NEW YORK (CNNfn) - For Mercury Finance, Friday struck like a chain reaction pile-up on the freeway as investors sent the auto financing company's shares spiraling downward.
On Wednesday, the company said it had discovered "accounting irregularities" which may have led to its earnings being overstated $90 million over four years.
And Friday, Mercury's troubles worsened when it said it would be unable to pay $17 million in commercial debt due the same day, causing its shares to plummet.
The stock lost 12-3/4 to 2-1/8 on the New York Stock Exchange on volume of 41 million shares -- the highest daily volume on the exchange since 1988 -- after it opened for trading Friday afternoon for the first time since Tuesday when the stock closed at 14-7/8. It fell as low as 1-7/16 but rebounded slightly.
The Illinois-based company said accurate reporting of its results would cut its 1996 earnings by more than 50 percent -- from $120.7 million to $56.7 million.
Mercury is blaming is woes on controller James Doyle, who the company said has disappeared. However, a Chicago law firm representing Doyle said he is in the custody of federal authorities because he could "no longer participate in the charade taking place at Mercury Finance."
The fallout was almost immediate. Bank Boston announced Wednesday it was canceling a $460 million deal to sell Mercury its Fidelity Acceptance subsidiary. Earlier, the two had agreed on a deal that would have given the bank 32.7 million of the auto finance company's shares.
Also, some shareholders have already filed a lawsuit. Vincent Cappucci, an attorney at Berger & Grossman, said he will attempt to recover all the money lost by investors. (178K WAV) or (178K AIFF)
Perhaps the biggest shock will come to investors. Based on the more than 172 million shares outstanding as of early November, the stock's spiral would mean a loss of more than $2.2 billion in market capitalization for the company and a drop in market value of 85 percent.
"The one thing we can be confident of is that the books are cooked, " said John Coffee, Professor of Law at Columbia University. "We don't need to know who cooked the books to know that there is deep trouble for this company ... Bankruptcy reorganization looms and that the creditors are going to start looking for deep pockets to sue."
Credit agencies also calculated the company is in critical condition, downgrading its commercial paper to a default rating.
"It was a liquidity issue and it hasn't been solved. If they get a clean bill of health from the auditors, that will change things," said Richard Schmidt of the Consumer Finance Group of Standard & Poor's. "But the fact is they have defaulted on their commercial paper."
There were also reports Friday that the lawyer for the company's senior financial officer was in Washington, D.C. talking to federal authorities about alleged misdeeds regarding the company's books.
Now the company faces a class-action federal racketeering lawsuit in Louisiana accusing mercury of overcharging customers for used cars and used car loans.