Phar-Mor was the discount chain Sam Walton feared — then its CEO went to prison for fraud

Phar-Mor was founded in 1982 by Mickey Monus and David Shapira in Youngstown, Ohio. It used a 'power buying' model — selling high volumes of goods at extremely low margins — and grew rapidly. At its peak in 1992, Phar-Mor had over 300 stores and 25,000 employees. Sam Walton once called Monus the only retailer he feared. The company was on track to reach 500 stores.

The fraud began when Monus and CFO Patrick Finn hid losses and secretly moved money from Phar-Mor to the World Basketball League, which Monus had founded. They falsified inventory data to borrow millions of dollars, ostensibly for growth, but actually to pay suppliers. Monus embezzled about $10 million. The total loss to investors exceeded $1 billion. The fraud was discovered when a former employee tipped off the company's board.

In 1992, Phar-Mor filed for Chapter 11 bankruptcy, closed 55 stores, and laid off 5,000 employees. It emerged in 1995 with 143 stores, but the damage was done. Monus was convicted on 109 federal counts and sentenced to 17 years and 7 months in prison (later reduced to 9 years on appeal). The company filed for bankruptcy again in 2001 and liquidated in 2002. Auditors Coopers & Lybrand were found guilty of fraudulent audits.