Remedies
(1) Permanent Injunction
The SEC seeks an order enjoining Sam M., Allen, and Kuszer from violating federal
securities laws in the future. Permanent injunctive relief is expressly authorized by
Congress to proscribe further violations of federal securities laws. 15 U.S.C. § 78u(d).
"The purpose of injunctive relief is not to punish the violator, but to deter him from
committing future infractions of the securities laws." SEC v. Bonastia, 614 F.2d 908, 912
(3d Cir. 1980). The SEC must demonstrate that "there is a reasonable likelihood that the
defendant, if not enjoined, will again engage in the illegal conduct." Id.; see also SEC v.
Materia, 745 F.2d 197, 200 (2d Cir. 1984); SEC v. Kimmes, 799 F. Supp. 852, 860 (N.D.
Ill. 1992), aff'd, 997 F.2d 287 (7th Cir. 1993). To determine whether there is a reasonable
likelihood of future violations, courts generally consider the following factors: (1) the
degree of scienter involved on the part of the defendant; (2) the isolated or recurrent
nature of the infraction; (3) the defendant's recognition of the wrongful nature of his
conduct; (4) the sincerity of his assurances against future violations; and (5) the
likelihood, because of defendant's professional occupation, that future violations might
occur. Bonastia, 614 F.2d at 912.
Page 125 of 139
This court concludes that there is a reasonable likelihood that Sam M. will commit future
securities law violations if he is not enjoined from doing so. As detailed throughout this
opinion, Sam M., as patriarch of the Antar family as well as co-founder, Executive Vice
President and director of Crazy Eddie, participated directly and extensively in the
schemes perpetrated at Crazy Eddie throughout the relevant time period. He acted
knowingly and intentionally in violating the federal securities laws over an extended
period of time, which involved large sums of money. Sam M. has never acknowledged
recognition of the wrongful nature of his conduct, maintaining throughout the history of
this litigation that he had no involvement or knowledge of what was happening at the
company. Because he has failed to acknowledge the wrongfulness of his conduct, any
attempt on his part to assure this court that he will not engage in such illegal conduct-something which Sam M. has not done--would ring hollow.
Sam M.'s business activities and relations certainly make it likely that he may engage in
future violations. Although lacking in much formal education, Sam M. has shown himself
throughout his life to be an acute businessman. Business is in his blood. This court has no
doubt that Sam M. will continue in developing businesses and in this regard, he will
inevitably be placed in circumstances where he will again be tempted with violating
federal securities laws.
Significantly, the recurrent nature of the violations of securities laws makes it extremely
likely that Sam M. may, without an injunction, commit future violations. See SEC v.
Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975) (recognizing that "the
commission of past illegal conduct is highly suggestive of the likelihood of future
violations"); CFTC v. American Metal Exch. Corp., 693 F. Supp. 168, 172 (D.N.J. 1988)
("Whether or not there is a reasonable likelihood of future violations depends upon a
consideration of the totality of the circumstances and may be inferred, or even presumed,
from past unlawful conduct, and the absence of proof to the contrary."). The violations on
the part of Sam M. were not simply an isolated act.
This court also concludes that an injunction is necessary with respect to Allen and
Kuszer. Although they may not have been as intricately involved in all aspects of
developing and implementing the schemes at Crazy Eddie as Sam M., they certainly were
aware of what was occurring, and in some instances, actively participated in fraudulent
activity. Their conduct throughout the relevant time period evidenced a high degree of
scienter. Moreover, although they did not sell as many shares as Sam M., it would be
naive for this court to conclude that the violations of securities laws were but an isolated
episode. Both Allen and Kuszer engaged in, facilitated, or were intimately aware of the
multitude of frauds perpetrated at the company.
As with Sam M., this court harbors no doubt that Allen and Kuszer will continue to
engage extensively in developing and operating businesses. Under these circumstances,
the protection of the investing public necessitates that Allen and Kuszer, along with Sam
M., be enjoined from any further violations of federal securities laws.
(2) Disgorgement
Page 126 of 139
The SEC also seeks an order requiring the defendants to disgorge all profits derived from
their insider trading activities. Courts have the authority, pursuant to § 22(a) of the
Securities Act, 15 U.S.C. § 77v(a), and § 27 of the Exchange Act, 15 U.S.C. § 78aa, to
order disgorgement of insider trading profits in an SEC enforcement action. See SEC v.
Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997); SEC v. First City Fin. Corp.,
281 U.S. App. D.C. 410, 890 F.2d 1215, 1230 (D.C. Cir.1989); SEC v. Tome, 833 F.2d
1086, 1096 (2d Cir. 1987). Disgorgement is an equitable remedy by nature, and the
district court is therefore invested with broad discretion in fashioning an appropriate
disgorgement order. SEC v. Hughes Capital Corp., 917 F. Supp. 1080, 1085 (D.N.J.
1996), aff'd, 124 F.3d 449 (3d Cir. 1997). As noted by the district court in Hughes
Capital, "'disgorgement wrests ill-gotten gains from the hands of a wrongdoer . . . [and
thus] it is an equitable remedy meant to prevent the wrongdoer from enriching himself by
his wrongs.'" Id. (quoting SEC v. Huffman, 996 F.2d 800, 802 (5th Cir.1993)); see also
SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998) ("Disgorgement is
designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating
securities laws by making violations unprofitable."). While "'disgorgement need only be a
reasonable approximation of profits causally connected to the violation,'" SEC v. Patel,
61 F.3d 137, 139 (2d Cir. 1995) (quoting First City Fin., 890 F.2d at 1231), it may not be
ordered as a punitive measure, Hughes Capital, 917 F. Supp. at 1085.
Clearly, based upon the findings of this court, the defendants must be ordered to disgorge
any profits made and any losses avoided from their trading of Crazy Eddie stock while in
possession of material, nonpublic information concerning the multitude of frauds
perpetrated at the company.
With respect to the Relief Defendants, there is no evidence that they either participated in
or were aware of the extensive frauds perpetrated at Crazy Eddie between 1979 and 1987.
This does not mean, however, that the proceeds derived from the stock of stock on their
behalf are insulated from disgorgement.
In SEC v. Antar, 831 F. Supp. 380, 398 (D.N.J. 1993), a case brought by the SEC against
Debbie I and her children, the court recognized that "where a federal court has subject
matter jurisdiction, it has the authority to grant the full panoply of equitable remedies so
that the plaintiff can obtain complete relief." Included within the panoply of equitable
remedies are constructive trusts and disgorgement of unjustly retained wealth, described
by the court as "longstanding remedies that are within a court's equitable powers." Id.
The court further recognized that Supreme Court jurisprudence had interpreted securities
statutes to confer jurisdiction over claims against non-violators. In Deckert v.
Independence Shares Corp., 311 U.S. 282, 288-89, 85 L. Ed. 189, 61 S. Ct. 229 (1940), a
case concerning the Securities Act, the Court held that federal courts had jurisdiction over
a claim in a securities fraud action seeking relief from a non-party who held funds sought
by the plaintiffs, even though the Securities Act did not contain express language
conferring such jurisdiction over non-parties. The Antar court stated:
Page 127 of 139
"That it does not authorize [a] bill [in equity as to third parties] in so many words is no
more significant than the fact that it does not in terms authorize execution to issue on a
judgment recovered under [the statutory provision authorizing the private right of
action]." In the Supreme Court's view, jurisdiction over third parties was properly based
on the intention underlying the "Act as a whole" and the unavoidable implication that the
Act intended "the power to make effective the right of recovery afforded by the Act."
831 F. Supp. at 399 (quoting Deckert, 311 U.S. 282 at 287-88).
Similarly, in SEC v. Cherif, 933 F.2d 403, 414 n.11 (7th Cir. 1991), the Seventh Circuit
Court of Appeals noted:
A court can obtain equitable relief from a non-party against whom no wrongdoing is
alleged if it is established that the non-party possesses illegally obtained profits but has
no legitimate claim to them. Courts have jurisdiction to decide the legitimacy of
ownership claims made by non-parties to assets alleged to be proceeds from securities
law violators.
In discussing Cherif, the Antar court concluded that the "touchstone for jurisdiction is
whether the non-party's claim to the property is legitimate, not whether the party is
innocent of fraud or wrongdoing." 831 F. Supp. at 399; see also International Controls
Corp. v. Vesco, 490 F.2d 1334, 1351 (2d Cir. 1974) ("The district court had ample
power, as a court of equity, to reach [a non-violator's] assets under the jurisdictional
purview of the 1934 Act.").
One method by which the SEC may reach the illegally obtained proceeds of fraudulent
stock sales is the doctrine of unjust enrichment. To recover under this doctrine, "a
plaintiff must establish that the defendant was enriched and that 'the circumstances
dictate that, in equity and good conscience, the defendant should be required to turn over
its money to the plaintiff.'" Antar, 831 F. Supp. at 402 (quoting Universal City Studios,
Inc. v. Nintendo Co., 797 F.2d 70, 79 (2d Cir. 1986)).
As discussed previously in this opinion, in the March, 1985 secondary public offering,
Eddie, knowing of the myriad of frauds perpetrated at Crazy Eddie, sold an aggregate of
150,000 shares of Crazy Eddie stock on behalf of Relief Defendants Rori Antar, Sam A.
Antar, Michelle Antar, Adam Kuszer, Sam Kuszer, and Simon Kuszer, for gross proceeds
of $ 3,150,000. This court therefore finds that the Relief Defendants do not have a
legitimate claim to the proceeds derived from the March, 1985 sale of stock made on
their behalf by Eddie. The Relief Defendants should not be permitted to retain funds
derived from the multifarious frauds perpetrated at the company, primarily at the
Page 128 of 139
direction of Eddie. While there is no allegation that the Relief Defendants either
participated in or were aware of the frauds, their enrichment came at the expense of
defrauded investors, and thus, equity mandates that the interests and rights of the victims
take precedence.
In sum, this court will order full disgorgement of profits from Sam M., Allen, Kuszer,
and the Relief Defendants. n33
n33 In its Amended Complaint, the SEC also sought an order enjoining Sam M. from
serving as a director or officer of any issuer of securities. The SEC has apparently
determined not to press this issue, as it has not been presented as an issue in the Final
Pretrial Order nor included in its Proposed Findings of Fact and Conclusions of Law.
C. Conclusion
For the reasons stated above, the court finds in favor of the SEC on all claims.
Defendants will be permanently enjoined from future violations of federal securities laws.
Defendants and Relief Defendants will further be ordered to disgorge all profits from the
above-described illegal transactions.
Counsel for the SEC is directed to submit to the court on fifteen (15) days notice a
proposed form of order in accordance with this opinion.
Page 129 of 139
SEC and PCAOB Roundtable on Internal Control Reporting
Requirements: My submission entitled, “The Implications
of the Crazy Eddie Fraud for 21st Century Auditing
Practices.”
Note: I have corrected some typos from the original submission to the SEC.
April 28, 2006
Nancy M. Morris
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20649-1090
Re: SEC and PCAOB Roundtable on Internal Control Reporting Requirements
Rule Comments File Number 4-511
The Implications of the Crazy Eddie Fraud for 21st Century Auditing Practices
I am the former Chief Financial Officer of Crazy Eddie, Inc., a now-defunct
chain of consumer electronics stores in New York and New Jersey whose
common stock began publicly trading in September 1984. Along with my
cousin Eddie Antar, his father Sam M. Antar, and other members of Eddie's
immediate family, I helped to mastermind one of the largest securities
frauds perpetrated in the 1980's. The notoriety of this case has continued
into the 21st century. "Crazy" Eddie Antar, dubbed the "Darth Vader of
Capitalism" by the then-United States Attorney Michael Chertoff (now the
Secretary of Homeland Security), has left a legacy of fraud that has
important implications for today's auditing practices.
The Crazy Eddie fraud and others like it were prime reasons for later reforms
like Sarbanes Oxley, the formation of the Public Company Accounting
Oversight Board (PCAOB) and stricter auditing standards in general. The
brazen and unprecedented methods used in the Crazy Eddie fraud to subvert
standard auditing procedures are still instructional today and should be
considered in the context of recent reforms.
My employment at Crazy Eddie began in 1971 at the age of 14, when I was
hired by Eddie Antar as a janitor and stock boy in one of the stores. From its
Page 130 of 139
inception, Crazy Eddie ran a cash-based business, and my starting salary
was $10 a day off the books. I was interested in numbers and statistics from
a young age and was an avid reader of the Wall Street Journal and Barron's
from the age of 13. Hoping to keep all aspects of the Crazy Eddie business
within the Antar family, which was very tightly knit, Eddie paid my way
through college with a view of making me the "numbers man" of the
operation.
With a degree in accounting from Bernard Baruch College, I passed the CPA
exam in the top 98th percentile in 1980. While I was in college, Crazy Eddie
retained a small accounting firm to audit its books and records, and was the
firm's largest client. To complete the two year audit experience requirement
for my CPA license, I went to work for this firm from 1981 to 1983, while
continuing to work part-time at Crazy Eddie, where I helped to skim cash
sales receipts, particularly during the busy holiday season. Through my
position at the accounting firm, I had access to the audit work papers for the
Crazy Eddie audits.
The culture of tax evasion was prevalent from the onset at Crazy Eddie. Our
philosophy was that the government was not entitled to any taxes that we
could hide from it. The family's choice to hire a small accounting firm to
audit the company's records was motivated by the fact that Crazy Eddie was
engaged in a massive skimming fraud. We also perpetrated other forms of
tax evasion, consumer fraud, and insurance fraud.
From 1979 to 1984, Crazy Eddie gradually reduced its skimming each year
to create artificial profit growth in the years prior to its initial public offering.
It in effect created a fraud by "going legitimate." I was learning from our
own accounting firm the methods by which our records were audited and
reporting this information back to the family so as to better subvert our
auditors.
By 1984, Crazy Eddie had gone public and had hired the ninth largest
accounting firm in the world to audit its records. We chose this firm because
the company almost completely lacked internal controls and had no chief
financial officer. My father, Eddy Antar, who had a high school education,
was the Treasurer. Despite an article published in Barron's criticizing the
company, Crazy Eddie went public and became the darling of Wall Street.
The company's $40 million capitalization at the time of the initial public
Page 131 of 139
offering grew to a $600 million market capitalization, built completely on
fraud.
I received my CPA license in 1985 and became the Controller of Crazy Eddie
that same year. In 1986, I was appointed Chief Financial Officer.
As a public company, we overstated our profits (rather than understate them
as a private company so as to underpay taxes), to increase our reported
earnings to shareholders and inflate the market price of Crazy Eddie stock.
Eddie, Sam M. Antar, and other family members sold over $100 million
dollars in inflated and worthless stock. I never made a profit selling Crazy
Eddie stock.
During the period from 1984 to 1987, we overstated the values of our
inventories, understated how much money we owed our creditors and even
put some of the previously skimmed money back into the company to
overstate the earnings of Crazy Eddie. We committed a host of other frauds
too numerous to list here as well.
The auditors failed to do fundamental audit work which would have
uncovered at least some of the fraud, such as sales cut off testing, aging
accounts payable and adequate substantive testing. In the last two years
(1986 & 1987) under Antar family control, the auditors failed to be present
at all of the inventory locations, leaving Crazy Eddie employees alone to take
inventories at year end for many of the store inventory locations. In the last
year of the audit, they left the key to the supposedly secure audit work in a
paper clip box on an office desk at Crazy Eddie premises at night.
Sarbanes Oxley
Many accounting firms have lobbied claiming that consulting services help
them understand their clients better. My experience from Crazy Eddie has
shown me that this was simply untrue, since both accounting firms that used
to audit the company provided consulting services far in excess of their audit
work. In fact during the last two years of the Crazy Eddie fraud, when the
largest part of the fraud was perpetrated, in terms of overstatements of
earnings, the large accounting firm had consulting personnel at Crazy Eddie
almost every day.
There have been people advocating exempting or relaxing Sarbanes Oxley
regulations for companies with small market capitalizations (under $125
Page 132 of 139
million). As stated previously, Crazy Eddie went public with a market
capitalization of $40 million (already built on a skimming fraud) and its
market capitalization eventually rose to over $600 million in less than two
years. Therefore, Crazy Eddie would have been subject to the SOX
exemption when it went public.
Sarbanes Oxley - Review of Internal Controls
Many critics of SOX have argued that internal controls are too costly for
small companies. The auditors of Crazy Eddie tried to remedy the situation
by doing a so called "substantive audit" with no reliance on internal controls
since the company's internal controls were very poor. While in theory you
can conduct an audit without reliance on internal controls, the absence of
adequate internal controls poses the problem of making almost all
companies difficult or virtually impossible to audit. Therefore, the review of
internal controls of a company by independent outside auditors is crucial for
effective auditing. It is evident that a company must have a viable system of
internal controls to be auditable. Both items are not mutually exclusive.
In many instances I found that the size of the accounting firm had no
bearing on their ability to conduct an audit. The accounting firm that ranked
number 9 in the world and audited Crazy Eddie from 1984 to 1986 merged
into a "Big Eight" firm in 1987 (a ‘big four" firm now) the last year of our
fraud. Ultimately, the Crazy Eddie fraud was not uncovered by the
company's auditors but as a result of informants due to family infighting.
Auditors' Lack of Investigative Skills
I found that the auditors of our accounting firms in many cases did not know
how to ask the right questions. When they did ask the right questions, they
did not know how to formulate the proper follow up questions and were
often too trusting of the answers they received. Many of the auditors were
not educated or trained well enough for their assignments. In point of fact,
accounting students are not trained to conduct field interviews in college and
there are no prerequisites for interviewing skills or education level to obtain
a CPA license.
As a CPA, I used my familiarity with accounting practices to outwit and
mislead the auditors. I also counted on the weakness of human nature.
Auditors do not want to believe their client is committing a crime.
Page 133 of 139
For example when we had converted our "off the books" payroll to a fully
"on the books" payroll prior to our initial public offering, the auditors noticed
many people who had been working for only $5,200 per year now being paid
$52,000 or more per year. They simply accepted our explanation of the
sacrifice and dedication of these employees, due to their investment in the
future growth of a growing public company.
In 1987 I simply changed two words in the footnotes of our disclosure
regarding the treatment of trade discounts and allowances to being
recognized "when earned" rather than "when received", making them
accounted for on a cash basis. I had discussed this change with the auditors
but there was no accounting change adjustment as required under generally
accepted accounting principles (GAAP). The Wall Street analysts and the
investing public did not notice required accounting adjustment under GAAP.
Auditors' Inexperience
I found that in many cases, auditors lacked the experience to handle their
field assignments. For example, the person who handled most of the
auditing for Crazy Eddie's accounts payable in 1987 had only six months'
experience in accounts payable and finished his work after the audit was
signed off. The auditor found major discrepancies in these records (which
were later found to be fraudulent in the SEC and FBI investigation), but
never investigated them during the audit. As a result, Crazy Eddie's accounts
payable was understated by 40% that year.
Accounting Education
Even today there are many complaints by companies and critics of Sarbanes
Oxley relating to the auditors review of internal controls in that they are
merely filling in boxes in their work papers. Like the auditors of Crazy Eddie,
today's auditors have not been adequately prepared for conducting these
reviews.
The solution is very fundamental. It is about education. Competence cannot
be legislated, though it can be learned. Sarbanes Oxley, the PCAOB and new
accounting regulations instituted by the American Institute of Certified Public
Accountants (AICPA) (SAS Number 99, for example) have placed much
emphasis on internal controls and detecting fraud. A significant majority of
accounting students still do not take a single dedicated college level course
to gain a complete understanding of these new requirements. They are often
Page 134 of 139
simply learned as part of a general auditing course and are covered within a
day or two of the semester.
Legislation such as Sarbanes Oxley cannot be effective unless it is properly
incorporated into the education of accounting students. As the future
auditors of modern businesses, these students simply do not have enough
education on issues such as white collar fraud, internal controls, securities
laws, accounting standards, and auditing standards and techniques.
Most accounting students do not take a single college level course on white
collar fraud, internal controls, securities law, insurance, sureties, estates,
etc. In fact, many of the subjects that are tested on the CPA exam are not
covered in college. They must "learn" these subject areas in a CPA exam
(cram) review course after they graduate.
Criminology and criminal psychology courses are almost nonexistent within
the context of an accounting education. A minority of universities and
colleges offer a specific white collar fraud class today and most of those
schools offer it as an elective course. Students are not even taught how to
ask proper questions or conduct field interviews. Criminology and interview
skills are not covered on the CPA exam. How can the auditors expect to
match the wits of criminals who actively engage in committing white collar
fraud?
The lack of education on these substantive issues is all the more disturbing
given that the required amount of credits to receive a CPA has since been
increased from 120 credits to 150 credits. The requirements for passing the
CPA exam have also been relaxed in many states.
The AICPA only "suggests" that CPAs take 10% of their mandatory
continuing education credits in fraud related areas without making
distinctions pertaining to an accountant's main areas of work.
In sum, the profession is not adequately educated, trained, and skilled to
deal with individuals who are intent on evading the law. I strongly suggest
that the SEC and the PCAOB establish higher minimum education, skills, and
training standards for accountants who conduct public company audits and
evaluate such internal controls. In addition I strongly suggest that the AICPA
establish higher minimum education, skills, and training standards for
accountants who conduct private company audits and evaluate such internal
controls.
Page 135 of 139
The system for educating our future CPAs must be reformed and upgraded
or the new reforms such as Sarbanes Oxley will be of very limited value. The
college curriculums and continuing education standards must be improved.
In the CPA Letter, published by the AICPA, in January 2003 an article said,
"Sam Antar, a former CPA with the now-defunct Crazy Eddie's electronics
chain, would be the first to agree that CPAs need to learn more about fraud.
That's because Antar, now a convicted felon, helped engineer a half-billion
dollar financial statement fraud that was made possible by taking advantage
of the company's independent auditors."
With the requirements of Sarbanes Oxley and new auditing standards such
as SAS Number 99 and the lack of corresponding education, training and
skills for our accountants, professionals are being sent into the field without
being properly equipped to implement these standards.
Today, there has been a multitude of company restatements of financial
reports, the PCAOB has reported too many issues relating to weaknesses in
its review of audits conducted by many accounting firms, and far too many
frauds are uncovered years after the fact, once significant damage has been
done. This evidence casts a poor reflection on both company professional
accounting staff (since many internal accountants go through the same
education curriculums as CPAs and are CPAs) and external auditors and
signifies a lack of proper education, training, skills, and internal controls.
Auditor Independence, Criminal Psychology, and Audit Costs
Today, the Crazy Eddie fraud is referenced is many publications, textbooks
and theses and is also included in many university curriculums. Many people
have wondered whether the long enduring success of the Crazy Eddie fraud
was due to the criminal subversion of the Antar family or the incompetence
of the auditors involved. People have also speculated as to whether the
independence of the auditors was impaired because of the extensive
consulting work that Crazy Eddie gave them, which served as a significant
source of revenues.
I have many answers. With regards to the small firm we used for many
years my cousin Eddie always liked the fact that he was their biggest client
of which they derived significant revenues as a means of deriving indirect
undue influence. Regarding both the small and large accounting firms, as
criminals taking advantage of human nature we believed our largess made
Page 136 of 139
them less likely to ask the tough questions. Maybe they were embarrassed
or maybe their economic self interest of losing high paying consulting
agreements played a role. Instead did they not have the education, training,
and skills I am advocating or were they plain stupid?
What is known is that it was common practice in the profession at the time
to "loss leader" the audits fees, or have low margins of income on these fees
and make it up with other business. Perhaps this is one unspoken reason
today (in addition to litigation costs absorbed by accounting firms) why
auditing fees have escalated as they have.
Understanding White Collar Fraud, Criminality, Consulting Work
I also knew that the lack of basic education on the part of the auditors,
regardless of how much consulting work they did with the aim of "knowing
the client", would make them essentially incapable of detecting the
fraudulent techniques that we employed. They knew nothing about
criminology. They could not fathom that their clients were committing
frauds.
They ignored signs like insiders selling their stocks at almost every
opportunity and the outlandish answers they received to their infrequent
good questions which were never followed up.
Preventing White Collar Fraud
Recently, many white collar criminals have received very stiff sentences,
which I firmly support. However, this is not a material deterrent to crime,
but rather a society's policy for dealing with the consequences of those
found guilty of it. A substantial majority of white collar crimes are committed
by people without prior criminal records.
Since being released from prison, Barry Minkow (ZZZZ Best Fraud), now a
pastor, respected community leader, author, and private investigator, has
helped the government uncover billions of dollars in fraud. He was once
aptly quoted in The Guardian on July 11, 2002 as saying, "Everyone I met in
prison had one thing in common - they never planned on being there."
White collar crime will continue to be a fact of society. It is only a matter of
how often these crimes will be brought to justice based on the diligence of
those who are properly trained. It will be either more noticed or less noticed.
Page 137 of 139
Crazy Eddie was not the exception to the rule, but, rather, a small case,
although highly sensationalized for the time, relative to today's fraud
headliners such as Enron, WorldCom, Tyco, and others. This is only proof
that the lessons demonstrated during a time when fraud occurred on a much
smaller scale still have not been inculcated. My lack of prior criminal
engagement is also not exceptional since over 88% of white collar fraud is
committed by people without prior criminal records. Do students or audit
staffs know this?
To deter this form of crime, companies need to build better barriers through
strong internal controls. We require an accounting profession with a higher
level of education, training and skills that is strongly independent from its
clients.
We need the implementation of laws like Sarbanes Oxley. Better internal
controls for corporations, are not just a means of combating fraud but are a
matter of good business practices in general.
According to an article published in the New York Times on December 3,
2005,"For all its cost, Sarbanes law is working," by Joseph Nocera:
John J. Mahoney, the chief financial officer at Staples, which has a market
cap in excess of $16 billion, has spent $7 million to $10 million instituting
Sarbanes-Oxley. "But it's been worth it. It has offered us an opportunity to
look at our processes, and in many cases to improve them," he said. "We
found that our people really benefited from the processes." He concluded:
"It has made Staples a better company."
One simple lesson from the Crazy Eddie fraud that can be learned is that
companies who get capital from the public markets (public companies) have
a sacred fiduciary duty to their investors and creditors to have strong
internal controls that are verifiable and reviewed by well qualified, truly
independent auditors. Private companies, too, owe the same duty to their
creditors and shareholders.
Strong internal controls, auditor independence, accounting education, and
the integrity of financial reporting are the four main pillars to the soundness
of our financial reporting system. They must all work in conjunction for
accounting standards to be properly implemented.
Page 138 of 139
Importance of Integrity of Financial Information to Survival of our Capitalist
Free Market Economic System
The main pillar of our capitalistic free market economic system, which is a
cornerstone of democracy, is the integrity of financial information. Without
reliable financial information, capitalism cannot and will not survive.
However, the integrity of financial information can only be achieved through
building blocks such as sound internal controls and independently verifiable
financial information. The well educated, skilled, and experienced accountant
is the first line of defense for the capitalist system.
Sarbanes Oxley is the Beginning of the Solution
Sarbanes Oxley should only be considered a first step in a much more
complex process towards improving a system of internal controls and, by
default, the integrity of financial reporting. Let us start the process of
making stronger the corporations, which is at the heart of our economic
system.
Respectfully submitted,
Sam E. Antar
Former Crazy Eddie Chief Financial Officer
Page 139 of 139