Equity Funding Scandal
Overview of Equity Funding
A mutual fund that primarily invests in equities is an equity fund. It may be controlled either aggressively or passively. Stock funds and equity funds can refer to the same thing. Stock mutual funds are primarily characterized by business size, the investing style of the assets in the portfolio, and the geographic location of the portfolio. A company may issue new stock in return for a lump sum upfront to get a loan. Your firm gets the funding it needs, and the investor becomes a shareholder. In other words, the investor stands to gain if your firm is a success.
The scandal over Equity Financing:
In the beginning, Equity Funding was built on a brand-new insurance programme idea. Traditional life insurance plans are a mix of insurance and savings. Term insurance, known as "pure insurance", offers coverage for a specific time and has no resale value. Term insurance rates should be based on age and health status. Standard life insurance charges higher premiums in the insured's younger years to pay the higher costs of providing protection in later years. The insurance firm invests the extra premiums collected in the younger years. As a percentage of their amassed capital, insurance firms make a pittance on the interest they pay to their covered customers. The insurance firms, for example, may earn 9% on the invested cash but only payout 2% to the insured. As a result, an insurance firm benefits financially from a policy's systematic saving component. A considerable sum of money is being offered to insurance brokers in exchange for signing customers up for life insurance policies.
The concept behind equity funding
A good idea that seemed logical to some in the banking sector. The organization was started in 1960 by insurance and insurance administration professionals. It's hard to tell when the group originated since some of the members had already started their own businesses before Equity Funding was created, and others had left the group. Stanley Goldblum became the company's CEO in 1970. Before working in the insurance industry, Goldblum worked at his father-in-meat law's packing company. He had risen to the plant manager position as a result of his own initiative and natural ability, but he had higher ambitions. On Wall Street, equity funding was a huge success.
The company's stated sales and profits grew at a rapid pace. Equity Funding was able to buy other businesses via stock exchanges since the company's price/earnings ratio was so high. However, despite the soundness of Equity Funding's premise, the firm never earned a profit. In the early 1970s, when it reported profits of more than $10 million annually, it lost more than $6 million each year. To hide the losses, inventive and dishonest tactics were used. For the most part, the discrepancy between actual losses and reported profits may be traced back to the creation and sale of bogus insurance contracts in the reinsurance market. Equity Funding's administration, on the other hand, was able to reduce its annual losses to roughly $500,000 by purchasing other thriving firms and pooling their actual earnings with Equity Funding. Equity Funding may not have started issuing phone insurance policies until 1969, but they implemented a scheme in which they provided free insurance to its workers, i.e., insurance for which they won't have to pay a premium for the first year. Employees can terminate their insurance coverage or pay their payments up to the end of the free first year. Equity Funding marketed these policies on the insurance marketplace, perfectly understanding that they'd be canceled. This made the ruse unpleasant. However, for an amount of time, Equity Funding continued to pay the premiums.
Shareholders' Equity Fund
There are a variety of equity funds to choose from, which is an incredible perk. More than coordination between mutual funds were accessible in the market as of 2017 as equities funds are the most popular form of mutual funds. Even if investors are looking for a particular sort of equity funds, such as one that focuses on companies in the financial sector or those that focus on a specific interest group, they may find one that fits their risk profile and investment purpose.
Even though many employees at Equity Funding were against the fabrication of bogus insurance policies, no one alerted law enforcement. Before blowing the whistle, some hoped to get a new job to save them from losing their current one. Equity Funding was finally brought to an end in 1973 when the company's auditors discovered the scheme to sell phone insurance policies.