A company's escalating financial fraud, initially concealed by falsified reports, becomes increasingly difficult to hide as it impacts operations, leading to internal dissent and a desperate attempt to secure external investment to mask the ongoing losses.
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to cover up the continuing losses pad
Finn was now faxing falsified Financial
reports to the board of directors and to
David shapira every
week but in November of 1990 a secretary
mistakenly faxed a report with the real
numbers to shapira here in black and
white was a report which no CEO could
ignore when he saw these startling
numbers shapira summoned Pat Finn to his Pittsburgh
Pittsburgh
offices Pat Finn told David shapir that
you know everything uh those are just
preliminary numbers we have to make some
adjustments to them and once we make the
adjustments to them then they'll they'll
be okay in the end the CEO of pharmore
failed to check the figures
independently he seems to have bought
Pat Finn's excuse now remember we're
three years into the fraud is CEO David
shapira really as gullible as he seems
well a cynic might say that considering
shapira's huge personal stake as a major
share shareholder in pharmore he
believed Finn because he wanted to after
all he'd put his money on Mickey monus
just like Pat Finn the people of
Youngstown the banks vendors and
investors but what none of them knew was
made the deficits continued to grow and
knowledge of the fraud was now about to
extend to another member of the company
Stan chlin joined farmer in 1990 he
quickly Rose to the position of
controller a job that placed him in
charge of all cash
dispersements well I I learned about the
fraud almost two years after my joining the
the
company that's when John Anderson took
me into his office and closed the door
and told me that well you're the
controller for Farm War now and and you
should be aware of this situation and he
pulled out a subledger
schedule and uh told me basically that
the financial statements at the end of
June 1991 were misstated by
million if anybody was likely to blow
the whistle it would seem to have been
the newcomer Stan cherelstein but he
didn't he too was persuaded to tow the
line I felt that through exclusivity
money through perhaps raising the prices
I felt that there were some options at
that point that Pat and Mickey had
available to them to correct the
situation and that's why I stayed on
with the company and that's why I never
told another Soul uh that coupled with
uh a fear that I I believe I had at the
time that maybe if I did go over their
heads maybe some harm could come to
myself physical harm physical harm I
would go back there
John Anderson had spent much of his
four-year career inside the fraud
cherelstein was the closest thing he'd
found to a moral
compass he was able to make a lot of
sense of things
and you know seem to to Give opinions
and and seem to say that no this is not
the way it should be we should be doing
things this way or know that is
absolutely wrong and
um he was was in there actually trying
to to fight and trying to change things
and um it just you know was up against a brick
brick
wall hiding the fraud was becoming more
and more of a problem the company was
frequently strapped for day-to-day cash
bills went unpaid for months we had
cabinets stuffed with held checks at the
company that had been generated out of
the accounts payable system but we
couldn't mail them because if we mailed
them the checks would have bounced so
they kept accumulating and accumulating
by the spring of 1991 farmer was holding
back $155 million it owed to vendors
they retaliated by halting shipments to some
some
stores Shoppers began to notice an
unusual site empty shelves an image at
odds with Farm more TV ads which
promised customers everything that's
Farm more continued to live in its dream
world even though CEO and board member
David shapira knew about most of the
held checks discover how far More's
power buying gives you far more buying
power so what was more important to
shapira and the directors than pressing
for explanations perhaps selling farmor's
farmor's
stock the prestigious New York
investment firm corporate Partners makes
large Investments on behalf of state and
corporate Pension funds Farm more had
caught their eye because if it kept
growing it would be a great candidate
for selling its shares on the New York
Stock Exchange
the company was growing and had hoped to
go public at some point and by having a
reputable uh investment firm make a
sizable investment would give a lot of
credibility to the company and its stock
for a future public
offering the stakes were substantial
once pharmore went public monus Shapiro
Finn and everyone else with a piece of
the company figured to realize the
entrepreneurial dream cashing in Big
Time corporate Partners wanted to invest
$200 million
but first quite naturally they would
send in their own accountants to check
the books charity imry farmor's legal
council had been asked to watch over
monus by farmor's CEO David shapira
afraid monus might jeopardize the
corporate Partners deal but in the
process imry picked up some alarming
scuttlebutt a farmor vice president told
her that some vendors were refusing to
supply stores because bills were going
unpaid imry documented her concerns in a
confidential memo to David Shira
covering everything from disgruntled
vendors to cash flow problems what did
the CEO
do he told her to rip it up imry chose
to keep one copy anyway and at the
bottom she noted what shapira had said
that quote he was aware of most of the
items listed in this memo and that quote
it was particularly important to rip it
up now because of pending financing
stock sale with CP that is Corporate partners
partners
if they went ahead with their stock
purchase corporate Partners would own
177% of farm more David shapira stood to
make more than $2 million on the deal
Mickey monus an even million shielded
from the rumors corporate Partners saw
only farmor's commanding role at the
convention and they were suitably
impressed I think what they saw was what
everybody else saw on the outside this
company with this unique buying
philosophy and buying ability and low
prices and and rapid growth coming from
nowhere to $3 billion in sales in in
record time and the Mystique that it was
taking over the Deep Discount world and
and they were going to end up on top of
the whole Heat by the time it was done 4
Weeks Later corporate Partners announced
their $200 million investment in
pharmore the official story was that
this would give pharmore the much needed
cash to continue its aggressive growth
plans but there were more pressing needs
for the money than growth or even
covering the fraud
much of it had to go first towards
paying off angry
vendors had corporate Partners known
that their money was going to be used to
pay Revlon and Proctor and Gamble and
Helen Curtis invoices from 3 four months
ago I don't think they ever would have
invested in the company but they didn't
know nor did anyone else Farm more was
now in the hole by 145 Mill
but Pat Finn was becoming more and more
anxious according to Finn monus had now
distanced himself from managing the
fraud which required more attention than
ever and Finn was stuck with the
responsibility of Designing new ways to
cover it up my energy and people who
work for me was going
to cover up a situation and it really
wasn't going towards uh making farmer a
better company and that really hurt and
I think we we all long for the day that
we could just kiss this goodbye and just
dedicate ourselves to making the company
better but if Finn still harbored some
hope chlin and Anderson had lost the
last shred of
Faith John and I continually talked
about the the fraud and what we were
going to do to resolve it we had these
discussions probably every day for lunch
and Pat was aware that we were talking
about it all the time and he knew that
we were nervous and it was those
concerns that we brought to Pat's
attention that really forced the April
meeting Finn now went to monus and told
him the junior Executives were
threatening to quit if something wasn't
done to address the
problem a meeting was set for a Saturday
morning in April of '92 cherelstein was
especially worried that if the fraud
were discovered monus could lay blame on
the accounting department so I went into
the April
meeting knowing
that I didn't want the situation blamed
on me cuz I had just arrived six months
earlier so I decided to tape it we're
getting real close to audit time here
right and we got some major problems on
right and now we're talking about how to
cover it next year that assumes we get
do an audit and you know I'm on the
front line out there I know that with
these Auditors and if something comes
out the light I'm there first and I got
to sit down try and cover this stuff
some comes out going to have to get the
T but the numbers are just uh well
problems are multiplying and the numbers
are multiplying yeah to get through the
audit else to tell that's we got to
do we a good spot here obviously keep
our fingers cross and get through it and
get the number
down leaving that
meeting you know there was a very
discouraging um a feeling a sense of
almost that um you know whatever the
guy's saying probably is not going to
happen Mickey's personality is he's in
essence he's a
gambler uh if he loses a bet he's going
to double up on the BET to hope hope
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