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Path: utzoo!dciem!ntt
From: ntt@dciem.UUCP (Mark Brader)
Newsgroups: net.legal
Subject: Re: Insurance question: Equity Funding Corp. of America
Message-ID: <645@dciem.UUCP>
Date: Mon, 23-Jan-84 15:02:18 EST
Article-I.D.: dciem.645
Posted: Mon Jan 23 15:02:18 1984
Date-Received: Mon, 23-Jan-84 15:48:16 EST
References: <319@pyuxbb.UUCP>
Organization: NTT Systems Inc., Toronto, Canada
Lines: 57

pyuxbb!drew (R. Drew Davis) asks:

     I recall a great fraud case in the reinsurance business that came
     to light a few years back:  an insurance company was selling off
     trumped up policies to reinsurers.  Thanks to the clever use of computers,
     the company was able to keep up payments & make a few claims to get
     some money back, but not enough to raise anybody's suspicions.
		...
     Anybody remember a few more details about that case?

This was the Equity Funding scandal.  My information about it comes from
Thomas Whiteside's book "Computer Capers" (1978).  The object of the fraud
was to raise the price of Equity's stock by creating a false impression
about the company's profitability.  The use of the computer was not really
particularly sophisticated; the bankruptcy trustee described it as a securities
fraud rather than a computer fraud.  In fact, at first the computer was not
used at all.  Auditors and reinsurers would require original documentation for
the policies, and this was produced at "fraud parties" in the evenings at the
company headquarters.  The fake policies were based on real ones with
minor modifications.  Also at the "fraud parties", some of the nonexistent
policyholders would be declared to have died, and when the reinsurers paid the
claims, this money would go to the company as earnings.  The total of these
claims was $1,175,000.  In a "computer fraud within a computer fraud", $144,000
was embezzled directly by some of the conspirators without knowledge of their
leaders!
   Now, as I said, the main objective of the scheme was not these false claims
but to make the company seem profitable.  The reinsurance company was entitled
to receive premiums paid by the policyholders after the first year.  To get
this money, Equity Funding simply increased the number of false policies that
they sold to reinsurers each year: a pyramid scheme.
   In 1971 the fraud had been operating for a couple of years, and they
estimated that they would require 20,000 to 50,000 false policies that year,
which was really too many to produce manually.  So at this point the computer
began to be used for this.  Whiteside does not make clear to what extent the
computer helped in generating the false data.  Where it was helpful was in
audits: when the auditors asked for supporting documents on random policies,
the computer would flag the fake ones, and the files would be "currently
being used" until the necessary documents could be synthesized by the fraud
staff.
   The scandal finally broke in 1973, by which time there were 64,000 false
policies as against only 33,000 real ones; $185,000,000 of reported assets
were nonexistent.  And how were they caught?  A former employee told the story.
Later there was also a tipoff from the inside that enabled the authorities to
take charge of the computer center before the tapes could be erased.

     One thing that bothers me is that I never heard of any programmers getting
     charged in that case.  It sure sounds to me like the executives who ran
     the insurance company would have needed some technical support.  Its
     hard for me to see how the programmers could have worked in ignorance
     of what was going on.  ("I was only following orders."?)

Whiteside says that the chairman of the board and several other officers
were convicted, and doesn't mention others.  It's an interesting point.
Since the computer side was relatively simple, they probably didn't need
too much support, but they did need some.  State's evidence?

Mark Brader