The biggest business scandals of 2020

Nikola’s roll

Perhaps inspired by infamous blood-testing firm Theranos, liquid hydrogen trucking startup Nikola has been taking the mantra “fake it ’til you make it” a bit too literally. Short-seller Hindenburg Research claimed in September that Nikola and its CEO, Trevor Milton, had made a string of misrepresentations of its technology. That included a 2016 promotional video that purported to show an operational Nikola freight truck but was in fact staged by rolling the truck down a long hill.

Nikola later confirmed that claim. But the company brazenly argued there was no deception, since the firm at the time described the video as showing the vehicle “in motion”—technically true, even if gravity was doing the work instead of hydrogen. Regardless, Milton soon fell on his sword, resigning as CEO.

For fans of corporate scandal, the truly scintillating element here is that Hindenburg’s report landed a mere two days after General Motors announced plans for a major partnership with Nikola (timing that surely helped Hindenburg profit from its short position). The deal would have seen GM take a major equity stake and manufacture Nikola’s planned Badger electric pickup. GM took its sweet time wiping the egg off its face, waiting until late November to announce that it would effectively back out of the deal.

From a June peak of $79.73, Nikola’s stock today trades at closer to $17 per share. —David Z. Morris

Wirecard’s collapse

The Wirecard saga offers two scandals in one. Former CEO Markus Braun seemed to think the financial services company had $2.1 billion that didn’t exist, to put the most charitable construction on events; the company collapsed in June and investors lost billions. The parallel scandal is the failure of regulators and auditors to spot the looming disaster despite years of warning signs. Bruce Dorris, a former prosecutor who is president of the Association of Certified Fraud Examiners, says, “When you look at the magnitude of what happened, this is the Enron of Germany.”

Wirecard, now insolvent and dismembered, was Europe’s preeminent fintech firm, offering mobile payment and banking services worldwide. Founded in 1999, it was near failure in 2002 when Braun, a former KPMG consultant, put in some capital and became CEO. The company expanded, went public, attracted new capital, and kept growing. 

Its success extended beyond financial growth. Wirecard was also a source of pride for Germany and Europe, a seemingly thriving global player in an important new industry dominated by startups in China and the U.S. Its rocketlike ascent peaked in 2018, when investors valued it at 24 billion euros ($27 billion) and it joined Germany’s business aristocracy as one of the 30 members of the DAX stock index.

But something wasn’t right. Outsiders, notably journalist Dan McCrum of the Financial Times, had been finding discrepancies in Wirecard’s accounts since 2015. Wirecard always denied vehemently that anything was wrong, but the drumbeat of doubts continued. In 2019, Germany’s market supervisor, BaFin, launched an investigation—not of Wirecard, but of the Financial Times. When the Singapore police raided Wirecard’s offices there a month later, BaFin banned short-selling of Wirecard stock for two months.

Matters came to a head last June when Wirecard announced that 1.9 billion euros (about $2.1 billion) was “missing.” Braun quickly resigned. The company soon announced “a prevailing likelihood” that the missing funds “do not exist.” Braun was arrested the next day and remains in custody. The stock, which once traded at 191 euros ($233), was recently at 0.43 euros (52 cents).

A report ordered by the European Parliament calls the Wirecard debacle “a potentially pivotal event for Europe’s capital market” that should trigger wholesale reform of financial market oversight. Enron’s collapse inspired the Sarbanes-Oxley Act. If the Wirecard scandal can spark a similar response, it may do at least some good. —Geoff Colvin

Luckin Coffee’s frothy finances

For a business named Luckin, its luck sure ran out quick. Founded in October 2017, the upstart coffee chain grew at an apparently breakneck pace to overtake Starbucks as China’s biggest bean-brew slinger by the start of the year. But as its acknowledgment of rampant fraudulent accounting would later reveal, the company’s caffeine fever-dreamed ambition—to hook a tea-drinking nation on joe—featured far more froth than substance.

As one of China’s youngest, hottest so-called unicorn startups, Beijing-based Luckin pitched itself as a tech company rather than a glorified barista biz. Luckin lured people to order drinks for takeout and delivery through its mobile app. The company served up copious discounts and “free” beverage vouchers, cutting the price of its drinks to about a third of the competition’s. Like any good tech startup, executives prioritized growth over profits. 

The strategy worked well, for a while. By the end of 2018, a little more than a year after its founding, Luckin opened more than 2,000 stores and acquired a $2 billion valuation from private investors. By May 2019, it raised $561 million at a $4.2 billion valuation going public on the Nasdaq stock exchange. In early 2020, after supposedly usurping the Chinese market’s coffee crown from Starbucks’s tiara-donning merlady—as measured by total number of stores (4,500 versus Starbucks’ 4,300)—its valuation soared to an all-time high of $12 billion. 

Then came the accusations of fraud. Luckin initially denied a report, circulated on Jan. 31 by Muddy Waters, the prominent U.S. short-seller firm, alleging fabricated sales. A few weeks later, though, on April 2, Luckin came clean, fessing up to $310 million in made-up money inflows—a large portion of its reported revenue for 2019. The company acknowledged the inflated figures, saw its stock delisted, reorganized its leadership team, and in December reached a $180 million settlement with the U.S. Securities and Exchange Commission.

Jinyi Guo, Luckin’s recently instated chairman and chief executive, said in a statement that the deal “reflects our cooperation and remediation efforts, and enables the company to continue with the execution of its business strategy.” He added that the company is “committed to a system of strong internal financial controls, and adhering to best practices for compliance and corporate governance.”

Carson Block, Muddy Waters’ founder, tells Fortune that he believes Luckin is just the tip of the iceberg when it comes to securities fraud by Chinese-based companies. “I’m of the view that almost every single one of them is committing fraud to some extent,” he said, noting that it is difficult for the SEC to enforce its rules on businesses based abroad. —Robert Hackett

Twitter’s security slip

On the afternoon of July 15, 2020, a series of increasingly famous Twitter accounts, including those of Elon Musk, Kim Kardashian, and Barack Obama, appeared to be getting a little weird, tweeting out a simple Bitcoin scam. Twitter had to shut down all tweeting by verified accounts while it raced to find the security hole.

Had the accounts been hijacked by an elite hacking team from Russia? State-backed operatives from North Korea? Hardly. A bored teenager in Florida named Graham Ivan Clark and some friends had managed to fool a Twitter employee over the phone into revealing the credentials needed to reset account passwords and email addresses. Clark was arrested a few weeks later and is awaiting trial. “It’s the oldest trick in the book,” says Rachel Tobac, CEO of San Francisco security firm SocialProof Security.

Twitter moved to limit how many employees had access to such power and took other steps to tighten security. It also issued a comprehensive report about how the hack had occurred. And that helped raise awareness and improve training at many companies to guard against further “social engineering” hacks, says Tobac. “Humans are the first line of defense.” —Aaron Pressman

Tesla’s lockdown defiance

Electric-auto maker Tesla wildly outperformed expectations in 2020, starting with a largely pre-COVID first-quarter earnings beat, and powering itself all the way onto the S&P 500. But CEO Elon Musk’s reaction to California measures to curb the coronavirus pandemic saw his company caught with its halo on crooked.

The first shots were fired in April, when Tesla attempted to defy lockdown orders by calling workers back to its Fremont factory but was stopped by Alameda County officials. Days later, during the April earnings call for that impressive first quarter, Musk shocked an audience of investors and analysts by describing California’s lockdown orders as “fascist,” which sounds even worse 300,000 dead Americans later. 

On May 9, Tesla sued to get out of lockdown, reasonably pointing to conflicting statements from Alameda County about Tesla’s status as an “essential business.” But just days later, Tesla simply restarted vehicle production without permission. Alameda officials seemingly caved in to Musk’s libertarian defiance, announcing on May 13 that it would approve Tesla’s plan to reopen the plant—after Tesla already had done so.

Conditions at the factory were subsequently described as unsafe, including lax face mask enforcement, and Tesla workers started testing positive for the coronavirus almost immediately. As if seeking to prove that he could devote much of his life to fighting climate change and still moonlight as a James Bond villain, Musk told workers they could stay home if they were concerned over safety—then sent termination letters to some who did. —David Z. Morris

A McDonald’s pickle

At the end of 2019, McDonald’s CEO Steve Easterbrook was fired for sexting with a subordinate in what the company said was a consensual relationship. “Given the values of the company, I agree with the board that it is time for me to move on,” Easterbrook said at the time in an email to employees.

Since then, things have gotten much, much messier. In August, McDonald’s filed a lawsuit against Easterbrook, alleging that he had physical sexual relationships with three McDonald’s employees in the year before he was fired and approved stock grants worth hundreds of thousands of dollars to one of those women. The company also claimed that he concealed evidence during its initial investigation, deleting emails from his phone. With these alleged new revelations, McDonald’s argued it had cause to fire Easterbrook and that he should repay his severance. Easterbrook fired back that the company knew about the stock awards and had the information about his other relationships when they negotiated his severance.

The litigation is ongoing, but what is clear is in its attempts to distance itself from the behavior of its former CEO, McDonald’s is willing to publicly air its dirty laundry in a way rarely seen in corporate America. —Beth Kowitt

PPP fraud

The $670 billion behemoth known as the Paycheck Protection Program is, by most measures, the largest small-business relief program in American history—a cornerstone of the federal government’s response to a once-in-a-generation pandemic that has devastated small-business owners across the country.

Yet nine months after it was enacted as part of the $2.2 trillion CARES Act pandemic aid package, PPP is swiftly becoming more synonymous with the least flattering aspects of government intervention: namely, waste, graft, and fraud that critics say was enabled by mismanagement and a lack of transparency on the part of the Trump administration.

Instances of PPP fraud are legion and continue to pile up, from the fake Florida ministry that allegedly received more than $8 million in government funds to the Texas man who allegedly poured nearly $1 million of PPP money into cryptocurrency. Those cases appear to be only the tip of the iceberg; there are suggestions that hundreds of millions, if not billions of dollars of taxpayer funds, may have been fraudulently allocated through PPP, with government watchdogs acknowledging the possibility of “widespread potential fraud and abuse.”

The Trump administration, for its part, points to the program’s successes in allocating more than $520 billion to roughly 5.2 million American businesses, enabling many to save jobs and keep workers on their payroll during a time of severe economic distress. But even on a legitimate basis, the program clearly had its flaws. Data recently released by the Small Business Administration suggests that more than half of all PPP funds went to only 5% of recipients and more than a quarter went to only 1%, with large and well-capitalized public companies among the beneficiaries of that lopsided distribution.

What’s more, there’s ample evidence that many small businesses—particularly minority-owned ones, which were hit disproportionately hard by the pandemic—weren’t able to get the money they needed through the program. Meanwhile, wealthy celebrities and well-connected politicians found it all too convenient to get the funds they desired.

As one government watchdog put it: “Fundamentally, this program was poorly designed and irresponsibly run by the Trump administration.” —Rey Mashayekhi

Wells Fargo

Wait—Wells Fargo is a top business scandal of 2020? Didn’t that mess happen in 2016?

Turns out it’s more accurate to say the scandal started in 2016. Four years later it’s still going strong, meriting a Special Achievement Award among business scandals and thus a place on our list.

D-Day was Sept. 8, 2016, when news broke that the bank had created more than 2 million fake accounts and would pay $185 million in penalties. That spectacular revelation led the news; within weeks congressional committees held hearings, and CEO John Stumpf abruptly retired. With penalties paid and leadership changed, the trouble seemed well on its way to resolution. But it wasn’t.

Fast-forward to 2020: In January, Stumpf agreed to pay a $17.5 million fine to the Office of the Comptroller of the Currency for his role in the scandal, and the OCC sought $37.5 million in fines from five other ex-officers. Wells Fargo in February agreed to pay $3 billion to resolve federal criminal and civil investigations of the scandal—an amount that was “appropriate given the staggering size, scope, and duration of Wells Fargo’s illicit conduct,” said U.S. Attorney Andrew Murray. In November, Stumpf agreed to pay the Securities and Exchange Commission a $2.5 million fine. The SEC also brought charges against Carrie L. Tolstedt, who led Wells Fargo’s retail bank when the fake accounts were created.

And those are just the main developments of 2020. In the intervening years the scandal got bigger, not smaller. The bank discovered it had created 3.5 million fake accounts, not 2 million. It also discovered it had charged more than 800,000 car loan customers for auto insurance they didn’t need or even know about (fine: $1 billion; class-action lawsuit settlement: about $400 million). 

Most damaging of all, the Fed in 2018 prohibited Wells Fargo from growing its assets beyond their level at the end of 2017, $1.95 trillion—an unprecedented sanction. That’s a major reason Wells Fargo has badly underperformed the S&P 500 and the other biggest banks (JPMorgan Chase, Bank of America, Citigroup) since the scandal began.

Wells Fargo’s February settlement with the Justice Department includes a deferred prosecution agreement that’s contingent on the bank “continuing to cooperate with further government investigations.” Further investigations? After four years, this epic scandal is still far from over. —Geoff Colvin

eBay on the attack

In August 2019, Ina and David Steiner, founders of online retail blog eCommerce Bytes, experienced harassment in a variety of forms: oddly threatening items mailed to their home including a bloody pig mask, live spiders and cockroaches, pornography, and a book about grieving a spouse; an expensive late-night pizza order; and Craigslist ads advertising a swingers party and an estate sale at their home address.

The couple, of Natick, Mass., reported the occurrences to police. It wasn’t until they noticed people in cars watching and following them that authorities began to connect the dots, the Wall Street Journal reported: Two different cars were rentals issued to eBay employees. A criminal  investigation found ongoing internal animosity at eBay toward the bloggers, who sometimes had been critical of eBay in their coverage.

According to an FBI affidavit, former eBay chief communications officer Steve Wymer read an eCommerce Bytes post about eBay’s then-CEO Devin Wenig’s salary back in April 2019, then texted Wenig, “We are going to crush this lady,” referring to its author, Ina Steiner.

Wenig and Wymer departed the company in September 2019. In a statement, eBay said “that while Wenig did not authorize the harassment campaign, his ‘inappropriate communications’ regarding the blog were among ‘a number of considerations leading to his departure from the company,’” Fortune’s Aaron Pressman reported in a summary of the scandal earlier this year. 

In another statement, obtained by Bloomberg, eBay said “neither the company nor any current eBay employee was indicted” and that eBay “was notified by law enforcement in August 2019 of suspicious actions by its security personnel toward a blogger, who writes about the company, and her husband.” The company said it “terminated all involved employees…in September 2019.”

Investigators found that the group behind the plot used prepaid debit cards, burner phones, anonymous email accounts, and VPN software to try to obscure their identities, and deleted messaging records. In September, four of the six individuals allegedly involved in the plot admitted to their involvement and soon pleaded guilty to conspiracy to commit cyberstalking and conspiracy to tamper with witnesses. —Lydia Belanger

Carlos Ghosn

Technically it was Dec. 29, 2019, when Carlos Ghosn boarded a bullet train from his home in Tokyo (where he was facing charges of financial misconduct and was free on bail). But it wasn’t until the early days of January that the full details about Ghosn’s escape from what he has called a “rigged Japanese justice system” began to emerge in the press. The train ride would be the first leg of his escape to Lebanon that seemed plucked from a Hollywood movie. Aided by an ex–Green Beret, he hid in a box designed to transport stereo equipment and was shuttled onto a private plane that flew to Istanbul, then transferred to a smaller plane that took him to Beirut (a country where he has a home and would face no extradition to Japan).

Perhaps the most astounding thing about the Ghosn saga? The fact that so many of us naively assumed in January that it would certainly be the business story of 2020. —Lee Clifford