Synopsis

ESM Government Securities (ESM), a Florida-based securities dealer, “sold” the same securities to numerous investors, promising to repurchase the securities later for a higher price. After Cincinnati-based Home State Savings & Loan lost $145 million on deposit at ESM, Ohio’s governor had to close the state’s 70 privately-insured thrifts until emergency legislation could be passed to shore up the state’s insurance fund. The Alexander Grant partner in charge of ESM’s audit learned of the fraud in 1978 but issued clean audit reports during each of the next six years while accepting $200,000 of “loans” from ESM officers.

Discussion Questions

1. How did Alan Novick conceal ESM’s losses on the financial statements?
2. What is a “repo”? How did ESM use repos to maintain a positive cash flow while suffering enormous trading losses?
3. How did accountant Laurie Holtz discover that ESM’s financial statements were misstated by approximately $300 million?
4. How did ESM’s bankruptcy affect the citizens and taxpayers of Ohio?
5. Why did Jose Gomez not report the ESM fraud as soon as he learned about it?
6. Why did the SEC charge the entire Alexander Grant accounting firm with fraud?

Additional Resources

Jose Gomez Interview. Grant Thornton partner Jose Gomez discusses his role in the ESM Government Securities fraud (21 minutes).