Case Study: Nextcard, Inc.

Submitted By elanperk03
Words: 1662
Pages: 7

Nextcard, Inc.
R. Elaina Perkins
Liberty University

In the late 1990’s Jeremy Lent created NextCard Inc. as an organization that would provide its customers with the opportunity to obtain a credit card in a very short period of time. Initially the business was successful because Lent hired marketing researchers to develop advertising that would target internet users who possessed credit cards with high balances and were frequent users of them. During its first year of operation NextCard extended over one billion dollars in credit to its customers however the company was not making a profit. Even the decision made by Lent to take the company public was not enough to assist the company with earning a profit. When the internet bubble burst causing the plummet in stock prices for internet based businesses NextCard’s stock suffered so severely that it lost all its financial backing and was faced with the question of how to raise capital. This was an issue because the company had never report a financial profit during it best times of operation coupled with the fact that the business model upon which the company was founded was invalid. The projected cost of obtaining new credit card customers was much higher than Lent originally estimated it to be and though large amounts of money was spent to attract specific credit card users what the researchers did not detail is that only one percent of the target audience actually responded to the advertisements designed to attract them. However even more problematic was that the audience the Lent was successful in attracting were high credit risks who racked up high credit card balances but never financially satisfied these debts which resulted in losses for NextCard.
Not willing to give up on the mission of the organization the NextCard executives withheld the extent of the company’s losses by refusing to provide accurate figures for the expected bad debts for each period. When the company’s financial records were reviewed by the Office of the Comptroller of the Currency they mandated that NextCard increase their projected bad debts allowance. However when they were publically reported NextCard denied that the bad debts reported was being caused by credit losses. Instead NextCard perpetrated that a fraudulent scheme resulting from hackers was the cause of the company’s financial woes. This might have worked had not a Wall Street analyst brought to the public’s attention that the company had continually been understating its’ credit losses which resulted in the companies investors to file a class action suit against NextCard and it executives.
Once the lawsuit was filed Thomas Trauger a partner of Ernest & Young (E&Y) law firm as well as the audit engagement partner for NextCard called a meeting consisting of Oliver Flanagan the senior audit manager for NextCard and Michael Mullen another audit manager for the company. With the assistance of these men, Trauger altered the company’s financials mandating that Mullen alter the software programming on his laptop so that the time stamp on the financials would not be changed from the original date that they were submitted. However as detailed as Trauger thought his plan was it did not pass the scrutiny of the Securities and Exchange Commission as they identified that the financial records had been altered. Mullen in an effort to avoid jail time assisted with investigation by providing a diskette that was in the possession of Flanagan which consisted of copies of the original financial records.
As a result NextCard was liquidated by the courts after being forced to file bankruptcy to in lieu of the millions of dollars in debt accrued by the company. Trauger and Flanagan received jail time as well as fines for impeding with a federal investigation. Mullen while being fined received probation in lieu of jail time for his efforts to assist the investigation. Lent and the other executive staff