In 1973, Equity Funding Corporation of America collapsed after it was revealed the company had created 64,000 fake life insurance policies. Executives used computer codes to hide the fraud and even claimed fake deaths to collect payouts from reinsurers. The scam was exposed by whistleblower Ronald Secrist who alerted analyst Raymond Dirks.
Origins and Early Growth
In 1960, Equity Funding Corporation of America (EFCA) began its operations in Los Angeles with a bold vision — to combine mutual fund investments with life insurance products. This innovative financial model allowed customers to invest in mutual funds and then borrow against these investments to purchase life insurance policies.
According to Investopedia, the strategy relied on the assumption that the value of the mutual funds would increase over time, thus covering the insurance premiums.
By 1972, EFCA had grown into one of the top ten life insurance firms in the United States, claiming assets worth $500 million.
Stanley Goldblum a leading figure in the company proudly said, “Quite obviously, this kind of production can only be generated by a professional, thoroughly dedicated group of people,” reflecting the firm’s impressive rise and his confidence in its team.
How the Fraud Was Carried Out
Behind EFCA’s booming public image was a large scale insurance fraud. The company generated thousands of fake life insurance policies and sold them to reinsurance companies. These fraudulent policies created immediate income but there were no real people behind them.
To maintain the illusion, EFCA used funds from new fake policies to pay the premiums of earlier ones — a setup resembling a Ponzi scheme. Shockingly, EFCA even claimed that some of these imaginary policyholders had died and collected death benefits from unsuspecting reinsurers.
Technology played a crucial role in this scam. EFCA’s Electronic Data Processing division created a program that used code numbers to categorize policies. For instance “Code 99” indicated accounts with no direct billing, making them easier to pass off as real to reinsurers. These systems helped disguise the fraud in layers of digital records.
Fred Levin, EFCA’s executive vice president openly stated “Publicly held companies do not lose money,” which reflected the company’s extreme focus on appearances and profit at any cost.
Exposing the Truth: The Whistleblower
The fraud came to light after Ronald Secrist, a former vice president at EFCA was fired. He approached Raymond Dirks, a Wall Street analyst and revealed the fake insurance policy scheme. Dirks investigated and informed his clients, prompting them to sell their EFCA stock in large volumes.
Dirks later explained his motive: “My clients include some of America’s largest financial institutions. Their sale of the stock… would so decimate the price of Equity Funding’s stock that investigators would be compelled to intervene before the company could cover up the fraud,” as reported by The Street.
Legal Action and Court Cases
In March 1973, both the New York Stock Exchange and the Securities and Exchange Commission suspended trading of EFCA shares. Just weeks later EFCA filed for bankruptcy. Investigators discovered that 64,000 out of 97,000 insurance policies were fake and $185 million out of the declared $737 million in assets did not exist.
That November, 22 individuals — including senior executives and auditors — were charged with 105 counts of fraud and conspiracy. Stanley Goldblum accepted guilt and received an eight year prison term along with a $20,000 fine. Fred Levin was sentenced to seven years, per The New York Times.
During the probe, executive Sam Lowell admitted to “playing games with numbers but didn’t know anything about phony policies,” revealing how deeply fraud was embedded within the organization.
A Wake-Up Call for the Financial Industry
EFCA’s collapse served as a harsh lesson for the financial world. Auditors from respected firms like Caedmon and Caedmon, Haskins and Sells and Peat Marwick Mitchell had all failed to identify the massive fraud. An internal check later showed that only 6 out of 82 policies were actually valid.
The case also sparked a major legal precedent: Dirks v SEC. The U.S. Supreme Court ruled in favor of Raymond Dirks, concluding that he had not committed insider trading, since he neither breached a fiduciary duty nor misused the information.
Justice Powell criticized the SEC’s broad definition of insider trading, stating that it “would have no limiting principle”, per The Washington Post.
Bankruptcy and Creditor Settlements
After EFCA’s bankruptcy, over 110 class action lawsuits and more than 15 private cases were filed. In 1975 a reorganization plan was approved by the bankruptcy court. Creditors were grouped into nine categories — some received full settlements while others, particularly those involved in fraud claims, received minimal or no payouts due to lack of funds.
To manage the restructuring, a new entity, Orion Capital Corporation, was formed to distribute cash, stock and notes to affected parties, according to Justia Law.
The EFCA scandal is remembered as one of the most notorious corporate frauds in American history. It revealed serious flaws in corporate oversight, auditing standards and regulatory systems.
Moreover it showed how technology could be exploited to facilitate fraud. As noted by The New Yorker this was one of the first major cases of computer-aided financial crime.
