Tip for Fraudsters: You get a bigger bang for the buck overstating income and overpaying taxes as public company than understating income and evading taxes as a private company. 1/
2. For example, assume a 40% income tax rate. If you understate earnings by $1 million, you save $400k in taxes.
3. If you inflate income by the same $1 million, you overpay $400k in taxes which results in an inflated net income of $600k.
4. However, if you are a public company, your stock trades at a multiple of earnings. If your stock is trading at 30x earnings, the value of the company rises by $18 million despite overpaying income taxes by $400k.
5. For the reasons above, at Crazy Eddie it was far more profitable screwing investors than screwing the IRS.
6. Crazy Eddie was mainly a tax fraud before it went public and a securities fraud after it went public.
7. Crazy Eddie took its fraud 2 steps further: First, we gradually reduced our skimming in the years before the IPO which gave us a higher PE ratio and a bigger bang for the buck when we inflated income as a public company.
8. Second: After Crazy Eddie went public, much of the the cash skimmed before we went public was laundered back into the company as revenues to inflate the value of the stock - Panama Pump scheme.
9. The Feds never uncovered Crazy Eddie’s schemes detailed in tweets 1 to 8 of this thread. They learned about it 2 years into investigation went I offered the information to negotiate a plea bargain.
10. To conclude, the Crazy Eddie fraudsters traded in one fraud (income tax evasion) for another more profitable fraud (securities fraud).
