The Salad Oil Scandal

In 1963 it was considered the most prodigious swindle of modern times.

The Salad Oil Scandal is a great example of the saying that there is no such thing as a new fraud – only new people committing the same types of fraud.

It was such a basic premise – saying you had something when in fact you didn’t have it.

What such examples provide are opportunities to retrofit circumstances to what could be happening within our own organisations – a “but for the Grace of God” examination before it is too late.

It is also timely to look back on past events to see if we, as a risk focused society, have learnt the lessons of past fraudulent and competency indiscretions.

Never has this been more important than on the day that the United States government seized control of Fannie Mae and Freddie Mac in its most dramatic market intervention in decades.

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The Salad Oil Scandal, also referred to as the "Soybean Scandal," was a major corporate scandal in 1963 that ultimately caused over $150 million in losses to corporations including American Express, Bank of America and Bank Leumi, as well as many international trading companies.

The scandal's ability to push otherwise cautious and conservative lenders into increasingly risky practices has prompted some comparisons to recent financial crises including the 2007 subprime mortgage financial crisis.

The scandal involved the company Allied Crude Vegetable Oil in New Jersey, led by Tino De Angelis, which discovered that it could obtain loans based upon the inventory of its salad oil.

Ships apparently full of salad oil would arrive at the docks, and inspectors would confirm that the ships were indeed full of oil, allowing the company to obtain millions in loans.

In reality, the ships were mostly filled with water, with a only a few feet of salad oil on top.

Since the oil floated on top of the water, it appeared to inspectors that these ships were loaded with oil. The company even transferred oil between different tanks while entertaining the inspectors at lunch.

Once the scandal was exposed, American Express was one of the biggest casualties. Its stock dropped more than 50% as a result of the scandal, which cost the company nearly $58 million.

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The son of poor Italian immigrants, De Angelis was forced to quit high school to support his parents.

Starting out as a meat cutter in The Bronx, he devised a method for speedily dismembering hogs by slicing them up on a moving assembly line. That helped him get a $10,000 loan to open his own pork-packing plant. While still in his 20s, he built it into the largest such operation in the Eastern U.S. and sold copious quantities of meat to the federal school-lunch program.

De Angelis wisely saw that a shrewd operator could make a fortune out of two other Government programs: farm price supports and foreign aid.

His idea: buy up the bulging soybean surplus, turn it into soybean oil, which is used for everything from salad dressing to paint, and ship the oil abroad—either privately or through the many Government aid programs.

Between 1958 and 1962, De Angelis built a sprawling refinery in Bayonne and leased 139 oil storage tanks, many as tall as five-story buildings.

Operating in a slippery, fiercely competitive industry, he outdid other companies by buying the most modern equipment, paying the highest wages and putting in the lowest bids for Government export contracts.

By 1962, he accounted for three-quarters of the nation's exports of soybean and cottonseed oils, shipping 361 million lbs.

All this required considerable capital—and that is how the swindle began.

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To finance his rapid growth, Tino borrowed huge sums of money, using huge amounts of oil as collateral.

But there was one hitch: he never had all that oil.

What he did have was a mountain of paper—certificates attesting that he owned the oil.

Although there was a similar incident at that very time was making headlines for having passed off similarly spurious paper for nonexistent ammonia tanks, the bankers and brokers never bothered to check up on De Angelis' tanks.

Nor did they question De Angelis' warehouse receipts, because Tino had them signed by officials of American Express Co.

In a sense, American Express got mixed up with Tino in an effort to spur sales of its famous travelers' checks.

Back in 1944, the company figured that it could induce bankers to push the checks by performing a service for them.

A subsidiary, American Express Warehousing, would store, inspect and vouch for the oil that commodities dealers commonly used as collateral for their bank loans. It was a rewarding business—De Angelis paid American Express Warehousing up to $20,000 a week—but terribly risky.

If anything went wrong, Amexco's subsidiary was responsible for making good on its warehouse certificates.

De Angelis' men duped Amexco with surprising ease.

Often, one of them would clamber to the top of a tank, drop in a weighted tape measure, then shout down to an Amexco inspector on the ground that the tank was 90% full.

Sometimes the tanks were indeed full—with water, topped by a thin slick of oil.

Usually many were empty. Moreover, the tanks were connected by a jungle of pipes; Tino's men sometimes sneaked into the casually guarded tank farm on weekends, pumped oil from one tank to another.

These machinations gave him an endless supply of oil certificates—and endless borrowing power.

At one time he had loans out on three times as much oil as the Bayonne tanks could hold.

But Tino figured—rightly—that his various and hotly competitive creditors would never get together and compare their overlapping certificates.

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The inspectors were eventually tipped off by such things as attempted bribery and delivery mistakes. So they returned to Allied's tanks in Bayonne and found the water.

The result was a massive crash of the futures market, wiping out in minutes the entire value of the loans.

On November 19, 1963, De Angelis's company filed for bankruptcy, at which point investors learned hundreds of millions were unaccounted for.

The brokerages who handled De Angelis's futures trades were now tainted, and the next day the New York Stock Exchange, worried about potential U.S. Securities and Exchange Commission involvement, suspended Williston and Beane and Ira Haupt and Co. from trading.

Word started spreading as traders investigated the suspension, and desperately tried to get their holdings out of the companies.

The entire debacle was overshadowed by the assassination of U.S. President John F. Kennedy on November 22, 1963.

Hours before Kennedy was shot, New York Stock Exchange president G. Keith Funston was attempting to avoid a massive crash caused by the 20,700 customers of Ira Haupt, who feared their holdings were now worthless.

Because of the trading the brokerage firm did on De Angelis' behalf, they owed various banks over $37,000,000 that it could not pay.

The Kennedy assassination provided the panic that Funston was trying to avoid. In 27 minutes, the Dow dropped 24 points (about 5%) and 2.6 million shares were sold off; the exchange closed 83 minutes early that day.

Based on the Time Magazine Article – The Man Who Fooled Everyone – Friday 4th June 1965