For many years the tech industry has been known for its innovation and pioneering of new ways of working and living our lives.
But like banking, the sector has never been free from scandals and criminal behavior.One of the biggest scandals was that of MiniScribe, a hard drive manufacturer who carried out a massive fraud in the mid-1980s.
The company was established in 1980 and rapidly became an important supplier to the big names in tech who was expanding quickly during the period. The scam started in 1987 after a review of the company’s accounts showed a shortfall of between $2 million and $4 million.
This meant it was costing more to make the hard drives than first thought, which meant the firm’s operating margins would be unimpressive.
Instead of accepting this, managers decided on a cover-up.They produced an inflated inventory count, and even broke into their accountants’ lock boxes to replace their correct count with fake figures.The fake numbers continued to be recorded.
The cover-up was discovered by Jesse Parker, the company’s director of Far East Operations in July 1987.
The inventory count showed the shortfall had grown to $15 million.
However, having discovered the cover up, chief executive Q.T Wiles decided to continue with it, ordering that all copies of the report were destroyed.
26,000 boxes of bricks
The most infamous part of Miniscribe’s increasingly desperate cover-up was managers deciding to rent a second warehouse in Colorado.
They then spent many hours filling 26,000 boxes full of bricks. Those boxes were then shipped to Singapore in an attempt to bolster the inventory count.
After completing the count, the company recalled the serial numbers as defective units, checking them back into inventory along with other broken hard drives. This meant the company continued to post impressive numbers.
One warning sign was that other companies were suffering from falling prices while Miniscribe continued to improve. Another red flag to the company’s Board of Directors was a dramatic increase in the company’s receivables, which indicated a large amount of unpaid billables.
At the same time inventories were also growing. Normally, increased receivables mean more sales, which means to inventory dropping.
An investigation began in October 1988 after another record-setting quarter.
Widespread fraud
The investigation found Wiles, known as “Dr. Fix It”, set iron-clad sales forecasts for the sales team, with no room for failure and bonuses if they were beaten.
This led to the team “touching up” documents as they moved up the chain. What this meant was Wiles setting even more demanding targets, which led to even more fraud.
Wiles left in February 1989, and was followed by a lot of the company’s managers. The investigation revealed Wiles and his team had “perpetrated a massive fraud” in a “company run amok.”
As well as the boxes of bricks, the company used more standard tricks to hide the fraud, like failing to write off bad debts and sending items to warehouses and booking them as sales. They also repeatedly sent defective products to different customers so one drive was booked as multiple sales.
The company carried out a round of layoffs, including most of the staff involved, in 1989. Those employees then told the local newspapers of the scandal, which was confirmed after further investigation.
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Bankruptcy and jail time
The scandal led to Miniscribe filing for bankruptcy. Its assets were bought out by another company, Maxtor.
Wiles was prosecuted and subsequently convicted for securities fraud. He spent three years in prison.
Miniscribe’s accountants, Coopers & Lybrand, also faced legal action. Patrick J. Schleibaum, who served as the chief financial officer of MiniScribe, was found guilty in June in a federal court in Denver on two counts: filing a false statement with the SEC and insider trading.
