Not long ago I saw a Beechcraft Bonanza plane in the sky, wondered what it was, did some research, and through a rabbit hole of clicks and curiosity I found myself reading crash reports on Bonanzas on the National Transportation Safety Board web site in bed one night. One in particular reminded me of something.
In 2010, a Bonanza crashed in Colorado, killing its pilot. That man was Terry Johnson, who was involved in one of the most infamous cases of accounting fraud in corporate history. Not because of size or scope or even press coverage.
It’s infamous because hard drive manufacturer Miniscribe shipped actual bricks instead of hard drives. I don’t mean “bricked” hard drives in the common sense of that term. I mean actual masonry bricks.
This is the story of Miniscribe.
The Early Days
Hard drives actually date to the 1950s, when IBM introduced the IBM 350, a room-sized unit that held 3.75MB and required a ton of power and cooling. For years, this technology was called “DASD” (direct attached storage device).
At the dawn of personal computers, hard drives were too expensive for the home user, and the first IBM PC had no support for them. Seagate dominated the space, but by 1980 a new competitor in Colorado, Miniscribe, had entered the market.
They were able to secure several lucrative contracts to supply IBM with hard drives for its new IBM XT. This upgraded personal computer supported HDDs and Miniscribe was right there to provide 5.25″ form factor hard drives with 5MB of storage. That’s enough for 28 180MB single-sized 5.25″ floppies (the technology of the day).
Miniscribe IPO’d in 1984 and was roaring along…
…until the XT flopped.
Enter Private Equity
The XT was not a bad system, but it was a very marginal improvement over the original. The market was already roiling with clones by then. IBM’s XT wasn’t a bad system, but it didn’t provide anything the consumers of 1983 were really dying to have, or that they couldn’t get from someone else for a lot cheaper.
IBM slashed orders to Miniscribe, so fell into the classic small business problem of being hostage to a single customer. They had to scale up production, support, and logistics to support IBM, but when IBM canceled their orders, Miniscribe didn’t have a queue of other customers.
The stock tanked, and in stepped a private equity firm Hambrecht & Quist. H&Q is forgotten today but in that era they were big players. In fact, Apple’s IPO was partially underwritten by H&Q (their name is in second place on Apple’s IPO tombstone).
Miniscribe was saved from insolvency, but now had new and very demanding task masters to answer to.
The Bricks
The new lease on life allowed Miniscribe to target other customers and by the late 80s they were firmly back in the black, counting Compaq and Digital Equipment (DEC) as customers. They posted $603 million in sales in 1988.
However, Miniscribe had some management challenges and through some sloppiness, they learned from an inventory in early 1987 that they were missing between $2 and $4 million in product. Worse, they expanded the audit to cover their Asian manufacturing centers and the number swelled to $15 million.
This was bad but hardly fatal. A sensible action plan would have looked like this:
- Fire the incompetent managers who let that happen
- Make a thorough and painstakingly accurate inventory
- Put new controls in place to make sure the issue never occurs again
- Have a bad quarter where the news is disclosed
If Miniscribe had done that, within 6 months everything would have been forgotten.
But private equity didn’t want to hear that. They expected constantly rising sales and profits. Disclosing missing inventory would ratchet up cost of goods sold, which would hurt margins and depress the stock. Terry Johnson and the rest of Miniscribe management knew exactly what would happen: bonuses would be canceled, and senior management would be shown the door.
So they decided to cheat. And headed to their local building supply store.
Dead of the Night
In July 1987, Johnson and crew of managers rented a new warehouse, and meticulously packed bricks into hard drive packaging. The bricks were about the size and nearly the exact weight of a hard drive from that era. Each brick was even assigned a serial number.
Shortly thereafter, these units were injected into the inventory by sending them to Singapore, and then receiving them in America as finished goods.
Of course, they weren’t finished goods. But the idea was that they company could keep its external auditors happy (see, we have that $15 million in hard drives) and slowly write off the drives as “defective” over the next couple years. It’d be a drag on earnings but not a catastrophic $15 million hit, and no one would ever know.
And they almost got away with it.
Unfortunately, the PC market slumped in 1988-89 and Miniscribe found itself under tremendous pressure. They responded by turning to other classic fraud techniquess, such as channel-stuffing (sending extra product to wholesalers and recording the sales, even though they’ll inevitably return it a few months later).
Eventually, Miniscribe couldn’t keep up the fraud and auditors discovered the shenanigans. Miniscribe declared bankruptcy in January 1990 and Maxtor acquired the shell a few months later. Several managers went to prison – in part because they’d timed their stock sales rather obviously – but Johnson escaped and went on to found another drive maker that was acquired by Connor Peripherals in 1986,
And the bricks?
The bricks were real – managers admitted as much under criminal investigation – but there are a couple amusing legends.
One is that employees, disgruntled over being shorted severance, moved the “brick” inventory into the regular inventory stream, resulting in customers and retail stores receiving packages that looked identical to Miniscribe drives on the outside but had masonry inside. This lead to someone tipping off investigators.
Another legend is that employees took a few packaged bricks home with them, and somewhere a collector still has a Miniscribe serial-numbered brick in their collection.
I have an eBay alert setup.
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I also enjoy using LEBs! I have an empire of little guys for VPNs, larger guys for apps, and big guys for databases and storage. When I'm not in front a screen I'm into German Shepherd dogs, quality knives, target shooting, theology, tabletop roleplaying games, and forest hiking.
I enjoy writing technical articles here on LowEndBox to help people get more out of their systems. You can find me on LowEndTalk @raindog308
“180MB single-sized 5.25″ floppies”
I think you meant
“180KB single-sided 5.25″ floppies”
Two corrections there