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How to Steal $500 Million

Original Air Date: November 8, 1994
Written by Jim Gilmore & Paul Judge and Paul Solman
Produced by Jim Gilmore
Reported by Paul Judge
Correspondent Paul Solman

 

ANNOUNCER: Tonight on FRONTLINE- they were just playing corporate hardball.

JAY ALIX, Bankruptcy Examiner: The company was growing and the cash was flowing-

GEORGE JEFFERS, President, Price-Less: -squeeze and leverage suppliers-

ANNOUNCER: But it got out of hand.

STAN CHERELSTEIN, former Controller: -cabinets stuffed with held checks--cover up $10 million-

PAT FINN, Chief Financial Officer (1988-1992): -sinking deeper and deeper-

ANNOUNCER: FRONTLINE correspondent Paul Solman investigates how one high-rolling entrepreneur and his loyal followers covered up one of the largest corporate frauds in United States history.

DAVID McLEAN, Associate General Counsel, Coopers & Lybrand: -fool the auditors-

CHARLES COHEN, Director, Phar-Mor: -cooked the books-

ANNOUNCER: Tonight on FRONTLINE, "How to Steal $500 Million."

RADIO TALK SHOW HOST: Five-nineteen- Ron Verb, with great talk radio 57, WKBN, Youngstown, Ohio. We get your opinions of Mickey Monus on WKBN. First we go to Youngstown. What do you think about Mickey Monus? The guy was a hero in this area. Jim, you're on WKBN. Hello.

1st CALLER: Yeah. Al Capone, Dillinger, Mickey Monus- they're all the same. I'll tell you what. He played Youngstown for a bunch of hicks from Mayberry. That's what I think.

RADIO TALK SHOW HOST: I thank you. On WKBN, to the east side. Sam, you're on great talk radio. Hello.

2nd CALLER: I would like to say that the Monus family has done more good for this valley than any harm to this valley and Mickey was trying to do the same. I think the books were cooked and Mickey was not aware of the books being cooked.

RADIO TALK SHOW HOST: What do you think of Mickey Monus- 782-8191 in Youngstown. That's 782-8191.

PAUL SOLMAN: In Youngstown, Ohio, it's the fraud of the century and they're still arguing as to how home-town hero Mickey Monus wound up losing $500 million of other people's money while building what seemed to be a retail empire, a discount chain called Phar-Mor.

INTRODUCER: I'd like to introduce at this time Michael Monus, the president of Phar-Mor, who brought us to 33 states, from zero to 300 stores.

MICKEY MONUS: Thank you, Carol. And having reached the 300th store, there's no stopping us now to being a national retailer and to having a store in every major market across the country.

PAUL SOLMAN: Mickey Monus- crook or classic entrepreneur, depending on your point of view.

The story of Phar-Mor is a tale of fraud, one of the largest in American corporate history, but it's also a modern morality play in which previously honest people, hired more or less at random, sustained the fraud for years. We'll show you how they did it, but you'll have to decide for yourself as to why and why they were allowed to carry on by everyone in a position to stop them, from investors to the board of directors to the auditing firm of Coopers & Lybrand.

But maybe the best question to ask as you watch the fraud unfold is simply this: What would you have done had you been a part of the juggernaut that was Phar-Mor?

PHAR-MOR TELEVISION COMMERCIAL: Some people in this world have one thing on their mind.

PAUL SOLMAN: In 1982, Monus opened his first Phar-Mor, a deep discount store that sold everything from prescription drugs to shampoo, all at unbelievably low prices. A key to low prices was "power buying," Monus's catch phrase for loading up when suppliers offered rock-bottom deals, thus creating far more savings for cost-conscious customers. The prices were so low, competitors couldn't figure out how Phar-Mor did it.

Monus looked like a winner to David Shapira, the Pittsburgh grocery executive who bankrolled the new venture and served as its CEO. Shapira had the credibility, Monus the gambling spirit. Strong sales at the first store so impressed Monus's bosses that a second store followed within seven months. Within a year there were eight.

To help him build the new firm, Monus hired young men. Many of them lacked experience, but they made up for it in loyalty to the boss. To run accounting, he chose Pat Finn.

PAT FINN, Chief Financial Officer (1988-1992): You could see yourself going after problems, challenging yourself, solving problems. In accounting, you know, you worked through a problem. There was a right answer and a wrong answer. Things were- things were black and white. And that's probably part of my personality. Things are black and white. Things are either right or wrong.

PAUL SOLMAN: To Pat Finn, the ethical calls had been easy until he met Mickey Monus, a man with a brash exterior, but an inspiring ability to create jobs and make money.

PAT FINN: He had the ability to motivate all of his- everyone who worked for him to have that same type of fire and that same type of dedication towards Phar-Mor.

PAUL SOLMAN: Monus used his growing reputation as a business prodigy to boost his home town. He was often on the front lines at public celebrations, inviting people to believe in whatever enterprise he pushed, whether it was Phar-Mor or a summer camp for local city kids.

ANTHONY CAFARO, Phar-Mor Investor: He became almost like a cult figure. He really did. He was bigger than life. He was bigger than life. He could do no wrong. He had the Midas touch. However you want to say it, he was a very, very important person for the psyche of the Youngstown area.

PAUL SOLMAN: Word of Monus's success spread quickly among local banks and investors who, in the recessionary days of the early 1980s, were starved for fast-growing investment opportunities.

ANTHONY CAFARO: People looked upon Phar-Mor as perhaps the greatest success story in the retail industry ever. I remember when Sam Walton from Wal-Mart came out and made the announcement that the only company that he fears at all in the expansion of Wal-Mart, his number-one competitor, is Phar-Mor.

PAUL SOLMAN: As it grew, Phar-Mor found itself up against Wal-Mart in mall after mall. In 1985, there were 12 stores; by 1987, 40. To win in the world of deep discount, you beat the other guy's price and hope to capture his customers. So for the next two years, Monus committed Phar-Mor to underselling Wal-Mart. But the prices were so low, he began losing money in those stores.

Pat Finn watched nervously as, year by year, the profit margins of the entire company eroded. By 1989 he realized Phar-Mor now faced a loss of millions. Finn went to Monus with the bad news.

Mickey Monus was in a tough position. Five years into running what had seemed a white-hot company in a sizzling industry, he was losing money. What were his options? He could announce the losses and risk losing his credibility, his credit and, quite possibly, his company, or he could buy a little time by parking the losses temporarily and put more effort into improving efficiency, getting lower prices from suppliers, something that would enable him to turn a profit once again.

Monus chose to buy time, according to his chief financial officer. Pat Finn states that when he brought the disappointing results to his boss, Monus simply crossed them out with a pen and wrote in higher numbers showing a profit. Now, this was illegal, but the report was mainly an internal document. Phar-Mor was lying primarily to its owners.

According to Pat Finn, Monus continued to change the weekly financial reports for four months before entrusting the task to him. Monus refused to talk to us about this or any other issue, but Pat Finn gave us his account.

PAT FINN: You knew you were doing something wrong, but you never understood how wrong. I think he- he helped me believe that, you know, starting it for him was being a team ballplayer. Give him time and he'll fix the problem.

PAUL SOLMAN: The true numbers were kept in a separate set of books called the "sub-ledger" and Phar-Mor's accounting manager, John Anderson, was brought into the plot to keep track of the temporarily altered figures.

JOHN ANDERSON, former Accounting Manager: It was really a report that, you know, Pat Finn wanted done, wanted kept track of so he can see where everything was at and- and what, I guess, problems he needed to cover.

PAUL SOLMAN: Finn had hired Anderson directly out of Youngstown State University, where this kind of accounting, presumably, was not part of the curriculum.

JOHN ANDERSON: Pat Finn always had an aggressive approach to accounting and call it aggressive or call it creative, that's the way it was done ever since I remember.

PAUL SOLMAN: Now, losses can be parked for a while, but eventually, they need to be covered with something tangible. By Finn's account, Monus set out to cover the shortfall by putting the arm on Phar-Mor's vendors.

The merchandise show, where retails and vendors haggle over the price of, say, a year's supply of strawberry-kiwi juice. For years, the name-brand vendors had the power here, but the success of huge deep-discount chains like Wal-Mart and now Phar-Mor had gradually tilted the balance. The chains were now big enough to muscle the suppliers.

GEORGE JEFFERS, President, Price-Less: They were certainly in a position to squeeze and leverage suppliers. No doubt about it. Everyone is under pressure to make sales. Here's a company that looked like it was going to be another Wal-Mart.

PAUL SOLMAN: Monus's inspiration was to squeeze up-front payments from vendors in return for not selling their competitors' products. He'd use these exclusivity fees to cover his losses.

GEORGE JEFFERS: They may have said to one company, "We'll keep your line if you'll give us a $500,000 or $1 million fee." And if they said no, they would go to the other company and give them the business.

PAUL SOLMAN: They'd give them the business all right. Coca-Cola, for instance, paid Phar-Mor $10 million to keep Pepsi out of Phar-Mor for just five years. Vendors let themselves be strong-armed by a retail newcomer without ever wondering, it seems, if the Phar-Mor phenomenon was for real.

Meanwhile, Phar-Mor's accountants used the millions in exclusivity fees to help offset the losses they were hiding, which had now reached $18 million. But the fees were not enough.

Phar-Mor wasn't Mickey Monus's only interest. He had invested in over a dozen other businesses and even had the moxie to take on the National Basketball Association.

TELEVISION REPORTER: Did you ever think you'd be a professional basketball- [crosstalk]

MICKEY MONUS: Well, it's a dream of mine.

TELEVISION REPORTER: Really?

MICKEY MONUS: Right.

TELEVISION REPORTER: Did you play ball?

MICKEY MONUS: Just in high school.

TELEVISION REPORTER: And how tall are you?

MICKEY MONUS: Five, nine.

TELEVISION REPORTER: Five, nine. So you could have made this league sometime, but it was 20 years ago.

MICKEY MONUS: I don't think I have the quickness.

TELEVISION REPORTER: Okay. Let's go back to courtside and Jim.

PAUL SOLMAN: Monus's World Basketball League had a hook: No player was taller than six foot, five, and the nine teams were located in smaller markets, in cities like Youngstown.

TOM ZAWISTOWSKI, former Director of Broadcasting, WBL: There's a lot of people who lose a lot of money in minor league sports, so yeah, it was a challenge because he was going to, again, do something that nobody had done. He was going to be a success where others had failed.

PAUL SOLMAN: As at Phar-Mor, Monus concentrated on image. He personally assembled the All-American Girls, a professional cheer-leading squad which traveled from game to game throughout the country. He pushed to popularize the league by broadcasting games, using a T.V. production company he'd bankrolled with borrowed money.

But how could Monus, whose Phar-Mor was hemorrhaging money, think he could make a pro sports league fly?

TOM ZAWISTOWSKI: These were people, you know, who had extreme confidence in their ability and- and it was just kind of a foregone conclusion that, now, "If we're going to create a new basketball league from scratch and we're going to make money on it when no one else has, well, hey, we're the people who started Phar-Mor. We can do- we can do these kind of things."

PAUL SOLMAN: But in reality, things at Phar-Mor were a mess. Even with the exclusivity money, the company was still facing a $12 million loss and the auditors were coming. So how do you make a $12 million loss disappear?

Well, you can start by dividing it up into smaller amounts- $12 million divided by 129 stores comes out to $93,023 and about 25 cents a store. So you put that on the expense side of each store's ledger. Then, to make it balance, you need to add $93,023 and about 25 cents to each store's assets. Now, you can't claim cash you haven't got. Any auditor can see through that. But you can claim another category of assets, your inventory, is worth more than it actually is. And that's the first thing they did.

So Phar-Mor claimed every six-pack of Coke in the store was worth, say, $2.30 when, in reality, it may have sold for a buck 98. Multiply that difference by thousands of six-packs of Coke in 129 stores and you're on your way to a $12 million cover-up.

COOPERS & LYBRAND TELEVISION COMMERCIAL: It's a whole new world facing today's chief executive. Competition is fierce.

PAUL SOLMAN: But how could Phar-Mor's respected auditors, Coopers & Lybrand, who sell themselves on their know-how, be so easily fooled, especially since a good auditor checks the inventory while it's physically counted?

Now, you can't check all the inventory in every story. Moreover, Coopers, having won the Phar-Mor account with a very low bid, wanted to limit its costs, so Coopers checked only four stores out of 129. And get this. Phar-Mor found out from Coopers which locations would be checked months in advance. So when Coopers arrived to examine the stores, it's not too surprising that everything appeared to be in order.

We went to Coopers & Lybrand to ask them why they were unable to uncover the fraud.

DAVID McLEAN, Associate General Counsel, Coopers & Lybrand: An accountant is a watchdog, but not a bloodhound. An accountant cannot be expected to search out and find every piece of fraud. It's- there is- there's really a big difference between being a bloodhound and a watchdog and I think that's an important distinction.

PAUL SOLMAN: So perhaps a fair question is not whether Coopers was hired as a bloodhound, but whether the watchdog was asleep. With only a tiny sample to go by, Coopers accepted Phar-Mor's inflated inventory figures year after year, even though Finn couldn't back them up with documents. In the end, the auditors not only bought Phar-Mor's numbers, but declared that the company had actually earned a record profit in 1989.

For the next two years, Phar-Mor grew and, by all appearances, it continued to prosper. To the folks back home, Mickey Monus had become a legend who breathed new life into their old town.

KIM SCIANNA, Restaurant Owner: He just produced jobs for everybody, you know, and not just the jobs around Youngstown, but around the country because every time they opened a store, they hired more people.

PAUL SOLMAN: Kim's Cafe was where Phar-Mor executives came to celebrate their victories. Monus, the local boy made good, would occasionally stop by to serve as celebrity bartender.

KIM SCIANNA: All the girls from upstairs requested- I forget the title of the song, but it went, "Mickey, Mickey, you're so fine. You're so fine, you blow our mind." And they'd be singing it over there and then they'd be all pointing over this way at the bar. And it- and then they'd get the whole dining room singing the song.

PAUL SOLMAN: Despite monumental losses, Monus played on as if nothing were wrong. He'd apparently convinced himself that Phar-Mor was destined for glory and, with salary and bonus of half a million dollars, he lived accordingly. In addition, he took another half million dollars to add a room to his house, to pay off a rather generous Visa balance, to pick up an engagement ring for his new fiancée.

Monus developed an attachment to posh West Palm Beach, where his second marriage took place - poolside - at the Ritz-Carlton Hotel. The bride wore gold, an 18-carat gold mesh gown donated for the day by a vendor, Absolut Vodka. It was worth more than half a million dollars and came complete with two armed guards.

Monus loved the high life, loved to be where the action was.

TOM ZAWISTOWSKI: It would be 3:00 o'clock in the afternoon and he'd say, "Let's go to Vegas and we're going now. Just- just take your wallet and let's go." And we would fly into Las Vegas and there would be a limo from Caesar's Palace that would meet the plane on the tarmac and we would get taken to the- to Caesar's Palace and there would be a suite for Mickey, 24 hours a day, seven days a week. It did not matter when we came there. There was always a suite.

PAUL SOLMAN: Monus was at home in the world of big bets and make-believe. He even built three stores in Las Vegas. And then there was the nightlife.

TOM ZAWISTOWSKI: Life was a game. Life was just this ride you're on. You know, you're working hard and you've got all this money, you know, coming through your hands. Whether you own it or not, you know, that's for someone else to decide, but you have the power, the ability to do anything. The gambling was insane. I mean, my coaches would come back and say, "Yeah, Mickey gave me $4,000 to gamble with last night and I lost it all."

PAUL SOLMAN: Monus's activities would eventually be scrutinized by bankruptcy examiner Jay Alix.

JAY ALIX, Bankruptcy Examiner: The sense I have is, like, it was a boys club. It was, like, a big boys club, is what it was, and they were having a great time and the company was growing and cash was flowing and there were no rules and restrictions and they were hot.

PAUL SOLMAN: But at Phar-Mor back in 1990, they were beginning to feel a different sort of heat. Losses were now more than $45 million and growing, but Monus refused to raise prices or retreat.

PAT FINN: He just couldn't admit defeat. It's a flaw that he had. He just couldn't look himself in the mirror and say, "Hey, we made a mistake here. We got to fix it and we got to go on."

PAUL SOLMAN: To cover up the continuing losses, Pat Finn was now faxing falsified financial reports to the board of directors and to David Shapira every week. But in November of 1990, a secretary mistakenly faxed a report with the real numbers to Shapira. Here in black and white was a report which no CEO could ignore.

While Shapira was ultimately responsible for Phar-Mor, he'd long ago left day-to-day operations to Mickey Monus. When he saw these startling numbers, Shapira summoned Pat Finn to his Pittsburgh offices.

JAY ALIX: Pat Finn told David Shapira that, you know, everything- "Those are just preliminary numbers. We have to make some adjustments to them and once we make the adjustments to them, then they'll- they'll be okay."

PAUL SOLMAN: In the end, the CEO of Phar-Mor failed to check the figures independently. He seems to have bought Pat Finn's excuse.

Now, remember, we are three years into the fraud. Is CEO, David Shapira, really as gullible as he seems? Well, a cynic might say that, considering Shapira's huge personal stake as a major shareholder in Phar-Mor, he believed Finn because he wanted to. After all, he'd put his money on Mickey Monus, just like Pat Finn, the people of Youngstown, the banks, vendors and investors. But what none of them knew was just how bad a bet they'd made.

The deficits continued to grow and knowledge of the fraud was now about to extend to another member of the company. Stan Cherelstein joined Phar-Mor in 1990. He quickly rose to the position of controller, a job that placed him in charge of all cash disbursements.

STAN CHERELSTEIN, former Controller: Well, I- I learned about the fraud almost two years after my joining the company. That's when John Anderson took me into his office and closed the door and told me that, "Well, you're the controller for Phar-Mor now and you should be aware of this situation." And he pulled out a sub-ledger schedule and told me, basically, that the financial statements at the end of June, 1991, were misstated by approximately $150 million.

PAUL SOLMAN: If anybody was likely to blow the whistle, it would seem to have been the newcomer, Stan Cherelstein, but he didn't. He, too, was persuaded to toe the line.

STAN CHERELSTEIN: I felt that, through exclusivity money, through perhaps raising the prices- I felt that there were some options, at that point, that Pat and Mickey had available to them to correct the situation. And that's why I stayed on with the company and that's why I never told another soul, that coupled with a fear that I- I believe I had at the time that maybe if I did go over their heads, maybe some harm could come to myself.

INTERVIEWER: Physical harm?

STAN CHERELSTEIN: Physical harm.

PAUL SOLMAN: John Anderson had spent much of his four-year career inside the fraud. Cherelstein was the closest thing he'd found to a moral compass.

JOHN ANDERSON: He was able to make a lot of sense of things and, you know, seemed to- to give opinions and seemed to say that, "No, this is not the way it should be. We should be doing things this way" or "No, that is absolutely wrong." And he was in there actually trying to fight and trying to change things, but just, you know, was up against a brick wall.

PAUL SOLMAN: Hiding the fraud was becoming more and more of a problem. The company was frequently strapped for day-to-day cash. Bills went unpaid for months.

STAN CHERELSTEIN: We had cabinets stuffed with held checks at the company that had been generated out of the accounts payable system, but we couldn't mail them because if we mailed them, the checks would have bounced. So they kept accumulating and accumulating.

PAUL SOLMAN: By the spring of 1991, Phar-Mor was holding back $155 million it owed to vendors. They retaliated by halting shipments to some stores. Shoppers began to notice an unusual sight- empty shelves, an image at odds with Phar-Mor T.V. ads, which promised customers everything.

Phar-Mor continued to live in its dream world, even though CEO and board member David Shapira knew about most of the held checks.

TELEVISION COMMERCIAL: Discover how Phar-Mor's power buying gives you far more buying power.

JAY ALIX: This is the kind of issue that would rise to a board level concern, I would think, in most companies. When a company needs hundreds of millions of dollars more than it planned on, the question would have to be asked, "Why?"

PAUL SOLMAN: So what was more important to Shapira and the directors than pressing for explanations? Perhaps selling Phar-Mor's stock. The prestigious New York investment firm, Corporate Partners, makes large investments on behalf of state and corporate pension funds. Phar-Mor had caught their eye because, if it kept growing, it would be a great candidate for selling its shares on the New York Stock Exchange.

JAY ALIX: The company was growing and had hoped to go public, at some point, and by having a reputable investment firm make a sizable investment would give a lot of credibility to the company and its stock for a future public offering.

PAUL SOLMAN: The stakes were substantial. Once Phar-Mor went public, Monus, Shapira, Finn and everyone else with a piece of the company figured to realize the entrepreneurial dream: cashing in big-time. Corporate Partners wanted to invest $200 million, but first, quite naturally, they would send in their own accountants to check the books.

Corporate Partners would also make its decision by evaluating Mickey Monus in action. They picked an event that happened to show off his strengths as a showman in one of his favorite haunts. Each May, Las Vegas hosts the biggest real estate convention of the year. Every major retailer in the country attends, including Phar-Mor, to make deals for new store locations.

Realtors were intent on impressing Phar-Mor. Monus was intent on impressing Corporate Partners. What Monus didn't know was that someone else was also watching him. Charity Imbrie, Phar-Mor's legal counsel, had been asked to watch over Monus by Phar-Mor's CEO, David Shapira, afraid Monus might jeopardize the Corporate Partners deal. But in the process, Imbrie picked up some alarming scuttlebutt. A Phar-Mor vice president told her that some vendors were refusing to supply stores because bills were going unpaid. Imbrie worried about the image of cheer-leaders wearing hot pants employed as company hostesses. She also heard about a senior v.p. of Coca-Cola who said he hated doing business with Phar-Mor because he was always being pressured to support the World Basketball League.

Imbrie documented her concerns in a confidential memo to David Shapira, covering everything from disgruntled vendors to cash flow problems. David Shapira received the incriminating memo shortly after Imbrie returned from the convention. So what did the CEO do? He told her to rip it up. Imbrie chose to keep one copy anyway and, at the bottom, she noted what Shapira had said, that - quote - "He was aware of most of the items listed in this memo" and that - quote "It was particularly important to rip it up now because of pending financing stock sale with C.P."- that is, Corporate Partners.

If they went ahead with their stock purchase, Corporate Partners would own 17 percent of Phar-Mor. David Shapira stood to make more than $2 million on the deal; Mickey Monus an even million. Shielded from the rumors, Corporate Partners saw only Phar-Mor's commanding role at the convention and they were suitably impressed.

JAY ALIX: I think what they saw was what everybody else saw on the outside, this company with this unique buying philosophy and buying ability and low prices and rapid growth coming from nowhere to $3 billion in sales in record time and the mystique that it was taking over the deep discount world and they were going to end up on top of the whole heap by the time it was done.

PAUL SOLMAN: Four weeks later, Corporate Partners announced their $200 million investment in Phar-Mor. The official story was that this would give Phar-Mor the much-needed cash to continue its aggressive growth plans, but there were more pressing needs for the money than growth or even covering the fraud. Much of it had to go first towards paying off angry vendors.

STAN CHERELSTEIN: Had Corporate Partners known that their money was going to be used to pay Revlon and Procter & Gamble and Helene Curtis invoices from three, four months ago, I don't think they ever would have invested in the company.

PAUL SOLMAN: But they didn't know, nor did anyone else.

ESPN ANNOUNCER: Welcome to the million-dollar Phar-Mor championship, the Phar-Mor in Youngstown.

PAUL SOLMAN: As summer spread across the Mahoning Valley, Mickey Monus presided over the annual Phar-Mor Open, an LPGA tournament sponsored by Phar-Mor. Phar-Mor was now in the hole by $145 million, but Monus appeared as upbeat as ever at the tournament, where he would dole out half a million dollars in prize money.

MICKEY MONUS: We got a little check here for her, $75,000 for first place.

PAUL SOLMAN: Much of it was raised from Phar-Mor vendors. But Pat Finn was becoming more and more anxious. According to Finn, Monus had now distanced himself from managing the fraud, which required more attention than ever, and Finn was stuck with the responsibility of designing new ways to cover it up.

PAT FINN: My energy, and people who worked for me, was going to cover up a situation and it really wasn't going towards making Phar-Mor a better company and that really hurt. And I think we- we all longed for the day that we could just kiss this good-bye and just dedicate ourselves to making the company better.

PAUL SOLMAN: But if Finn still harbored some hope, Cherelstein and Anderson had lost the last shred of faith.

STAN CHERELSTEIN: John and I continually talked about the fraud and what we were going to do to resolve it. We had these discussions probably every day for lunch and Pat was aware that we were talking about it all the time and he knew that we were nervous. And it was those concerns that we brought to Pat's attention that really forced the April meeting.

PAUL SOLMAN: Finn now went to Monus and told him that junior executives were threatening to quit if something wasn't done to address the problem. A meeting was set for a Saturday morning in April of '92. Cherelstein was especially worried that if the fraud were discovered, Monus could lay blame on the accounting department.

STAN CHERELSTEIN: So I went into the April meeting knowing that I didn't want the situation blamed on me, because I had just arrived six months earlier, so I decided to tape it.

JOHN ANDERSON: We're getting real close to audit time here.

MICKEY MONUS: Right.

JOHN ANDERSON: And we got some major problems out there.

MICKEY MONUS: Right.

JOHN ANDERSON: And, you know, we're talking about how to cover it next year-

MICKEY MONUS: Yeah.

JOHN ANDERSON: -and that assumes we get through an audit. And, you know, I'm on the front line out there-

MICKEY MONUS: Yeah, I know that.

JOHN ANDERSON: -with these auditors. And if something comes out to light, I'm there first and I have to-

MICKEY MONUS: Yeah.

JOHN ANDERSON: -sit there and try and cover this stuff.

MICKEY MONUS: Something comes out, you're going to have to get to Pat.

JOHN ANDERSON: But the numbers are just-

MICKEY MONUS: Well, they get-

JOHN ANDERSON: The problems are multiplying and the numbers are multiplying here.

MICKEY MONUS: Got to get through the audit. I mean, I don't know what else to tell you. That's what we got to do. I mean, we ain't in a good spot here, obviously. Keep our fingers crossed and get through it and get the number down.

JOHN ANDERSON: Leaving that meeting, you know, there was a very discouraging feeling, a sense of almost that, you know, whatever the guy's saying probably is not going to happen.

PAT FINN: Mickey's personality is he's- in essence, he's a gambler. If he loses a bet, he's going to double up on the bet, the hope- hope- hopefully, the next time he can recover his- his funds.

TELEVISION SPORTS ANNOUNCER: It is very testy in Youngstown.

PAUL SOLMAN: Monus's penchant for doubling up his bets was about to prove his undoing. The WBL was a disaster, soaking up money. In the first year alone, Monus personally had to put up over a million dollars for the league and still it wasn't enough. But where would he get more money to prop up the league? From a familiar source of funding, as it happens: Phar-Mor vendors.

Tom Zawistowski says Phar-Mor's executive in charge of buying simply ordered vendors to become sponsors.

TOM ZAWISTOWSKI: We'd go to his office and he'd say, "All right," you know, "here's who I think will buy," you know, "Frito-Lay, Fuji Film," you know, people like that. And then, basically, he'd get them on the speaker phone and he'd say, "Listen," you know, "this is important to us. You're going to buy a $50,000 sponsorship," period.

PAUL SOLMAN: But when fans lost interest in Monus's basketball league, so did the sponsors. Remarkably, Monus directed that Phar-Mor funds be used to keep the league going.

Monus's signature had been printed on dozens of Phar-Mor checks to prop up the basketball league. By 1991, millions of dollars had been embezzled. But then a check to this travel agency for WBL expenses would cause the entire scheme to unravel. The travel agent showed the check to her landlord, who happened to be a Phar-Mor investor. He brought it to the attention of David Shapira.

David Shapira called in Pat Finn for an explanation. Now, try to put yourself in Pat Finn's shoes for a moment. What would you have done? Well, true to form, Finn stonewalled, then admitted that a million dollars of Phar-Mor money had gone to support Monus's basketball league when, in fact, more than $10 million had already been embezzled for this purpose. Shapira said he wanted to see the check registers himself, so Finn raced back to Monus, afraid the entire fraud might now be exposed.

Monus suggested one last, desperate gamble. According to Finn, he said there was still time to paper over the WBL fraud as long as they didn't lose their nerve.

PAT FINN: I felt like I- I was almost, like, in quicksand. I kept sinking deeper and deeper and deeper. But I always had a belief that we could fix it. I never wanted to tell myself that- that we couldn't fix it because if we couldn't fix it, there was nothing but bad.

JOHN ANDERSON: I remember very distinctly he called Stan and myself in his office and he said that, "Well, we have to- we have to get these checks and- and type over who they were paid out to or white-out who they were paid to." I flat out refused. I- as soon as I heard that, I said, "There's no way that I'm going to do that."

PAUL SOLMAN: Finally, someone had drawn the line. But there was still Stan Cherelstein. Finn asked his controller to come to his home the next morning.

STAN CHERELSTEIN: I arrived at Pat's house early Saturday morning. We looked through the journals very briefly before we looked at each other and knew that there was no way that we could cover up $10 million in advances to the World Basketball League. And I think, at that point in time, he and I both knew that it was over.

PAUL SOLMAN: Cherelstein and Finn decided it was time to get a lawyer. They went to Cleveland attorney Jerry Gold with their story.

JERRY GOLD: They thought the worst that would happen, they'd get fired. Yeah, as soon as I learned the amount of money involved- nobody walks away from those kind of situations. When you sign your name and somebody loses $100 million, you can't walk away.

PAUL SOLMAN: Early the next week, the first public sign that something might be amiss was a broadcast to Phar-Mor's employees.

MICKEY MONUS: [Phar-Mor broadcast, July 28, 1992] Good afternoon, everybody.

PAUL SOLMAN: Mickey Monus and David Shapira announced a "corporate readjustment."

MICKEY MONUS: The board of directors of Phar-Mor, in conjunction with David and myself, have come up with a restructuring plan. I will relinquish my roles of president and chief operating officer and become a vice chairman of the office of the chairman and we-

PAUL SOLMAN: In fact, Shapira had wanted to fire Monus, but was convinced by board members to keep him on until investigations were complete in a position of no real power.

DAVID SHAPIRA: I will be the new chief operating officer. The senior vice presidents will report to me. I'm going to be running the business on a day-to-day basis.

PAUL SOLMAN: His bet on Monus gone bad, Shapira needed to find out how much money was missing. Who did he turn to? The auditors, Coopers & Lybrand.

DAVID McLEAN: When we first heard that these checks had been found, we pulled together the audit team and we simply went out to start- start digging into areas that had not been dug into prior to- to this discovery.

PAUL SOLMAN: Coopers began interviewing employees who could tell them what they'd missed. John Anderson was anxious to talk.

JOHN ANDERSON: They needed my help and I knew that I would want it divorced from- from the Pat Finn situation and- and I must admit, I was overwhelmed, but at the same time, I was- I was- I was not hesitant or reluctant at all to kind of show them everything that I knew that was going on.

PAUL SOLMAN: Anderson told them the WBL payments were just the beginning of a huge fraud. With Anderson leading them by the hand, Coopers now discovered the full extent of what it had missed during four years of audits. And Phar-Mor's board now discovered the awful truth. Charles Cohen, a Phar-Mor director, says the board was shocked.

CHARLES COHEN, Director, Phar-Mor: It was at that point that we realized that we were talking about a massive accounting fraud in which the accounting department, apparently under the direction of Mickey Monus, had cooked the books at- in a world-class way.

PAUL SOLMAN: The board had to do something. It fired the auditors, blaming them for not finding the fraud. The game was over. In fact, the company that even Wal-Mart feared hadn't earned a dime in five years. A tip about a check for travel arrangements had led to the discovery of one of the biggest corporate frauds in U.S. history.

Pat Finn had decided to come clean and confess everything, but there was one great danger: that he would be blamed for the whole thing if Monus were to claim ignorance of the fraud. So on Tuesday, July 28th, Finn called Monus at home.

MICKEY MONUS: Hello?

PAT FINN: Mick-

MICKEY MONUS: Yeah?

PAT FINN: What's going on?

MICKEY MONUS: How you doing?

PAT FINN: Not good.

PAUL SOLMAN: Finn wanted taped proof of Monus's involvement to take with him when he went to the authorities.

PAT FINN: I mean, it's- when we- when we go in and we talk about this-

MICKEY MONUS: Yeah.

PAT FINN: -I mean, are you going to protect me and my guys and say that, you know, you basically were authorizing this?

MICKEY MONUS: Hey, I'm going to protect you. What am I going to tell them? I mean, what am I going to tell them, that I didn't know anything about it? Is that what you mean?

PAT FINN: Yeah. I mean, you almost have to say that you authorized it- I mean, that you knew about it.

MICKEY MONUS: I'm going to say that we had a- we had a bucket [?] to cover the gross profit and we weren't covering it and it got away from us. That's what I'm going to say, okay?

PAT FINN: Man, I just feel we're just cooked.

PAUL SOLMAN: The next day, Finn turned himself and the tape over to the authorities. For Mickey Monus, it also appeared to be over. Phar-Mor fired him and he was indicted on 129 criminal counts. The government accused him of directing the fraud. Their chief witness would be his protege, Pat Finn.

MICKEY MONUS: I really am not going to comment on the case.

ATTORNEY: [?] We're not going to talk about the case. I appreciate that you have a job to do. We're not going to talk about it, okay?

PAUL SOLMAN: If convicted, Monus would face life in prison and fines of more than $36 million. Overnight, Phar-Mor's image of success was snuffed out.

PHAR-MOR EMPLOYEE: I'd like to kill him. I really would.

PAUL SOLMAN: Thousands of employees were laid off when the company filed for bankruptcy, revealing that it needed half a billion dollars to erase the losses. In desperation, Phar-Mor closed half the stores Monus had opened. And the shock wave spread quickly across the nation's business community, as suppliers, banks and investors learned that they'd been backing a loser all these years. Anthony Cafaro's company lost more than $9 million.

ANTHONY CAFARO: Everybody gets hurt. I mean, all the employees, obviously, the investors. Their stock is worth virtually nothing. Many of the vendors actually lost money or will lose. They're not going to be paid dollar for dollar when the bankruptcy comes out. The banks, the lenders, have lost. Who's- who's made money on it? I- nobody has, ultimately. The only people that come out are the attorneys, at the end.

PAUL SOLMAN: A slew of legal suits followed, as investors and lenders hurried to stake their claims. Phar-Mor's last official act before it filed for bankruptcy was to sue Coopers & Lybrand, claiming their audits fell far short of accounting standards, were, in fact, incompetent.

CHARLES COHEN: I have been around audits for almost 30 years and I'm a professor of securities regulations, so I have read many cases involving auditors. A normal, careful audit by attentive managers and staff, in my opinion, should have and would have exposed some of the failures that occurred here.

PAUL SOLMAN: But Coopers & Lybrand has its excuse. It was royally snookered, just like everyone else.

DAVID McLEAN: When you have the most senior management of the company, particularly its financial management, consciously setting out to fool the auditors, to hide information from them, as they testified in the Monus trial, it's very hard to get around that kind of activity by the- by the senior management.

PAUL SOLMAN: But according to the SEC, auditors have a responsibility to do more.

WILLIAM McLUCAS, Director of Enforcement: The auditors, at the end of the day, have no room to compromise. They have a responsibility to dig deeper, to be skeptical, to ask questions and to impose a discipline on management and on the financial reporting process that may otherwise not be there.

PAUL SOLMAN: If found negligent, Coopers will be liable for hundreds of millions of dollars. But they're fighting back.

DAVID McLEAN: We're suing David Shapira, as the CEO, and our assertion is that he either knew or was recklessly indifferent in not knowing of what was going on around him. And we believe that they are principally responsible for the fraud.

PAUL SOLMAN: But now, answer me this. How can there be a crime involving half a billion dollars where everyone is a victim? The accountants, the board of directors, the chief executive all failed to prevent it from happening. All claim it was the other guy's fault. They blame each other and, above all, Mickey Monus, the self-deluded gambler. But how far are self-delusion and gambling from the positive traits of optimism and daring, which we expect from our entrepreneurs? Not that far, perhaps, which is why we also expect those in oversight positions to keep an eye on those taking the risks. When they don't, we wind up in court because without controls, a system based on gambling and self-delusion will tend to run amok.

Surprising to many, Mickey Monus's first trial ended in a hung jury.

1st JUROR: [June 23, 1994] Oh, no. We had our minds made up. He was as guilty as I'm standing here.

REPORTER: Really?

2nd JUROR: There's more than enough facts to convict, I feel. But some people just refused to see the facts.

REPORTER: Who was undecided?

1st JUROR: One person on the whole jury. Every single- I believe the person was paid off, myself. Just, I mean-

PAUL SOLMAN: The FBI is taking these allegations seriously and is investigating for possible jury tampering. While Monus continues to maintain he did nothing wrong, Phar-Mor is attempting to dig itself out of bankruptcy. By cutting expenses and closing their money-losing stores, they might yet stage a comeback.

David Shapira never responded to repeated requests for an interview. He still sits on Phar-Mor's board, across the table from Corporate Partners, which is suing him to recover their $200 million investment.

John Anderson, in return for his cooperation, was never prosecuted. Despite his role in hiding the fraud for four years, he still sees himself as a victim.

JOHN ANDERSON: I used to have this belief that all people were good and that all people had good intentions. And where I'm at right now is I really have a hard time trusting people and that's something I have to learn to do again because I want to do that again. But having been through this particular experience has really- has made me look at people and situations in business in an unfavorable manner and I have to- to learn to trust people again.

PAUL SOLMAN: Stan Cherelstein was fired by Phar-Mor, but never charged with anything. He's named in several civil suits brought by investors and now works in Florida as an accountant.

STAN CHERELSTEIN: I really think that the situation at Phar-Mor occurs at small companies, in middle-sized companies, all the time. And my recommendation to any accountants or chief financial officers would be, "Don't let it happen. Don't let it start because once you start, it's very easy to let it happen a second time and who knows where it will end."

PAUL SOLMAN: It ended in jail for Pat Finn. Last February, having admitted his responsibility for crafting the fraud, he reported to a federal prison to begin serving a 33-month sentence.

PAT FINN: It's okay to be loyal. It's okay to- to, as I did, try to build a company, to nurture something from the beginning. But never- never lose sight of yourself. Never compromise yourself for that. It's not worth it. It's not worth it. No matter how much of a team ballplayer you think you are, you're just destroying yourself and destroying things that are- that are important to you.

WILLIAM McLUCAS: You can understand certain things. You can understand aggressive accounting. You can understand people who are executives who are hard-charging, who are optimistic. That's how they get to be leaders. Those very things that made someone a superb executive, a superb accountant, a superb chief financial officer sometimes also make them a superb criminal.

PAUL SOLMAN: Mickey Monus is still gambling, still denying everything, and now awaits the start of his second trial. The jury will have to decide whether Mickey Monus is a crook or just a hard-driving entrepreneur.

RADIO TALK SHOW HOST: What a sad day it is for Youngstown. What a black day it is for Youngstown.

1st CALLER: Like you say, he brought a lot of value and positive things to the valley-

2nd CALLER: I felt bad because-

1st CALLER: -and all of us appreciated that.

2nd CALLER: -it's another black mark against our town and it seems that we're- we seem to be so gullible that we want-

3rd CALLER: I compare Mickey Monus kind of, like, to- to Richard Nixon. He just got caught.

VIEWER: Dear FRONTLINE: I am so grateful for FRONTLINE-

ANNOUNCER: And now it's time for your letters. "Is This Any Way to Run a Government?" FRONTLINE's recent investigation of government waste and mismanagement inside the U.S. Department of Agriculture, sparked this outcry.

EDWARD HOWARD: Dear FRONTLINE: We are a small business trying to make an honest living. When we are in trouble financially, we cut down and cut out first personal luxuries and then company-wide excess. Why can't our government be forced to live by the same rules? Edward Howard, Greenville, South Carolina.

ANNOUNCER: But Hubertine Mog, a retired school teacher from Wilson, Kansas, wrote: "I felt the producers were in their usual agriculture-bashing mood. Most of these people have no idea or background in agriculture. You failed to point out how farmers have been cheated out of a just price at the marketplace, a price high enough so that they can meet their living and farming needs." She went on to say-

HUBERTINE MOG: Every one of you in the city profits from this unjust policy by paying less for your food while farmers are forced to give up their livelihood. Hubertine Mog.

ANNOUNCER: And a long-time Forest Service employee had this personal reaction.

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She's the emblem for women who wanted it all.

HILLARY RODHAM CLINTON: My world exploded when I got to Wellesley.

1st WELLESLEY COLLEGE GRADUATE: We've been endowed with a sense that we could do it all.

2nd WELLESLEY COLLEGE GRADUATE: They were not easy decisions.

3rd WELLESLEY COLLEGE GRADUATE: -if I hadn't gotten married-

4th WELLESLEY COLLEGE GRADUATE: I would not have a husband. I would not have children.

5th WELLESLEY COLLEGE GRADUATE: -could I still make a difference-

6th WELLESLEY COLLEGE GRADUATE: -the price tag-

7th WELLESLEY COLLEGE GRADUATE: -still agonizing-

HILLARY RODHAM CLINTON: I had to listen to myself.

8th WELLESLEY COLLEGE GRADUATE: It's my life. Do I measure against Hillary?

ANNOUNCER: The struggles of a generation, "Hillary's Class," on FRONTLINE.

Copyright (c) 1994 WGBH Educational Foundation