Miniscribe Brick: A hard drive scandal

Last Updated on March 14, 2024 by Dave Farquhar

The Miniscribe Brick refers to an accounting scandal perpetuated by Miniscribe Corporation, a defunct manufacturer of hard drives. CEO Quentin Thomas Wiles and CFO Patrick J. Schleibaum served time in Federal prison as a result of fallout from Miniscribe’s accounting practices, which included counting bricks as hard drive inventory.

The Miniscribe Brick really was a brick

In January 1987, Miniscribe’s officers discovered an inventory shortfall of between $2 and $4 million. Rather than reporting the discrepancy and taking a charge, a number of managers covered up the problem by various means, including breaking into their accounting firm’s lockboxes and changing counts.

But the problem quickly grew. By July, the shortfall in inventory grew to $15 million, and the CEO, Quentin Thomas (QT) Wiles, became aware of the issue. Wiles himself suggested continuing to cover up the problem. This led to managers renting a warehouse in Colorado, purchasing 26,000 bricks, then packaging up the bricks in hard drive boxes, including serial numbers.

The fake drives then found their way to two customers, CompuAdd and CalAbco. The customers agreed in advance to reject the shipments, so they wouldn’t end up in consumer hands. Whether the brick-drives shipped for real or only on paper is unclear. But they did book the Miniscribe brick drives as $4.3 million in sales, then added the returns to inventory, valuing them at $3.66 million. Since the shipment happened in one quarter and the return happened the next, Miniscribe effectively double-counted the brick drives.

As a result of this story, pretty much any time a retro computing Youtuber makes a video with a Miniscribe hard drive involved in any way, there will be a flood of comments saying, “At least it wasn’t a brick!”

Miniscribe’s fraud was more than bricks

But Miniscribe’s fraud didn’t end with bricks. The bricks are a convenient symbol for Miniscribe’s woes, but even double counting the bricks only made half of the $15 million problem disappear. Miniscribe also packaged up defective drives, and any obsolete parts or other scrap they could scrounge up between its factories in Colorado, Hong Kong, and Singapore that weighed around 4 pounds and fit in the box. These non-functional drives ended up in inventory, valued at $8.9 million.

Of course, this isn’t the kind of problem that happens at healthy companies. Miniscribe had other problems.

Miniscribe Corporation’s early history

Terry Johnson, a 20-year veteran of the hard drive business, founded Miniscribe in Longmont, Colorado in 1980. It booked $81,000 in sales in 1981 but grew quickly to $5 million in 1982 and $77 million in 1983.

The 1983 growth occurred because it secured the contract to supply the 10-megabyte hard drive used in IBM’s PC/XT computer in 1983.  This led to going public with an Initial Public Offering (IPO) in late 1983, opening for trading in January 1984. Unfortunately for IBM and Miniscribe, the PC/XT didn’t meet IBM’s initial sales expectations, so IBM dramatically cut back its orders. Sales for 1984 grew only modestly, to $125 million, and slipped to $114 million in 1985.

Miniscribe’s stock value plummeted, the company laid off 26% of its staff, and Johnson left the company. Company president Roger Gower assumed the role of CEO. At the time Johnson said he’d been planning to leave for some time and his departure had nothing to do with IBM.

Venture capital firm Hambrecht & Quist (H&Q) bought 12 percent of the company for $20 million to become its largest shareholder. One of H&Q’s conditions was that their turnaround specialist, QT Wiles, would take over as CEO. H&Q had a long track record of involvement with young tech companies, including Apple Computer and Adobe Systems in the 1980s, and Netscape and Amazon in the 1990s. Miniscribe wasn’t one of their success stories, although for a while it looked like it would be. At the end of 1989, Miniscribe had 8 percent of the highly competitive hard drive market, and reading contemporary reviews of its products, critics had nothing but good things to say about them.

QT Wiles

QT Wiles’ nickname was Dr. Fix It. He was known for a can-do attitude, refusing to take no for an answer, and juggling jobs from his home in Sherman Oaks, Calif., a suburb of Los Angeles. While he was CEO of Miniscribe, he was also running four other companies, including Adobe and chipmaker VLSI.

Wiles further reduced Miniscribe’s headcount by 20 percent. Then he reorganized what was left and moved production overseas, much the way he’d done for other firms. Most crucially, he set aggressive growth targets, with handsome rewards for making your numbers, but severe penalties for missing. The incentives could double a middle manager’s salary, or bring a quick end to their tenure.

And the problem was, while tech was a growth industry in the mid 1980s, things were changing rapidly. There were 50-100 companies attempting to make hard drives at the time. Many of them only lasted one or two generations of drives. During Wiles’ tenure, the industry shifted from a 5.25-inch form factor to 3.5 inches, a new method of encoding, and various methods of interfacing the drives. Miniscribe did a better job of staying current than most accounts give it credit for. The problem wasn’t that Miniscribe failed to introduce 3.5-inch drives. Not only did they introduce 3.5-inch drives, they sold more 3.5-inch drives in 1987 than anyone else. It’s that keeping up with the industry was expensive and cut into profits, and falling prices weren’t helping matters.

The high pressure environment coupled with the difficulties of a very competitive industry invited fraud.

The computer industry as a whole was growing at a rate of between 7 and 10 percent per year in the late 1980s, but Miniscribe was reporting much more than that. After that 1985 setback, Miniscribe’s reported revenues jumped to $185 million for 1986, $362 million for 1987, and $603 million in 1988.

It was a mirage, and that fateful January 1987 inventory was the first indicator that not everything at Miniscribe was on the up and up. The company had been cooking its books.

Normally, a company would restate its figures, take a loss, and get on with life. But that’s not what Miniscribe decided to do.

One crime leads to another

Coopers & Lybrand had already started their audit when the problems came to light. Miniscribe adjusted its books, then broke into the accountants’ lockboxes to change their numbers to match. Warren Perry, Miniscribe’s former manager of investor relations, testified in 1994 that he volunteered to learn how to pick locks and break into the footlockers containing the accountants’ files. He said they then transposed numbers to make the numbers line up while also making it look like human error in the event they were ever caught.

Wiles may not have been aware at this point of what was happening. But by July, he knew things weren’t right. And by then, the gap in inventory was no longer a couple of million bucks. It kept growing, and reached $15 million by July. Wiles removed Schleibaum and replaced him with Owen Taranta. By November, Wiles was demanding an unconventional solution to the problem. He wanted to write down the loss over 12 consecutive quarters rather than all at once.

With yet another audit around the corner in the following January, in December 1987, Taranta and other executives packaged up the 26,000 bricks. Taranta even brought his wife and children to help.

Profits and losses

Miniscribe reported a record profit for 1987 of $31.1 million, after reporting $22.7 million for 1986. But the problem was H&Q expected each year to be better than the last. And in 1988, demand for hard drives decreased, and Miniscribe failed to win lucrative contracts with Apple and Digital Equipment Corp. it had been counting on.

Wiles’ scheme required profitable quarters to work. Miniscribe reported profits for the first three quarters of 1988, but the numbers didn’t add up. Miniscribe’s directors questioned why inventory was growing at the same time profits were growing. Normally, increased money coming in would mean decreasing inventory.

And at least some of the inventory pileup was real. It wasn’t all Miniscribe bricks and defective drives and scrounged-up scrap metal. And that was Wiles’ fault. Miniscribe sold drives at capacities ranging from 20 megabytes to 380 megabytes. Wiles insisted on increasing production of the high-end, multi-hundred-megabyte drives at a time when the bestselling drives were in the 20-40 megabyte range. In 1988, a 20-megabyte drive retailed for around $280 and a 40-megabyte drive retailed for around $400. Wiles was swinging for the fences with his 380-meg drives, which retailed for $1,700.

The profits had less basis in reality. No basis, actually. The reality was Miniscribe wasn’t turning a profit and was spending money faster than they could borrow it. After maxing out its credit line with Bank of America, Miniscribe took on a $90 million credit line with Standard Chartered Bank. That money quickly ran out and Standard Chartered refused to loan more. Miniscribe started having trouble paying suppliers, and employee paychecks started bouncing.

Schleibaum, no longer CFO but still employed at Miniscribe, bailed at this point. He exercised his stock options and sold it all, making $775,940 in profit.

For the last quarter of 1988, Miniscribe reported a loss of $14 million, rather than the $40 million it had actually lost. In February 1989, Wiles resigned. He also exercised stock options and sold his stock, netting $1.4 million on his way out. The board chose Richard P. Rifenburgh, Wiles’ partner at H&Q, as the new CEO.

Word of the Miniscribe bricks goes public

New management quickly became aware there was massive fraud, though it took a good six months to get to the bottom of it. They reported revised results for 1986 to 1989, and a November 2, 1989 article in The Colorado Springs Gazette stated the company had $8 million in working capital and a negative net worth of $88 million. And as the company lost viability, the dirty laundry started coming out. After all, a year before, analysts had been led to believe Miniscribe had $100 million in cash on hand, somewhat less than $100 million in debt, and significant positive net worth.

Miniscribe quickly faced 20 lawsuits as a result of the fraud, and had no way out except bankruptcy. Competing hard drive manufacturer Maxtor purchased Miniscribe’s assets for $46 million in cash and stock in April 1990. Wearnes Technology was the only other company that bid.

Miniscribe ceased to exist as anything but a legal entity at that point. But it still had to deal with the lawsuits. Miniscribe sued 60 of its former executives, as well as H&Q and Coopers & Lybrand for a total of $400 million. The tangled web of lawsuits took several years to unwind.

Aftermath

In March 1993, Wiles was found guilty of issuing false and misleading financial statements, covering up the fraud, and insider trading. He served three years in prison as was released in June 1999. Schleibaum served two. This is comparable to the time Media Vision’s executives served later in the decade for their own inventory fraud. Although nothing Media Vision did involved bricks. I also think it’s worth mentioning that the average Federal drug sentence is 97 months and the average Federal racketeering sentence is 70 months.

Three former top executives, Gerald Goodman, Warren Perry and Owen Taranta, received immunity in exchange for testifying against Wiles and Schleibaum. Various lower-level executives paid fines to the Securities and Exchange Commission. After Miniscribe ran out of money, shareholders successfully sued VC firm Hambrecht & Quist, accounting firm Coopers & Lybrand, and Q.T. Wiles for securities fraud. Wiles was still facing lawsuits after his 1999 release from prison. He kept a low profile after his release. I found a quote from his attorney, Cary Lerman, in the September 14, 2002 issue of The Rocky Mountain News stating Wiles was out of prison and alive. Wiles was 82 at the time and still residing in suburban Los Angeles.

Lerman also said prison was hard for Wiles given his age and health. To that I say finding new jobs and paying bills in the meantime was hard for the thousands of people laid off due to his fraud.

Wiles died sometime in 2018, at the age of 98 or 99. He is buried in Westwood Memorial Park in Los Angeles County, Calif., USA.

Miniscribe Corporation’s legacy should be more than bricks

To some extent, it’s unfortunate that Miniscribe’s legacy begins and ends with boxing up bricks and issuing them serial numbers and treating them as fake inventory. Miniscribe had been an innovator. Its drives performed well, and in its 1990 reliability roundup, PC Magazine noted that Miniscribe was the second-most mentioned drive manufacturer in its survey. It’s also noteworthy that in that survey, Miniscribe’s reliability was only average. That would suggest the high-stakes, high-pressure environment QT Wiles put in place took a toll on quality.

The scandal made national headlines but was an especially big story in Miniscribe’s home state of Colorado. For years afterward, Quest Electronics, a Denver electronics dealer, kept a brick in a display case alongside other hard drives with a label on it that said “Miniscribe 40 MB” and a price, as a joke.

Maxtor continued operating out of Miniscribe’s former operations in Colorado until 2006, when Seagate purchased its rival. Seagate wound down the former Miniscribe operations as a cost-saving measure.

Today, there are only three hard drive makers left in the world: Seagate, Western Digital, and Toshiba. And we’ve had hard drive scandals since. But the SMR scandal of a few years ago has nothing on the Miniscribe Brick.