American Express Probes Possible Fraud
American Express Co., reeling from disclosures of huge third-quarter losses on its Optima Card operation, is looking into whether middle-level executives deliberately falsified records to downplay an alarming rise in non-payment of credit card bills.
Disclosure of the big losses has caused American Express stock to plummet and prompted unusually harsh criticism of the company from some securities analysts Friday. They noted that the surprise disclosure was only the latest in a series of major embarrassments for the diversified financial services giant. The company Friday also confirmed that it expects to have to set aside a large amount for Optima losses again in its fourth quarter.
American Express stock fell $1.25 to $21.75 Friday before trading on the New York Stock Exchange was halted for the day in advance of a company statement addressing how the losses would be accounted for in the fourth quarter. The decline followed a drop of $2.375 to $23 Thursday. The stock price has fallen by 14% the last two days.
The company earlier this week said it was taking a $265-million charge against earnings for the third quarter ended Sept. 30, mainly due to problems with Optima. Although the company in a statement Friday denied that it would take a “special charge” in its current fourth quarter, spokesman Lawrence A. Armour didn’t rule out that “normal” provisions for losses from bad credit card debts could be as much as $100 million higher than in either of the first two quarters of the year.
Optima, introduced in 1987, was American Express’ attempt to compete with Visa and MasterCard by offering revolving credit. The company has acknowledged that it marketed Optima too aggressively to consumers who turned out to be poor credit risks. It said Optima was hurt by the economic downturn and a sharp rise in personal bankruptcies. A spokesman confirmed that American Express’ top executives, including Chairman and Chief Executive James D. Robinson III, didn’t learn of rapidly worsening problems at Optima until less than three weeks ago.
In a telephone interview, President Harvey Golub confirmed that American Express has retained an outside law firm to conduct an internal investigation into why $24 million in Optima Card losses weren’t recognized in earlier quarters. The company said Wednesday that the losses weren’t disclosed earlier “because of certain failures to comply properly with internal credit policies.” The $24 million in losses made up part of the $155 million the company said it was setting aside in the third quarter to cover losses from Optima Card holders who had defaulted on their bills.
Executives connected with the Optima project were known to be under intense pressure to produce good results. Golub, who is also a member of the company’s two-person “office of the chairman,” declined to comment on whether the company has uncovered evidence of deliberate wrongdoing in failing to book the $24 million over three earlier quarters. But, he said, “it does appear there were individuals who misclassified certain transactions.” He declined to identify them.
If the company turns up evidence of deliberate wrongdoing, it would be the second time in recent years that an American Express unit was caught falsifying profit data: In 1989, the company disclosed that its Boston Co. investment management unit had falsely inflated its 1988 profit by $30 million.
A number of securities analysts who follow American Express said they were taken by surprise by the announcement earlier this week about Optima losses. The company has suffered a long series of miscues and embarrassments in recent years, including record losses at its Shearson Lehman Bros. unit, the seizure by insurance regulators of a Shearson-owned life insurance unit and acknowledgement that American Express had mounted an international smear campaign against a top executive who had left the company, Edmond Safra.
Golub said American Express has notified the Federal Deposit Insurance Corp. of the $24-million discrepancy. Optima operations are conducted through a subsidiary, Centurion Bank, which is subject to FDIC regulation. He said the discovery has required the company to amend quarterly “call reports” it had filed earlier with the FDIC. Call reports are quarterly reports of a bank’s condition and income.
An FDIC spokesman said the agency routinely doesn’t comment on whether it has launched an investigation of a bank. Golub said American Express’ internal investigation would be completed in the coming week.
This week’s developments intensified speculation on Wall Street that Robinson may soon be pressured to leave or take early retirement. Company officials dismissed the speculation.
“There are a lot of fed-up investors,” said Gerald Lewinsohn, an analyst at Merrill Lynch. Lewinsohn said erroneous financial reports such as the apparent underreporting of Optima Card losses “doesn’t speak well of a company, particularly one that prides itself on having an image of high quality.” He added: “It’s a great embarrassment to the company.”
The big losses at Optima weren’t expected in part because Optima Cards were issued only to customers who had held American Express charge cards for at least a year. The company presumably had detailed knowledge of their credit histories. “What’s so surprising is that they didn’t know their customers nearly as well as we all thought,” said Michael W. Blumstein, an analyst at Morgan Stanley & Co.
Blumstein said the $24-million discrepancy, coming in the wake of the 1989 problem at Boston Co., suggests that the management of American Express is too decentralized. “Clearly investors are asking themselves if there is sufficient control here,” he said.
