ABSTRACT
Ray Dirks stood out on Wall Street. Nicknamed the “hippie analyst” for his long sideburns and bangs that reached the top of his glasses, Dirks entered the securities business only after his theater company failed. Though unconventional, Dirks had an impressive list of clients. He developed a reputation for insight into the insurance industry by criticizing the proposed merger of ITT and Hartford Fire Insurance in 1970. In March 1973, Dirks received a tip from a former employee of Equity
Funding Corporation of America (EFCA). The informant claimed that senior managers at EFCA were inflating the company’s assets by recording thousands of fictitious life insurance policies. The man’s story was believable enough that Dirks advised several large clients to reconsider their holdings of EFCA stock. During the next two weeks, Dirks interviewed dozens of EFCA employ-
ees, including CEO Stanley Goldblum, trying to either verify or disprove the allegations. While Dirks sought answers, his clients dumped several hundred thousand shares of EFCA stock, causing the price to drop 50 percent and prompting an investigation by the SEC. The authorities eventually discovered that 64,000 of EFCA’s 99,000 alleged life insurance policies were phony and $62 million of the reported $117 million of loan receivables did not exist. The first indictment issued by the SEC went to-Ray Dirks, for insider
trading. Although he helped uncover the most significant accounting fraud since McKesson & Robbins 35 years earlier, the SEC believed he acted improperly by informing his clients of the suspected fraud. Dirks was convicted and lost the first several rounds of appeals. It was not until 10 years and $100,000 of lawyers’ fees later that the U.S. Supreme Court overturned Dirks’s conviction.
