Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

The bourgeoisie can be termed as any group of people who are discontented with what they have, but satisfied with what they are
Nicolás Dávila

This one on the report card business schools seemed too important to pass up.  I think it relates to the points Dr. Brazil made in the quotation that I placed (with permission) in http://www.trinity.edu/rjensen/book05q1.htm#020805
(You have to scroll down some distance to find the Brazil quotation.)

Today's Bourgeoisie
Education molds not just individuals but also common assumptions and conventional wisdom. And when it comes to the business world, our universities - and especially their graduate business schools - are powerful shapers of the culture.

History suggests it was always this way. Even Isaac Newton, of gravity fame but who also held the position of master of the mint, lost money in the South Sea Bubble. He got out, thinking it was a bubble, then got back in when it kept going up. He lost a small fortune in the process when it finally collapsed. Human greed, coupled with hubris, hasn't changed in the four centuries for which we have some sense of economic history.
Lawrence B. Lindsey, "Loosen Deposit Insurance Rules To Prevent a Bank Run," The Wall Street Journal, September 17, 2008 ---
http://online.wsj.com/article/SB122161066927045759.html?mod=djemEditorialPage
Jensen Comment
You can read about the South Sea Bubble in 1720 at http://en.wikipedia.org/wiki/South_Sea_bubble
The South Sea Company was selling shares in itself and calling it income.

Mortgage Backed Securities are like boxes of chocolates. Criminals on Wall Street and one particular U.S. Congressional Committee stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poors rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide. Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted. Momma always said: '"Sniff the chocolates first Forrest." Things generally don't pass the smell test if they came from Wall Street or from Washington DC.
Forrest Gump as quoted at http://newsgroups.derkeiler.com/Archive/Rec/rec.sport.tennis/2008-10/msg02206.html


                           Forrest Gump's Momma

The Sleazy Subprime Mortgage Lending Companies Have a New (actually renewed old) Scheme to Make Billions at Taxpayer Expense
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means. You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
Chad Terhune and Robert Berner, "FHA-Backed Loans: The New Subprime The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more," Business Week, November 19, 2008 --- http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm?link_position=link2
Jensen Comment
That's right. The greedy slime balls "Borne of Sleaze, Bribery, and Lies" are resurfacing with Barney Frank's blessing --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

"Financial Reversals:  Everything bad is good again," by  Jacob Sullum, Reason Magazine, November 19, 2008 ---
http://www.reason.com/news/show/130142.html

"Proposed new Bailout Plan," by Andreas Hippin, Bloomberg, November 20, 2008 ---
http://www.wallstreetoasis.com/forums/proposed-new-bailout-plan

The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.

The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ``You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS's are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody's and S&P have already issued their top investment grade ratings for the PRBS's.

Head pirate, Ubu Kalid Shandu, said "we need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster." Shandu added, "We don't call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better."

I'm suspicious that Andreas Hippin, in the above tidbit, was inspired by "The End" by Michael Lewis
"The End," by Michael Lewis December 2008 Issue The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#TheEnd 

From the Financial Clippings Blog on October 22, 2008 --- http://financeclippings.blogspot.com/

I wrote earlier that credit rating agencies seem to be run like protection rackets..

from CNBC

In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.

Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.

Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."

Fraud and incompetence among credit rating agencies --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

The New York Stock Exchange's report on the pay package given to its former chairman, Dick Grasso, made clear the excessiveness of the compensation and the ineffectiveness of the safety controls that failed to stop it. What the report didn't provide, however, was an answer to an obvious question: Why did nobody on the exchange's board look at that astronomical sum and feel some personal responsibility to find out what was happening?  I can't read minds, but I think it's fair to say that to some extent the players in this drama - as well as those in the ones now being played out in courtrooms and starring former executives of Tyco, WorldCom and HealthSouth - have been shaped by the broader business culture they have worked in for so long. And, as with any situation in which we are puzzled by how a group of people can think in a seemingly odd way, it helps to look back to how they were educated. Education molds not just individuals but also common assumptions and conventional wisdom. And when it comes to the business world, our universities - and especially their graduate business schools - are powerful shapers of the culture.
Robert J. Shiller, "How Wall Street Learns to Look the Other Way," The New York Times, February 8, 2005 --- http://www.nytimes.com/2005/02/08/opinion/08shiller.html 

Ending a bitter public fight over whether former New York Stock Exchange Chief Executive Dick Grasso was paid too much, a state appeals court ruled that Mr. Grasso can keep every penny collected from his $187.5 million multiyear compensation package. The 3-to-1 ruling by the Appellate Division of the New York State Supreme Court was a vindication for the relentless Mr. Grasso, who was ousted after details of his lucrative pay were revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall Street Journal, July 2, 2008; Page A1 --- http://online.wsj.com/article/SB121492781324819635.html?mod=todays_us_page_one

Clinton's famously crude remark
And I hope that comes through in the book (Infectious Greed).  I am very critical of the tax law changes that created the incentives for companies to pay executives with stock options, which were made at the beginning of the Clinton Administration to appease populist anti-corporation forces among his supporters by appearing to do something about what, even then, was alleged to be excessive pay for corporate executives.  Not to mention his Administration's hands-off approach to Wall Street (when Arthur Levitt headed the SEC).  There's that great story --- perhaps apocoryphal --- that I recount in the book about Clinton's famously crude remark when he discovered that voters cared much more about whether the stocks were going up than his economic program.
Frank Partnoy, Partnoy's Solutions, welling@weeden, October 21, 2005

Symptoms include "excessive and sometimes fraudulent risks
Add to the growing number of recently diagnosed diseases in America the Icarus Syndrome. This malady, discovered by a law professor, is said to affect corporations in particular. The symptoms include "excessive and sometimes fraudulent risks." The disease has attacked corporate America not only in our own scandal-plagued times but, it seems, since about 1873.  Icarus in the Boardroom (Oxford University Press, 250 pages, $25) is an attempt to alert public-health officials, so to speak, to the dangers of this contagion. David Skeel, a professor of law at the University of Pennsylvania, labels all sorts of apparently admirable traits -- "self-confidence, visionary insight, the ability to think outside the box" -- as potential Icaran qualities, full of danger. They "may spur entrepreneurs to take misguided risks," he writes, "in the belief that everything they touch will eventually turn to gold." Fortunately, he offers a number of cures, ranging from small doses of regulation to massive doses of regulation.  And little wonder. What is most interesting about "Icarus in the Boardroom" is the vast divide it reveals -- between American lawyers who study corporations and, well, everybody else. Following common sense and economic logic, most people view corporate risk-taking and corporate fraud as different things: Fraud involves lying; risk-taking does not. As in the case of Enron and WorldCom, fraudulent executives often misstate how much risk their investors will assume.  For academic lawyers such as Mr. Skeel, however, it seems that risk-taking and fraud are points on a continuum. Risk-taking quickly fades into "excessive" risk-taking, which then morphs into fraud. Mr. Skeel never says just how we are to distinguish acceptable risks from the excessive and fraudulent kind. Apparently, though, lawmakers and regulators will figure out a formula, for it falls to them, in Mr. Skeel's view, "to prevent risk-taking that edges toward market manipulation or fraud."
Jonathan R. Macey, "A Risky Proposition," The Wall Street Journal,  March 15, 2005; Page D8 --- http://online.wsj.com/article/0,,SB111083993718979142,00.html?mod=todays_us_personal_journal 

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Two months ago, shortly before Japan ordered Citigroup to close its private banking unit there for, among other things, failing to guard against money laundering, Charles O. Prince, the chief executive, commissioned an independent examination of his bank's lapses. When he received the assessment in mid-October, he got an eyeful.
"It's Cleanup Time at Citi," by Timothy L. O'Brien and Landon Thomas, Jr., The New York Times, November 7, 2004 --- http://www.nytimes.com/2004/11/07/business/yourmoney/07citi.html  

The Sleazy Subprime Mortgage Lending Companies Have a New (actually renewed old) Scheme to Make Billions at Taxpayer Expense
As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means. You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.
Chad Terhune and Robert Berner, "FHA-Backed Loans: The New Subprime The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more," Business Week, November 19, 2008 --- http://www.businessweek.com/magazine/content/08_48/b4110036448352.htm?link_position=link2
Jensen Comment
That's right. The greedy slime balls "Borne of Sleaze, Bribery, and Lies" are resurfacing with Barney Frank's blessing --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

"Financial Reversals:  Everything bad is good again," by  Jacob Sullum, Reason Magazine, November 19, 2008 ---
http://www.reason.com/news/show/130142.html

"Proposed new Bailout Plan," by Andreas Hippin, Bloomberg, November 20, 2008 ---
http://www.wallstreetoasis.com/forums/proposed-new-bailout-plan

The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.

The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ``You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS's are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody's and S&P have already issued their top investment grade ratings for the PRBS's.

Head pirate, Ubu Kalid Shandu, said "we need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster." Shandu added, "We don't call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better."

I'm suspicious that Andreas Hippin, in the above tidbit, was inspired by "The End" by Michael Lewis
"The End," by Michael Lewis December 2008 Issue The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#TheEnd 

From the Financial Clippings Blog on October 22, 2008 --- http://financeclippings.blogspot.com/

I wrote earlier that credit rating agencies seem to be run like protection rackets..

from CNBC

In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.

Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.

Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."

Fraud and incompetence among credit rating agencies --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

In the years after Enron, many chief executives had been operating in a defensive crouch. Last year, however, they switched to offense, yelping about the new securities rules — way too strict and so time-consuming — and whining that Eliot Spitzer and his meddlesome investigations could wreck the nation’s economy. The United States Chamber of Commerce even sued the Securities and Exchange Commission, hoping to overturn its new rule requiring mutual fund chairmen to be independent.  So as 2005 dawns, it is again time to grant the Augustus Melmotte Memorial Prizes, named for the charlatan who parades through “The Way We Live Now,” the novel by Anthony Trollope. Mr. Melmotte, who would fit just fine into today’s business world, is a confidence man who takes London by storm in the late 1800’s.
Gretchen Morgensen, "The Envelopes, Please," The New York Times, January 1, 2005 --- http://www.nytimes.com/2005/01/01/business/yourmoney/02award.backup.html?oref=login 
Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/fraud001.htm#Governance 

Who's Preying on Your Grandparents?
Back in February, Jose and Gloria Aquino received a flier in the mail inviting them to a free seminar on one of their favorite topics: protecting their financial assets. As retirees, they were always on the lookout for safe investment strategies as well as tips on how to make sure they didn't outlive their savings. Besides, the flier promised a free lunch for anyone attending the workshop, so what did they have to lose? Potentially plenty, they would soon discover.
Gretchen Morgenson, "Who's Preying on Your Grandparents?" The New York Times, May 15, 2005 --- http://www.nytimes.com/2005/05/15/business/yourmoney/15vict.html?

Dilbert Cartoons on Market Manipulations
"Scott Adams Discovers Market Manipulation," by Barry Ritholtz, Ritholtz Blog, March 2013 ---
http://www.ritholtz.com/blog/2013/03/scott-adams-manipulators/

Regular readers know I am a fan of Scott Adams, creator of the comic Dilbert and occasional commentator on a variety of matters.

He has a somewhat odd blog post up, titled, Here Come the Market Manipulators. In it, he makes two interesting suggestions: The first is to decry “market manipulators,” who do what they do for fun and profit to the detriment of the rest of us. The second is to say that these manipulators are likely to cause “a 20% correction in 2013.”

Let’s quickly address both of these issues: First off, have a look at the frequency of 20% corrections in markets. According to Fidelity (citing research from Capital Research and Management Company), over the period encompassing 1900-2010, has seen the following corrections occur:

Corrections During 1900 – 2010

5%:  3 times per year

10%:  Once per year

20%:  Once every 3.5 years

Note that Fido does not specify which market, but given the dates we can assume it is the Dow Industrials. (I’ll check on that later).

Note that US market’s have not had a 20% correction since the lows in March 2009. I’ll pull up the relevant data in the office, but a prior corrective action of 19% is the closest we’ve come, followed by a ~16% and ~11%.

As to the manipulators of the market, I can only say: Dude, where have you been the past 100 years or so?

Yes, the market gets manipulated. Whether its tax cuts or interest rate cuts or federal spending or wars or QE or legislative rule changes to FASB or even the creation of IRAs and 401ks, manipulation abounds.

In terms of the larger investors who attract followers — I do not see the same evidence that Adams sees. Sure, the market is often driven by large investors. Yes, many of these people have others who follow them. We need only look at what Buffet, Soros, Dalio, Icahn, Ackman, Einhorn and others have done to see widely imitated stock trades. But that has shown itself to be a bad idea, and I doubt anyone is making much money attempting to do so. And, it hardly leads to the conclusion that any more than the usual manipulation is going on.

Will be have a 20% correction? I guarantee that eventually, we will. Indeed, we are even overdue for it, postponed as it is by the Fed’s manipulation.

But I have strong doubts it is going to be caused by a cabal manipulating markets for fun & profit. It will occur because that’s what markets do . . .

 

 

Previously:
Dilbert’s Unified Theory of Everything Financial’  (October 15th, 2006)

7 Suggestions for Scott Adams (November 27th, 2007)

Don’t Follow Wealthy Investors, Part 14 (February 17th, 2008)

"What’s Wrong with the Financial Services Industry?" by Barry Ritholtz, Ritholtz Blog, February 21, 2013 ---
http://www.ritholtz.com/blog/2013/02/whats-wrong-with-the-financial-services-industry/

Jensen Comment
You can also see a Dilbert cartoon about making up data ---
http://www.trinity.edu/rjensen/Theory01.htm

Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm

How the Gatekeepers Failed in Their Responsibilities to Protect the Public from Corporate and Banking Fraud

Brooksley Born, chair of the Commodity Futures Trading Commission --- suggested that government should at least study whether some regulation might make sense, a stampede of lobbyists, members of Congress, and other regulators --- including Alan Greenspan and Robert Rubin --- ran her over, admonishing her to keep quiet.  Derivatives tightened the connections among various markets, creating enormous financial benefits and making global transacting less costly --- no one denied that.  But they also raised the prospect of a system-wide breakdown.  With each crisis, a few more dominos fell, and regulators and market participants increasingly expressed concerns about systematic risk --- a term that described a financial-market epidemic.  After Long-Term Capital collapsed, even Alan Greenspan admitted that the financial markets had been close to the brink.  
Frank Partnoy, Infectious Greed (Henry Holt and Company, 2004, Page 229)

Throughout 1994 and 1995, Brickell (the banking industry's pit bull in Washington) and Levitt (Head of the SEC) worked to protect the finance industry from new legislation.  In early 1994, lobbyists waited for investors to calm down from the shock of how much money-fund managers and corporate treasures had lost gambling on interest rates.  When legislation was introduced, Brickell fought it and Levitt gave speeches saying the financial industry should police itself.  The issues were complicated, and the public --- once angered by the various scandals ---  ultimately lost interest.  Instead of new derivatives regulation, Congress, various federal agencies, and even the Supreme Court created new legal rules that insulated Wall Street from liability and enabled financial firms to regulate themselves.   Under the influence of Levitt and Brickell, regulators essentially left the abuses of the 1990s to what Justice Cardozo had called the "morals of the market place."
Frank Partnoy, Infectious Greed (Henry Holt and Company, 2004, Page 143)

In God, but not our financial advisor, we trust!
Declining trust has spurred some 25% of the affluent investors surveyed to move a portion of their assets out of their financial-services firms in the past two years, according to a study by Spectrem Group, a Chicago research and consulting firm. A litany of complaints, including poor investment performance, conflicts of interest, hidden fees and financial scandals, prompted wealthy investors to move their business elsewhere.
Rachel Emma Silverman, "Wealthy Lose Trust in Advisers," The Wall Street Journal, February 2, 2005, Page D2 --- http://online.wsj.com/article/0,,SB110730662305243216,00.html?mod=todays_us_personal_journal 

One of the world's most widely known and respected economists, Henry Kaufman is almost single-handedly responsible for founding the spectator sport known as "Fed watching." He began a 26-year career at Salomon Brothers in 1962, when he was probably the only Wall Street employee with a doctorate. There he built one of the most prestigious securities research departments and became a senior partner and vice chairman. In the last 30 years, he has been one of the most vocal critics of insufficient financial oversight and regulation, and his pronouncements and prognostications have often moved markets. We interviewed Dr. Kaufman in his New York office, where he heads his own international economic consulting firm.
Wall Street Wisdom --- http://www.amazon.com/exec/obidos/tg/feature/-/41979/102-2649781-5248131 

Question
What is the SEC's new NMS?
In the best possible marketplace, all buyers see the prices asked by all sellers and all sellers see the prices offered by all buyers -- and little guys are treated the same as big ones. The result: competition that insures the most efficient interplay of supply and demand. In theory, it sounds great. And indeed, this is the idea behind the Security and Exchange Commission's push for an integrated stock market called the National Market System, or NMS. But could the best intentions backfire? Wharton finance professor Marshall E. Blume answers that question in a new research paper titled, "Competition and Fragmentation in the Equity Markets: The Effect of Regulation NMS."
"Will the SEC's National Market System Stifle the Innovation It Hopes to Promote?" Wharton Business School at the University of Pennsylvania, Knowledge@Wharton, April 4, 2007 --- Click Here

"Psychology Of Fraud: Why Good People Do Bad Things (with cartoons)," by Chana Joffe-Walt and Alix Spiegel, NPR, May 1, 2012 ---
http://www.npr.org/2012/05/01/151764534/psychology-of-fraud-why-good-people-do-bad-things
Thank you Jim McKinney for the heads up.

Jensen Comment
This was a very good broadcast. I've tracked fraud for years -- http://www.trinity.edu/rjensen/Fraud.htm

One of the most important aspects of fraud psychology is the follow-the-herd-mentally when those around you are both committing fraud and getting away with it. My best illustrations here are tracked in my extensive timeline of derivative financial instruments frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Another key ingredient of some large frauds is that white collar crime pays big even if you get caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

For some fraud is a disease like pedophilia in that the worst of the worst just seem to not be able to help themselves. Recidivism: is very high after being released from prison.---
http://www.springerlink.com/content/w125216287260u28/

Question
"U.S. Securities Law: Does 'High Intensity' Enforcement Pay Off?" Knowledge@Wharton, May 30, 2007 ---
Click Here

Strong enforcement is critical to obtaining good governance and adding value to corporations, and investors stand to gain from it.

. . .

In the U.K., the FSA budget for enforcement is between 12.5% and 13% of its total budget, which Coffee said is consistent with many other countries. The SEC spends around 40% of its overall budget on enforcement, and Australia spends even more -- nearly 47% in 2005. Coffee also noted that the SEC has 1,200 attorneys working full time for the agency. The FSA, he said, maintains a "skeletal" legal staff and outsources cases when necessary. In Britain and many other countries, regulators place more emphasis on negotiating settlements to avoid formal enforcement actions. "They don't like to keep a legal enforcement staff because they see enforcement as a last-ditch effort."

. . .

In the wake of corporate scandals in the U.S., criminal enforcement is the "ultimate deterrence," Coffee said. Citing research from cases between 1978 and 2004, he noted that some 755 individuals and 40 firms were indicted for "financial misrepresentation," which he said is just a small subset of securities violations. In all, 1,230.7 years of incarceration and 397.5 years of probation were imposed, with an average sentence of 4.2 years.

Continued in article

Importance of Internal Controls Even Among the "Good Folks"
April 3, 2011 Message from Jim McKinney

On today’s NPR Program, This American Life, there was an interesting story today about how a young untrained person was put in-charge of The Kennedy Center gift shop and learned the importance of internal controls. The shrinkage was in the 40% range initially. The main point was, here are these basically good people volunteering time, and yet many of them were stealing cash and merchandise because there were no internal controls.

http://www.thisamericanlife.org/radio-archives/episode/431/see-no-evil

Jim McKinney, Ph.D., C.P.A.
Tyser Teaching Fellow
Accounting and Information Assurance
Robert H. Smith School of Business
4333G Van Munching Hall
University of Maryland
College Park, MD 20742-1815
http://www.rhsmith.umd.edu

There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud.
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

A second paper in this series will examine the theoretical justifications for the importance of the stock market as perhaps the central financial institution in the United States.
"Who Needs the Stock Market? Part I: The Empirical Evidence," by Lawrence E. Mitchell George Washington University - Law School, SSRN, October 30, 2008 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1292403

Data on historical and current corporate finance trends drawn from a variety of sources present a paradox. External equity has never played a significant role in financing industrial enterprises in the United States. The only American industry that has relied heavily upon external financing is the finance industry itself. Yet it is commonly accepted among legal scholars and economists that the stock market plays a valuable role in American economic life, and a recent, large body of macroeconomic work on economic development links the growth of financial institutions (including, in the U.S, the stock market) to growth in real economic output. How can this be the case if external equity as represented by the stock market plays an insignificant role in financing productivity? This paradox has been largely ignored in the legal and economic literature.

This paper surveys the history of American corporate finance, presents original and secondary data demonstrating the paradox, and raises questions regarding the structure of American capital markets, the appropriate rights of stockholders, the desirable regulatory structure (whether the stock market should be regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission, for example), and the overall relationship between finance and growth.

The answers to these questions are particularly pressing in light of a dramatic increase in stock market volatility since the turn of the century creating distorted incentives for long-term corporate management, especially trenchant in light of the recent global financial collapse.

A second paper in this series will examine the theoretical justifications for the importance of the stock market as perhaps the central financial institution in the United States.

Shocking 25 Minute Video
A Rigged Trading System: "The odds are better in Las Vegas than on Wall Street"
This is the same fraud as the one committed by Max in the Broadway show called The Producers (watch the Bloomberg video of how the fraud works)
Max sold over 100% of the shares in his play.
A fraudulent market manipulation contributed to the Wall Street meltdown
Phantom Shares and Market Manipulation (Bloomberg News video on naked short selling) --- http://video.google.com/videoplay?docid=4490541725797746038

Labor Unions Want Less Financial Disclosure and accountability

From day one of the Obama era, union leaders want the lights dimmed on how they spend their mandatory member dues. The AFL-CIO's representative on the Obama transition team for Labor is Deborah Greenfield, and we're told her first inspection stop was the Office of Labor-Management Standards, or OLMS, which monitors union compliance with federal law. Ms. Greenfield declined to comment, citing Obama transition rules, but her mission is clear enough. The AFL-CIO's formal "recommendations" to the Obama team call for the realignment of "the allocation of budgetary resources" from OLMS to other Labor agencies. The Secretary should "temporarily stay all financial reporting regulations that have not gone into effect," and "revise or rescind the onerous and unreasonable new requirements," such as the LM-2 and T-1 reporting forms. The explicit goal is to "restore the Department of Labor to its mission and role of advocating for, protecting and advancing the interests of workers." In other words, while transparency is fine for business, unions are demanding a pass for themselves.
"Quantum of Solis Big labor wants Obama to dilute union disclosure rules," The Wall Street Journal, December 21, 2008 --- http://online.wsj.com/article/SB122990431323225179.html?mod=djemEditorialPage

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.
David Warsh, "A Recent Exercise in Nation-Building by Some Harvard Boys," EconomicPrincipals.com, March 27, 2011 ---
http://www.economicprincipals.com/issues/2011.03.27/1248.html
Thank you Robert Walker for the heads up.

It was worth a smile at breakfast that morning in February 2006, a scrap of social currency to take out into the world. Michael Porter, the Harvard Business School management guru, had grown famous offering competitive strategies to firms, regions, whole nations.  Earlier he had taken on the problems of inner cities, health care and climate change.  Now he was about to tackle perhaps the hardest problem of all (that is, after the United States’ wars in Afghanistan and Iraq).

He had become adviser to Moammar Khadafy’s Libya.

There at the bottom of the front page of the Financial Times was a story that no one else had that day, or any other – a scoop. It turned out that Porter and his friend Daniel Yergin and the consulting firms which they had respectively co-founded and founded, Monitor Group and Cambridge Energy Research Associates, had been working for a year on a plan to diversify the Libyan economy away from its heavy dependence on oil. Their teams had conducted more than 2,000 interviews with “small- and medium-scale entrepreneurs as well as Libyan and foreign business leaders.” (Both men are better-known as celebrated authors:  Porter for Competitive Strategy: Techniques for Analyzing Industries and Competitors and The Competitive Advantage of Nations, Yergin for The Prize: the Epic Quest for Oil, Money and Power and The Commanding Heights: the Battle for the World Economy.)

The next day Porter would present the 200-page document they had prepared in a ceremony in Tripoli. Khadafy himself might attend. The FT had seen a copy of the report, which envisaged a glorious future under the consultants’ plan. If all went well, it said, then by 2019 – the 50th anniversary of the military coup that brought Col. Khadafy to power – Libya would have “one of the fastest rates of business formation in the world,” making it a regional leader contributing to the “wealth and stability of surrounding nations.”

. . .

We now know that Khadafy’s son bribed his way into his PhD from the London School of Economics (LSE); that Monitor Group had been paid to help him write his dissertation there (much of which apparently turns out to have been plagiarized, anyway); that the Libyan government was paying Monitor $250,000 a month for its services; that, according to The New York Times, Libya’s sovereign wealth fund today owns a portion of Pearson PLC, the conglomerate that publishes the Financial Times and The Economist; that the whole deal quietly fell apart two years later.

Sir Howard Davies resigned earlier this month as director of the LSE after it was disclosed he had accepted a ₤1.5 million donation in 2009 from a charity controlled by Saif Khadafy.

It turns out that Monitor also proposed to write a book boosting Khadafy as “one of the most recognizable individuals on the planet,” promised to generate positive press, and to bring still more prominent academics, policymakers and journalists  to Libya, according to Farah Stockman of The Boston Globe. She did a banner job of pursuing the details she found in A Proposal For Expanding the Dialogue Surrounding the Ideas of Moammar Khadafy, a proposal from Mark Fuller in 2007 that a Libyan opposition group posted on the Web.

Among those enlisted were Sir Anthony Giddens, former director of the LSE; Francis Fukuyama, then of Johns Hopkins University; Benjamin Barber, of Rutgers University (emeritus); Nicholas Negroponte, founder of MIT’s Media Lab; Robert Putnam and Joseph Nye, both former deans of Harvard’s Kennedy School of Government.  Nye received a fee and wrote a broadly sympathetic account of his three-hour visit with Khadafy for The New Republic. He also told the Globe’s Stockman he had commented on a chapter of Saif’s doctoral dissertation. (When The New Republic scolded Nye earlier this month, after Mother Jones magazine disclosed the fee, Nye replied that his original manuscript implied that he had been employed as a consultant by Monitor, but that the phrase had been edited out).

. . .

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.

New Book --- Yeah Right!
Harvard Business Review on Making Smart Decisions --- Click Here
http://hbr.org/product/harvard-business-review-on-making-smart-decisions/an/10323-PDF-ENG?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date New Book --- Yeah Right!

Jensen Comment
In Chile the Chicago Boys rebuilt a nation with honor. I Libya the Harvard Boys were apparently less honorable.

And look what a desert swamp we're mired in now!

. . . being a Harvard professor apparently means never having to say you’re sorry

The entire year 2006 ethics flap about climbers not rendering aid to a supposedly dying climber on Mt. Everest was preceded by a great 1983 real world case called the Parable of the Sadhu from the Harvard Business School --- Click Here

The Parable of the Sadhu was and still is widely used in ethics courses, especially regarding issues of situational ethics and group versus individual ethics. The author Bowen H. McCoy was the managing director of the investment banking firm Morgan Stanley & Co. After returning to New York, McCoy was conscious stricken about leaving a dying religious man during an Everest climb. The climbers at that time shed some clothes to keep the dying man warm. But climbers from various nations (U.S., Switzerland, and Japan) actually moved on and did not help the man down to shelter because they all felt that he was going to die in any case. Also, the weather was such that the climbers could not complete their climbing goal if they delayed to carry the dying man to shelter.

McCoy wrote the following after returning to New York:

We do not know if the sadhu lived or died. For many of the following days and evenings Stephen and I discussed and debated our behavior toward the sadhu. Stephen is a committed Quaker with deep moral vision. He said, "I feel that what happened with the Sadhu is a good example of the breakdown between the individual ethic and the corporate ethic. No one person was willing to assume ultimate responsibility for the sadhu. Each was willing to do his bit just so long as it was not too inconvenient. When it got to be a bother everyone just passed the buck to someone else and took off . . . "

. . .

Despite my arguments, I feel and continue to feel guilt about the sadhu. I had literally walked through a classic moral dilemma without fully thinking through the consequences. My excuses for my actions include a high adrenaline flow, super-ordinate goal, and a once-in-a-lifetime opportunity --- factors in the usual corporate situation, especially when one is under stress.

Real moral dilemmas are ambiguous and many of us hike right through them, unaware that they exist. When, usually after the fact, someone makes an issue of them, we tend to resent his or her bringing it up. Often, when the full import of what we have done (or not done) falls on us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances we may contemplate what we have done from inside a prison.

Had we mountaineers have been free of physical and mental stress caused by the effort and the high altitude, we might have treated the sadhu differently. Yet isn't stress the real test of personal and corporate values? The instant decisions executives make under pressure reveal the most about personal and corporate character.

Among the many questions that occur to me when pondering my experience are:  What are the practical limits of moral imagination and vision? Is there a collective or institutional ethic beyond the ethics of the individual? At what level of effor or commitment can one discharge one's ethical responsibilities?

Continued in this 1983 Harvard Business School Case.

Jensen Comment
I might add that this 1983 case was written before the breakdown in ethics during the 1990s high tech bubble in which investment banking, executive compensation, corporate governance, and corporate ethics in general sometimes become Congress to the core --- http://www.trinity.edu/rjensen/FraudCongress.htm

********************

You can read more about the 2006 repeat of the dilemma at
"Everest pioneer appalled that climber was left to die," by Steve McMorran, Seattle Times, May 25, 2006 --- http://seattletimes.nwsource.com/html/nationworld/2003017177_everest25.html

May 28, 2006 reply from Andrew Priest [a.priest@ECU.EDU.AU]

Hi Bob

And you can contrast this action and the 2006 with the help given to Lincoln Hall again this year (events still going on). Lincoln was left on the mountain, assumed dead. He was not and is lower down the mountain and doing okay. Details at < http://www.mounteverest.net/news.php?id=3315>  and more details at
< http://www.mounteverest.net/news.php?id=3311> .

Compassion and caring wins out every time in my view over selfishness.

Andrew

"Remarks by Chairman Alan Greenspan Before a conference sponsored by the Office of the Comptroller of the Currency, Washington, D.C. October 14, 1999 --- http://federalreserve.gov/boarddocs/speeches/1999/19991014.htm 

Measuring Financial Risk in the Twenty-first Century

During a financial crisis, risk aversion rises dramatically, and deliberate trading strategies are replaced by rising fear-induced disengagement. Yield spreads on relatively risky assets widen dramatically. In the more extreme manifestation, the inability to differentiate among degrees of risk drives trading strategies to ever-more-liquid instruments that permit investors to immediately reverse decisions at minimum cost should that be required. As a consequence, even among riskless assets, such as U.S. Treasury securities, liquidity premiums rise sharply as investors seek the heavily traded "on-the-run" issues--a behavior that was so evident last fall.

As I have indicated on previous occasions, history tells us that sharp reversals in confidence occur abruptly, most often with little advance notice. These reversals can be self-reinforcing processes that can compress sizable adjustments into a very short period. Panic reactions in the market are characterized by dramatic shifts in behavior that are intended to minimize short-term losses. Claims on far-distant future values are discounted to insignificance. What is so intriguing, as I noted earlier, is that this type of behavior has characterized human interaction with little appreciable change over the generations. Whether Dutch tulip bulbs or Russian equities, the market price patterns remain much the same.

We can readily describe this process, but, to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific investments that make up our broad price indexes of stocks and other assets.

Nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant.

Probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. Furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics. Under these circumstances, fear and disengagement on the part of investors holding net long positions often lead to simultaneous declines in the values of private obligations, as investors no longer realistically differentiate among degrees of risk and liquidity, and to increases in the values of riskless government securities. Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account.

The uncertainties inherent in valuations of assets and the potential for abrupt changes in perceptions of those uncertainties clearly must be adjudged by risk managers at banks and other financial intermediaries. At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources--reserves or capital--to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence. These reserves will appear almost all the time to be a suboptimal use of capital. So do fire insurance premiums.

The above is only a quotation from the speech.

UNEQUAL TREATMENT:  Congress to the Core

"Playing Favorites:  Why Alan Greenspan's Fed lets banks off easy on corporate fraud," by Ronald Fink, CFO Magazine, April 2004, pp. 46-54 --- http://www.cfo.com/article/1,5309,12866||M|886,00.html 

The module below is not in the above online version of the above article.  However, it is on Page 51 of the printed version.

UNEQUAL TREATMENT

IF THE FEDERAL RESERVE BOARD AND THE SECURITIES AND EXCHANGE Commission pursue the same agenda, why were Merrill Lynch & Co. and the Canadian Imperial Bank of Commerce (CIBC) treated so differently by the Corporate Fraud Task Force--a team with representatives from the SEC, the FBI, and the Department of Justice (DoJ) set up to prosecute perpetrators of Enron's fraud--than were Citigroup and J. P. Morgan Chase & Co.?  After all, all four banks did much the same thing.

Under settlements signed with the SEC last July, Citigroup and Chase were fined a mere $101 million (including $19 million for its actions relating to a similar fraud involving Dynegy) and $135 million, respectively, which amounts to no more than a week of either's most recent annual earnings.  And they agreed, in effect, to cease and desist from doing other structured-finance deals that mislead investors.  That contrasts sharply with the punishment meted out by the DoJ to Merrill and CIBC, each of which not only paid $80 million in fines, but also agreed to have their activities monitored by a supervising committee that reports to the DoJ.  Even more striking, CIBC agreed to exit not only the structured-finance business but also the plain-vanilla commercial--paper conduit trade for three years.  No regulatory agency involved in the settlements would comment on the cases, though the SEC's settlement with Citigroup took note of the bank's cooperation in the investigation.

But Brad S. Karp, an attorney with the New York firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, suggested recently that the terms of the SEC settlement with its client, Citigroup, reflected a lack of knowledge or intent on the bank's part.  As Karp noted more than once at a February conference on legal issues and compliance facing bond-market participants, the SEC's settlement with Citigroup was ex scienter, a Latin legal phrase meaning "without knowledge."

However, the SEC's administrative order to Citigroup cited at least 13 instances where the bank was anything but in the dark about its involvement in Enron's fraud.

As Richard H. Walker, former director of the SEC's enforcement division and now general counsel of Deutsche Bank's Corporate and Investment Bank, puts it, all the banks involved in Enron's fraud "had knowledge" of it.  Yet Walker isn't surprised by their disparate treatment at the hands of regulators.  "The SEC does things its way," he says, "and the Fed does them another."  *Ronald Fink and Tim Reason

Most of us enter the investment business for the same sanity-destroying reasons a woman becomes a prostitute:  It avoids the menace of hard work, is a group activity that requires little in the way of intellect, and is a practical means of manking money for those with no special talent for anything else.
Richard New, The Wall Street Jungle (as quoted by Frank Partnoy in FIASCO:  The Inside Story of a Wall Street Trader.)

Behind every great fortune there lies a great crime.
Honore de Balzac (as quoted by Frank Partnoy in FIASCO:  The Inside Story of a Wall Street Trader.)

But for Freddie Mac, the other pillar of the colossal U.S. mortgage market, Freddie Mac's restatement has only caused headaches and has even raised new questions about the quality of financial reporting.
Patrick Barta, "Restatement by Freddie Mac Puts Fannie on the Spot," The Wall Street Journal, January 12, 2004, Page C1.

The problem is the companies' (Freddie Mac versus Fannie Mae) business and financial statements have become so complex that they are effectively "unanalyzable" says James Bianco, president of Bianco Research, a Chicago-based fixed-income research firm that has been critical of Fannie and Freddie in the past.  He says the same is becoming true of other large financial institutions, particularly those that, like Fannie and Freddie, use large volumes of derivatives, which are investment contracts that can be used by companies to offset risk from interest rate shifts.
Ibid

The Timeline of the Recent History of Fannie Mae Scandals 2002-2008 --- http://www.trinity.edu/rjensen/caseans/000index.htm#FannieMae
"Fannie Mayhem: A History," The Wall Street Journal, July 14, 2008

So what's a little business deal among friends?  It's trouble, if the friends are college or college-foundation trustees who benefit personally from the decisions they make on behalf of the institutions they serve.  
Julianne Basinger, "Boars Crack Down on Members' Insider Benefits," The Chronicle of Higher Education, February 6. 2004, Page A1.

Mutual-fund investors sent a record $14 billion in net assets to exchange-traded funds last month as they sought escape from the recent share-trading scandal.
Aaron Lucchetti, The Wall Street Journal, January 23, 2004 --- http://online.wsj.com/article/0,,SB107482213730209735,00.html?mod=mkts_main_news_hs_h 

S. Scott Voynich, Chair of the American Institute of Certified Public Accountants, has stated that further changes were necessary to regain the confidence of American investors. Voynich was the keynote speaker at the Institute’s 2003 AICPA National Conference on Current SEC Developments  .
http://accountingeducation.com/news/news4675.html 

Nothing wrong with overcharging, so long as everyone else is doing it, right?
Gretchen Morgenson"The Mutual Fund Scandal's Next Chapter," The New York Times, December 7, 2003
(See below)

Are you disgusted enough with mutual funds to raise a stink?  So far, savers don't seem nearly as outraged as they were about Enron--yet deceptive funds and sneaky "financial advisers" have swiped more money, from more people, than all the corporate scandals combined.  The House of Representatives just passed a reform bill, but in the Senate, the going looks tough.  Your legislators are scooping up money from the mutual-fund lobby, which hopes to head off any major change.  To counter the lobby, Congress needs angry protest calls from voters like you.
Jane Bryant Quinn (See Below)

One the one hand, eliminating the middleman would result in lower costs, increased sales, and greater consumer satisfaction;  on the other hand, we're the middleman.
New Yorker Cartoon, Page 29, The New Yorker Book of Business Cartoons
In the context of the recent mutual fund scandals, financial advisors have become those middlemen.

Boyer had also asked Kmart's auditors at PricewaterhouseCoopers in several cases to look into various accounting issues and was unsatisfied with the firm's work, according to the lawsuit.
"Fired From Kmart, Ex-CFO Is Key Figure in Lawsuits," SmartPros (See below)

"I believe this (mutual fund rip-off) is the worst scandal we've seen in 50 years, and I can't say I saw it coming," said Arthur Levitt, the former chairman of the Securities and Exchange Commission for nearly eight years under the Clinton administration. "I probably worried about funds less than insider trading, accounting issues and fair disclosure to investors" by public companies.
Stephen Labaton --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

Illegal or unfair trading isn't hard for directors (or the SEC) to spot, says New York Attorney General Eliot Spitzer, who brought the first of these scandals to light.  They just have to compare their funds' total sales with total redemptions.  When the two are about the same, skimming might be going on.  I asked Lipper, a fund-tracking service, to list the larger funds where redemptions reached 90 to 110 percent of sales.  It found 229, some looking obviously churned.
Jane Bryant Quinn --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

One thing your can count on:  When you invest, a lot of the people you trust are going to cheat.  Billions of investor dollars whirl through the system.  It's all too easy for insiders to stick their hands into that current and grab.  We're not talking about a bad apple here and there.  Cheating runs through Wall Street's very seams --- even in the sainted mutual funds.
Jane Bryant Quinn --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

But Wall Street's Lobbyists Still Have a Firm Grip Where it Counts
While Representative Baker pushes his bill in the House, the Senate is not expected to take up a measure before next year. Some lawmakers have filed bills, but Senator Richard Shelby, the Alabama Republican who heads the Senate banking committee, has said he is not convinced of the need for new laws.
Stephen Labaton, "S.E.C. Offers Plan for Tightening Grip on Mutual Funds," The New York Times, November 19, 2003 --- http://www.nytimes.com/2003/11/19/business/19sec.html 

You can read more about SEC Chairman William H. Donaldson's defense of his quick and some say marshmallow punishment of mutual fund cheaters at http://www.trinity.edu/rjensen/fraud.htm#Cleland  

What makes this such a big scandal is that the savings of half the households in the U.S. are at stake here.  The tragedy is that now that the scandal is surfacing in the media and in state courts, the SEC is only wrist slapping mutual funds.  This is along with the continued wrist slapping of investment banking (e.g., why is Merrill Lynch still in existence after frauds dating back to Orange County ?) is the real evidence of industry power over regulators.  Sarbanes-Oxley won’t do it!  It’s still Congress to the core in Washington DC as long as industries have regulators in their well-financed  pockets --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

New York State Attorney General Eliott Spitzer's charges of improper trading practices by several leading mutual fund families are another blow to public trust in financial institutions. Mutual funds have been the place you would advise the most unsophisticated investors to go: Mutual funds were designed for grandpa and grandma, and repeatedly recommended to them by all kinds of benevolent authorities. Thus scandals in the mutual fund sector are potentially much more damaging to public trust in our financial institutions than are scandals in other sectors -- such as the one playing out in the New York Stock Exchange right now.
See Robert Shiller's article below.

If you don't know jewelry, know your jeweler.
Warren Buffett,

Lowly investors who lost their retirement accounts following the advice of Citigroup's Jack Grubman or followed the "research" of some other firm that was bought and paid for by favored clients can only burn with shame and disbelief. Restore investor confidence in Wall Street? Not likely for baby boomers, who've already been publicly fleeced in broad daylight. Wall Street will have to wait for another generation of innocents to prey upon.
Richard Dooling, The New York Times, May 4, 2003

Mr. Quattrone's rise shows how some who were on the inside during the tech boom piled up huge fortunes in part through special access, unavailable to other investors, to the machinery of that era's frenzied stock market. But now he faces a crunch. The steep yearlong downturn in tech stocks has hurt the profits of his technology group. And in recent weeks, the group he heads has come under scrutiny in connection with a federal probe into whether some investment-bank employees awarded shares of hot IPOs in exchange for unusually high commissions, and whether those commissions amounted to kickbacks.
Susan Pulliam and Randall Smith, The Wall Street Journal, May 3, 2003 --- http://online.wsj.com/article/0,,SB988836228231147483,00.html?mod=2_1040_1

The Investment Banker Who Got Away to Start Another Day
The (Frank Quattrone) deal marks the end of a sorry chapter in American business history. While high-profile white-collar crime persists, the dramatic criminal cases that were launched just after the dotcom economy fizzled are now mostly completed. The icons of massive, turn-of-the-century corporate fraud--Ken Lay and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, Dennis Kozlowski and Mark Swartz of Tyco--are convicted and, in Lay's case, dead. Even Martha Stewart has served time. And many, if not most, of the cases the feds brought against smaller fish--to help assuage a share-owning public that had been scammed by phony accounting and overhyped stock--are resolved. The government claims that since mid-2002 it has won more than 1,000 corporate-fraud convictions, including those of more than 100 CEOs and presidents.
Barbara Kiviat, "The One Who Got Away:  The decision to abandon a high-profile case against a dotcom poster boy marks the end of a sorry era,"  Time Magazine, August 27, 2006 --- Click Here

Cleaning Up Corporate Japan
Is Japan Inc. finally moving toward more responsible corporate governance? After last week's arrest of Yoshiaki Tsutsumi, owner of the country's major railway, hotel and resort conglomerate Seibu group, there's at least reason to believe that the government is finally demanding more accountability from its corporate leaders.  Mr. Tsutsumi, former chairman of Seibu railway and its holding company, Kokudo, was arrested on Thursday on charges of insider trading and falsification of documents. While his guilt of these charges is still to be determined, the Japanese press has not held back from criticizing the politically influential Mr. Tsutsumi and his business empire, portraying them as powerful symbols of corporate Japan's lack of transparency and disregard for shareholder interests.
"Cleaning Up Corporate Japan," The Wall Street Journal, March 10, 2005 --- http://online.wsj.com/article/0,,SB111040748350775119,00.html?mod=opinion&ojcontent=otep 

Hi Milt,

I think the problem in the investment banking industry that spilled over into accounting, banking, mutual funds, securities dealers, and large corporations is truly "infectious greed." When deregulations came 8n 1995, executives watched as investment bankers became filthy rich and many, certainly not all, decided to join in the fun.

What is important in Parnoy's latest book is a greater explanation of "how" it was done.

And yes, I think that many would do it again even if they knew they would get caught. See http://www.trinity.edu/rjensen/fraudconclusion.htm#CrimePays  
Many of the perpetrators in the 1990s are now sitting in places like London and Switzerland enjoying a very nice life with no longer having to work. Many of them will gladly sacrifice pride for wealth, which is something that I gather would never appeal to you.

As for Nixon, I think his years in public office drove him to pathological paranoia. He was driven more by fear than greed. I think he wanted to go down in history as a great statesman, and he feared his enemies were out keep him from realizing his dream.

Bob Jensen

-----Original Message----- 
From: MILT COHEN [mailto:uncmlt@juno.com]  
Sent: Sunday, April 25, 2004 9:06 AM 
To: Jensen, Robert 
Subject: comment on your comments

Hi Bob

I read your comments on various books written on securities fraud and related "fun & games" with investors per Cheryl Dunn's request --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

Just a couple of comments from my view. I read one of the books you wrote on - namely Liar's Poker and I also read a book on Michael Milkens dealings during his days at Drexel, his downfall along with Drexel's, and how others of that era that were involved in those dealings.

It seems to me that most of these books get muddled down into the same expose type of writing and/or reporting. It's like, wow! Is that what really happened? Or, I guess I forgot about that. Each book seems to be a primer for the next "hero" who wlll take investors and accountants for another fleecing. And make lawyers rich.

My question to you (and you may have the same feeling I have) is why are there so many fraudulent happenings in the security arena? One would think that with jail sentences and monetary fines being given (even Martha Stewart), people's reputations driven into a ditch - perhaps forever (notwithstanding Michael Milken's good deeds in medicine and education) is the wealth obtained so worthy of being convicted of being a thief? Does anyone have that answer? Is it all worth it just to get out of jury duty? Back in history when I was an under grad back in the 1950s the big defalcation (as it was titled) was the McKesson Robbins inventory cover-up of the 1930s. The next one that comes to my mind was the Equity Funding matter of the 1960-1970 era that centered on the fraud of writing nonexistent life insurance contracts that brought attention to the firm of Seidman & Seidman (I had a friend working for them during that era). 

After Equity Funding, the fraud circuit was quiet for awhile, but in the last fifteen or so years, it seems we experience one hit after another (like airplanes in a flight plan at LAX) - all centering on the oversight of audits that have gone on for years or even decades. The latest being the B of A involvement with the Italian dairy company. (how a bank account could be overlooked or confirmed when it didn't exist is beyond me). My conclusion after 45 years in this "game" is that it all relates back to Richard Nixon. Nixon in his day depicted the worst of fraud and lying in the matter of Watergate. (He also was depicted as a less than ethical politician here in California. The name "tricky Dick" didn't come from nowhere). Anyway, he showed the populace that anyone can "get away with it". Fast forward to Bill Clinton and we have another example of not telling the truth. (only he has the definition of sex?) So what can our kids and students think as they trudge through college. If ethics is not emphasized in class (and I assume it is not a major topic these or any other days) and ethical actions are not depicted in real life as well as in movies and TV (look at Ormirosa's actions on the Donald Trump show) how can we expect that these financial frauds will not be a continual event? Perhaps the next reality show should be centered on financial fraud. It might bring in bigger ratings than Trump's show did. (And Trump is such an icon of ethical behavior in business dealings too - (that's a joke)).

Anyway, I just thought I'd share my feelings on your thoughts and comments on current readings and topical events.

Sincerely,
Milt Cohen Chatsworth, Ca.

Hi Again Milt,

The entire body of agency theory that evolved in the past three decades is built upon the underlying assumption that managers' utility functions are also in the best interest of the prosperity of corporations and shareholders. Agency theory falls apart when managers like Fastow, Kozwalski, Waksal, etc. are willing to loot the company and/or rob shareholders for personal gain even if they know they will get caught and spend some relaxing time in Club Fed --- http://www.trinity.edu/rjensen/fraudconclusion.htm#CrimePays 

We always hope that dastardly managers are few and far between such that your assumptions and agency theory still hold water. What we saw in the late 1990s, however, was that highly infectious greed that commenced to sicken entire industries such as investment banking, energy traders, stock brokers, and securities dealers after Federal regulations were eliminated in 1995 --- http://www.trinity.edu/rjensen/FraudCongress.htm 

Sadly, the auditing profession was not immune to infectious greed as consulting opportunities exploded in auditing clients. We would hope that integrity is being restored in the auditing profession, but the scandals in tax shelter marketing and client billing cheating since the Sarbanes-Oxley legislation have further eroded the credibility of auditing firms --- http://www.trinity.edu/rjensen/Fraud.htm#others 

See "ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf 

Bob Jensen

-----Original Message----- 
From: MILT COHEN [mailto:uncmlt@juno.com]  
Sent: Sunday, April 25, 2004 2:31 PM To: Jensen, Robert 
Subject: Re: comment on your comments

You may be precisely correct in your conclusion, but one would like to think that the greedy bunch wouldn't want to ruin the 'game" for everyone else. That old story about killing the goose that lays the golden eggs is happening. Another story about the bar owner watching a new bartender steal every other drink that is sold. Finally when the bartender pockets two in a row, the owners calls him over and asks, "aren't we partners on that one?" I mean, in order for investors to part with money the thieves have to let others make a few bucks just to sweeten the pot, or the game is over, in my view. The flip side is that with new laws and the emphasis on accountant's trust, many students will opt out of accounting and just head for the finance sign. I tutored a student last year who was trying to understand Intermediate Accounting. He said he did well in the Principle course. His last remark to me was that if he blows the mid-term he'll drop the course and take up Finance just to keep his grade average. So much for tenacity and commitment.

Sincerely Milt Cohen

March 13, 2009 message from Zafar Khan

Why was Sarbanes-Oxley enacted?

Zafar Khan, Ph.D.
Professor
Eastern Michigan University

March 14, 2009 reply from Bob Jensen

Hi Zafar,

Sarbanes (SOX) was enacted to keep investors from abandoning the U.S. stock market after enormous scandals like Enron, WorldCom, and other huge scandals that revealed CPA audits themselves were becoming both substandard and non-profitable --- http://www.trinity.edu/rjensen/FraudEnron.htm

To make money, auditing firms themselves were profiting from irresponsible audit cost cutting and non-audit consulting that compromised their auditing independence. Inside corporations, internal controls for responsible financial reporting had broken down or never existed in the first place.

Sarbanes forced auditors to become more independent and also made it possible to double or triple audit fees, thereby restoring auditing to profitable services rather than services that lost money for auditing firms trying to be responsible auditors.

SOX also created the PCAOB that got serious about reviewing auditor performance (including fining Deloitte a million dollars). Many of the large and smaller CPA firms failed the PCAOB tests early on and soon cleaned up their audit practices with the PCAOB breathing down their backs.

Among other things SOX increased government funding for the SEC and the FASB (which before SOX received no taxpayer funding). This, in turn, made the FASB less dependent upon sales of publications. The FASB then made many publications free electronically, most notably free distribution of standards and interpretations. The IASB, sadly, still depends upon publication revenue such that IFRS are not free unless you play games like download the equivalent Hong Kong accounting standards.

See http://en.wikipedia.org/wiki/Sarbanes_and_Oxley

A variety of complex factors created the conditions and culture in which a series of large corporate frauds occurred between 2000-2002. The spectacular, highly-publicized frauds at Enron (see Enron scandal), WorldCom, and Tyco exposed significant problems with conflicts of interest and incentive compensation practices. The analysis of their complex and contentious root causes contributed to the passage of SOX in 2002. In a 2004 interview, Senator Paul Sarbanes stated:

The Senate Banking Committee undertook a series of hearings on the problems in the markets that had led to a loss of hundreds and hundreds of billions, indeed trillions of dollars in market value. The hearings set out to lay the foundation for legislation. We scheduled 10 hearings over a six-week period, during which we brought in some of the best people in the country to testify...The hearings produced remarkable consensus on the nature of the problems: inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analysts' conflict of interests, inadequate disclosure provisions, and grossly inadequate funding of the Securities and Exchange Commission.

• Auditor conflicts of interest: Prior to SOX, auditing firms, the primary financial "watchdogs" for investors, were self-regulated. They also performed significant non-audit or consulting work for the companies they audited. Many of these consulting agreements were far more lucrative than the auditing engagement. This presented at least the appearance of a conflict of interest. For example, challenging the company's accounting approach might damage a client relationship, conceivably placing a significant consulting arrangement at risk, damaging the auditing firm's bottom line.
   
• Boardroom failures: Boards of Directors, specifically Audit Committees, are charged with establishing oversight mechanisms for financial reporting in U.S. corporations on the behalf of investors. These scandals identified Board members who either did not exercise their responsibilities or did not have the expertise to understand the complexities of the businesses. In many cases, Audit Committee members were not truly independent of management.
   
• Securities analysts' conflicts of interest: The roles of securities analysts, who make buy and sell recommendations on company stocks and bonds, and investment bankers, who help provide companies loans or handle mergers and acquisitions, provide opportunities for conflicts. Similar to the auditor conflict, issuing a buy or sell recommendation on a stock while providing lucrative investment banking services creates at least the appearance of a conflict of interest.
   
• Inadequate funding of the SEC: The SEC budget has steadily increased to nearly double the pre-SOX level. In the interview cited above, Sarbanes indicated that enforcement and rule-making are more effective post-SOX.
   
• Banking practices: Lending to a firm sends signals to investors regarding the firm's risk. In the case of Enron, several major banks provided large loans to the company without understanding, or while ignoring, the risks of the company. Investors of these banks and their clients were hurt by such bad loans, resulting in large settlement payments by the banks. Others interpreted the willingness of banks to lend money to the company as an indication of its health and integrity, and were led to invest in Enron as a result. These investors were hurt as well.
   
• Internet bubble: Investors had been stung in 2000 by the sharp declines in technology stocks and to a lesser extent, by declines in the overall market. Certain mutual fund managers were alleged to have advocated the purchasing of particular technology stocks, while quietly selling them. The losses sustained also helped create a general anger among investors.
   
• Executive compensation: Stock option and bonus practices, combined with volatility in stock prices for even small earnings "misses," resulted in pressures to manage earnings. Stock options were not treated as compensation expense by companies, encouraging this form of compensation. With a large stock-based bonus at risk, managers were pressured to meet their targets.

 

Pay Me More and More and More
Sadly, SOX did not attack the root problems that led to the subsequent subprime lending scandals. These root problems included pay-for-performance compensation plans that motivated mortgage brokers, real estate appraisers, banks, and investment banks to screw both shareholders and home owners.

Pass the Trash
Added to this was Congressional pressure on Fannie Mae and Freddie Mack to buy hopeless mortgages that had almost no chance of being repaid. Banks commenced a practice of passing the trash to Freddie, Fannie, and Wall Street investment banks that, in turn, passed the trash to their customers in CDOs that were intended to diversify the bad loan risks (but failed to do so when the real estate bubble burst).

SOX has worked in countless ways, but not all ways
There are countless success stories where SOX led to better internal controls and better auditing with more substantive testing in place of lousy analytical reviews. However, SOX did almost nothing to prevent fraud in the mortgage brokering and banking sectors.

You can read more about subprime sleaze at http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

You can read more about auditing professionalism at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

Fiduciaries turned into whores
One of the most sad things for me is the way that CPA auditing firms failed to signal the public that banks were filling up on toxic loans. Equally unprofessional were the credit rating agencies like Standard and Poors and Moody’s that in essence became Wall Street’s whores.

Why regulations fail and succeed in the turning of the carousel
The main problem with government regulations on industry is that industry eventually runs the regulators (e.g., the Federal Reserve, SEC, FDA, FAA, FCC, etc.) until some enormous scandals force the regulators to use the powers entrusted to them. Then we get new regulations that industry eventually figures out how to circumvent. Then we wait for more huge scandals. And so the carousel goes round and round.

Socialism bypasses the regulation process by owning and running the industries. Then the abuses really begin
The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.
Winston Churchill

May 14, 2009 reply from Zafar Khan [zkhan@EMICH.EDU]

Hi Bob, one can always depend upon you to set the record straight. Otherwise, some might continue to believe that this (SOX) was another gratuitous government intervention to disrupt the smooth functioning of our self correcting financial markets.

I also read in a recent post that the government should not do anything about executive compensation despite the obscene abuse of power by the executives of public companies who have enriched themselves while running their companies into the ground because the market will in the end sort it out. My humble response to that is dream on.

Zafar Khan, Ph.D.
Professor
Eastern Michigan University

March 15, 2009 reply from Bob Jensen

Hi again Zafar,

After the fall of Andersen you would've thought CPA auditors would've "self corrected" without having SOX since their reputations had hit bottom.

In 2003 a former professor of accounting at the University of Illinois and long-time executive partner with Andersen told accounting professors that the CPA firm executives "still didn't get it." This is probably why we needed SOX and the PCAOB to help them "get it." Art Wyatt’s plenary session speech at the 2003 American Accounting Association annual meetings is at http://aaahq.org/AM2003/WyattSpeech.pdf
Art is also a former AAA President and a member of the Accounting Hall of Fame. His opinions have a lot of clout in both the CPA profession and academe.

From “Topics for Class Debate” at http://www.trinity.edu/rjensen/FraudRotten.htm
This might be a good topic of debate for an ethics and/or fraud course.  The topic is essentially the problem of regulating and/or punishing many for the egregious actions of a few.  The best example is the major accounting firm of Andersen in which 84,000 mostly ethical and highly professional employees lost their jobs when the firm's leadership repeatedly failed to take action to prevent corrupt and/or incompetent audits of a small number audit partners.  Clearly the firm's management failed and deserves to be fired and/or jailed for obstruction of justice and failure to protect the public in general and 83,900 Andersen employees.  A former Andersen executive partner, Art Wyatt, contends that Andersen's leadership did not get the message and that leadership in today's leading CPA firms is still not (just before SOX) getting the message --- http://aaahq.org/AM2003/WyattSpeech.pdf 

Bob Jensen's threads on auditing professionalism are at http://www.trinity.edu/rjensen/Fraud001.htm#Professionalism

"8 Accused of Kickbacks, Fraud at Wall Street Brokerage Firms," SmartPros, May 23, 2008 --- http://accounting.smartpros.com/x61954.xml

"Eliot Spitzer's Case Book," by Elizabeth Weinstein, The Wall Street Journal, April 28, 2005

Eliot Spitzer is a man on the hunt. From mutual funds to music, executive compensation to counterfeit drugs, the New York attorney general has pursued investigations of alleged misdeeds in half a dozen industries.

Though sometimes criticized for focusing too closely on Wall Street -- and on his own bid for New York state governor in 2006 -- Mr. Spitzer's probes have led to stricter controls on Wall Street research and spurred other attorneys general to action. His landmark investigations have zeroed in on high-profile executives, most recently Maurice Greenberg at insurer American International Group.

Last year alone, the New York attorney general's office recovered a record $2.38 billion earmarked for restitution to individual shareholders and other consumers. Mr. Spitzer's office, which has an annual budget of $214 million, has added nearly 50 lawyers to its staff of more than 500 attorneys since 1999.

Here is an overview of key investigations:

Investment Banking ­ Stock research
Probe launched: 2001
At issue: Misleading information in analysts' public research reports

An investigation into the stock research issued by Merrill Lynch & Co.'s Internet group, whose star analyst was Henry Blodget, showed that some analysts harbored different opinions privately from those they expressed in their public research reports. The investigation spawned a wide-ranging probe over nearly two years into the procedures at many firms. Ultimately, 10 of the largest securities firms agreed to pay $1.4 billion to settle charges that they routinely issued misleading stock research to curry favor with corporate clients during the stock-market bubble of the late 1990s. The firms consented to the charges without admitting or denying wrongdoing. The $1.4 billion settlement was among the highest ever imposed by securities regulators, and both Mr. Blodget and Jack Grubman of Salomon Smith Barney were banned from the securities business.

Investment Banking - IPOs
Probe launched: 2001
At issue: Unfair allocations of shares in initial public offerings

Mr. Spitzer's office also charged that several big Wall Street firms improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business. Two companies, Citigroup Inc.'s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group's Credit Suisse First Boston, settled these charges as part of the $1.4 billion pact with securities firms and did so without admitting or denying wrongdoing. In a related probe, former star CSFB banker Frank Quattrone was convicted of obstruction of justice for impeding and investigation of CSFB's IPO allocations.

Insurance - Improper transactions
Probe launched: 2003
At issue: Whether several AIG business deals were designed to manipulate its financial statements

In 2003, the Securities and Exchange Commission and Mr. Spitzer's office looked into insurance transactions that American International Group Inc. conducted with two firms, cellphone distributor Brightpoint Inc. and PNC Financial Services Group Inc. AIG paid $126 million in a settlement without admitting or denying guilt. Later, both the SEC and Mr. Spitzer's office scrutinized a deal struck between AIG and Berkshire Hathaway's General Reinsurance unit in 2000 to determine if the deal was aimed at making the giant insurer's reserves look healthier than they were. Longtime Chairman Maurice R. "Hank" Greenberg retired from the company, and in late March, AIG admitted to a broad range of improper accounting. Other AIG executives were forced out, including chief financial officer Howard Smith. Meanwhile, Berkshire chief Warren Buffett this week told investigators that he didn't know details about the contentious transaction. Mr. Greenberg also was deposed and repeatedly invoked his constitutional right against self incrimination.

Insurance - Broker fees
Probe launched: 2004
At issue: Whether fees paid by insurance companies to insurance brokers and consultants posed a conflict of interest

Mr. Spitzer and other state attorneys general as well as insurance regulators in New York and Illinois alleged that insurance companies routinely paid fees to brokers and consultants who advised employers on where to buy policies for workers, a potential conflict of interest. Mr. Spitzer accused several insurance brokers of accepting undisclosed commissions and, in the case of Marsh & McLennan, of bid-rigging -- soliciting fake bids from insurers to help steer business to favored providers. In February 2005, Marsh agreed to pay $850 million in restitution to clients of its Marsh Inc. insurance brokerage firm who allegedly were cheated by Marsh brokers. Marsh neither admitted nor denied wrongdoing.

The investigations shook up an insurance dynasty. Marsh was run by Jeffrey W. Greenberg, the eldest son of AIG's former head Maurice Greenberg, before he was ousted as a result of the probe. Another insurance firm included in the probe, Ace Ltd., is run by Evan Greenberg, Jeffrey's younger brother. Meanwhile, Aon Corp. reached a $190 million settlement without admitting or denying wrongdoing, and earlier this month, insurance broker Willis Group Holdings Ltd. said it would pay $51 million and change its business practices to end an investigation by attorneys general in New York and Minnesota. Willis admitted no wrongdoing or liability.

NYSE - Executive Compensation
Probe launched: 2004
At issue: Whether then-New York Stock Exchange Chairman Dick Grasso's compensation was excessive

Mr. Spitzer sued Mr. Grasso, the NYSE and the Wall Street executive who headed its compensation committee for what Mr. Spitzer claimed was a pay package so huge that it violated the state law governing not-for-profit groups. Mr. Spitzer said the compensation -- valued at nearly $200 million -- came about as a result of Mr. Grasso's intimidation of the exchange's board of directors. Mr. Grasso, who denied there was anything improper about his pay, was forced to resign from the Big Board in September 2003 following a public outcry over his compensation. The lawsuit, which is still in progress, led to new governance oversight at the Big Board.

Retail
Probe launched: 2004
At issue: Antitrust violations by retailers

Mr. Spitzer claimed that Federated Department Stores Inc. and May Department Stores Co. conspired to pressure housewares makers Lenox Inc., a unit of Brown-Forman Corp. and Waterford Wedgwood PLC's U.S. unit to pull out as planned anchors of Bed Bath & Beyond Inc.'s new tableware department. The case was settled in August when the four companies agreed to pay a total of $2.9 million in civil penalties but admit no wrongdoing. Later, Mr. Spitzer charged James M. Zimmerman, Federated's retired chairman, with perjury, alleging that he lied under oath to conceal evidence of possible antitrust violations. Mr. Zimmerman has pleaded not guilty.

Music
Probe launched: 2004
At issue: Payments by music companies middlemen aimed at securing better airplay for the labels' artists

Mr. Spitzer's investigation, which is continuing, centers around independent promoters -- middlemen between record companies and radio stations -- whom music labels pay to help them secure better airplay for their music releases. Broadcasters are prohibited from taking goods or cash for playing songs on their stations. The independent-promotion system has been viewed as a way around laws against payola -- undisclosed cash payments to individuals in exchange for airplay. Last fall, Mr. Spitzer requested information from Warner Music Group, EMI Group PLC, Vivendi Universal SA's Universal Music Group, and Sony Corp. and Bertelsmann AG's Sony BMG Music Entertainment. Warner Music received an additional subpoena last week.

Marketing
Probe launched: 2004
At issue: Software secretly installed on home computers to put ads on screens

After a six-month investigation into Internet marketer Intermix Media Inc., Mr. Spitzer in April 2005 filed suit, claiming the company installed a wide range of advertising software on home computers nationwide. The software, known as "spyware" or "adware," prompts nuisance pop-up advertising on computer screens, setting users up for PC slowdowns and crashes. The programs sometimes don't come with "un-install" applications and can't be removed by most computers' add/remove function. Mr. Spitzer said the suit is designed to combat the practice of redirecting of home computer users to unwanted Web sites, the adding of unnecessary toolbar items and the delivery of unwanted ads that pop up on computer screens. The civil suit accuses Intermix of violating state General Business Law provisions against false advertising and deceptive business practices, and also of trespass under New York common law. Intermix has said it doesn't "promote or condone spyware" and has ceased distribution of the software at issue, which it says was introduced under prior leadership.

Health Care
Probe launched: 2005
At issue: Covert sales of counterfeit drugs

Mr. Spitzer's office has sent subpoenas to three big drug wholesalers -- Cardinal Health Inc., Amerisource Bergen Corp. and McKesson Corp. -- related to the companies' purchase of drugs on the secondary market. Although few details about the probe have emerged, some industry analysts have said that the subpoenas are likely connected to sales transactions involving counterfeit products. Counterfeit drugs are those sold under a product name without proper authorization -- they can include drugs without the active ingredient, with an insufficient quantity of the active ingredient, with the wrong active ingredient, or with fake packaging. The investigation focuses on the secondary market, where the wholesalers buy drugs from each other, often at lower prices, and counterfeit drugs are hard to track. It isn't clear whether the wholesalers are the focus of a probe or just sources of information.

How Grasso Got Greener:  Grasso Took Fifth In SEC Testimony
An official in the office of New York state's attorney general yesterday said former New York Stock Exchange Chief Executive Dick Grasso last year declined to answer certain questions during a deposition by the Securities and Exchange Commission regarding that regulator's probe of trading firms at the Big Board. Avi Schick, a lawyer working for Attorney General Eliot Spitzer, made that assertion during a pretrial hearing in New York state court for a civil lawsuit claiming that Mr. Grasso's $187.5 million pay package as Big Board chief was excessive under New York law covering not-for-profits. (The NYSE has since become a public company, NYSE Group Inc.) The disclosure could be useful to Mr. Spitzer in the compensation case if he can use it to suggest that Mr. Grasso was an inadequate market regulator.
Chad Bray, "Grasso Took Fifth In SEC Testimony, Spitzer Aide Says," The Wall Street Journal, March 17, 2006; Page C3 --- Click Here

Ending a bitter public fight over whether former New York Stock Exchange Chief Executive Dick Grasso was paid too much, a state appeals court ruled that Mr. Grasso can keep every penny collected from his $187.5 million multiyear compensation package. The 3-to-1 ruling by the Appellate Division of the New York State Supreme Court was a vindication for the relentless Mr. Grasso, who was ousted after details of his lucrative pay were revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall Street Journal, July 2, 2008; Page A1 --- http://online.wsj.com/article/SB121492781324819635.html?mod=todays_us_page_one

Can You Train Business School Students To Be Ethical?
The way we’re doing it now doesn’t work. We need a new way

Question
What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

"Can You Train Business School Students To Be Ethical? The way we’re doing it now doesn’t work. We need a new way," by Ray Fisman and Adam Galinsky, Slate, September 4, 2012 ---
http://www.slate.com/articles/business/the_dismal_science/2012/09/business_school_and_ethics_can_we_train_mbas_to_do_the_right_thing_.html

A few years ago, Israeli game theorist Ariel Rubinstein got the idea of examining how the tools of economic science affected the judgment and empathy of his undergraduate students at Tel Aviv University. He made each student the CEO of a struggling hypothetical company, and tasked them with deciding how many employees to lay off. Some students were given an algebraic equation that expressed profits as a function of the number of employees on the payroll. Others were given a table listing the number of employees in one column and corresponding profits in the other. Simply presenting the layoff/profits data in a different format had a surprisingly strong effect on students’ choices—fewer than half of the “table” students chose to fire as many workers as was necessary to maximize profits, whereas three quarters of the “equation” students chose the profit-maximizing level of pink slips. Why? The “equation” group simply “solved” the company’s problem of profit maximization, without thinking about the consequences for the employees they were firing.

 

Rubinstein’s classroom experiment serves as one lesson in the pitfalls of the scientific method: It often seems to distract us from considering the full implications of our calculations. The point isn’t that it’s necessarily immoral to fire an employee—Milton Friedman famously claimed that the sole purpose of a company is indeed to maximize profits—but rather that the students who were encouraged to think of the decision to fire someone as an algebra problem didn’t seem to think about the employees at all.

 

The experiment is indicative of the challenge faced by business schools, which devote themselves to teaching management as a science, without always acknowledging that every business decision has societal repercussions. A new generation of psychologists is now thinking about how to create ethical leaders in business and in other professions, based on the notion that good people often do bad things unconsciously. It may transform not just education in the professions, but the way we think about encouraging people to do the right thing in general.

 

At present, the ethics curriculum at business schools can best be described as an unsuccessful work-in-progress. It’s not that business schools are turning Mother Teresas into Jeffrey Skillings (Harvard Business School, class of ’79), despite some claims to that effect. It’s easy to come up with examples of rogue MBA graduates who have lied, cheated, and stolen their ways to fortunes (recently convicted Raj Rajaratnam is a graduate of the University of Pennsylvania’s Wharton School of Business; his partner in crime, Rajat Gupta, is a Harvard Business School alum). But a huge number of companies are run by business school grads, and for every Gupta and Rajaratnam there are scores of others who run their companies in perfectly legal anonymity. And of course, there are the many ethical missteps by non-MBA business leaders—Bernie Madoff was educated as a lawyer; Enron’s Ken Lay had a Ph.D. in economics.

 

In actuality, the picture suggested by the data is that business schools have no impact whatsoever on the likelihood that someone will cook the books or otherwise commit fraud. MBA programs are thus damned by faint praise: “We do not turn our students into criminals,” would hardly make for an effective recruiting slogan.

 

If it’s too much to expect MBA programs to turn out Mother Teresas, is there anything that business schools can do to make tomorrow’s business leaders more likely to do the right thing? If so, it’s probably not by trying to teach them right from wrong—moral epiphanies are a scarce commodity by age 25, when most students start enrolling in MBA programs. Yet this is how business schools have taught ethics for most of their histories. They’ve often quarantined ethics into the beginning or end of the MBA education. When Ray began his MBA classes at Harvard Business School in 1994, the ethics course took place before the instruction in the “science of management” in disciplines like statistics, accounting, and marketing. The idea was to provide an ethical foundation that would allow students to integrate the information and lessons from the practical courses with a broader societal perspective. Students in these classes read philosophical treatises, tackle moral dilemmas, and study moral exemplars such as Johnson & Johnson CEO James Burke, who took responsibility for and provided a quick response to the series of deaths from tampered Tylenol pills in the 1980s.

It’s a mistake to assume that MBA students only seek to maximize profits—there may be eye-rolling at some of the content of ethics curricula, but not at the idea that ethics has a place in business. Yet once the pre-term ethics instruction is out of the way, it is forgotten, replaced by more tangible and easier to grasp matters like balance sheets and factory design.  Students get too distracted by the numbers to think very much about the social reverberations—and in some cases legal consequences—of employing accounting conventions to minimize tax burden or firing workers in the process of reorganizing the factory floor.

 

Business schools are starting to recognize that ethics can’t be cordoned off from the rest of a business student’s education. The most promising approach, in our view, doesn’t even try to give students a deeper personal sense of mission or social purpose – it’s likely that no amount of indoctrination could have kept Jeff Skilling from blowing up Enron. Instead, it helps students to appreciate the unconscious ethical lapses that we commit every day without even realizing it and to think about how to minimize them.  If finance and marketing can be taught as a science, then perhaps so too can ethics.

 

These ethical failures don’t occur at random – countless experiments in psychology and economics labs and out in the world have documented the circumstances that make us most likely to ignore moral concerns – what social psychologists Max Bazerman and Ann Tenbrusel call our moral blind spots.  These result from numerous biases that exacerbate the sort of distraction from ethical consequences illustrated by the Rubinstein experiment. A classic sequence of studies illustrate how readily these blind spots can occur in something as seemingly straightforward as flipping a fair coin to determine rewards. Imagine that you are in charge of splitting a pair of tasks between yourself and another person. One job is fun and with a potential payoff of $30; the other tedious and without financial reward. Presumably, you’d agree that flipping a coin is a fair way of deciding—most subjects do. However, when sent off to flip the coin in private, about 90 percent of subjects come back claiming that their coin flip came up assigning them to the fun task, rather than the 50 percent that one would expect with a fair coin. Some people end up ignoring the coin; more interestingly, others respond to an unfavorable first flip by seeing it as “just practice” or deciding to make it two out of three. That is, they find a way of temporarily adjusting their sense of fairness to obtain a favorable outcome.

 

Jensen Comment
I've always thought that the most important factors affecting ethics were early home life (past) and behavior others in the work place (current). I'm a believer in relative ethics where bad behavior is affected by need (such as being swamped in debt) and opportunity (weak internal controls at work).  I've never been a believer in the effectiveness of teaching ethics in college, although this is no reason not to teach ethics in college. It's just that the ethics mindset was deeply affected before coming to college (e.g. being street smart in high school) and after coming to college (where pressures and temptations to cheat become realities).

An example of the follow-the-herd ethics mentality.
If Coach C of the New Orleans Saints NFL football team offered Player X serious money to intentionally and permanently injure Quarterback Q of an opposing team, Player X might've refused until he witnessed Players W, Y, and Z being paid to do the same thing.  I think this is exactly what happened when several players on the defensive team of the New Orleans Saints intentionally injured quarterbacks for money.

New Orleans Saints bounty scandal --- http://en.wikipedia.org/wiki/New_Orleans_Saints_bounty_scandal

Question
What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

See Bob Jensen's "Rotten to the Core" document at http://www.trinity.edu/rjensen/FraudRotten.htm
The exact quotation from Jane Bryant Quinn at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Why white collar crime pays big time even if you know you will eventually be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

Bob Jensen's threads on professionalism and ethics ---
http://www.trinity.edu/rjensen/Fraud001c.htm

Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm

September 5, 2012 reply from Paul Williams

Bob,

This is the wrong question because business schools across all disciplines contained therein are trapped in the intellectual box of "methodological individualism." In every business discipline we take as a given that the "business" is not a construction of human law and, thus of human foible, but is a construction of nature that can be reduced to the actions of individual persons. Vivian Walsh (Rationality Allocation, and Reproduction) critiques the neoclassical economic premise that agent = person. Thus far we have failed in our reductionist enterprise to reduce the corporation to the actions of other entities -- persons (in spite of principal/agent theorists claims). Ontologically corporations don't exist -- the world is comprised only of individual human beings. But a classic study of the corporation (Diane Rothbard Margolis, The Managers: Corporate Life in America) shows the conflicted nature of people embedded in a corporate environment where the values they must subscribe to in their jobs are at variance with their values as independent persons. The corporate "being" has values of its own. Business school faculty, particularly accountics "scientists," commit the same error as the neoclassical economists, which Walsh describes thusly:

"...if neo-classical theory is to invest its concept of rational agent with the penumbra of moral seriousness derivable from links to the Scottish moral philosophers and, beyond them, to the concept of rationality which forms part of the conceptual scheme underlying our ordinary language, then it must finally abandon its claim to be a 'value-free` science in the sense of logical empiricism (p. 15)." Business, as an intellectual enterprise conducted within business schools, neglects entirely "ethics" as a serious topic of study and as a problem of institutional design. It is only a problem of unethical persons (which, at sometime or another, includes every human being on earth). If one takes seriously the Kantian proposition that, to be rationally ethical beings, humans must conduct themselves so as to treat always other humans not merely as means, but also always as ends in themselves, then business organization is, by design, unethical. Thus, when the Israeli students had to confront employees "face-to-face" rather than as variables in a profit equation, it was much harder for them to treat those employees as simply disposable means to an end for a being that is merely a legal fiction. One thing we simply do not treat seriously enough as a worthy intellectual activity is the serious scrutiny of the values that lay conveniently hidden beneath the equations we produce. What thoughtful person could possibly subscribe to the notion that the purpose of life is to relentlessly increase shareholder wealth? Increasing shareholder value is a value judgment, pure and simple. And it may not be a particularly good one. Why would we be surprised that some individuals conclude that "stealing" from them (they, like the employees without names in the employment experiment, are ciphers) is not something that one need be wracked with guilt about. If the best we can do is prattle endlessly on about the "tone at the top" (do people who take ethics seriously get to the top?), then the intellectual seriousness which ethics is afforded within business schools is extremely low. Until we start to appreciate that the business narrative is essentially an ethical one, not a technical one, then we will continue to rue the bad apples and ignore how we might built a better barrel.

Paul

September 5, 2012 reply from Bob Jensen

Hi Paul,


Do you think the ethics in government is in better shape, especially given the much longer and more widespread history of global government corruption throughout time? I don't think ethics in government is better than ethics in business from a historical perspective or a current perspective where business manipulates government toward its own ends with bribes, campaign contributions, and promises of windfall enormous job benefits for government officials who retire and join industry?


Government corruption is the name of the game in nearly all nations, beginning with Russia, China, Africa, South America, and down the list.


Political corruption in the U.S. is relatively low from a global perspective.
See the attached graph from
http://en.wikipedia.org/wiki/Corruption_%28political%29

Respectfully,
Bob Jensen

"Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?" by Ben W. Heineman, Jr., Harvard Business Review Blog,  January 10, 2013 --- Click Here
http://blogs.hbr.org/cs/2013/01/scandals_plague_sectors_not_ju.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

The trouble with crony capitalism isn't capitalism. It's the cronies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#CronyCapitalism

Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

History of Fraud in America --- 
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm

"2009 Securities Litigation Study," by PricewaterhouseCoopers (PwC), May 6, 2010 ---
http://snipurl.com/pwc050610

Summary:
The financial crisis continued to dominate the litigation landscape in 2009 - although to a lesser degree than in 2008, according to the annual PwC Securities Litigation Study. Governments worldwide remained focused on regulatory overhaul, stimulus plans and investigations into the "who, what, when, where, why, and how" of alleged wrongdoings related to the crisis.

This is an annual PwC study.

Bob Jensen's threads on securities frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on auditing firm litigation ---
http://www.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

"Who’s Checking Your Channel?" by Bruce Carton, Securities Docket, December 8, 2010

Two months ago I declared September 2010 “Insider Trading Month” for the Securities and Exchange Commission’s sudden burst of enforcement activity on that front. Then came November, and boy, did enforcement go off the charts.

The extraordinary activity of prosecutors and regulators that month set Wall Street traders abuzz, but compliance officers and other executives at public companies should also take careful notice. And what’s so different about the latest round of insider-trading cases? Investigators are focusing on the flow of supply-chain information. That includes a lot more people than the gossipy traders working in lower Manhattan.

On November 20, reports circulated that both the Justice Department and the SEC were preparing insider-trading cases against a long list of Wall Street entities: consultants, investment bankers, hedge fund and mutual fund traders, and analysts. According to the Wall Street Journal, the charges would allege “a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies.” Two days later, the FBI raided the offices of three hedge funds as part of the investigation, with more raids expected.

Portions of the investigation are fairly standard—hedge funds tipped off to pending merger deals, for example; that’s nothing new under the sun. But another wrinkle has equity research analysts on red alert. Regulators are now thought to be probing whether an analyst practice commonly known as “channel checking” constitutes illegal insider trading. If so, the public companies whose information is in play could soon be pulled into the whirlwind.

One company where channel checks have reportedly now become a widely used and highly relied-upon source of information for traders is Apple.

In a channel check, analysts try to glean information about a company’s production via interviews with the company’s suppliers, distributors, contract manufacturers, and sometimes even current company employees. The goal is to piece together a better picture of the company’s performance. Apple, always secretive about its products, is an example of a company where channel checking is reportedly common. Indeed, analyst reports based on channel checks routinely cause Apple stock to dip or surge.

As supply-chain expert Pradheep Sampath of GXS noted on his blog, these interviews typically occur without the target company’s permission or participation. Sampath adds that:

Data collected from these sources is seemingly innocuous when viewed separately. When pieced together however, these data points from a company’s supply chain can deliver startling insights into revenue and future earnings of a company—much in advance of such information becoming publicly available. This practice becomes more pronounced for companies such as Apple that are extremely guarded and secretive about information they make publicly available.

Reasons abound to question whether the Justice Department or the SEC will ever decide to bring a channel-checking case. First, the information gleaned from any one individual in the channel is unlikely to be material by itself. For example, the maker of screens for Apple’s iPhones may reveal that sales of those screens to Apple ticked up in December. But given that Apple has so many revenue streams and just as many channels for those streams, this one detail from our screen-maker is not likely to be material by itself.

Only when that information is pieced together with many other pieces of information to build a “mosaic” does a larger picture emerge that might arguably be material information about the company. This is, in effect, what equity research analysts are paid to do. But as the U.S. Supreme Court stated in the SEC’s ultimately unsuccessful insider-trading case against research analyst Raymond Dirks, analysts play an important role in preserving a healthy market, and imposing “an inhibiting influence” on that role may not be desirable.

Nonetheless, if prosecutors are now scrutinizing analysts’ practices of gathering information from a public company’s supply chain—which have a long, established history—that presents an important opportunity for public companies to re-examine their own policies and procedures concerning how such information is tracked and controlled. Here are some questions that public companies will want to consider:

1. Are analysts interested in, and attempting to obtain, information from our supply-chain?

If not, then channel checks may be more of a back-burner issue for you. If yes, press on.

2. As part of our agreements with suppliers, distributors, and manufacturers, do we have confidentiality or non-disclosure agreements (NDAs) in place?

Implicit in any enforcement action or prosecution that might result from the ongoing channel-check probe is the idea that the information in question is confidential and a company’s suppliers should not be sharing it. Suppliers speaking to Apple analysts, for example, may well be violating NDA agreements with Apple and allowing analysts to access confidential information. That doesn’t differ much from committing insider trading by obtaining information from inside the company itself.

If the SEC and prosecutors now view supply-chain information as material, non-public information that can support an insider-trading case, then companies should take a fresh look at how they try to prevent the misuse of such information.

Jacob Frenkel, a former SEC enforcement attorney now with law firm Shulman, Rogers, Gandal, Pordy & Ecker, says that weak corporate controls over supply chains has been a looming issue and was bound to become a compliance headache sooner or later. Frenkel says companies should adopt rules governing the conduct of their business partners, including what information they may share.

3. If we do have confidentiality agreements or NDAs in place with suppliers, distributors, and manufacturers, are they being violated? And are we seeking to enforce them?

To continue the Apple example: If traders routinely receive and act upon analyst reports based on supply chain interviews about the company, one wonders whether any NDAs with suppliers are in place or enforced. (Regulators would certainly be wondering about it.) For the record, Apple told the Wall Street Journal that the company does not release that type of information about its production, and declined to comment further.

Consider this hypothetical:

Company X’s supply-chain information is material and non-public, meaning Company X or a “person acting on its behalf” could not selectively disclose it to one analyst under Regulation FD without making a public disclosure of that same information; Company X is fully aware that its suppliers are providing supply-chain information regularly to select analysts; and Company X either (a) does not impose an NDA on its suppliers, or (b) does impose an NDA but never enforces it. Is the supplier’s disclosure of information to select analysts, with Company X’s knowledge, a “back door” violation of Regulation FD (or at least the spirit of Regulation FD)?

4. Are we permitting current company employees to hold discussions with analysts or traders as industry “consultants”?

Law professor Peter Henning noted in a recent article that many employees are providing information as consultants do so openly, and “it may even be that these consultants were authorized by corporate employers—or it was at least tolerated as a cost of keeping talented employees.” Given the risk that an employee/consultant may end up talking about the company, however, Henning says it is an “interesting issue” why a company would allow one of its employees to consult in this fashion.

Given the SEC’s intense focus on insider trading, there is certainly more to come on this front, so keep an eye on developments in the coming months. And keep an ear to the ground for those whispers from your suppliers, distributors, and contract manufacturers.

Originally published in Compliance Week. Reprinted with permission. © 2010 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com.  

Bob Jensen threads on dirty rotten frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm

"The Triumph of Propaganda," by Nemo Almen, American Thinker, January 2, 2011 ---
http://www.americanthinker.com/2011/01/the_triumph_of_propaganda.html

Does anyone remember what happened on Christmas Eve last year?  In one of the most expensive Christmas presents ever, the government removed the $400 billion limit on their Fannie and Freddie guaranty.  This act increased taxpayer liabilities by six trillion dollars; however, the news was lost in the holiday cheer.  This is one instance in a broader campaign to manipulate the public perception, gradually depriving us of independent thought.

Consider another example: what news story broke on April 16, 2010?  Most of us would say the SEC's lawsuit against Goldman Sachs.  Goldman is the market leader in "ripping the client's face off," in this instance creating a worst-of-the-worst pool of securities so Paulson & Co could bet against it.  Many applauded the SEC for this action.  Never mind that singling out one vice president (the "Fabulous Fab") and one instance of fraud is like charging Al Capone with tax evasion.  The dog was wagged.

Very few caught the real news that day, namely the damning complicity of the SEC in the Stanford Ponzi scheme.  Clearly, Stanford was the bigger story, costing thousands of investors billions of dollars while Goldman later settled for half a billion.  Worse, the SEC knew about Stanford since 1997, but instead of shutting it down, people left the SEC to work for Stanford.  This story should have caused widespread outrage and reform of the SEC; instead it was buried in the back pages and lost to the public eye.

Lest we think the timing of these was mere coincidence, the Goldman lawsuit was settled on July 15, 2010, the same day the financial reform package passed.  The government threw Goldman to the wolves in order to hide its own shame.  When the government had its desired financial reforms, it let Goldman settle.  These examples demonstrate a clear pattern of manipulation.  Unfortunately, our propaganda problem runs far deeper than lawsuits and Ponzi schemes.

Here is a more important question: which companies own half of all subprime and Alt-A (liar loan) bonds?  Paul Krugman writes that these companies were "mainly out of the picture during the housing bubble's most feverish period, from 2004 to 2006.  As a result, the agencies played only a minor role in the epidemic of bad lending."[iii]  This phrase is stupefying.  How can a pair of companies comprise half of a market and yet have no major influence in it?  Subprime formed the core of the financial crisis, and Fannie and Freddie (the "agencies") formed the core of the subprime market.  They were not "out of the picture" during the subprime explosion, they were the picture.  The fact that a respectable Nobel prize-winner flatly denies this is extremely disturbing.

Amazingly, any attempt to hold the government accountable for its role in the subprime meltdown is dismissed as right-wing propaganda.  This dismissal is left-wing propaganda.  It was the government that initiated securitization as a tool to dispose of RTC assets.  Bill Clinton ducks all responsibility, ignoring how his administration imposed arbitrary quotas on any banks looking to merge as Attorney General Janet Reno "threatened legal action against lenders whose racial statistics raised her suspicions."[iv]  Greenspan fueled the rise of subprime derivatives by lowering rates,[v] lowering reserves,[vi] and beating down reasonable opposition.  And at the center of it all were Fannie and Freddie bribing officials, committing fraud, dominating private-sector competition, and expanding to a six-trillion-dollar debacle.  The fact that these facts are dismissed as propaganda shows just how divorced from reality our ‘news' has become.  Yes, half of all economists are employed by the government, but this is no reason to flout one's professional responsibility.  As a nation we need to consider all the facts, not just those that are politically expedient.

Continued in article

Nemo Almen is the author of The Last Dodo: The Great Recession and our Modern-Day Struggle for Survival.

"The Stanford Sentence SEC examiners first flagged Stanford way back in the 1990s," The Wall Street Journal, June 15, 2012 ---
http://professional.wsj.com/article/SB10001424052702303734204577466672525877312.html?mg=reno64-wsj#mod=djemEditorialPage_t

Convicted Ponzi schemer R. Allen Stanford was sentenced Thursday to 110 years in federal prison for his $7 billion fraud. Stanford victimized thousands of individual investors to fund a lifestyle of private jets and island vacation homes. Now the question is whether there will be anything left at all for these victims once authorities in jurisdictions around the world finish sifting through the wreckage.

Stanford "stole more than millions. He stole our lives as we knew them," said victim Angela Shaw, according to Reuters. Certificates of deposit issued by a Stanford bank in Antigua promised sky-high returns but succeeded only in destroying the savings of middle-class retirees. More than three years after U.S. law enforcement shut down the Stanford outfit, victims have recovered nothing.

A receiver appointed by a federal court, Ralph Janvey, has collected $220 million from the remains of Stanford's businesses but has already used up close to $60 million in fees for himself and other lawyers, accountants and professionals, plus another $52 million to wind down the Stanford operation.

And then there's the Securities and Exchange Commission, which didn't charge Stanford for years even after its own examiners raised red flags as early as the 1990s. The SEC has lately pursued a bizarre attempt at blame-shifting, trying to get the Securities Investor Protection Corporation to cover investor losses. Even the SEC must know that SIPC doesn't guarantee paper issued by banks in Antigua—or anywhere else for that matter.

SEC enforcers should instead focus on catching the next Allen Stanford. Careful investors should expect that they won't.

Bob Jensen's threads on Ponzi schemes are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

"The 11 Most Shocking Insider Trading Scandals Of The Past 25 Years," Business Insider, November 4, 2010 --- 
http://www.businessinsider.com/biggest-insider-trading-scandals-2010-11#ixzz14WznUXEr

1986: Ivan Boesky, Dennis Levine and the fall of Drexel Burnham Lambert

2001: Martha Stewart and ImClone (I think this is less about what she did than who she was)

2001: Art Samberg's Illegal Microsoft Trades

2001: Rene Rivkin Convicted For Insider Trading That Netted Him Only $346

2005: Joseph Nacchio and Qwest Communications

2006: Livedoor and Murakami, The Enron Of Japan

2007: Mitchel Guttenberg, David Tavdy and Erik Franklin

Read more: http://www.businessinsider.com/biggest-insider-trading-scandals-2010-11#2007-mitchel-guttenberg-david-tavdy-and-erik-franklin-7#ixzz14X1N1ftN

2007: Mitchel Guttenberg, David Tavdy and Erik Franklin

2007: Randi and Christopher Collotta

2009: The Galleon Mess

2010: Some Very Wily Brothers - Charles and Sam Wyly And An Alleged $550 M Scheme

2010: Insider Trading By French Doc Might Have Helped FrontPoint Avoid Huge Losses

 American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

"The Difficulty of Proving Financial Crimes," by Peter J. Henning, DealBook, December 13, 2010 ---
http://blogs.law.harvard.edu/corpgov/2010/12/20/why-do-cfos-become-involved-in-material-accounting-manipulations/

The prosecution revolved around the recognition of revenue from Network Associates’ sales of computer security products to a distributor through what is called “sell-in” accounting rather than the “sell-through” method. Leaving aside the accounting minutiae, prosecutors asserted that Mr. Goyal chose “sell-in” accounting as a means to overstate revenue from the sales and did not disclose complete information to the company’s auditors about agreements with the distributor that could affect the amount of revenue generated from the transactions.

The line between aggressive accounting and fraud is a thin one, involving the application of unclear rules that require judgment calls that may turn out to be incorrect in hindsight. While Mr. Goyal was responsible as the chief financial officer for adopting an accounting method that likely enhanced Network Associates’ revenue, the problem with the securities fraud theory was that prosecutors did not introduce evidence that the “sell-in” method was improper under Generally Accepted Accounting Principles. And even if it was, the court pointed out lack of evidence that that this accounting method had a “material” impact on Network Associates’ revenue, which must be shown to prove fraud.

A more significant problem for prosecutors was the absence of concrete proof that Mr. Goyal intended to defraud or that he sought to mislead the auditors. The Court of Appeals for the Ninth Circuit found that the “government’s failure to offer any evidence supporting even an inference of willful and knowing deception undermines its case.”

The court rejected the proposition that an executive’s knowledge of accounting and desire to meet corporate revenue targets can be sufficient to establish the intent to commit a crime. The court stated, “If simply understanding accounting rules or optimizing a company’s performance were enough to establish scienter, then any action by a company’s chief financial officer that a juror could conclude in hindsight was false or misleading could subject him to fraud liability without regard to intent to deceive. That cannot be.”

The court further explained that an executive’s compensation tied to the company’s performance does not prove fraud, stating that such “a general financial incentive merely reinforces Goyal’s preexisting duty to maximize NAI’s performance, and his seeking to meet expectations cannot be inherently probative of fraud.”

Don’t be surprised to see the court’s statements about the limitations on corporate expertise and financial incentives as proof of intent quoted with regularity by defense lawyers for corporate executives being investigated for their conduct related to the financial meltdown. The opinion makes the point that just being at the scene of financial problems alone is not enough to show criminal intent.

If the Justice Department decides to try to hold senior corporate executives responsible for suspected financial chicanery or misleading statements that contributed to the financial meltdown, the charges are likely to be similar to those brought against Mr. Goyal, requiring proof of intent to defraud and to mislead investors, auditors, or the S.E.C.

The intent element of the crime is usually a matter of piecing together different tidbits of evidence, such as e-mails, internal memorandums, public statements and the recollection of participants who attended meetings. Connecting all those dots is not an easy task, as prosecutors learned in the case against two former Bear Stearns hedge fund managers when e-mails proved to be at best equivocal evidence of their intent to mislead investors, resulting in an acquittal on all counts.

The collapse of Lehman Brothers raises issues about whether prosecutors could show criminal conduct by its executives. The bankruptcy examiner’s report highlighted the firm’s use of the so-called “Repo 105” transactions to make its balance sheet look healthier than it was each quarter, which could be the basis for criminal charges. But the appeals court opinion highlights how great the challenge would be to establish a Lehman executive’s knowledge of improper accounting or the falsity of statements because just arguing that a chief executive or chief financial officer had to be aware of the impact of the transactions would not be enough to prove the case.

The same problems with proving a criminal case apply to other companies brought down during the financial crisis, like Fannie Mae, Freddie Mac and American International Group. Many of the decisions that led to these companies’ downfall were at least arguably judgment calls made with no intent to defraud, short-sighted as they might have been. Disclosures to regulators and auditors, and public statements to shareholders, are rarely couched in definitive terms, so proving that a statement was in fact false can be difficult, and then showing knowledge of its falsity even more daunting.

In a concurring opinion in the Goyal case, Chief Judge Alex Kozinski bemoaned the use of the criminal law for this type of conduct, stating that this prosecution was “one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds.”

Despite the public’s desire to see some corporate executives sent to jail for their role in the financial meltdown, the courts will hold the government to the requirement of proof beyond a reasonable doubt and not simply allow the cry for retribution to lead to convictions based on high compensation and presiding over a company that sustained significant losses.

Continued in article

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Absolutely Must-See CBS Sixty Minutes Videos
You, your students, and the world in general really should repeatedly study the following videos until they become perfectly clear!
Two of them are best watched after a bit of homework.

Video 1
CBS Sixty Minutes featured how bad things became when poison was added to loan portfolios. This older Sixty Minutes Module is entitled "House of Cards" --- http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody
This segment can be understood without much preparation except that it would help for viewers to first read about Mervene and how the mortgage lenders brokering the mortgages got their commissions for poisoned mortgages passed along to the government (Freddie Mack and Fannie Mae) and Wall Street banks. On some occasions the lenders like Washington Mutual also naively kept some of the poison planted by some of their own greedy brokers.
The cause of this fraud was separating the compensation for brokering mortgages from the responsibility for collecting the payments until the final payoff dates.

First Read About Mervene --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Then Watch Video 1 at http://www.cbsnews.com/video/watch/?id=3756665n&tag=contentMain;contentBody

Videos 2 and 3
Inside the Wall Street Collapse (Parts 1 and 2) first shown on March 14, 2010

Video 2 (Greatest Swindle in the History of the World) --- http://www.cbsnews.com/video/watch/?id=6298154n&tag=contentMain;contentAux

Video 3 (Swindler's Compensation Scandals) --- http://www.cbsnews.com/video/watch/?id=6298084n&tag=contentMain;contentAux

My wife and I watched Videos 2 and 3 on March 14. Both videos feature one of my favorite authors of all time, Michael Lewis, who hhs been writing (humorously with tongue in cheek) about Wall Street scandals since he was a bond salesman on Wall Street in the 1980s. The other person featured on in these videos is a one-eyed physician with Asperger Syndrome who made hundreds of millions of dollars anticipating the collapse of the CDO markets while the shareholders of companies like Merrill Lynch, AIG, Lehman Bros., and Bear Stearns got left holding the empty bags.

The major lessons of videos 2 and 3 went over the head of my wife. I think that viewers need to do a bit of homework in order to fully appreciate those videos. Here's what I recommend before viewing Videos 2 and 3 if you've not been following details of the 2008 Wall Street collapse closely:

• Read about Mervene if you did not already do so for Video 1 ---  http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
  
   
• Be able to define a CDO and relate a poisoned CDO to Mervene's mortgage (particularly the bit Wall Street bankers slicing and dicing Mervene's hopeless mortgage into multiple CDOs in an effort to diversify repayment risk among various international buyers of this diversified poison)..
  CDO --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation
  How CDOs brought down the banks --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
   

This is not necessary to Videos 2 and 3, but to really appreciate what suckered the Wall Street Banks into spreading the poison, you should read about how they all used the same risk diversification mathematical function --- David Li's Gaussian Copula Function:

Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster:  The Formula That Killed Wall Street --- http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html 

Some highlights:

"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

"The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM  

The rhetorical question is whether the failure is ignorance in model building or risk taking using the model?

 

• You should understand how the Wall Street Banks used the big credit rating agencies to give AAA ratings to sell CDO bonds that should've instead been rated as junk bonds. Michael Lewis in Video 2 seems to think the credit rating agencies were just naive and were manipulated by the Wall Street bankers. I'm more inclined to think the CRAs were knowingly and greedily part of the frauds ---  http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
  CRA --- http://en.wikipedia.org/wiki/Credit_rating_agency
  
   
• You should also understand what a credit default swap (CDS) is and how Video 2 above keeps calling it unregulated credit "insurance." Essentially, this is how some banks, particularly Goldman Sachs was "insuring" against the value collapse of the poisoned CDOs they were creating and selling. The "insurance" company brokering the AIG credit default swaps was AIG.
  CDS --- http://en.wikipedia.org/wiki/Credit_default_swap
  Here's how they worked ---  http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
  
   
• Understand how some Wall Street Banks were better connected in the Treasury Department and Federal Reserve than other banks. In particular, Goldman Sachs alumni were practically in charge while Hank Paulson (former Goldman Sachs CEO) was U.S. Treasury Secretary. Why did Paulson save Goldman Sachs and let others watch their shareholders get wiped out like Lehman Bros., Bear Stearns, Merrill Lynch, etc.? Understand why saving Goldman Sachs with TARP money entailed saving AIG since saving AIG was crucial to paying off the CDS insurance.
  
   
• For the above three videos it is not necessary to understand the lack of professionalism (at best) among the bank auditors that never provided any warning that thousands of banks that failed had badly underestimated bad debts and overvalued poisoned loan portfolios. The above videos do not get into the failings of the CPA auditors in this regard, but you can read about these failings at
  http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

For more on the inside track of all of this I highly recommend Janet Tavakili's great book entitled Dear Mr. Buffett (Wiley, 2009). Videos 1-3 will help you understand some of the technicalities in her fantastic and very depressing book.

Here are some of the take-aways from the three CBS videos above:

• The root cause of the 2008 meltdown of Wall Street was really the failings on Main Street where the poison was first added to mortgages by Main Street brokers who were willing to broker mortgages (including re-financings) that were bound to be defaulted. Note that the problem was not just in brokering mortgages for poor people (Barney's Rubble). Poisoned mortgages were also being written for higher income people who were borrowing beyond their means for those four-car garage dream houses with swimming pools and marble floors. In other words the root cause was the ability to broker a poisoned mortgage and then sell it to Freddie Mack, Fannie Mae, and the Wall Street Banks.
  
   
• The next cause of the 2008 meltdown was David Li's risk diversification formula that all the Wall Street banks were using on the theory that default risk of mortgage investments could be diversified by crumbling mortgage cookies into crumbs that were reassembled into thousands of CDOs (each CDO having only a small crumble of each mortgage's poison). With the blessings of credit rating agencies, these CDO bonds were then sold as AAA-rated when in fact they were worse than junk.
  
   
• Videos 2 and 3 above stress how the underlying cause of allowing a one-eyed physician with Asperger Syndrome make hundreds of millions dollars by detecting the collapse of the CDO values way in advance of the Wall Street pros is that the Wall Street pros were paid not to look for the CDO risks. And the bank CDO sellers who perhaps did understand the risks were willing to screw their eimployers (such as Lehman, Bear Stearnes, etc.) because it was so easy to steal hundreds of millions from these employers who were even willing and still are willing to pay them bonuses in spite of their thefts.
  
   
• After the government bailed them out, the Wall Street banks that survived because of the government's bailout are still paying out billions in bonuses. One of my favorite quotes in Video 2 goes something like:
  
  "If Goldman does not pay its best people billions in bonuses they will quit and go to JP Morgan, and if JP Morgan does not pay its best people billions in bonuses they will quit and go to Goldman." Meanwhile the taxpayers got screwed out of nearly a trillion dollars.
  
   
• Video 2 leaves us with the impression that Wall Street is no longer a value-added part of U.S. economy. The TARP in reality is truly the Greatest Swindle in the History of the World --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
  Meanwhile the surviving swindlers and their credit rating agencies and their auditors are still thriving as if nothing has happened. Opps! I forgot that the credit rating agencies and auditing firms still have some multi-billion shareholder lawsuits pending that do threaten their survival. But a lot of big swindlers still have their yachts thanks to Hank and Ben and Tim.

I highly recommend the outstanding and often humorous books of both Michael Lewis and Frank Partnoy.
My timeline of these books and the scandals they write about can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Rotten to the Core --- http://www.trinity.edu/rjensen/FraudRotten.htm

Related CBS Sixty Minutes videos are as follows:

• Video:  Strong ARM of Mortgage Bubble is Building to Burst: 
  "Second Financial Economic Crash Coming - Huge & Soon," CBS Sixty Minutes --- http://www.youtube.com/watch?v=JKlBJavw_X4
  
   

• CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
  The title of the video is “The Man Who Would Be King.”
  Also see http://www.fraud-magazine.com/FeatureArticle.aspx
  
   

• Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009 ---
  http://www.cbsnews.com/video/watch/?id=5274961n&tag=contentBody;housing
  
   

• CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC ---
  http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
  The title of the video is “The Man Who Would Be King.”
  Also see http://www.fraud-magazine.com/FeatureArticle.aspx
  
   

• David Walker's Wake Up Call ---
  http://www.cbsnews.com/video/watch/?id=2532398n&tag=mncol;lst;8

I also recommend watching all the David Walker videos on YouTube.
Watch them and weep.

Oil and Water Must Read:  Economists versus Criminologists
:"Why the ‘Experts’ Failed to See How Financial Fraud Collapsed the Economy," by "James K. Galbraith, Big Picture, June 2, 2010 ---
http://www.ritholtz.com/blog/2010/06/james-k-galbraith-why-the-experts-failed-to-see-how-financial-fraud-collapsed-the-economy/

The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original PDF text is here.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word “naughtiness.” This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled “Looting: Bankruptcy for Profit,” by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: “the best way to rob a bank is to own one.” The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart’s Den of Thieves on the Boesky-Milken era and Kurt Eichenwald’s Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a “license to steal.” In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found “fraud, abuse or missing documentation in virtually every file.” An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of “insurance,” provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails — those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?

Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Thank you.

~~~

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, and of a new preface to The Great Crash, 1929, by John Kenneth Galbraith. He teaches at The University of Texas at Austin

Bob Jensen's threads on the subprime sleaze is at
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

The Greatest Swindle in the History of the World
Paulson and Geithner Lied Big Time

"The Ugly AIG Post-Mortem:  The TARP Inspector General's report has a lot more to say about the rating agencies than it does about Goldman Sachs," by Holman Jenkins, The Wall Street Journal, November 24m 2009 --- Click Here

A year later, the myrmidons of the media have gotten around to the question of why, after the government took over AIG, it paid 100 cents on the dollar to honor the collateral demands of AIG's subprime insurance counterparties.

By all means, read TARP Inspector General Neil Barofsky's report on the AIG bailout—but read it honestly.

It does not say AIG's bailout was a "backdoor bailout" of Goldman Sachs. It does not say the Fed was remiss in failing to require Goldman and other counterparties to settle AIG claims for pennies on the dollar.

It does not for a moment doubt the veracity of officials who say their concern was to stem a systemic panic that might have done lasting damage to the U.S. standard of living.

To be sure, Mr. Barofsky has some criticisms to offer, but the biggest floats inchoate between the lines of a widely overlooked section headed "lessons learned," which focuses on the credit rating agencies. The section notes not only the role of the rating agencies, with their "inherently conflicted business model," in authoring the subprime mess in the first place—but also the role of their credit downgrades in tipping AIG into a liquidity crisis, in undermining the Fed's first attempt at an AIG rescue, and in the decision of government officials "not to pursue a more aggressive negotiating policy to seek concessions from" AIG's counterparties.

Though not quite spelling it out, Mr. Barofsky here brushes close to the last great unanswered question about the AIG bailout. Namely: With the government now standing behind AIG, why not just tell Goldman et al. to waive their collateral demands since they now had the world's best IOU—Uncle Sam's?

Congress might not technically have put its full faith and credit behind AIG, but if banks agreed to accept this argument, and Treasury and Fed insisted on it, and the SEC upheld it, the rating agencies would likely have gone along. No cash would have had to change hands at all.

This didn't happen, let's guess, because the officials—Hank Paulson, Tim Geithner and Ben Bernanke—were reluctant to invent legal and policy authority out of whole cloth to overrule the ratings agencies—lo, the same considerations that also figured in their reluctance to dictate unilateral haircuts to holders of AIG subprime insurance.

Of course, the thinking now is that these officials, in bailing out AIG, woulda, shoulda, coulda used their political clout to force such haircuts, but quailed when the banks, evil Goldman most of all, insisted on 100 cents on the dollar.

This story, in its gross simplification, is certainly wrong. Goldman and others weren't in the business of voluntarily relinquishing valuable claims. But the reality is, in the heat of the crisis, they would have acceded to any terms the government dictated. Washington's game at the time, however, wasn't to nickel-and-dime the visible cash transfers to AIG. It was playing for bigger stakes—stopping a panic by asserting the government's bottomless resources to uphold the IOUs of financial institutions.

What's more, if successful, these efforts were certain to cause the AIG-guaranteed securities to rebound in value—as they have. Money has already flowed back to AIG and the Fed (which bought some of the subprime securities to dissolve the AIG insurance agreements) and is likely to continue to do so for the simple reason that the underlying payment streams are intact.

Never mind: The preoccupation with the Goldman payments amounts to a misguided kind of cash literalism. For the taxpayer has assumed much huger liabilities to keep homeowners in their homes, to keep mortgage payments flowing to investors, to fatten the earnings of financial firms, etc., etc. These liabilities dwarf the AIG collateral calls, inevitably benefit Goldman and other firms, and represent the real cost of our failure to create a financial system in which investors (a category that includes a lot more than just Goldman) live and die by the risks they voluntarily take without taxpayers standing behind them.

No, Moody's and S&P are not the cause of this policy failure—yet Mr. Barofsky's half-articulated choice to focus on them is profound. For the role the agencies have come to play in our financial system amounts to a direct, if feckless and weak, attempt to contain the incentives that flow from the government's guaranteeing of so many kinds of private liabilities, from the pension system and bank deposits to housing loans and student loans.

The rating agencies' role as gatekeepers to these guarantees is, and was, corrupting, but the solution surely is to pare back the guarantees themselves. Overreliance on rating agencies, with their "inherently conflicted business model," was ultimately a product of too much government interference in the allocation of credit in the first place.

The Mother of Future Lawsuits Directly Against Credit Rating Agencies and I, ndirectly Against Auditing Firms

It has been shown how Moody's and some other credit rating agencies sold AAA ratings for securities and tranches that did not deserve such ratings --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

My friend Larry sent me the following link indicating that a lawsuit in Ohio may shake up the credit rating fraudsters.
Will 49 other states and thousands of pension funds follow suit?
Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.
http://www.nytimes.com/2009/11/21/business/21ratings.html?em

Jensen Comment
The credit raters will rely heavily on the claim that they relied on the external auditors who, in turn, are being sued for playing along with fraudulent banks that grossly underestimated loan loss reserves on poisoned subprime loan portfolios and poisoned tranches sold to investors --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bad things happen in court where three or more parties start blaming each other for billions of dollars of losses that in many cases led to total bank failures and the wiping out of all the shareholders in those banks, including the pension funds that invested in those banks. A real test is the massive lawsuit against Deloitte's auditors in the huge Washington Mutual (WaMu) shareholder lawsuit.

"Ohio Sues Rating Firms for Losses in Funds," by David Segal, The New York Times, November 20m 2009 --- Click Here

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

“Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

"Rating agencies lose free-speech claim," by Jonathon Stempel, Reuters, September 3, 2009 ---
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE5824KN20090903

There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by down grading your bonds. And believe me, it’s not clear sometimes who’s more powerful.  The most that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out.
Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert of Financial Matters:  Two Thumbs Down for Credit Reporting Agencies," Washington University Law Quarterly, Volume 77, No. 3, 1999 --- http://www.trinity.edu/rjensen/FraudCongressPartnoyWULawReview.htm 

Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html

"How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 --- http://www.mcclatchydc.com/homepage/story/77244.html

Paulson and Geithner Lied Big Time:  The Greatest Swindle in the History of the World
What was their real motive in the greatest fraud conspiracy in the history of the world?
Bombshell:  In 2008 and early 2009, Treasury Secretary leaders Paulson and Geithner told the media and Congress that AIG needed a global bailout due to not having cash reserves to meet credit default swap (systematic risk) obligations and insurance policy payoffs. On November 19, 2009 in Congressional testimony Geithner now admits that all this was a pack of lies. However, he refuses to resign as requested by some Senators.

"AIG and Systemic Risk Geithner says credit-default swaps weren't the problem, after all," Editors of The Wall Street Journal, November 20, 2009 --- Click Here

TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.

Hello?

For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

Both Treasury and the Fed say they think it would have been inappropriate for the government to muscle counterparties to accept haircuts, though the New York Fed tried to persuade them to accept less than par. Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?

Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might not have been able to pay claims to its insurance policy holders: "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world."

Yet, if there is one thing that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulated subsidiaries—where there was no CDS trading—then the Beltway narrative implodes.

Interestingly, in Treasury's official response to the Barofsky report, Assistant Secretary Herbert Allison explains why the department acted to prevent an AIG bankruptcy. He mentions the "global scope of AIG, its importance to the American retirement system, and its presence in the commercial paper and other financial markets." He does not mention CDS.

All of this would seem to be relevant to the financial reform that Treasury wants to plow through Congress. For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for restructuring the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure.

More broadly, lawmakers now have an opportunity to dig deeper into the nature of moral hazard and the restoration of a healthy financial system. Barney Frank and Chris Dodd are pushing to give regulators "resolution authority" for struggling firms. Under both of their bills, this would mean unlimited ability to spend unlimited taxpayer sums to prevent an unlimited universe of firms from failing.

Americans know that's not the answer, but what is the best solution to the too-big-to-fail problem? And how exactly does one measure systemic risk? To answer these questions, it's essential that we first learn the lessons of 2008. This is where reports like Mr. Barofsky's are valuable, telling us things that the government doesn't want us to know.

In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's report, Mr. Geithner said, "It's a great strength of our country, that you're going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight." He added, "Now, you're going to see a lot of conviction in this, a lot of strong views—a lot of it untainted by experience."

Mr. Geithner has a point about Monday-morning quarterbacking. He and others had to make difficult choices in the autumn of 2008 with incomplete information and often with little time to think, much less to reflect. But that was last year. The task now is to learn the lessons of that crisis and minimize the moral hazard so we can reduce the chances that the panic and bailout happen again.

This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

Jensen Comment
One of the first teller of lies was the highly respected Gretchen Morgenson of The New York Times who was repeating the lies told to her and Congress by the Treasury and the Fed. This was when I first believed that the problem at AIG was failing to have capital reserves to meet CDS obligations. I really believed Morgenson's lies in 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
 

Here's what I wrote in 2008 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Credit Default Swap (CDS)
This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

"Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 --- http://www.nytimes.com/2008/09/21/business/21gret.html
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 --- http://www.nytimes.com/2009/03/08/business/08gret.html

What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

You tube had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" --- http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
In particular note this video by Paddy Hirsch --- http://www.youtube.com/watch?v=kaui9e_4vXU
Paddy has some other YouTube videos about the financial crisis.

Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Bob Jensen's threads on why the infamous "Bailout" won't work --- http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity

Bob Jensen's "Rotten to the Core" threads --- http://www.trinity.edu/rjensen/FraudRotten.htm

"Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine McKenna, re: The Auditors, September 18, 2009 --- http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

When each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by “healthier” institutions, they were all carrying in their wallets non-qualified, clean opinions on their financial statements from their auditors. In none of the cases had the auditors warned shareholders and the markets that there was “ a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.”

Continued in a very good article by Francine (she talks with some major players)
http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

Francine maintains an outstanding auditing blog at
http://retheauditors.com/

Bob Jensen's threads on "Where Were the Auditors?" ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Some auditing firms are now being hauled into court in bank shareholder and pension fund lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Federal securities class action lawsuits increased 19 percent in 2008, with almost half involving firms in the financial services sector according to the annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research --- http://securities.stanford.edu/scac_press/20080106_YIR08_Press_Release.pdf

Especially note the 2008 Year in Review link at http://securities.stanford.edu/clearinghouse_research/2008_YIR/20080106.pdf

Simoleon Sense Reviews Janet Tavakoli’s Dear Mr. Buffett ---
http://www.simoleonsense.com/simoleon-sense-reviews-janet-tavakolis-dear-mr-buffett/

What’s The Book (Dear Mr. Buffett) About

Dear Mr. Buffett, chronicles the agency problems, poor regulations, and participants which led to the current financial crisis. Janet accomplishes this herculean task by capitalizing on her experiences with derivatives, Wall St, and her relationship with Warren Buffett. One wonders how she managed to pack so much material in such few pages!

Unlike many books which only analyze past events, Dear Mr. Buffett, offers proactive advice for improving financial markets. Janet is clearly very concerned about protecting individual rights, promoting honesty, and enhancing financial integrity. This is exactly the kind of character we should require of our financial leaders.

Business week once called Janet the Cassandra of Credit Derivatives. Without a doubt Janet should have been listened to. I’m confident that from now on she will be.

Closing thoughts

Rather than a complicated book on financial esoterica, Janet has created a simple guide to understanding the current crisis. This book is a must read for all students of finance, economics, and business. If you haven’t read this book, please do so.

Warning –This book is likely to infuriate you, and that’s a good thing! Janet provides indicting evidence and citizens may be tempted to initiate vigilante like witch trials. Please consult with your doctor before taking this financial medication.

Continued in article

September 1, 2009 reply from Rick Lillie [rlillie@CSUSB.EDU]

Hi Bob,

I am reading Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street, by Janet Tavakoli. I am just about finished with the book. I am thinking about giving a copy of the book to students who perform well in my upper-level financial reporting classes.

I agree with the reviewer’s comments about Tavakoli’s book. Her explanations are clear and concise and do not require expertise in finance or financial derivatives in order to understand what she (or Warren Buffet) says. She explains the underlying problems of the financial meltdown with ease. Tavakoli does not blow you over with “finance BS.” She does in print what Steve Kroft does in the 60 Minutes story.

Tavakoli delivers a unique perspective throughout the book. She looks through the eyes of Warren Buffett and explains issues as Buffett sees them, while peppering the discussion with her experience and perspective.

The reviewer is correct. Tavakoli lets the finance world, along with accountants, attorneys, bankers, Congress, and regulators, have it with both barrels!

Tavakoli’s book is the highlight of my summer reading.

Best wishes,

Rick Lillie

Rick Lillie, MAS, Ed.D., CPA Assistant Professor of Accounting Coordinator - Master of Science in Accountancy (MSA) Program Department of Accounting and Finance College of Business and Public Administration CSU San Bernardino 5500 University Pkwy, JB-547 San Bernardino, CA. 92407-2397

Telephone Numbers: San Bernardino Campus: (909) 537-5726 Palm Desert Campus: (760) 341-2883, Ext. 78158

For technical details see the following book:
Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance) by Janet M. Tavakoli (2008)

FBI Arrest in What Appears to Be the World's Largest Case Involving Insider Information
More and more keeps coming out, including revelations of wiretapping

"8 trades the insiders allegedly made The government's case against the Galleon crew includes transactions in companies like Google, AMD, Hilton and Sun," by Michael Copeland, Fortune, October 19, 2009 --- Click Here
http://money.cnn.com/2009/10/19/markets/insider_trading_arrests.fortune/?postversion=2009101912

The government's case in what it is calling the largest insider trading case involving a U.S. hedge fund contains a detailed list of trades involving household-name companies.

Investigators have pieced together a case that alleges more than $25 million in illegal gains based on trading in 2006-09 on companies including Advanced Micro Devices (AMD, Fortune 500), Akamai (AKAM), Clearwire (CLWR), Google (GOOG, Fortune 500), Hilton, Polycom (PLCM) and Sun Microsystems (JAVA, Fortune 500), among others.

The six people charged include hedge fund billionaire Raj Rajaratnam, founder of Galleon Group; Robert Moffat, IBM's (IBM, Fortune 500) top hardware executive and an oft-discussed CEO candidate; Mark Curland and Danielle Chiesi, executives of the hedge fund New Castle Partners; Anil Kumar, a director at consulting firm McKinsey & Co.; and Rajiv Goel, an executive in Intel's treasury department.

Just what did they allegedly do? Using information gleaned from wiretapped conversations between the accused and others, along with the statements of an apparent informant, SEC investigators have pieced together a series of episodes alleging to show how the defendants used inside information and well-timed trades to turn million-dollar profits.

Those charged have yet to enter pleas in the case. Jim Waldman, a lawyer for Rajaratman, told the Wall Street Journal that the hedge fund chief "is innocent. We're going to fight the charges." Lawyers for some of the other accused said their clients are shocked by the charges and deny wrongdoing.

What follows is a condensed account of eight major trades the suspects made and the inside information they capitalized on, according to the the SEC investigation and complaint. At the center of some of the trades is an unnamed "Tipper A," a person who gathered a great deal of information on companies for Rajaratnam, and whose identity presumably will be made public as the case unfolds in court.

Polycom beats the Street

On Jan. 10, 2006, the unnamed source identified in the SEC's complaint as "Tipper A" told Galleon's Rajaratnam that, based on information received from a Polycom insider, revenues at the video-conferencing company for the fourth-quarter of 2005 were about to beat Wall Street estimates. Polycom was set to announce its earnings more than two weeks later.

Rajaratnam sent an instant message to his trader instructing him to "buy 60 [thousand shares] PLCM" for certain Galleon Tech funds. All told, from Jan. 10 through Jan. 25, the date of the Polycom earnings release, Rajaratnam and Galleon bought 245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did beat the Street, and collectively, the Galleon Tech funds made over $570,000 in connection with their Polycom trades based on Tipper A's tip.

The same scenario was repeated for Polycom's first-quarter 2006 earnings, the complaint says. Galleon made $165,000 on the information. Tipper A made $22,000.

The Hilton takeover

Tipper A allegedly obtained confidential information in advance of a July 3, 2007, announcement that a private equity group would be buying Hilton for $47.50 per share, a premium of $11.45 over the July 3 closing price. Tipper A obtained the information from an analyst who, at the time, was working at Moody's, a rating agency that was evaluating Hilton's debt in connection with the planned buyout. Tipper A bought call option contracts based on the information, and passed on the tip to Rajaratnam.

On July 3, Rajaratnam and Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That evening, the Hilton transaction was announced. Tipper A sold all of the Hilton call option contracts for a profit of more than $630,000, the complaint says. To compensate the source for the Hilton tip, Tipper A paid the source $10,000. The Galleon Tech funds sold their Hilton shares after the July 3 announcement for a profit of more than $4 million.

Google Misses

Around July 10, 2007, a PR consultant to Google allegedly told Tipper A that Google's second-quarter earnings per share would be down about 25 cents. The Street had estimated yet another strong quarter for the search giant, which was scheduled to report earnings July 19.

Two days later Tipper A bought put options in Google and passed along details of the pending Google miss to Rajaratnam. He and Galleon began buying Google put options for the Galleon Tech funds, and continued buying them through July 19. In addition, Galleon funds bought other options betting on a fall in Google shares and sold short Google stock beginning July 17.

On July 19, Google announced its earnings results, disclosing that its earnings-per-share was indeed 25 cents lower than the prior quarter. Google's share price fell from over $548 per share to almost $520 per share. The Galleon Tech funds' profits from the Google tip were almost $8 million. Tipper A sold all of the put options the day after the July 19 announcement for a profit of over $500,000.

Trading in Intel

Rajaratnam allegedly tapped former Wharton classmate and Intel executive Rajiv Goel just before Intel's (INTL) scheduled fourth-quarter 2006 earnings announcement to get inside information on the world's largest chipmaker. On Jan. 8, 2007, Rajaratnam contacted Intel's Goel. The next day, Rajaratnam bought 1 million shares of Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per share.

Goel and Rajaratnam communicated again multiple times over the Martin Luther King Day weekend that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam reversed course, selling the Galleon Tech funds' entire 1.5 million share long position in Intel at $22.03 per share, and making a profit of a little over $1 million

Later that day, after the markets closed, Intel released its fourth-quarter 2006 earnings. Although the company's earnings beat analysts' projections, its guidance was below expectations. Intel's stock price fell nearly 5% on the news, but Rajaratnam was already out of the stock.

According to Intel officials, Goel has been placed on administrative leave pending the court case.

Clearwire Gets a Partner

In early February 2008, Goel allegedly tipped Rajaratnam that there was a pending joint venture between wireless broadband company Clearwire and Sprint (S, Fortune 500). Intel was a huge shareholder in Clearwire. Over the next three months, Galleon Tech funds bought and sold Clearwire shares on three occasions. Each time, the Galleon Tech funds traded in advance of news reports relating to the deal between Clearwire and Sprint, and shortly after calls between Goel and Rajaratnam. Overall, the Galleon Tech funds realized gains of about $780,000 on their Clearwire trading between February and May 2008. On May 8, the joint venture between Sprint and Clearwire was publicly announced.

As payback for Goel's tips, Rajaratnam (or someone acting on his behalf) executed trades in Goel's personal brokerage account based on inside information concerning Hilton and PeopleSupport (the government notes that a Galleon director sits on the PeopleSupport's board of directors though no charges of wrongdoing have been brought against that person), which resulted in nearly $250,000 in profits for Goel.

Shorting Akamai

Another hedge fund executive, New Castle's Danielle Chiesi, is an acquaintance of Rajaratnam. When an Akamai executive told her that the Internet infrastructure company would trend lower in the company's second-quarter 2008 guidance to investors, the government claims she passed along the information to Rajaratnam. The consensus among Akamai's management was that Akamai's stock price would decline in the wake of the lowered guidance scheduled for July 30.

Chiesi and the Akamai source spoke multiple times between July 2 and July 24. Chiesi told what she had learned from the Akamai source to her colleague at New Castle, Mark Kurland. On July 25, several New Castle funds took short positions in Akamai shares. The positions grew through July 30. Rajaratnam's Galleon funds also built up a short position during the same period.

In its second-quarter 2008 earnings announcement on July 30, Akamai's results disappointed investors. The stock fell nearly 20% following the announcement. New Castle made $2.4 million. The Galleon Tech funds took home more than $3.2 million.

IBM knows Sun

In January 2009, IBM was conducting due diligence on Sun Microsystems in preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL, Fortune 500)). As part of that process, Sun opened its books to IBM, providing its second-quarter 2009 results in advance of the scheduled Jan. 27 announcement.

Because much of Sun's business is hardware, IBM's top hardware executive Robert Moffat was involved in the evaluation of Sun. Moffat allegedly had access to Sun's earnings results. He and Chiesi were also friends and contacted each other repeatedly during January 2009. The frequency of contact between the two increased just prior to the Sun earnings release, investigators say.

On Jan. 26, New Castle began acquiring a substantial long position in Sun. On Jan. 27, after the market close, Sun reported earnings that exceeded Wall Street's estimates, posting a two-cent per-share profit when analysts had expected a loss. Sun shares soared 21% on the news. New Castle made almost $1 million.

AMD gets out of manufacturing

On June 1, 2008, McKinsey & Co. began advising Advanced Micro Devices over its negotiations with two Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi government, Advanced Technology Investment Co., would take over AMD's chip manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala Investment Co., would provide a large investment in AMD (in the end, it would total $314 million). According to the SEC, Anil Kumar was one of the McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.

On Aug. 14, Kumar learned that the two deals were finally getting done. The next day he told Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon increased their long position in AMD by buying more than 2.5 million shares in Galleon funds and continuing to build their long position until just before the announcement of the AMD transactions. Rajaratnam and Galleon bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on Oct. 3. On Oct. 8, the deals were announced publicly. AMD's stock price increased by about 25%. All told, the value of Galleon's entire position in AMD increased approximately $9.5 million in Oct. 6-7.

However, the allegedly ill-gotten gain was wiped out by the financial crisis of the time. Because the Galleon Tech funds had accumulated much of their AMD position beginning in August, before the crisis sent stock prices, including AMD's, tumbling in September and October, the funds lost money on the overall trade

The Deep Shah Insiders Leak at Moody's:  What $10,000 Bought
Leaks such as this are probably impossible to stop
What disturbs me is that the Blackstone Group would exploit investors based up such leaks
"Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall Street Journal, October 20, 2009 ---
http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box

"Billionaire among 6 nabbed in inside trading case Wall Street wake-up call: Hedge fund boss, 5 others charged in $25M-plus insider trading case," by Larry Neumeister and Candice Choi,  Yahoo News, October 16, 2009 --- Click Here

One of America's wealthiest men was among six hedge fund managers and corporate executives arrested Friday in a hedge fund insider trading case that authorities say generated more than $25 million in illegal profits and was a wake-up call for Wall Street.

Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.

U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured by $20 million in collateral despite a request by prosecutors to deny bail. He also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York City.

U.S. Attorney Preet Bharara told a news conference it was the largest hedge fund case ever prosecuted and marked the first use of court-authorized wiretaps to capture conversations by suspects in an insider trading case.

He said the case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.

"Greed is not good," Bharara said. "This case should be a wake-up call for Wall Street."

Joseph Demarest Jr., the head of the New York FBI office, said it was clear that "the $20 million in illicit profits come at the expense of the average public investor."

The Securities and Exchange Commission, which brought separate civil charges, said the scheme generated more than $25 million in illegal profits.

Robert Khuzami, director of enforcement at the SEC, said the charges show Rajaratnam's "secret of success was not genius trading strategies."

"He is not the master of the universe. He is a master of the Rolodex," Khuzami said.

Galleon Group LLP said in a statement it was shocked to learn of Rajaratnam's arrest at his apartment. "We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities," the statement said.

The firm added that Galleon "continues to operate and is highly liquid."

Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the world's wealthiest billionaires, with a $1.3 billion net worth.

According to the Federal Election Commission, he is a generous contributor to Democratic candidates and causes. The FEC said he made over $87,000 in contributions to President Barack Obama's campaign, the Democratic National Committee and various campaigns on behalf of Hillary Rodham Clinton, U.S. Sen. Charles Schumer and New Jersey U.S. Sen. Robert Menendez in the past five years. The Center for Responsive Politics, a watchdog group, said he has given a total of $118,000 since 2004 -- all but one contribution, for $5,000, to Democrats.

The Associated Press has learned that even before his arrest, Rajaratnam was under scrutiny for helping bankroll Sri Lankan militants notorious for suicide bombings.

Papers filed in U.S. District Court in Brooklyn allege that Rajaratnam worked closely with a phony charity that channeled funds to the Tamil Tiger terrorist organization. Those papers refer to him only as "Individual B." But U.S. law enforcement and government officials familiar with the case have confirmed that the individual is Rajaratnam.

At an initial court appearance in U.S. District Court in Manhattan, Assistant U.S. Attorney Josh Klein sought detention for Rajaratnam, saying there was "a grave concern about flight risk" given Rajaratnam's wealth and his frequent travels around the world.

His lawyer, Jim Walden, called his client a "citizen of the world," who has made more than $20 million in charitable donations in the last five years and had risen from humble beginnings in the finance profession to oversee hedge funds responsible for nearly $8 billion.

Walden promised "there's a lot more to this case" and his client was ready to prepare for it from home. Rajaratnam lives in a $10 million condominium with his wife of 20 years, their three children and two elderly parents. Walden noted that many of his employees were in court ready to sign a bail package on his behalf.

Rajaratnam -- born in Sri Lanka and a graduate of University of Pennsylvania's Wharton School of Business -- has been described as a savvy manager of billions of dollars in technology and health care hedge funds at Galleon, which he started in 1996. The firm is based in New York City with offices in California, China, Taiwan and India. He lives in New York.

According to a criminal complaint filed in U.S. District Court in Manhattan, Rajaratnam obtained insider information and then caused the Galleon Technology Funds to execute trades that earned a profit of more than $12.7 million between January 2006 and July 2007. Other schemes garnered millions more and continued into this year, authorities said.

Bharara said the defendants benefited from tips about the earnings, earnings guidance and acquisition plans of various companies. Sometimes, those who provided tips received financial benefits and sometimes they just traded tips for more inside information, he added.

The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."

The agent said he learned from federal authorities that Rajaratnam had a ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.

Also charged in the scheme are Rajiv Goel, 51, of Los Altos, Calif., a director of strategic investments at Intel Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and group executive at International Business Machines Corp.'s Systems and Technology Group.

The others charged in the case were identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60, also of New York City.

According to court papers, Chiesi worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc. that had assets worth about $1 billion under management. Kurland is a top executive at New Castle.

Kumar's lawyer, Isabelle Kirshner, said of her client: "He's distraught." He was freed on $5 million bail, secured in part by his $2.5 million California home.

Kerry Lawrence, an attorney representing Moffat, said: "He's shocked by the charges."

Bail for Kurland was set at $3 million while bail for Moffat and Chiesi was set at $2 million each. Lawyers for Moffat and Chiesi said their clients will plead not guilty. The law firm representing Kurland did not immediately return a phone call for comment.

A message left at Goel's residence was not immediately returned. He was released on bail after an appearance in California.

A criminal complaint filed in the case shows that an unidentified person involved in the insider trading scheme began cooperating and authorities obtained wiretaps of conversations between the defendants.

In one conversation about a pending deal that was described in a criminal complaint, Chiesi is quoted as saying: "I'm dead if this leaks. I really am. ... and my career is over. I'll be like Martha (expletive) Stewart."

Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company whose stock plummeted after a negative public announcement. She served five months in prison and five months of home confinement.

Prosecutors charged those arrested Friday with conspiracy and securities fraud.

A separate criminal complaint in the case said Chiesi and Moffat conspired to engage in insider trading in the securities of International Business Machines Corp.

According to another criminal complaint in the case, Chiesi and Rajaratnam were heard on a government wiretap of a Sept. 26, 2008, phone conversation discussing whether Chiesi's friend Moffat should move from IBM to a different technology company to aid the scheme.

"Put him in some company where we can trade well," Rajaratnam was quoted in the court papers as saying.

The complaint said Chiesi replied: "I know, I know. I'm thinking that too. Or just keep him at IBM, you know, because this guy is giving me more information. ... I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too."

According to the court papers, Rajaratnam replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well, not really. I mean, come on. ... you know, we nailed it."

Continued in article

"Arrest of Hedge Fund Chief Unsettles the Industry," by Michael J. de la Merced and Zachery Kouwe, The New York Times, October 18, 2009 --- http://www.nytimes.com/2009/10/19/business/19insider.html?_r=1

The firm made no secret that its investors included technology executives. Among them was Anil Kumar, a McKinsey director who did consulting work for Advanced Micro Devices and was charged in the scheme. Another defendant, Rajiv Goel, is an Intel executive who is accused of leaking information about the chip maker’s earnings and an investment in Clearwire.

Prosecutors also say that a Galleon executive on the board of PeopleSupport, an outsourcing company, regularly tipped off Mr. Rajaratnam about merger negotiations with a subsidiary of Essar Group of India. Regulatory filings by PeopleSupport last year identified the director as Krish Panu, a former technology executive. He was not charged on Friday.

Galleon has previously been accused of wrongdoing by regulators. In 2005, it paid more than $2 million to settle an S.E.C. lawsuit claiming it had conducted an illegal form of short-selling.

Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm 

Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

Question
Do you ever get the feeling while we debate accounting theory and standards that we're just fiddling while investors burn?

"Is stock market still a chump's game? Small investors won't have a fair shot until a presumption of integrity is restored. It's not clear that Obama's proposed remedy will resolve the conflicts," by Eliot Spitzer, Microsoft News, August 19, 2009 ---
http://articles.moneycentral.msn.com/Investing/Extra/is-stock-market-still-a-chumps-game.aspx
Link forwarded by Steve Markoff [smarkoff@KIMSTARR.ORG]

One of America's great accomplishments in the last half-century was the so-called "democratization" of the financial markets.

No longer just for the upper crust, investing became a way for the burgeoning middle class to accumulate wealth. Mutual funds exploded in size and number, 401k plans made savings and investing easy, and the excitement of participating in the growth of our economy gripped an ever larger percentage of the population.

Despite a backdrop of doubters -- those who knowingly asserted that outperforming the average was an impossibility for the small investor -- there was a growing consensus that the rules were sufficient to protect the mom-and-pop investor from the sharks that swam in the water.

That sense of fair play in the market has been virtually destroyed by the bubble burstings and market drops of the past few years.

Recent rebounds notwithstanding, most people now are asking whether the system is fundamentally rigged. It's not just that they have an understandable aversion to losing their life savings when the market crashes; it's that each of the scandals and crises has a common pattern: The small investor was taken advantage of by the piranhas that hide in the rapidly moving currents.

And underlying this pattern is a simple theme: conflicts of interest that violated the duty the market players had to their supposed clients.

It is no wonder that cynicism and anger have replaced what had been the joy of participation in the capital markets.

Take a quick run through a few of the scandals:

• Analysts at major investment banks promote stocks they know to be worthless, misleading the investors who rely on their advice yet helping their investment-banking colleagues generate fees and woo clients.
• Ratings agencies slap AAA ratings on debt they know to be dicey in order to appease the issuers -- who happen to pay the fees of the agencies, violating the rating agency's duty to provide the marketplace with honest evaluations.
• Executives receive outsized and grotesque compensation packages -- the result of the perverted recommendations of compensation consultants whose other business depends upon the goodwill of the very CEOs whose pay they are opining upon, thus violating the consultants' duty to the shareholders of the companies for whom they are supposedly working.
• Mutual funds charge exorbitant fees that investors have to absorb -- fees that dramatically reduce any possibility of outperforming the market and that are set by captive boards of captive management companies, not one of which has been replaced for inadequate performance, violating their duty to guard the interests of the fund investors for whom they supposedly work.
• "High-speed trading" produces not only the reality of a two-tiered market but also the probability of front-running -- that is, illegally trading on information not yet widely known -- that eats into the possible profits of the retail clients supposedly being served by these very same market players, violating the obligation of the banks to get their clients "best execution" without stepping between their customers and the best available price.
• AIG (AIG, news, msgs) is bailed out, costing taxpayers tens of billions of dollars, even though (as we later learned) the big guys knew that AIG was going down and were able to hedge and cover their positions. Smaller investors are left holding the stock, and all of us are left picking up the tab.

The unifying theme is apparent: Access to information and advice, the very lifeblood of a level playing field, is not where it needs to be. The small investor still doesn't have a fair shot.

While there have been case-specific remedies, the aggregate effect of all the scandals is still to deny the market the most essential of ingredients: the presumption of integrity.

The issue confronting those who wish to solve this problem is that there really is no simple fix.

Bob Jensen's threads on the economic crisis are at
http://www.trinity.edu/rjensen/2008Bailout.htm

Alpha Return on Investment --- http://en.wikipedia.org/wiki/Alpha_(investment)

What the professional investors don't tell you ---
I downloaded this video --- http://www.cs.trinity.edu/~rjensen/temp/FinancialRounds.flv

From the Financial Rounds Blog on September 4, 2009 ---
http://financialrounds.blogspot.com/

When I teach investments, there's always a section on market efficiency. A key point I try to make is that any test of market efficiency suffers from the "joint hypothesis" problem - that the test is not tests market efficiency, but also assumes that you have the correct model for measuring the benchmark risk-adjusted return.

In other words, you can't say that you have "alpha" (an abnormal return) without correcting for risk.

Falkenblog makes exactly this point:
 

In my book Finding Alpha I describe these strategies, as they are built on the fact that alpha is a residual return, a risk-adjusted return, and as 'risk' is not definable, this gives people a lot of degrees of freedom. Further, it has long been the case that successful people are good at doing one thing while saying they are doing another.
 

Even better, he's got a pretty good video on the topic (it also touches on other topics). Enjoy.

You can watch the video under September 4, 2009 at http://financialrounds.blogspot.com/
I downloaded this video --- http://www.cs.trinity.edu/~rjensen/temp/FinancialRounds.flv

Bob Jensen's threads on Return on Investment (ROI) are at
http://www.trinity.edu/rjensen/roi.htm

Bob Jensen's threads on market efficiency (EMH) are at 
http://www.trinity.edu/rjensen/theory01.htm#EMH

Bob Jensen's investment helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

Instead of adding more regulating agencies, I think we should simply make the FBI tougher on crime and the IRS tougher on cheats

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
The title of the video is “The Man Who Would Be King.”

Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
 Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---
http://www.trinity.edu/rjensen/FraudRotten.htm

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

Being Honest About Being Dishonest
Democrats openly admit that most of the stimulus money is going to counties that voted for Obama
A new study released by USA Today also finds that counties that voted for Obama received about twice as much stimulus money per capita as those that voted for McCain. "The stimulus bill is designed to help those who have been hurt by the economic downturn.... Do you see disparity out there in where the money is going? Certainly," a Democratic congressional staffer knowledgeable about the process told FOXNews.com.
John Lott, "ANALYSIS: States Hit Hardest by Recession Get Least Stimulus Money," Fox News, July 19, 2009--- http://www.foxnews.com/story/0,2933,533841,00.html

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

The legislation's guidelines for crafting the rescue plan were clear: the TARP should protect home values and consumer savings, help citizens keep their homes and create jobs. Above all, with the government poised to invest hundreds of billions of taxpayer dollars in various financial institutions, the legislation urged the bailout's architects to maximize returns to the American people.

That $700 billion bailout has since grown into a more than $12 trillion commitment by the US government and the Federal Reserve. About $1.1 trillion of that is taxpayer money--the TARP money and an additional $400 billion rescue of mortgage companies Fannie Mae and Freddie Mac. The TARP now includes twelve separate programs, and recipients range from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and General Motors.

Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to nineteen of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund, as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in US markets, rising unemployment and generally tougher economic times ahead.

What cannot be disputed, however, is the financial bailout's biggest loser: the American taxpayer. The US government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and--with the exception of the automakers--letting companies take taxpayer money without a coherent plan for how they might return to viability.

The bailout's perks have been no less favorable for private investors who are now picking over the economy's still-smoking rubble at the taxpayers' expense. The newer bailout programs rolled out by Treasury Secretary Timothy Geithner give private equity firms, hedge funds and other private investors significant leverage to buy "toxic" or distressed assets, while leaving taxpayers stuck with the lion's share of the risk and potential losses.

Given the lack of transparency and accountability, don't expect taxpayers to be able to object too much. After all, remarkably little is known about how TARP recipients have used the government aid received. Nonetheless, recent government reports, Congressional testimony and commentaries offer those patient enough to pore over hundreds of pages of material glimpses of just how Wall Street friendly the bailout actually is. Here, then, based on the most definitive data and analyses available, are six of the most blatant and alarming ways taxpayers have been scammed by the government's $1.1-trillion, publicly funded bailout.

1. By overpaying for its TARP investments, the Treasury Department provided bailout recipients with generous subsidies at the taxpayer's expense.

When the Treasury Department ditched its initial plan to buy up "toxic" assets and instead invest directly in financial institutions, then-Treasury Secretary Henry Paulson Jr. assured Americans that they'd get a fair deal. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said in October 2008.

Yet the Congressional Oversight Panel (COP), a five-person group tasked with ensuring that the Treasury Department acts in the public's best interest, concluded in its monthly report for February that the department had significantly overpaid by tens of billions of dollars for its investments. For the ten largest TARP investments made in 2008, totaling $184.2 billion, Treasury received on average only $66 worth of assets for every $100 invested. Based on that shortfall, the panel calculated that Treasury had received only $176 billion in assets for its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.

Not all investors subsidized the struggling banks so heavily while investing in them. The COP report notes that private investors received much closer to fair market value in investments made at the time of the early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion in Goldman Sachs in September, the Omaha-based company received securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.

As of May 15, according to the Ethisphere TARP Index, which tracks the government's bailout investments, its various investments had depreciated in value by almost $147.7 billion. In other words, TARP's losses come out to almost $1,300 per American taxpaying household.

2. As the government has no real oversight over bailout funds, taxpayers remain in the dark about how their money has been used and if it has made any difference.

While the Treasury Department can make TARP recipients report on just how they spend their government bailout funds, it has chosen not to do so. As a result, it's unclear whether institutions receiving such funds are using that money to increase lending--which would, in turn, boost the economy--or merely to fill in holes in their balance sheets.

Neil M. Barofsky, the special inspector general for TARP, summed the situation up this way in his office's April quarterly report to Congress: "The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP."

This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated that twenty separate criminal investigations were already underway involving corporate fraud, insider trading and public corruption. He also told the Financial Times that his office was investigating whether banks manipulated their books to secure bailout funds. "I hope we don't find a single bank that's cooked its books to try to get money, but I don't think that's going to be the case."

Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. "[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks," Baker says, adding that the public "won't realize we gave money away to some of the richest people."

3. The bailout's newer programs heavily favor the private sector, giving investors an opportunity to earn lucrative profits and leaving taxpayers with most of the risk.

Under Treasury Secretary Geithner, the Treasury Department has greatly expanded the financial bailout to troubling new programs like the Public-Private Investment Program (PPIP) and the Term Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example, encourages private investors to buy "toxic" or risky assets on the books of struggling banks. Doing so, we're told, will get banks lending again because the burdensome assets won't weigh them down. Unfortunately, the incentives the Treasury Department is offering to get private investors to participate are so generous that the government--and, by extension, American taxpayers--are left with all the downside.

Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP program in a New York Times op-ed this way:

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year's time. The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is 'worth.' Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That's 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest--$12 in "equity" plus $126 in the form of a guaranteed loan.

If, in a year's time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that's left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37."

Worse still, the PPIP can be easily manipulated for private gain. As economist Jeffrey Sachs has described it, a bank with worthless toxic assets on its books could actually set up its own public-private fund to bid on those assets. Since no true bidder would pay for a worthless asset, the bank's public-private fund would win the bid, essentially using government money for the purchase. All the public-private fund would then have to do is quietly declare bankruptcy and disappear, leaving the bank to make off with the government money it received. With the PPIP deals set to begin in the coming months, time will tell whether private investors actually take advantage of the program's flaws in this fashion.

The Treasury Department's TALF program offers equally enticing possibilities for potential bailout profiteers, providing investors with a chance to double, triple or even quadruple their investments. And like the PPIP, if the deal goes bad, taxpayers absorb most of the losses. "It beats any financing that the private sector could ever come up with," a Wall Street trader commented in a recent Fortune magazine story. "I almost want to say it is irresponsible."

4. The government has no coherent plan for returning failing financial institutions to profitability and maximizing returns on taxpayers' investments.

Compare the treatment of the auto industry and the financial sector, and a troubling double standard emerges. As a condition for taking bailout aid, the government required Chrysler and General Motors to present detailed plans on how the companies would return to profitability. Yet the Treasury Department attached minimal conditions to the billions injected into the largest bailed-out financial institutions. Moreover, neither Geithner nor Lawrence Summers, one of President Barack Obama's top economic advisors, nor the president himself has articulated any substantive plan or vision for how the bailout will help these institutions recover and, hopefully, maximize taxpayers' investment returns.

The Congressional Oversight Panel highlighted the absence of such a comprehensive plan in its January report. Three months into the bailout, the Treasury Department "has not yet explained its strategy," the report stated. "Treasury has identified its goals and announced its programs, but it has not yet explained how the programs chosen constitute a coherent plan to achieve those goals."

Today, the department's endgame for the bailout still remains vague. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wrote in the Financial Times in May that the government's response to the financial meltdown has been "ad hoc, resulting in inequitable outcomes among firms, creditors, and investors." Rather than perpetually prop up banks with endless taxpayer funds, Hoenig suggests, the government should allow banks to fail. Only then, he believes, can crippled financial institutions and systems be fixed. "Because we still have far to go in this crisis, there remains time to define a clear process for resolving large institutional failure. Without one, the consequences will involve a series of short-term events and far more uncertainty for the global economy in the long run."

The healthier and more profitable bailout recipients are once financial markets rebound, the more taxpayers will earn on their investments. Without a plan, however, banks may limp back to viability while taxpayers lose their investments or even absorb further losses.

5. The bailout's focus on Wall Street mega-banks ignores smaller banks serving millions of American taxpayers that face an equally uncertain future.

The government may not have a long-term strategy for its trillion-dollar bailout, but its guiding principle, however misguided, is clear: what's good for Wall Street will be best for the rest of the country.

On the day the mega-bank stress tests were officially released, another set of stress-test results came out to much less fanfare. In its quarterly report on the health of individual banks and the banking industry as a whole, Institutional Risk Analytics (IRA), a respected financial services organization, found that the stress levels among more than 7,500 FDIC-reporting banks nationwide had risen dramatically. For 1,575 of the banks, net incomes had turned negative due to decreased lending and less risk-taking.

The conclusion IRA drew was telling: "Our overall observation is that US policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world's central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar." The report concluded with a question: "Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?"

6. The bailout encourages the very behaviors that created the economic crisis in the first place instead of overhauling our broken financial system and helping the individuals most affected by the crisis.

As Joseph Stiglitz explained in the New York Times, one major cause of the economic crisis was bank overleveraging. "Using relatively little capital of their own," he wrote, banks "borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations." Financial institutions engaged in overleveraging in pursuit of the lucrative profits such deals promised--even if those profits came with staggering levels of risk.

Sound familiar? It should, because in the PPIP and TALF bailout programs the Treasury Department has essentially replicated the very over-leveraged, risky, complex system that got us into this mess in the first place: in other words, the government hopes to repair our financial system by using the flawed practices that caused this crisis.

Then there are the institutions deemed "too big to fail." These financial giants--among them AIG, Citigroup and Bank of America-- have been kept afloat by billions of dollars in bottomless bailout aid. Yet reinforcing the notion that any institution is "too big to fail" is dangerous to the economy. When a company like AIG grows so large that it becomes "too big to fail," the risk it carries is systemic, meaning failure could drag down the entire economy. The government should force "too big to fail" institutions to slim down to a safer, more modest size; instead, the Treasury Department continues to subsidize these financial giants, reinforcing their place in our economy.

Of even greater concern is the message the bailout sends to banks and lenders--namely, that the risky investments that crippled the economy are fair game in the future. After all, if banks fail and teeter at the edge of collapse, the government promises to be there with a taxpayer-funded, potentially profitable safety net.

The handling of the bailout makes at least one thing clear, however. It's not your health that the government is focused on, it's theirs-- the very banks and lenders whose convoluted financial systems provided the underpinnings for staggering salaries and bonuses, while bringing our economy to the brink of another Great Depression.

Bob Jensen's threads how your money was put to word (fraudulently) to pay for the mistakes of the so-called professionals of finance --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

Bob Jensen's threads on why the infamous "Bailout" won't work --- http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity

"SEC Charges Four With Fraud," by Kathy Shwiff, The Wall Street Journal, July 15, 2009 --- http://online.wsj.com/article/SB124751046687234157.html#mod=todays_us_money_and_investing

The Securities and Exchange Commission charged Seattle securities lawyer David Otto, three other individuals and two companies with conducting a fraudulent "pump-and-dump" scheme in which they secretly unloaded more than $1 million in "penny stocks" of a company touting a nonexistent antiaging product.

The complaint says the defendants violated antifraud and other provisions of federal securities laws. The SEC is seeking disgorgement and financial penalties.

The agency said misleading news releases and Web profiles touting beverages and nutritional supplements pushed the stock price of Seattle-based MitoPharm up more than four times to above $2.30 although MitoPharm's products were in the developmental stage. Two key products didn't exist, according to the complaint.

The SEC said Mr. Otto sold his shares for more than $1 million while Houston-based stock promoter Charles Bingham generated proceeds of $300,000 before heavy selling caused the price to fall to a nickel by November 2007.

The SEC's complaint, filed in federal court in Seattle, charges Mr. Otto, associate Todd Van Siclen of Seattle, Mr. Bingham and his company, Wall Street PR Inc., along with MitoPharm and its chief executive, Pak Peter Cheung of Vancouver.

Mr. Otto's attorney, Jeff Coopersmith said Mr. Otto committed no intentional violation of securities law. Mr. Bingham's attorney, Ronald Kaufman, said his client is as much a victim as any other shareholder. Mr. Bingham said his firm lost money on the work it did for MitoPharm, adding he had no way of knowing the products, which were being manufactured in China, weren't as described. The other defendants couldn't be reached for comment.

Bob Jensen's threads on securities frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#SecuritiesFraud

"Insider Trading Inside the SEC," by Joe Weisenthal, Business Insider, May 15, 2009 --- http://www.businessinsider.com/insider-trading-at-the-sec-2009-5

Kotz, who told Congress last year he was examining whether frequent trades by the pair broke agency rules, referred the case to the U.S. Attorney’s Office in Washington after finding evidence the bets might amount to insider trading, he wrote in the March 3 report released by Senator Charles Grassley. Both lawyers still work for the agency and denied improper conduct.

The report faults the agency for inadequately monitoring trades by employees and relying on an “honor system.” The lawyers frequently discussed stocks at work, traded in at least one company under investigation and didn’t properly disclose some transactions, it says. One lawyer made 247 trades in the two years ending January 2008, and the other made 14.
ead the whole thing >

Question
What are hedge funds, especially after Bernie Madoff made them so famous?

When people ask me this question, my initial response is that a hedge fund no longer necessarily has anything to do with financial risk hedging. Rather a hedge fund is merely a "private" investment "club" that does not offer shares to the general public largely because it would then subject itself to more SEC, stock exchange, and other regulators. Having said this, it's pretty darn easy for anybody with sufficient funds to get into such a "private" club. Minimum investments range from $10,000 to $1,000,000 or higher.

Since Bernie Madoff made hedge funds so famous, the public tends to think that a hedge fund is dangerous, fraudulent, and a back street operation that does not play be the rules. Certainly hedge funds emerged in part to avoid being regulated. Sometimes they are risky due to high leverage, but some funds skillfully hedge to manage risk and are much safer than mutual funds. For example, some hedge funds have shrewd hedging strategies to control risk in interest rate and/or foreign currency trading.

Most hedge funds are not fraudulent. In general, however, it's "buyer beware" for hedge fund investors.

I would never invest in a hedge fund that is not audited by a very reliable CPA auditing firm. Not all CPA auditing firms are reliable (Bernie Madoff proved you can engage a fraudulent auditor operating out of a one-room office). Hence, the first step in evaluating a hedge fund is to investigate its auditor. The first step in evaluating an auditor is to determine if the auditing firm is wealthy enough to be a serious third party in law suits if the hedge fund goes belly up.

But the recent multimillion losses of Carnegie Mellon, the University of Pittsburgh, and other university endowment funds that invested in a verry fraudulent hedge fund purportedly audited by Deloitte suggests that the size and reputation of the auditing firm is not, by itself, sufficient protection against a criminal hedge fund (that was supposedly given a clean opinion by Deloitte in financial reports circulated to the victims of the fraud).

When learning about hedge funds, you may want to begin at http://en.wikipedia.org/wiki/Hedge_Fund

"What is a hedge fund and how is it different from a mutual fund?" by Andy Samuels, Business and Finance 101 Examiner, June 10, 2009 --- Click Here
Jim Mahar pointed out this link.

Having migrated away from their namesake, hedge funds no longer  focus primarily on “hedging” (attempting to reduce risk) because hedge funds are now focused almost blindly on one thing: returns.

Having been referred to as “mutual funds for the super rich” by investopedia.com, hedge funds are very similar to mutual funds in that they pool money together from many investors. Hedge funds, like mutual funds, are also managed by a financial professionals, but differ because they are geared toward wealthier individuals.

Hedge funds, unlike mutual funds, employ a wider array of ivesting techniques, which are considered more aggresive. For example, hedge funds often use leverage to amplify their returns (or losses if things go wrong).

The other key difference between hedge funds and mutual funds is the amount of regulation involved. Hedge funds are relatively unregulated because investors in hedge funds are assumed to be more sophisticated investors, who can both afford and understand the potential losses. In fact, U.S. laws require that the majority of investors in the fund are accredited.

Most hedge funds draw in investors because of the trustworthy reputations of the executives of the fund. Word-of-mouth praise and affiliations are often the key to success. Bernie Madoff succeed in luring customers based on two leading factors:  (1) His esteemed reputation on Wall Street and (2) His highly regarded connections in the Jewish community where he drew in most of his victims.

A Bit of History
German Chancellor's Call for Global Regulations to Curb Hedge Funds
Germany and the United States are parting company again, this time over Chancellor Gerhard Schröder's call for international regulations to govern hedge funds. Treasury Secretary John W. Snow, speaking here Thursday at the end of a five-country European tour, said the United States opposed "heavy-handed" curbs on markets. He said that he was not familiar with the German proposals, but left little doubt about how Washington would react. "I think we ought to be very careful about heavy-handed regulation of markets because it stymies financial innovation," Mr. Snow said after a news conference here to sum up his visit. Noting that the Securities and Exchange Commission has proposed that hedge funds be required to register themselves, he said he preferred the "light touch rather than the heavy regulatory burden."
Mark Landler, "U.S. Balks at German Chancellor's Call for Global Regulations to Curb Hedge Funds," The New York Times, June 17, 2005 --- http://www.nytimes.com/2005/06/17/business/worldbusiness/17hedge.html?

Bob Jensen's threads on frauds are linked at http://www.trinity.edu/rjensen/fraud.htm
In particular see http://www.trinity.edu/rjensen/fraud001.htm

Video 1: "Nobelist Daniel Kahneman On Behavioral Economics (Awesome)!" Simoleon Sense, June 5, 2009 ---
http://www.simoleonsense.com/video-nobelist-daniel-kahneman-on-behavioral-economics-awesome/

Introduction (Via Fora.Tv)

Nobel Prize-winning psychologist Daniel Kahneman addresses the Georgetown class of 2009 about the merits of behavioral economics.

He deconstructs the assumption that people always act rationally, and explains how to promote rational decisions in an irrational world.

Topics Covered:

1. The Economic Definition Of Rationality

2. Emphasis on Rationality in Modern Economic Theory

3. Examples of Irrational Behavior (watch this part)

4. How to encourage rational decisions

Speaker Background (Via Fora.Tv)

Daniel Kahneman - Daniel Kahneman is Eugene Higgins Professor of Psychology and Professor of Public Affairs Emeritus at Princeton University. He was educated at The Hebrew University in Jerusalem and obtained his PhD in Berkeley. He taught at The Hebrew University, at the University of British Columbia and at Berkeley, and joined the Princeton faculty in 1994, retiring in 2007. He is best known for his contributions, with his late colleague Amos Tversky, to the psychology of judgment and decision making, which inspired the development of behavioral economics in general, and of behavioral finance in particular. This work earned Kahneman the Nobel Prize in Economics in 2002 and many other honors

Video 2:  Nancy Etcoff is part of a new vanguard of cognitive researchers asking: What makes us happy? Why do we like beautiful things? And how on earth did we evolve that way?
Simoleon Sense, June 10, 2009
http://www.simoleonsense.com/science-of-happiness/ 

"Must Read: Why People Fall Victim To Scams," Simoleon Sense, March 18, 2009 ---
http://www.simoleonsense.com/must-read-why-people-fall-victim-to-scams/
The paper is at http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft1070.pdf

A fraudulent market manipulation contributed to the Wall Street meltdown
Phantom Shares and Market Manipulation (Bloomberg News video on naked short selling) --- http://video.google.com/videoplay?docid=4490541725797746038

Securities Fraud --- http://en.wikipedia.org/wiki/Securities_fraud

Securities fraud, also known as investment fraud, is a practice in which investors are deceived and manipulated, resulting in losses.^[1] Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.

Securities fraud frequently includes theft of capital from investors and misstatements on a public company's financial reports. The term also encompasses a wide range of other actions, including insider trading.

Sometimes the losses caused by securities fraud are difficult to quantify, but real. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.

This white collar crime has become increasingly frequent as the Internet and World Wide Web are giving criminals greater access to prey. The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants. Securities regulators and other prominent groups estimate civil securities fraud totals approximately $40 billion per year. Fraudulent schemes perpetrated in the securities and commodities markets can ultimately have a devastating impact on the viability and operation of these markets.

According to the FBI, securities fraud includes false information on a company's financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.

Overview --- http://en.wikipedia.org/wiki/Securities_fraud

1 Types of securities fraud 1.1 Internet fraud 1.2 Insider trading 1.3 Microcap fraud 1.4 Accountant fraud 1.5 Boiler rooms 2 Pervasiveness of securities fraud 3 Characteristics of victims and perpetrators 4 Other effects of securities fraud 5 Related subjects 6 See also 7 References

The Way Financial Media Fraud Works
Video from YouTube (not sure how long it will be online)
 http://www.youtube.com/watch?v=dwUXx4DR0wo

From Jim Mahar's Blog on March 152, 2009 --- http://financeprofessorblog.blogspot.com/

 

YouTube - Jon Stewart vs Jim Cramer Interview Fight on Daily Show ---
http://www.youtube.com/watch?v=LceizefhP4k

While there was much hype in the days leading up to the show, the actual interview was pretty good. Jon Stewart vs Jim Cramer. Here is the link from The DailyShow for the entire episode.

It is also available (at least temporarily) on YouTube

Jon Stewart vs Jim Cramer Interview Fight on Daily Show ---
http://www.youtube.com/watch?v=LceizefhP4k

Some talking points:

* Stewart's main point seems to be that while Cramer and CNBC claim to be looking out for investors, in actuality they are are nothing more than entertainment at best and accomplices at worst.

* It is interesting to see the discussion on Short Selling and the way that Cramer (and by inference other hedge fund managers) essentially lied to drive the price down. I would have to think the SEC might be interested in this.

* Stewart maintains that the financial media plays a role in governance. They dropped the ball.

* Cramer was good in admitting that success (year after year of 30% returns) changes our view and we forget that things go wrong.

* Line of the day from Stewart: "We are both snake oil salesmen, but I let people know I sell snake oil.:

* Line of the day from Cramer: "No one should be spared in this environment."


The whole interview (unedited) is also available. Here is the 3rd part:
 

 

0c

Jim Cramer Unedited Interview Pt. 3

 

 

 

 

Video from YouTube (not sure how long it will be online)
 http://www.youtube.com/watch?v=dwUXx4DR0wo
 

Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was arrested and charged with securities fraud Thursday in what federal prosecutors called a Ponzi scheme that could involve losses of more than $50 billion.

It is bigger than Enron, bigger than Boesky and bigger than Tyco

"Madoff Scandal: 'Biggest Story of the Year'," Seeking Alpha, December 12, 2008 ---
http://seekingalpha.com/article/110402-madoff-scandal-biggest-story-of-the-year?source=wildcard

According to RealMoney.com columnist Doug Kass, general partner and investment manager of hedge fund Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd., today's late-breaking report of an alleged massive fraud at a well known investment firm could be "the biggest story of the year." In his view,

it is bigger than Enron, bigger than Boesky and bigger than Tyco.
It attacks at the core of investor confidence -- because, if true, and this could happen ... investors might think that almost anything imaginable could happen to the money they have entrusted to their fiduciaries.

Here are some excerpts from the Bloomberg report, entitled "Madoff Charged in $50 Billion Fraud at Advisory Firm":

Bernard Madoff, founder and president of Bernard Madoff Investment Securities, a market-maker for hedge funds and banks, was charged by federal prosecutors in a $50 billion fraud at his advisory business.

Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was granted release on a $10 million bond guaranteed by his wife and secured by his apartment. Madoff’s wife was present in the courtroom.

"It’s all just one big lie," Madoff told his employees on Dec. 10, according to a statement by prosecutors. The firm, Madoff allegedly said, is "basically, a giant Ponzi scheme." He was also sued by the Securities and Exchange Commission.

Madoff’s New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co (GE). and Citigroup Inc. (C).

...

SEC Complaint

The SEC in its complaint, also filed today in Manhattan federal court, accused Madoff of a "multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm."

The SEC said it’s seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Ira Sorkin, another defense lawyer for Madoff, couldn’t be immediately reached for comment.

...

Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two individuals listed on regulatory records as "direct owners and executive officers."

Peter Madoff was a board member of the St. Louis brokerage firm A.G. Edwards Inc. from 2001 through last year, when it was sold to Wachovia Corp (WB).

$17.1 Billion

The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.

...

Madoff’s Web site advertises the "high ethical standards" of the firm.

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door," according to the Web site. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."

...

"These guys were one of the original, if not the original, third market makers," said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. "They had a great business and they were good with their clients. They were around for a long time. He’s a well-respected guy in the industry."

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan)

Continued in article

And here is the SEC press release

Also see http://lawprofessors.typepad.com/securities/

What was the auditing firm of Bernard Madoff Investment Securities, the auditor who gave a clean opinion, that's been insolvent for years?
Apparently, Mr Madoff said the business had been insolvent for years and, from having $17 billion of assets under management at the beginning of 2008, the SEC said: “It appears that virtually all assets of the advisory business are gone”. It has now emerged that Friehling & Horowitz, the auditor that signed off the annual financial statement for the investment advisory business for 2006, is under investigation by the district attorney in New York’s Rockland County, a northern suburb of New York City.
"The $50bn scam: How Bernard Madoff allegedly cheated investors," London Times, December 15, 2008 ---
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5345751.ece

It was at the Manhattan apartment that Mr Madoff apparently confessed that the business was in fact a “giant Ponzi scheme” and that the firm had been insolvent for years.

To cap it all, Mr Madoff told his sons he was going to give himself up, but only after giving out the $200 - $300 million money he had left to “employees, family and friends”.

All the company’s remaining assets have now been frozen in the hope of repaying some of the companies, individuals and charities that have been unfortunate enough to invest in the business.

However, with the fraud believed to exceed $50 billion, whatever recompense investors could receive will be a drop in the ocean.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Where were the auditors?
What surprised me is the size of this alleged fraud
"This is huge," said David Rosenfeld, associate regional director of the SEC's New York Regional Office.
"This is a truly egregious fraud of immense proportions."

"Carnegie Mellon and Pitt Accuse 2 Investment Managers of $114-Million Fraud," by Scott Carlson, Chronicle of Higher Education, February 26, 2009 --- Click Here

The University of Pittsburgh and Carnegie Mellon University are suing two investment managers who allegedly took $114-million from the institutions and spent it on cars, horses, houses for their wives, and even teddy bears. The two managers, Paul Greenwood and Stephen Walsh, are said to have taken a total of more than $500-million from the universities and other investors through their company, Westridge Capital Management, and they have also been charged with fraud by the Federal Bureau of Investigation. The universities named several associates of Mr. Greenwood and Mr. Walsh in the lawsuit. According to the complaint, the universities became alarmed after the National Futures Association, a nonprofit organization that investigates member firms, tried to audit Mr. Greenwood and Mr. Walsh’s company. The association determined that that Mr. Greenwood and Mr. Walsh had taken hundreds of millions in loans from the investment funds. On February 12 the association suspended their membership after repeatedly trying, and failing, to contact them. That step spurred the universities to try to locate their money. On February 18 they contacted the Securities and Exchange Commission and sought an investigation. According to their lawsuit, Carnegie Mellon had invested $49-million and the University of Pittsburgh had invested $65-million. Today’s Pittsburgh Post-Gazette listed some of the things that Mr. Greenwood and Mr. Walsh had purchased with their investors’ money: rare books, Steiff teddy bears at up to $80,000 each, a horse farm, cars, and a $3-million residence for Mr. Walsh’s ex-wife. Mr. Greenwood and Mr. Walsh were also handling money for retirement funds for teachers and public employees in Iowa, North Dakota, and Sacramento County, California. In the Post-Gazette, David Rosenfeld, an associate regional director of the SEC’s New York Regional Office, said the case represented “a truly egregious fraud of immense proportions.” Mr. Walsh, it appears, had ties to another university as well. He is a member of the foundation board at the State University of New York at Buffalo, from which he graduated in 1966 with a political-science degree. In a written statement, officials at Buffalo said that he had not been an active board member for the past two years and that foundation policy forbade investing university money with any member of the board.

"Pitt, CMU money managers arrested in fraud FBI says they misappropriated $500 million for lavish lifestyles," by Jonathon Silver, Pittsburgh Post-Gazette, February 26, 2009 --- http://www.post-gazette.com/pg/09057/951834-85.stm

Two East Coast investment managers sued for fraud by the University of Pittsburgh and Carnegie Mellon University misappropriated more than $500 million of investors' money to hide losses and fund a lavish lifestyle that included purchases of $80,000 collectible teddy bears, horses and rare books, federal authorities said yesterday.

As Pitt and Carnegie Mellon were busy trying to learn whether they will be able to recover any of their combined $114 million in investments through Westridge Capital Management, the FBI yesterday arrested the corporations' managers.

Paul Greenwood, 61, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were charged in Manhattan -- by the same office prosecuting the Bernard L. Madoff fraud case -- with securities fraud, wire fraud and conspiracy.

Both men also were sued in civil court by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which alleged that the partners misappropriated more than $553 million and "fraudulently solicited" $1.3 billion from investors since 1996.

The Accused

Paul Greenwood and Stephen Walsh are accused of misappropriating millions from investors. Here is a look at some of their biggest personal purchases:

• HOME: Mr. Greenwood, a horse breeder, owned a horse farm in North Salem, N.Y., an affluent community that counts David Letterman as a resident.

• BEARS: Mr. Greenwood owns as many as 1,350 Steiff toys, including teddy bears costing as much as $80,000.

• DIVORCE: Mr. Walsh bought his ex-wife a $3 million condominium as part of their divorce settlement.

"This is huge," said David Rosenfeld, associate regional director of the SEC's New York Regional Office. "This is a truly egregious fraud of immense proportions."

Lawyers for the defendants either could not be reached or had no comment.

Mr. Greenwood and Mr. Walsh, longtime associates and former co-owners of the New York Islanders hockey team, ran Westridge Capital Management and a number of affiliated funds and entities.

As late as this month, the partners appeared to be doing well. Mr. Greenwood told Pitt's assistant treasurer Jan. 21 that they had $2.8 billion under management -- though that number is now in question. And on Feb. 2, Pitt sent $5 million to be invested.

But in the course of less than three weeks, Westridge's mammoth portfolio imploded in what federal authorities called an investment scam meant to cover up trading losses and fund extravagant purchases by the partners.

An audit launched Feb. 5 by the National Futures Association proved key to uncovering the alleged deceit and apparently became the linchpin of the case federal prosecutors are building.

That audit came about in an indirect way. The association, a self-policing membership body, had taken action against a New York financier. That led to a man named Jack Reynolds, a manager of the Westridge Capital Management Fund in which CMU invested $49 million; and Mr. Reynolds led to Westridge.

"We just said we better take a look at Jack Reynolds and see what's happening, and that led us to Westridge and WCM, so it was a domino effect," said Larry Dyekman, an association spokesman. "We're just not sure we have the full picture yet."

Mr. Reynolds has not been charged by federal authorities, but he is named as a defendant in the lawsuit that was filed last week by Pitt and CMU.

"Greenwood and Walsh refused to answer any of our questions about where the money was or how much there was," Mr. Dyekman continued.

"This is still an ongoing investigation, and we can't really say at this point with any finality how much has been lost."

The federal criminal complaint traces the alleged illegal activity to at least 1996.

FBI Special Agent James C. Barnacle Jr. said Mr. Greenwood and Mr. Walsh used "manipulative and deceptive devices," lied and withheld information as part of a scheme to defraud investors and enrich themselves.

The complaint refers to a public state-sponsored university called "Investor 1" whose details match those given by Pitt in its lawsuit.

The SEC's Mr. Rosenfeld said the fraud hinged not so much on the partners' investment strategy but on the fact that they are believed to have simply spent other people's money on themselves.

"They took it. They promised the investors it would be invested. And instead of doing that they misappropriated it for their own use," Mr. Rosenfeld said.

Not only do federal authorities believe Mr. Greenwood and Mr. Walsh used new investors' funds to cover up prior losses in a classic Ponzi scheme, they used more than $160 million for personal expenses including:

• Rare books bought at auction;

• Steiff teddy bears purchased for up to $80,000 at auction houses including Sotheby's;

• A horse farm;

• Cars;

• A residence for Mr. Walsh's ex-wife, Janet Walsh, 53, of Florida, for at least $3 million;

• Money for Ms. Walsh and Mr. Greenwood's wife, Robin Greenwood, 57, both of whom are defendants in the SEC suit. More than $2 million was allegedly wired to their personal accounts by an unnamed employee of the partners.

"Defendants treated investor money -- some of which came from a public pension fund -- as their own piggy bank to lavish themselves with expensive gifts," said Stephen J. Obie, the Commodity Futures Trading Commission's acting director of enforcement.

It is not clear how Pitt and CMU got involved with Mr. Greenwood and Mr. Walsh. But there is at least one connection involving academia. The commission suit said Mr. Walsh represented to potential investors that he was a member of the University at Buffalo Foundation board and served on its investment committee.

Mr. Walsh is a 1966 graduate of the State University of New York at Buffalo where he majored in political science.

He was a trustee of the University at Buffalo Foundation, but the foundation did not have any investments in Westridge or related firms.

Universities, charitable organizations, retirement and pension funds are among the investors who have done business with Mr. Greenwood and Mr. Walsh.

Among those investors are the Sacramento County Employees' Retirement System, the Iowa Public Employees' Retirement System and the North Dakota Retirement and Investment Office, which handles $4 billion in investments for teachers and public employees.

The North Dakota fund received about $20 million back from Westridge Capital Management, but has an undetermined amount still out in the market, said Steve Cochrane, executive director.

Mr. Cochrane said Westridge Capital was cooperative in returning what money it could by closing out their position and sending them the money.

"I dealt with them exclusively all these years," Mr. Cochrane said.

"They always seemed to be upfront and honest. I think they're as stunned and as victimized as we are, is my guess."

He said Westridge Capital had done an excellent job over the years.

The November financial statement indicated that the one-year return from Westridge Capital was a negative 11.87 percent, but the five-year annualized rate of return was a positive 8.36 percent.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Rotten to the Core threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

Bernard Madoff's Gangster Family Seems to Have Been Overlooked by Investors

"Pretty v. Ugly at the University," University Diaries Blog, Inside Higher Ed, February 24, 2009 --- http://www.insidehighered.com/blogs/university_diaries

Bernard Madoff is a classic Mafia-style gangster. He comes from gangsters - his mother was a crook. Investigators are looking into his father-in-law. A lot of his friends and investors are crooks. He was born a crook, has always been a crook.

"The FBI believes Madoff may never have properly invested any of the money entrusted to him," writes Stephen Foley in The Independent. That's <em>never</em>. Madoff is in his seventies.

Psychopathically evil, Madoff makes an exception - again, Mafia-style - for his closest family and friends. His last act before turning himself in was writing big checks to the inner circle.

Tomorrow, Harry Markopolos will tell Congress how easy it was, ten years ago, for him to prove that Madoff was a crook, and how difficult it was for him to convince the SEC, or anyone else, of this obvious truth.

An ugly story, isn't it.... Ugh. Let us turn to the verdant paths of Brandeis University, and walk to the door of its art museum, where pretty canvases hang on the walls and rekindle our sense of the beauty of the world and the goodness of mankind.

Yet all of this beauty will soon be shuttered, because that ugly world is all over Brandeis. It's all over a number of other universities, too -- Yeshiva, Bard, NYU, all the schools who loved charitable Bernie Madoff and his charitable friends.

Madoff, after all, was a philanthropist.

Not that he, as the word suggests, loves people. He hates people.

But he (and benefactors like Carl Shapiro, his closest business associate) gave lots of money to pretty places like universities, places that stand for love, not hate, and beauty, not ugliness. Why did he do that?

For the same reason many other crooks do it. To get their names on buildings, and, much more importantly, to launder their images. Madoff's been cleaning himself up for public consumption all his life, and there's nothing like gifts to universities to do oneself up <em>real</em> good.

University Diaries has covered, over the years, many amusing stories of universities using the latest in stone-blasting technology to get the names of crooks off of buildings the crooks endowed. At any given time, some university in this country is using power tools on its walls in a desperate effort to dissociate itself from scum. Here's the latest case. One of the most amusing was Dennis Kozlowski at Seton Hall.

Even if it doesn't call for power tools, the problem of taking crooks' money can be just as troublesome, as with the University of Missouri-Columbia's Kenneth L. Lay Chair in International Economics.

Sometimes things call for quick-action internet prowess. Recall how, deep in the pre-exposure night, Yeshiva University deleted from its webpages the once-sainted names of Bernard Madoff and his partner, Ezra Merkin.

Our wretched economy will continue to reveal the reputation-laundering enterprise some of our universities have been running.

Just as every Madoff associate or victim claims to be a deceived innocent, so these campuses will tell us they never suspected a thing.

The farce would be fun to watch if it weren't so incredibly destructive.

Bob Jensen's Fraud Updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on security frauds are at http://www.trinity.edu/rjensen/FraudRotten.htm

"Argentina Has a Bond It Wants to Sell You:  Deadbeat nations should be kept out of U.S. capital markets," by Mark Shapiro and Nancy Soderberg, The Wall Street Journal, February 27, 2009 --- http://online.wsj.com/article/SB123569777717089081.html?mod=djemEditorialPage

In 2001, Argentina defaulted on $81 billion in sovereign bonds. Four years later it presented a unilateral, nonnegotiable restructuring plan worth about 25 cents on the dollar. When half of its foreign lenders said "no thanks," Buenos Aires repudiated their claims.

Since Argentina had earlier agreed to waive sovereign immunity and accept the jurisdiction and judgments of New York courts, more than 160 lawsuits were filed. But the governments of Nestor Kirchner and of his wife and successor, Christina Fernandez, have ignored numerous court judgments. Judge Thomas Griesa has repeatedly condemned their conduct, noting in 2005 that "I have not heard one single word from the [Argentine] Republic except ways to avoid paying those judgments." Nothing has changed since then.

If Argentina gets away with its misdeeds -- offering terrible terms for restructuring its debt and then repudiating its obligations to those who object -- the likelihood of additional defaults could increase substantially. If that occurs, it would inflict another serious blow to a global financial system in crisis.

Already, Buenos Aires's scofflaw behavior is being imitated. Citing Argentina's example, Ecuador recently defaulted on sovereign debts issued in the U.S., though it has the means to meet its obligations. The default drove down the market price of the bonds. The Correa government then entered the American secondary market with a massive repurchase program, scooping up much of its own debt at a very steep discount.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Rotten to the Core threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

Question
Is the history of Arthur Levitt Jr. at the SEC so pure?
He does charge out at $900 per hour --- http://en.wikipedia.org/wiki/Arthur_Levitt

When he was Director of the SEC, Arthur Levitt and his Chief SEC Accountant gave the large auditing firms considerable trouble (unlike SEC Chairman Harvey Pitt). But to my knowledge Levitt was pretty much hands off on free-wheeling Wall Street financial institutions and is now probably given too much credence in terms of cleaning up the mess after Chris Cox was the disastrous head of the SEC --- http://www.trinity.edu/rjensen/2008Bailout.htm#SEC 

Leavitt was easily duped by his close friend Bernie Madoff, probably not separating church and state when Levitt was head of the SEC and Madoff was committing fraud (for over 28 years of phony stock trades in his investment fund that Levitt, Pitt, and Cox left unregulated to the point of not even requiring audits by registered auditing firms).

From The Wall Street Journal Accounting Weekly Review on January 23, 2009

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's Rotten to the Core threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

"Madoff Chasers Dug for Years, to No Avail:  Regulators Probed at Least 8 Times Over 16 Years; Congress Starts Review of SEC Today," by Kara Scannell, The Wall Street Journal, January 5, 2008 --- http://online.wsj.com/article/SB123111743915052731.html?mod=djem_jiewr_AC

Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff's business practices as "highly unusual." The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers.

Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.

The serial regulatory failures will be on display Monday when Congress holds a hearing to probe why the alleged fraud went undetected. Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency's chairman, Christopher Cox, to investigate the mess.

The situation is even more awkward because SEC examiners seemed to be looking in the right places, yet still were unable to unmask the alleged scheme. For example, investigators were led astray by concerns that Mr. Madoff, now under house arrest, was placing orders for favored clients ahead of others to get a better price, a practice known as "front running." Front running isn't thought to have played a role in the firm's collapse.

Concern that the SEC lacks the expertise to keep up with fraudsters is the latest criticism of the agency, which saw the Wall Street investment banks it oversees get pummeled or vanish altogether in 2008. With Congress likely to take a hard look at how to structure oversight of financial markets, the SEC is struggling to maintain its clout.

The failure to stop Mr. Madoff also is an embarrassment for Mary Schapiro, the Finra chief who has been nominated by President-elect Barack Obama as the next SEC chairman. Finra was involved in several investigations of Mr. Madoff's firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way.

Ms. Schapiro declined to comment. Mr. Cox has previously acknowledged mistakes by the SEC. The agency declined to comment.

Regulatory gaps abound in the paper trail generated by the SEC's scrutiny of Bernard L. Madoff Investment Securities, according to a review of the documents. Many of the details haven't been reported previously.

For years, Mr. Madoff told regulators he wasn't running an investment-advisory business. By saying he instead managed accounts for hedge funds, Mr. Madoff was able to avoid regular reviews of his advisory business.

In 1992, Mr. Madoff had a brush with the SEC's enforcement division, which had sued two Florida accountants for selling unregistered securities that paid returns of 13.5% to 20%. The SEC believed at the time it had uncovered a $440 million fraud.

"We went into this thinking it could be a major catastrophe," Richard Walker, then-chief of the SEC's New York office, told The Wall Street Journal at the time.

The SEC probe turned up money that had been managed by Mr. Madoff. He said he didn't know the money had been raised illegally.

With no investors found to be harmed, the SEC concluded there was no fraud. But the scheme indicated Mr. Madoff was managing money on behalf of other people.

In 1999 and 2000, the SEC sent examiners into Mr. Madoff's firm to review its trading practices. SEC officials worried the firm wasn't properly displaying orders to others in the market, violating a trading rule. In response, Mr. Madoff outlined new procedures to address the findings.

Continued in article

A Tale of Four Investors
Forwarded by Dennis Beresford

Four investors made different investment decisions 10 years ago.  Investor one was extremely risk averse so he put $1 million in a safe deposit box.  Today he still has $1 million.  Investor two was a bit less risk averse so she bought $1 million of 6% Fanny Mae Preferred.  She put the $15,000 she received in dividends each quarter in a safe deposit box.  After receiving 40 dividends, she recently sold her investment for $20,000 so she now has $620,000 in her safe deposit box.  Investor three was less risk averse so he bought and held a $1 million well diversified U.S. stock portfolio which he recently sold for $1 million, putting the $1 million in his safe deposit box.  Investor four had a friend who knew someone who was able to invest her $1 million with Bernie Madoff.  Like clockwork, she received a $10,000 check each and every month for 120 months.  She cashed all the checks, putting the money in her safe deposit box.  She was outraged to learn that she will no longer receive her monthly checks.  Even worse, she lost all her principal.  She only has $1,200,000 in her safe deposit box. She hopes the government will bail her out.

 Lawrence D. Brown
J. Mack Robinson Distinguished Professor of Accounting
Georgia State University
December 18, 2008

Robert Edward Rubin (born August 29, 1938) is Director and Senior Counselor of Citigroup where he was the architect of Citigroup's strategy of taking on more risk in debt markets, which by the end of 2008 led the firm to the brink of collapse and an eventual government rescue [1]. From November to December 2007, he served temporarily as Chairman of Citigroup.[2][3] From 1999 to present, he earned $115 million in pay at Citigroup[4]. He served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations.
Wikipedia --- http://en.wikipedia.org/wiki/Robert_Rubin

A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged Ponzi-style scheme that's now choking world banking. Director Rubin and ousted CEO Prince - and their lieutenants over the past five years - are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.
Paul Tharp, "'PONZI SCHEME' AT CITI SUIT SLAMS RUBIN," The New York Post, December 5, 2008 --- http://www.nypost.com/seven/12042008/business/ponzi_scheme_at_citi_142511.htm

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Why Madoff's Hedge Fund Could Be Audited by Non-registered Auditors
We all know that Bernie Madoff's brokerage firm was audited by an obscure 3-person accounting firm that is not registered with the Public Company Accounting Oversight Board.  This was permitted because the SEC exempted privately owned brokerage firms from the SOX requirement that firms are audited by registered accountants.  Floyd Norris reports, in today's NY Times, that the SEC has now quietly rescinded that exemption.  As a result, firms that audit broker-dealers for fiscal years that end December 2008 or later will have to be registered.  However, under another SOX provision, PCAOB is allowed to inspect only audits of publicly held companies.  NYTimes, Oversight for Auditor of Madoff.
"Why an Obscure Accounting Firm Could Audit Madoff's Records," Securities Law Professor Blog, January 9, 2008 ---
http://lawprofessors.typepad.com/securities/

"SEC Goes After Another Ponzi Scheme," Securities Law Professor Blog, January 8, 2009 --- http://lawprofessors.typepad.com/securities/

Another Ponzi scheme -- is the SEC seeking atonement for failure to uncover the Madoff fraud?

The SEC announced today that it has filed an emergency civil enforcement action to halt an ongoing affinity fraud and Ponzi scheme orchestrated by Buffalo-based Gen-See Capital Corporation a/k/a Gen Unlimited ("Gen-See") and its owner and president, Richard S. Piccoli.  According to the Commission's complaint, the defendants have raised millions of dollars from investors by promising steady, "guaranteed" returns, ranging from 7.1% to 8.3% per annum, and no fees or commissions. In November 2008 alone, the defendants raised over $500,000 from investors. The defendants have relied heavily on advertisements in newsletters published by churches and dioceses. The complaint further alleges that the defendants told investors that their money was invested in "high quality" residential mortgages that the defendants were able to purchase at a discount. The defendants did not invest the funds as promised, but instead used new investor funds to make payments to earlier investors. In addition, the complaint alleges that Gen-See's offering and sale of securities to the public was not registered with the Commission.

The Commission seeks, among other emergency relief, a temporary restraining order (i) enjoining the defendants from future violations of the federal securities laws; (ii) freezing the defendants' assets; (iii) directing the defendants to provide verified accountings; and (iv) prohibiting the destruction, concealment or alteration of documents. In addition to this emergency relief, the Commission seeks preliminary and permanent injunctive relief and civil money penalties against the defendants as well as disgorgement by the defendants of their ill-gotten gains plus prejudgment interest.

"SEC Takes Action to Halt Ponzi Scheme," Securities Law Professor Blog, January 7, 2009 --- http://lawprofessors.typepad.com/securities/

The SEC filed an emergency action to halt an estimated $50 million Ponzi scheme conducted by Joseph S. Forte (“Forte”) and Joseph Forte, L.P. (“Forte LP”), of Broomall, Pennsylvania. According to the Commission’s complaint, from at least February 1995 to the present, Forte has been operating a Ponzi scheme in which he fraudulently obtained approximately $50 million from as many as 80 investors through the sale of securities in the form of limited partnership interests.  The federal district court for the Eastern District of Pennsylvania issued an order granting a preliminary injunction, freezing assets, compelling an accounting, and imposing other emergency relief. Without admitting or denying the allegations in the Commission’s complaint, Forte and Forte LP consented to the entry of the order.

The Commission’s complaint alleges that in late December 2008, Forte admitted to federal authorities that from at least 1995 through December 2008, he had been conducting a Ponzi scheme. Forte, who has never been registered with the Commission in any capacity, told investors that he would invest the limited partnership funds in a securities futures trading account in the name of Forte LP that would trade in futures contracts, including S&P 500 stock index futures (“trading program”).  Forte has admitted that he misrepresented and falsified Forte LP’s trading performance from the very first quarter. From 1995 through September 30, 2008, the defendants reported to investors annual returns ranging from 18.52% to as high as 37.96%. However, from January 1998 through October 2008, the Forte LP trading account had net trading losses of approximately $3.3 million.

Greenspan's Disastrous Agency Problem
In political science and economics, the principal-agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. Various mechanisms may be used to try to align the interests of the agent with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or fear of firing. The principal-agent problem is found in most employer/employee relationships, for example, when stockholders hire top executives of corporations. Numerous studies in political science have noted the problems inherent in the delegation of legislative authority to bureaucratic agencies. The implementation of legislation (such as laws and executive directives) is open to bureaucratic interpretation, creating opportunities and incentives for the bureaucrat-as-agent to deviate from the intentions or preferences of the legislators. Variance in the intensity of legislative oversight also serves to increase principal-agent problems in implementing legislative preferences.
Wikipedia --- http://en.wikipedia.org/wiki/Agency_theory
 

Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.
Alan Greenspan in 2004 as quoted by Peter S. Goodman, Taking a Good Look at the Greenspan Legacy," The New York Times, October 8, 2008 --- http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?em

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.

“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.

On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.

Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.

Bob Jensen's timeline of derivatives scandals and the evolution of accounting standards for accounting for derivatives financial instruments can be found at http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds

"‘I made a mistake,’ admits Greenspan," by Alan Beattie and James Politi, Financial Times, October 23, 2008 ---
http://www.ft.com/cms/s/0/aee9e3a2-a11f-11dd-82fd-000077b07658.html?nclick_check=1

“I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders,” he said.

In the second of two days of tense hearings on Capitol Hill, Henry Waxman, chairman of the House of Representatives, clashed with current and former regulators and with Republicans on his own committee over blame for the financial crisis.

Mr Waxman said Mr Greenspan’s Federal Reserve – along with the Securities and Exchange Commission and the US Treasury – had propagated “the prevailing attitude in Washington... that the market always knows best.”

Mr Waxman blamed the Fed for failing to curb aggressive lending practices, the SEC for allowing credit rating agencies to operate under lax standards and the Treasury for opposing “responsible oversight” of financial derivatives.

Christopher Cox, chairman of the Securities and Exchange Commission, defended himself, saying that virtually no one had foreseen the meltdown of the mortgage market, or the inadequacy of banking capital standards in preventing the collapse of institutions such as Bear Stearns.

Mr Waxman accused the SEC chairman of being wise after the event. “Mr Cox has come in with a long list of regulations he wants... But the reality is, Mr Cox, you weren’t doing that beforehand.”

Mr Cox blamed the fact that congressional responsibility was divided between the banking and financial services committees, which regulate banking, insurance and securities, and the agriculture committees, which regulate futures.

“This jurisdictional split threatens to for ever stand in the way of rationalising the regulation of these products and markets,” he said.

Mr Greenspan accepted that the crisis had “found a flaw” in his thinking but said that the kind of heavy regulation that could have prevented the crisis would have damaged US economic growth. He described the past two decades as a “period of euphoria” that encouraged participants in the financial markets to misprice securities.

He had wrongly assumed that lending institutions would carry out proper surveillance of their counterparties, he said. “I had been going for 40 years with considerable evidence that it was working very well”.

Continued in the article

Jensen Comment
In other words, he assumed the agency theory model that corporate employees, as agents of their owners and creditors, would act hand and hand in the best interest for themselves and their investors. But agency theory has a flaw in that it does not understand Peter Pan.

Peter Pan, the manager of Countrywide Financial on Main Street, thought he had little to lose by selling a fraudulent mortgage to Wall Street. Foreclosures would be Wall Street’s problems and not his local bank’s problems. And he got his nice little commission on the sale of the Emma Nobody’s mortgage for $180,000 on a house worth less than $100,000 in foreclosure. And foreclosure was almost certain in Emma’s case, because she only makes $12,000 waitressing at the Country Café. So what if Peter Pan fudged her income a mite in the loan application along with the fudged home appraisal value? Let Wall Street or Fat Fannie or Foolish Freddie worry about Emma after closing the pre-approved mortgage sale deal. The ultimate loss, so thinks Peter Pan, will be spread over millions of wealthy shareholders of Wall Street investment banks. Peter Pan is more concerned with his own conventional mortgage on his precious house just two blocks south of Main Street. This is what happens when risk is spread even farther than Tinkerbell can fly!
Also see how corporate executives cooked the books --- http://www.trinity.edu/rjensen/theory01.htm#Manipulation

The Saturday Night Live Skit on the Bailout --- http://patdollard.com/2008/10/it-is-here-the-banned-snl-skit-cannot-hide-from-louie/ 

Selling New Equity to Pay Dividends:  Reminds Me About the South Sea Bubble of 1720 ---
http://en.wikipedia.org/wiki/South_Sea_bubble

"Fooling Some People All the Time"

"Melting into Air:  Before the financial system went bust, it went postmodern," by John Lanchester, The New Yorker, November 10, 2008 --- http://www.newyorker.com/arts/critics/atlarge/2008/11/10/081110crat_atlarge_lanchester

This is also why the financial masters of the universe tend not to write books. If you have been proved—proved—right, why bother? If you need to tell it, you can’t truly know it. The story of David Einhorn and Allied Capital is an example of a moneyman who believed, with absolute certainty, that he was in the right, who said so, and who then watched the world fail to react to his irrefutable demonstration of his own rightness. This drove him so crazy that he did what was, for a hedge-fund manager, a bizarre thing: he wrote a book about it.

The story began on May 15, 2002, when Einhorn, who runs a hedge fund called Greenlight Capital, made a speech for a children’s-cancer charity in Hackensack, New Jersey. The charity holds an annual fund-raiser at which investment luminaries give advice on specific shares. Einhorn was one of eleven speakers that day, but his speech had a twist: he recommended shorting—betting against—a firm called Allied Capital. Allied is a “business development company,” which invests in companies in their early stages. Einhorn found things not to like in Allied’s accounting practices—in particular, its way of assessing the value of its investments. The mark-to-market accounting that Einhorn favored is based on the price an asset would fetch if it were sold today, but many of Allied’s investments were in small startups that had, in effect, no market to which they could be marked. In Einhorn’s view, Allied’s way of pricing its holdings amounted to “the you-have-got-to-be-kidding-me method of accounting.” At the same time, Allied was issuing new equity, and, according to Einhorn, the revenue from this could be used to fund the dividend payments that were keeping Allied’s investors happy. To Einhorn, this looked like a potential Ponzi scheme.

The next day, Allied’s stock dipped more than twenty per cent, and a storm of controversy and counter-accusations began to rage. “Those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie,” Allied’s C.E.O. said. Einhorn would be the first to admit that he wanted Allied’s stock to drop, which might make his motives seem impure to the general reader, but not to him. The function of hedge funds is, by his account, to expose faulty companies and make money in the process. Joseph Schumpeter described capitalism as “creative destruction”: hedge funds are destructive agents, predators targeting the weak and infirm. As Einhorn might see it, people like him are especially necessary because so many others have been asleep at the wheel. His book about his five-year battle with Allied, “Fooling Some of the People All of the Time” (Wiley; $29.95), depicts analysts, financial journalists, and the S.E.C. as being culpably complacent. The S.E.C. spent three years investigating Allied. It found that Allied violated accounting guidelines, but noted that the company had since made improvements. There were no penalties. Einhorn calls the S.E.C. judgment “the lightest of taps on the wrist with the softest of feathers.” He deeply minds this, not least because the complacency of the watchdogs prevents him from being proved right on a reasonable schedule: if they had seen things his way, Allied’s stock price would have promptly collapsed and his short selling would be hugely profitable. As it was, Greenlight shorted Allied at $26.25, only to spend the next years watching the stock drift sideways and upward; eventually, in January of 2007, it hit thirty-three dollars.

All this has a great deal of resonance now, because, on May 21st of this year, at the same charity event, Einhorn announced that Greenlight had shorted another stock, on the ground of the company’s exposure to financial derivatives based on dangerous subprime loans. The company was Lehman Brothers. There was little delay in Einhorn’s being proved right about that one: the toppling company shook the entire financial system. A global cascade of bank implosions ensued—Wachovia, Washington Mutual, and the Icelandic banking system being merely some of the highlights to date—and a global bailout of the entire system had to be put in train. The short sellers were proved right, and also came to be seen as culprits; so was mark-to-market accounting, since it caused sudden, cataclysmic drops in the book value of companies whose holdings had become illiquid. It is therefore the perfect moment for a short-selling advocate of marking to market to publish his account. One can only speculate whether Einhorn would have written his book if he had known what was going to happen next. (One of the things that have happened is that, on September 30th, Ciena Capital, an Allied portfolio company to whose fraudulent lending Einhorn dedicates many pages, went into bankruptcy; this coincided with a collapse in the value of Allied stock—finally!—to a price of around six dollars a share.) Given the esteem with which Einhorn’s profession is regarded these days, it’s a little as if the assassin of Archduke Franz Ferdinand had taken the outbreak of the First World War as the timely moment to publish a book advocating bomb-throwing—and the book had turned out to be unexpectedly persuasive.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Heavy Insider Trading --- http://investing.businessweek.com/research/stocks/ownership/ownership.asp?symbol=ALD

Allied's independent auditor is KPMG
KPMG has a lot of problems with litigation --- http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on the collapse of the Banking System are at http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm
Also see Fraud Rotten at http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm
Also see the theory of fair value accounting at http://www.trinity.edu/rjensen/theory01.htm#FairValue

Bob Jensen's threads on earnings management and creative accounting to cook the books ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation

Keeping Score on the SEC in 2008

"The SEC in 2008: A Very Good Year? A terrific one, the commission says, tallying a fiscal-year record in insider-trading cases, and the second-highest number of enforcement cases overall. But what would John McCain say?" by Stephen Taub and Roy Harris, CFO.com, October 22, 2008 --- http://www.cfo.com/article.cfm/12465408/c_12469997

Timeline of Financial Scandals, Auditing Failures, and the Evolution of International Accounting Standards ---- http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds

White Collar Fraud Site --- http://www.whitecollarfraud.com/
Note the column of links on the left.

Online Searching for Law, Accounting, and Finance --- http://securities.stanford.edu/

Stanford University Law School Securities Class Action Clearinghouse --- http://securities.stanford.edu/

Securities Law Archives --- http://www.bespacific.com/mt/archives/cat_securities_law.html

Securities and Exchange Commission --- http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

Accounting Fraud --- http://www.trinity.edu/rjensen/Fraud.htm

Question
Why are so many Ivy League alumni behind bars?

From Bloomberg.com July 3, 2008 --- http://www.bloomberg.com/apps/news?pid=20601103&sid=awkNQpGwkfkU&refer=us

No matter which prison former Refco Inc. Chief Executive Officer Phillip Bennett serves the 16-year sentence he received today in Manhattan federal court, chances are he will be the only one there with a master's degree from Cambridge University in England.

The head of what was once the biggest independent U.S. futures broker, Bennett also was ordered to forfeit $2.4 billion in assets for what prosecutors said was ``among the very worst'' white-collar crimes. He faced a possible life sentence after pleading guilty to bank fraud and money laundering.

Bennett, 60, joins at least a dozen other wealthy corporate executives with degrees from elite institutions such as Harvard University and the University of Pennsylvania's Wharton School who've been incarcerated for white-collar crimes this decade. Exceptional intelligence, self-confidence and feeling special, common among those educated at such schools, can turn into deviousness, arrogance and entitlement, said Tom Donaldson, a professor of ethics and law at Wharton in Philadelphia.

``If the devil exists, he no doubt has a high IQ and an Ivy League degree,'' Donaldson said. ``It's clear that having an educational pedigree is no prophylactic against greed and bad behavior.''

Imprisoned executives with Ivy League degrees include Jeffrey Skilling, 54, former CEO of Enron Corp. (Harvard Business School); Timothy Rigas, 52, former chief financial officer of Adelphia Communications Corp. (Wharton); and William Sorin, 59, former general counsel of New York-based Comverse Technology Inc. (Harvard Law School).

Elite Schools

Some of these convicted executives have multiple degrees. Conrad Black, the former CEO of Chicago-based Hollinger International Inc., now serving a 6 1/2-year sentence for stealing $6.1 million from the company, has two bachelor's degrees from Carleton University, a master's degree from McGill University and a law degree from Laval University, all in Canada.

``There is a correlation between going to an elite school and ending up as a CEO,'' said Edwin Hartman, a professor of business ethics at New York University's Stern School of Business. ``Look at the list of the heads of the 400 elite companies. They certainly didn't go to no-name state schools.''

A top-level education may also cultivate arrogance, said Maurice Schweitzer, who teaches information management at Wharton.

`They Feel Special'

``We tell our students at premier institutions that they are special, and they certainly feel special,'' Schweitzer said. ``We have famous faculty and great resources. They are surrounded by accomplished peers, and recruiters flock to them.''

Massachusetts-based Harvard University spokeswoman Rebecca Rollins said the school didn't have an immediate comment.

Wrongdoing in the executive suite is more about character flaws than alma maters, said Andrew Weissmann, a former federal prosecutor who led the U.S. Justice Department task force that investigated the collapse of Enron.

``Just because you went to a good school doesn't mean you have a good moral compass,'' Weissmann said.

Moreover, some of the executives convicted since the Sarbanes-Oxley Act was passed in 2002 in response to corporate corruption didn't attend elite schools. HealthSouth Corp. founder Richard Scrushy, 55, sentenced to almost 7 years in prison for bribery, has a bachelor's degree from the University of Alabama in Birmingham. Former Tyco International Ltd. CEO L. Dennis Kozlowski, convicted of stealing $137 million from the company and in prison for 8 1/3 to 25 years, has a bachelor's degree from Seton Hall University.

Risk Takers

Executives with top educations may end up trading their pin stripes for prison jumpsuits because they're driven to excel.

``People who succeed in corporate America are risk-takers,'' said Anthony Barkow, a former federal prosecutor and Harvard Law School graduate who is now a New York University Law School professor. ``They're smart, confident and sometimes even arrogant. That's what it takes to succeed. Risk-takers get closer to the line and sometimes cross it.''

Graduates from top-tier universities may feel so special, they think law doesn't apply to them, Wharton's Schweitzer said.

``We encourage our students to explore and think outside the box,'' Schweitzer said. ``In general, this approach is very constructive, but it may prompt people to be less likely to recognize an ethical dilemma.''

Morgenthau's Warning

Current and former prosecutors who've handled white-collar cases said the defendants' most common trait was avarice.

``It doesn't matter if you graduated from the best schools in the world and had every privilege accorded to you or not,'' said Campbell, a member of the Enron Task Force with degrees from Yale University and the University of Chicago School of Law. ``Greed is a strong motivation, and it can cause you to make mistakes.''

Robert Morgenthau, the Manhattan District Attorney who is a graduate of Amherst College and Yale Law School, issued this warning:

``No matter what your position is in life or where you went to school, if you commit a crime in our jurisdiction, we'll be happy to prosecute you.''

Question
What are do so many executives cheat in recent years?

Answer
See Question 1 and Answer 1 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's "Congress to the Core" threads are at http://www.trinity.edu/rjensen/FraudCongress.htm

"Merrill Lynch Settlement With SEC Worth Up to $7B," SmartPros, August 25, 2008 --- http://accounting.smartpros.com/x62971.xml

Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement.

The largest U.S. brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors. Under that deal, announced Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2.

Merrill also agreed to pay a $125 million fine in a separate accord with state regulators.

The $330 billion market for auction-rate securities collapsed in mid-February.

The SEC's estimate of a $7 billion recovery is based on its projection of the eventual amount of the bonds that will be cashed in by the affected investors, who bought them before Feb. 13. The $10 billion to $12 billion is the total amount that Merrill is committing to buy back. The firm has to offer redemptions to all investors, though not all may cash in the securities.

The SEC said the new agreement will enable retail investors, small businesses and charities who purchased the securities from Merrill "to restore their losses and liquidity."

New York-based Merrill neither admitted nor denied wrongdoing in agreeing to the federal settlement, which is subject to approval by SEC commissioners.

The firm wasn't fined under the accord, but the SEC said Merrill "faces the prospect" of a penalty after completing its obligations under the agreement. The amount of the penalty, if any, would take into account the extent of Merrill's misconduct in marketing and selling auction-rate securities, and an assessment of whether it fulfilled its obligations, the SEC said.

"Merrill Lynch's conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement," Linda Thomsen, the agency's enforcement director, said in a statement. "We will continue to aggressively investigate wrongdoing in the marketing and sale of auction-rate securities."

Merrill, Goldman Sachs Group Inc. and Deutsche Bank on Thursday brought to eight the number of global banks that have settled a five-month investigation into claims they misled customers into believing the securities were safe.

The auction-rate securities market involved investors buying and selling instruments that resembled regular corporate debt, except the interest rates were reset at regular auctions - some as frequently as once a week. A number of companies and retail clients invested in the securities because, thanks to the regular auctions, they could treat their holdings as liquid, almost like cash.

Major issuers included companies that financed student loans and municipal agencies like the Port Authority of New York and New Jersey. When big banks ceased backstopping the auctions with supporting bids because of concerns about credit exposure, the bustling market collapsed. That left some issuers paying double-digit interest rates because of the terms under which they issued the securities.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

Jensen Comment
It's unbelievable how many huge frauds there are in which Merrill Lynch has been an active participant. For example, do a word search for "Merrill" in this document that you are reading now.

"Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," by Ray Ball at the University of Chicago, SSRN, September 17, 2008 --- (free download) --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1272804

Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well-researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What caused the scandalous behavior? Why was there such a rash of accounting scandals at one time? Who killed Arthur Andersen – the SEC, or the market? Did fraudulent accounting kill Enron, or just keep it alive for too long? What is the social cost of financial reporting fraud? Does the US in fact operate a “principles-based” or a “rules-based” accounting system? Was there market failure? Or was there regulatory failure? Or both? Was the Sarbanes-Oxley Act a political and regulatory over-reaction?

Jensen Comment
Although Professor Ball is best known for empirical research of capital markets data, the above article is best described as a commentary of his personal opinion. On many issues I agree with him, but on some issues I disagree.

Would market forces have killed Enron even if there was no criminal case for document destruction?

Ray Ball (opinion with no supporting evidence)
I conclude that market forces, left to their own devices, would have closed Andersen.

Bob Jensen (agrees completely with supporting evidence)
I don't think there's any doubt that Andersen would've folded due to market forces of a succession of failed audits for which it did not change its fundamental behavior and questions of auditor independence after losing a succession of failed audit lawsuits prior to Enron. For example, it continued to hire hire the in-charge auditor of Waste Management even after his felony conviction.

When the Securities and Exchange Commission found evidence in e-mail messages that a senior partner at Andersen had participated in the fraud at Waste Management, Andersen did not fire him. Instead, it put him to work revising the firm's document-retention policy. Unsurprisingly, the new policy emphasized the need to destroy documents and did not specify that should stop if an S.E.C. investigation was threatened. It was that policy David Duncan, the Andersen partner in charge of Enron audits, claimed to be following when he shredded Andersen's reputation.
Floyd Norris, "Will Big Four Audit Firms Survive in a World of Unlimited Liability?," The New York Times, September 10, 2004


Although Ray Ball does not cite the empirical evidence, there is empirical evidence that ultimately, due to a succession of incompetent or fraudulent audits, having Andersen as an auditor raised a client's cost of capital.

"The Demise of Arthur Andersen," by Clifford F. Thies, Ludwig Von Mises Institute, April 12, 2002 --- http://www.mises.org/fullstory.asp?control=932&FS=The+Demise+of+Arthur+Andersen

From Yahoo.com, Andrew and I downloaded the daily adjusted closing prices of the stocks of these companies (the adjustment taking into account splits and dividends). I then constructed portfolios based on an equal dollar investment in the stocks of each of the companies and tracked the performance of the two portfolios from August 1, 2001, to March 1, 2002. Indexes of the values of these portfolios are juxtaposed in Figure 1.

From August 1, 2001, to November 30, 2001, the values of the two portfolios are very highly correlated. In particular, the values of the two portfolios fell following the September 11 terrorist attack on our country and then quickly recovered. You would expect a very high correlation in the values of truly matched portfolios. Then, two deviations stand out.

 

In early December 2001, a wedge temporarily opened up between the values of the two portfolios. This followed the SEC subpoena. Then, in early February, a second and persistent wedge opened. This followed the news of the coming DOJ indictment. It appears that an Andersen signature (relative to a "Final Four" signature) costs a company 6 percent of its market capitalization. No wonder corporate clients--including several of the companies that were in the Andersen-audited portfolio Andrew and I constructed--are leaving Andersen.

Prior to the demise of Arthur Andersen, the Big 5 firms seemed to have a "lock" on reputation. It is possible that these firms may have felt free to trade on their names in search of additional sources of revenue. If that is what happened at Andersen, it was a big mistake. In a free market, nobody has a lock on anything. Every day that you don’t earn your reputation afresh by serving your customers well is a day you risk losing your reputation. And, in a service-oriented economy, losing your reputation is the kiss of death.

Did (undetected) fraudulent accounting keep Enron alive too long?

Ray Ball
It is difficult to escape the conclusion that market forces caused Enron’s bankruptcy, for the simple reason that it had invested enormous sums and by 2000 was not generating profits. Conversely, its accounting transgressions kept the company alive for some period (perhaps one or two years) longer than would have occurred if it had reported its true profitability. The welfare loss arose from keeping an unprofitable company alive longer than optimal, and wasting capital and labor that were better used elsewhere.

Bob Jensen (disagrees with the power of GAAP in the case of Enron)
I think Ray Ball is attributing too much to financial reports of past transactions. Even if Enron's financial reports were "true" in terms of conformance with GAAP, the market may well have kept Enron alive because of profit potential of some of the huge, albeit presently losing, ventures. The counter example here is the more legitimate reporting losses in Amazon.com  for almost its entire history and the willingness of investors to "bet on the come" of Amazon's ventures in spite of the reported losses in conformance with GAAP. Furthermore, Enron's executives were so skilled at sales pitches, I think Enron might've actually kept going much, much longer if it conformed to GAAP and simply pitched its sweet-sounding ventures and political connections in Washington DC. Enron was primarily brought down by fraud that commenced to appear in the media and the pending lawsuits that formed overhead due to the fraud.

Who killed Enron – the SEC or the market?

Ray Ball
It is difficult to escape the conclusion that market forces caused Enron’s bankruptcy, for the simple reason that it had invested enormous sums and by 2000 was not generating profits. Conversely, its accounting transgressions kept the company alive for some period (perhaps one or two years) longer than would have occurred if it had reported its true profitability. The welfare loss arose from keeping an unprofitable company alive longer than optimal, and wasting capital and labor that were better used elsewhere.

Bob Jensen (disagrees because losing divisions could've been dropped in favor of continued operations of highly profitable divisions)
What Ray does not seek out is the first tip of the demise of Enron. The single event that commenced Enron's dominos to fall has to be the reporting of illegal related party transactions by a Wall Street Journal Reporter. Once these became known, the SEC had to act and commenced a chain of events from which Enron could not possibly survive in terms of lawsuits and market reactions with lawsuit risks that bore down on the market prices of Enron shares.

After John Emshwiller's WSJ report, determining whether the market or the SEC brought down Enron is a chicken versus egg question!

Eichenwald states the following on pp. 490-492 in Conspiracy of Fools --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#22

It was section eight, called "Related Party Transactions," that got John Emshwiller's juices flowing. After being assigned to follow the Skilling resignation, Emshwiller had put in a request for an interview, then scrounged up a copy of Enron's most recent SEC filing in search of any nuggets. What he found startled him.  Words about some partnerships run by an unidentified "senior officer."  Arcane stuff, maybe, but the numbers were huge.  Enron reported more than $240 million in revenues in the first six months of the year from its dealings with them. One fact struck Emshwiller in particular.  This anonymous senior officer, the filing said, had just sold his financial interest in the partnerships.  Now, it said, the partnerships were no longer related to Enron. The senior officer had just sold his interest, Skilling had just resigned.  The connection seemed obvious. Could Enron have actually allowed Jeff Skilling to run partnerships that were doing massive business with the company?  Now that, Emshwiller thought, would be a great story. Emshwiller was back on the phone with Mark Palmer.  With no better explanation for Skilling's resignation, he said, the Journal was going to dig through everything it could find.  Right now he was focusing on these partnerships.  Were those run by Skilling? "No, that's not Skilling," Palmer replied, almost nonchalantly.  "That's Andy Fastow." A pause.  "Who's Andy Fastow?" Emshwiller asked. The message was slipped to Skilling later that day.  A Journal reporter was pushing for an explanation of his departure and now was rooting around, looking for anything he could find.  Probably best just to give the paper a call. Emshwiller was at his desk when the phone rang. "Hi," a soft voice said.  "It's Jeff Skilling." It was a startling moment.  Emshwiller had been on the hunt, and suddenly the quarry just walked in and lay down on the floor, waiting for him to fire.  So he did: why was Skilling quitting his job? "It's all pretty mundane," Skilling replied.  He'd worked hard and accomplished a lot but now had the freedom to move on.  His voice was distant, almost depressed. He and been ruminating about it for a while, Skilling went on, but had wanted to stay on at the company until the California situation eased up.  Then, he took the conversation in a new direction. "The stock price has been very disappointing to me," Skilling said.  "The stock is less than half of what it was six months ago.  I put a lot of pressure on myself.  I felt I must not be communicating well enough." Skilling rambled as Emshwiller took it down.  India.  California.  Expense cuts.  The good shape of Enron. "Had the stock price not done what it did..."  He paused.  "I don't think I would have felt the pressure to leave if the stock price had stayed up." What?  Had Emshwiller heard that right?  Was all this stuff about "personal reasons" out the window?  Had Skilling thrown in the towel because of the stock price? "What was that, Mr. Skilling?" Emshwiller asked. The employees at Enron owned lots of shares, Skilling said.  They were worried, always asking him about the direction of the price.  He found it very frustrating. "Are you saying that you don't think you would have quit if the stock price had stayed up?" Skilling was silent for several seconds. "I guess so," he finally mumbled. Minutes later, Emshwiller burst into his boss's office.  "You're not gong to believe what Skilling just told me!"

 

What are the incentives to commit fraud?

Ray Ball
My view, based on mainly anecdotal experience, is that non-financial motives are more powerful than is commonly believed, and sometimes are the dominant reason for committing accounting fraud. An important motivator seems to be maintaining the esteem of one’s peers,ranging from co-workers to the public at large. Enron executives reportedly were celebrities in Houston, and in important places like the White House.

Bob Jensen (disagrees as to level of importance of non-financial motives except in isolated instances such as possibly Ken Lay)
Although there are instances where non-financial motives may have been powerful, I believe that they generally pale when compared to the financial reasons for committing all types of financial fraud, including accounting fraud --- http://www.trinity.edu/rjensen/FraudCongress.htm

Was Sarbanes-Oxley Necessary?

Ray Ball (who is generally critical of the need for Sarbanes-Oxley relative to market forces without such regulation and fraud penalties)
Markets need rules, and rely on trust. U.S. financial markets historically had very effective rules by world standards, the rules were broken, and there were immense consequences for the transgressors.

Bob Jensen (strongly disagrees)
One need only look how the market-based system worldwide moved in cycles of being Congress to the core among the major corporations, investment banks, insurance companies, and credit rating companies --- http://www.trinity.edu/rjensen/FraudCongress.htm
After getting caught these firms simply moved on to new schemes without fear of market forces.

Nowhere is the wild west of market-based fraud more evident than in the timeline history of derivative financial instruments frauds --- http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds

I do agree with Ray Ball that regulation in and of itself is not panacea when either preventing or detecting fraud.

If auditors and their clients do not take there professional and ethical responsibilities more seriously then neither market forces nor regulators will prevent frauds from increasingly undermining our prized capital markets.

Bob Jensen's Congress to the Core threads are at http://www.trinity.edu/rjensen/FraudCongress.htm

Bob Jensen's Fraud Conclusions are at http://www.trinity.edu/rjensen/FraudConclusion.htm

The Most Criminal Class Writes the Laws

Question
Trading of insider information is against U.S. law for every segment of society except for one privileged segment that legally exploits investors for personal gains by trading on insider information. What is that privileged segment of U.S. society legally trades on inside information for personal gains?

Hints:
Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop

Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/

Why single out capitalism for immorality and ethics misbehavior?
Making capitalism ethical is a tough task – and possibly a hopeless one.
Prem Sikka (see below)

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.
Prem Sikka (see below)

Jensen Comment
Yeah right Prem, as if making the public sector and socialism ethical is an easier task. The least ethical nations where bribery, crime, and immorality are the worst are likely to be the more government (dictator) controlled and lower on the capitalism scale. And in the so-called capitalist nations, the lowest ethics are more apt to be found in the public sector that works hand in hand with bribes from large and small businesses.

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

We hang the petty thieves and appoint the great ones to public office.
Aesop

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

Why should members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides," The Wall Street Journal, March 28, 2006; Page A1 --- http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one

The Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties:  Few if any are uncorrupted
Committee members have shown no appetite for taking up all those cases and are considering an amnesty for reporting violations, although not for serious matters such as accepting a trip from a lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates that members of Congress have received more than $18 million in travel from private organizations in the past five years, with Democrats taking 3,458 trips and Republicans taking 2,666. . . But of course, there are those who deem the American People dumb as stones and will approach this bi-partisan scandal accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points for her minion, that are sure to come back and bite her .... “House Minority Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips she accepted from outside sponsors that were worth $8,580 and occurred as long as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National Ledger, January 6, 2006 --- http://www.nationalledger.com/artman/publish/article_27262498.shtml 

And when they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page A20  --- Click Here

Oh, and don't forget Fannie Mae and Freddie Mac, those two government-sponsored mortgage giants that engineered the 2008 subprime mortgage fiasco and are now on the public dole. The Fed kept them afloat by buying over a trillion dollars of their paper. Now, part of the Treasury's borrowing from the public covers their continuing large losses.
George Melloan, "Hard Knocks From Easy Money:  The Federal Reserve is feeding big government and harming middle-class savers," The Wall Street Journal, July 6, 2010 --- http://online.wsj.com/article/SB10001424052748704103904575337282033232118.html?mod=djemEditorialPage_t

"A Low, Dishonest Decade: The press and politicians were asleep at the switch.," The Wall Street Journal, December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage

Stock-market indices are not much good as yardsticks of social progress, but as another low, dishonest decade expires let us note that, on 2000s first day of trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq Composite Index stood at 4131, both substantially higher than where they are today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the first great Wall Street disaster of this unhappy decade. The Dow got north of 14000 before the real-estate bubble imploded.

And it was supposed to have been such an awesome time, too! Back in the late '90s, in the crescendo of the Internet boom, pundit and publicist alike assured us that the future was to be a democratized, prosperous place. Hierarchies would collapse, they told us; the individual was to be empowered; freed-up markets were to be the common man's best buddy.

Such clever hopes they were. As a reasonable anticipation of what was to come they meant nothing. But they served to unify the decade's disasters, many of which came to us festooned with the flags of this bogus idealism.

Before "Enron" became synonymous with shattered 401(k)s and man-made electrical shortages, the public knew it as a champion of electricity deregulation—a freedom fighter! It was supposed to be that most exalted of corporate creatures, a "market maker"; its "capacity for revolution" was hymned by management theorists; and its TV commercials depicted its operations as an extension of humanity's quest for emancipation.

Similarly, both Bank of America and Citibank, before being recognized as "too big to fail," had populist histories of which their admirers made much. Citibank's long struggle against the Glass-Steagall Act was even supposed to be evidence of its hostility to banking's aristocratic culture, an amusing image to recollect when reading about the $100 million pay reportedly pocketed by one Citi trader in 2008.

The Jack Abramoff lobbying scandal showed us the same dynamics at work in Washington. Here was an apparent believer in markets, working to keep garment factories in Saipan humming without federal interference and saluted for it in an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."

But the preposterous populism is only one part of the equation; just as important was our failure to see through the ruse, to understand how our country was being disfigured.

Ensuring that the public failed to get it was the common theme of at least three of the decade's signature foul-ups: the hyping of various Internet stock issues by Wall Street analysts, the accounting scandals of 2002, and the triple-A ratings given to mortgage-backed securities.

The grand, overarching theme of the Bush administration—the big idea that informed so many of its sordid episodes—was the same anti-supervisory impulse applied to the public sector: regulators sabotaged and their agencies turned over to the regulated.

The public was left to read the headlines and ponder the unthinkable: Could our leaders really have pushed us into an unnecessary war? Is the republic really dividing itself into an immensely wealthy class of Wall Street bonus-winners and everybody else? And surely nobody outside of the movies really has the political clout to write themselves a $700 billion bailout.

What made the oughts so awful, above all, was the failure of our critical faculties. The problem was not so much that newspapers were dying, to mention one of the lesser catastrophes of these awful times, but that newspapers failed to do their job in the first place, to scrutinize the myths of the day in a way that might have prevented catastrophes like the financial crisis or the Iraq war.

The folly went beyond the media, though. Recently I came across a 2005 pamphlet written by historian Rick Perlstein berating the big thinkers of the Democratic Party for their poll-driven failure to stick to their party's historic theme of economic populism. I was struck by the evidence Mr. Perlstein adduced in the course of his argument. As he tells the story, leading Democratic pollsters found plenty of evidence that the American public distrusts corporate power; and yet they regularly advised Democrats to steer in the opposite direction, to distance themselves from what one pollster called "outdated appeals to class grievances and attacks upon corporate perfidy."

This was not a party that was well-prepared for the job of iconoclasm that has befallen it. And as the new bunch muddle onward—bailing out the large banks but (still) not subjecting them to new regulatory oversight, passing a health-care reform that seems (among other, better things) to guarantee private insurers eternal profits—one fears they are merely presenting their own ample backsides to an embittered electorate for kicking.

Before reading this module you may want to read about Governmental Accounting at http://en.wikipedia.org/wiki/Governmental_accounting

"Don't Like the Numbers? Change 'Em If a CEO issued the kind of distorted figures put out by politicians and scientists, he'd wind up in prison," by Stanford Economics Professor Michael J. Boskin, The Wall Street Journal, January 14, 2010 ---
http://online.wsj.com/article/SB10001424052748704586504574654261655183416.html?mod=djemEditorialPage

Politicians and scientists who don't like what their data show lately have simply taken to changing the numbers. They believe that their end—socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française—justifies throwing out even minimum standards of accuracy. It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperature. A CEO or CFO issuing such massaged numbers would land in jail.

The late economist Paul Samuelson called the national income accounts that measure real GDP and inflation "one of the greatest achievements of the twentieth century." Yet politicians from Europe to South America are now clamoring for alternatives that make them look better.

A commission appointed by French President Nicolas Sarkozy suggests heavily weighting "stability" indicators such as "security" and "equality" when calculating GDP. And voilà!—France outperforms the U.S., despite the fact that its per capita income is 30% lower. Nobel laureate Ed Prescott called this disparity the difference between "prosperity and depression" in a 2002 paper—and attributed it entirely to France's higher taxes.

With Venezuela in recession by conventional GDP measures, President Hugo Chávez declared the GDP to be a capitalist plot. He wants a new, socialist-friendly way to measure the economy. Maybe East Germans were better off than their cousins in the West when the Berlin Wall fell; starving North Koreans are really better off than their relatives in South Korea; the 300 million Chinese lifted out of abject poverty in the last three decades were better off under Mao; and all those Cubans risking their lives fleeing to Florida on dinky boats are loco.

In Argentina, President Néstor Kirchner didn't like the political and budget hits from high inflation. After a politicized personnel purge in 2002, he changed the inflation measures. Conveniently, the new numbers showed lower inflation and therefore lower interest payments on the government's inflation-linked bonds. Investor and public confidence in the objectivity of the inflation statistics evaporated. His wife and successor Cristina Kirchner is now trying to grab the central bank's reserves to pay for the country's debt.

America has not been immune from this dangerous numbers game. Every president is guilty of spinning unpleasant statistics. President Richard Nixon even thought there was a conspiracy against him at the Bureau of Labor Statistics. But President Barack Obama has taken it to a new level. His laudable attempt at transparency in counting the number of jobs "created or saved" by the stimulus bill has degenerated into farce and was just junked this week.

The administration has introduced the new notion of "jobs saved" to take credit where none was ever taken before. It seems continually to confuse gross and net numbers. For example, it misses the jobs lost or diverted by the fiscal stimulus. And along with the congressional leadership it hypes the number of "green jobs" likely to be created from the explosion of spending, subsidies, loans and mandates, while ignoring the job losses caused by its taxes, debt, regulations and diktats.

The president and his advisers—their credibility already reeling from exaggeration (the stimulus bill will limit unemployment to 8%) and reneged campaign promises (we'll go through the budget "line-by-line")—consistently imply that their new proposed regulation is a free lunch. When the radical attempt to regulate energy and the environment with the deeply flawed cap-and-trade bill is confronted with economic reality, instead of honestly debating the trade-offs they confidently pronounce that it boosts the economy. They refuse to admit that it simply boosts favored sectors and firms at the expense of everyone else.

Rabid environmentalists have descended into a separate reality where only green counts. It's gotten so bad that the head of the California Air Resources Board, Mary Nichols, announced this past fall that costly new carbon regulations would boost the economy shortly after she was told by eight of the state's most respected economists that they were certain these new rules would damage the economy. The next day, her own economic consultant, Harvard's Robert Stavis, denounced her statement as a blatant distortion.

Scientists are expected to make sure their findings are replicable, to make the data available, and to encourage the search for new theories and data that may overturn the current consensus. This is what Galileo, Darwin and Einstein—among the most celebrated scientists of all time—did. But some climate researchers, most notably at the University of East Anglia, attempted to hide or delete temperature data when that data didn't show recent rapid warming. They quietly suppressed and replaced the numbers, and then attempted to squelch publication of studies coming to different conclusions.

The Obama administration claims a dubious "Keynesian" multiplier of 1.5 to feed the Democrats' thirst for big spending. The administration's idea is that virtually all their spending creates jobs for unemployed people and that additional rounds of spending create still more—raising income by $1.50 for each dollar of government spending. Economists differ on such multipliers, with many leading figures pegging them at well under 1.0 as the government spending in part replaces private spending and jobs. But all agree that every dollar of spending requires a present value of a dollar of future taxes, which distorts decisions to work, save, and invest and raises the cost of the dollar of spending to well over a dollar. Thus, only spending with large societal benefits is justified, a criterion unlikely to be met by much current spending (perusing the projects on recovery.gov doesn't inspire confidence).

Even more blatant is the numbers game being used to justify health-insurance reform legislation, which claims to greatly expand coverage, decrease health-insurance costs, and reduce the deficit. That magic flows easily from counting 10 years of dubious Medicare "savings" and tax hikes, but only six years of spending; assuming large cuts in doctor reimbursements that later will be cancelled; and making the states (other than Sen. Ben Nelson's Nebraska) pay a big share of the cost by expanding Medicaid eligibility. The Medicare "savings" and payroll tax hikes are counted twice—first to help pay for expanded coverage, and then to claim to extend the life of Medicare.

One piece of good news: The public isn't believing much of this out-of-control spin. Large majorities believe the health-care legislation will raise their insurance costs and increase the budget deficit. Most Americans are highly skeptical of the claims of climate extremists. And they have a more realistic reaction to the extraordinary deterioration in our public finances than do the president and Congress.

As a society and as individuals, we need to make difficult, even wrenching choices, often with grave consequences. To base those decisions on highly misleading, biased, and even manufactured numbers is not just wrong, but dangerous.

Squandering their credibility with these numbers games will only make it more difficult for our elected leaders to enlist support for difficult decisions from a public increasingly inclined to disbelieve them.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush

Bob Jensen's threads on The Sad State of Governmental Accounting and Accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

University of Illinois at Chicago Report on Massive Political Corruption in Chicago
"Chicago Is a 'Dark Pool Of Political Corruption'," Judicial Watch, February 22, 2010 ---
http://www.judicialwatch.org/blog/2010/feb/dark-pool-political-corruption-chicago

A major U.S. city long known as a hotbed of pay-to-play politics infested with clout and patronage has seen nearly 150 employees, politicians and contractors get convicted of corruption in the last five decades.

Chicago has long been distinguished for its pandemic of public corruption, but actual cumulative figures have never been offered like this. The astounding information is featured in a lengthy report published by one of Illinois’s biggest public universities.

Cook County, the nation’s second largest, has been a “dark pool of political corruption” for more than a century, according to the informative study conducted by the University of Illinois at Chicago, the city’s largest public college. The report offers a detailed history of corruption in the Windy City beginning in 1869 when county commissioners were imprisoned for rigging a contract to paint City Hall.

It’s downhill from there, with a plethora of political scandals that include 31 Chicago alderman convicted of crimes in the last 36 years and more than 140 convicted since 1970. The scams involve bribes, payoffs, padded contracts, ghost employees and whole sale subversion of the judicial system, according to the report. 

Elected officials at the highest levels of city, county and state government—including prominent judges—were the perpetrators and they worked in various government locales, including the assessor’s office, the county sheriff, treasurer and the President’s Office of Employment and Training. The last to fall was renowned political bully Isaac Carothers, who just a few weeks ago pleaded guilty to federal bribery and tax charges.

In the last few years alone several dozen officials have been convicted and more than 30 indicted for taking bribes, shaking down companies for political contributions and rigging hiring. Among the convictions were fraud, violating court orders against using politics as a basis for hiring city workers and the disappearance of 840 truckloads of asphalt earmarked for city jobs. 

A few months ago the city’s largest newspaper revealed that Chicago aldermen keep a secret, taxpayer-funded pot of cash (about $1.3 million) to pay family members, campaign workers and political allies for a variety of questionable jobs. The covert account has been utilized for decades by Chicago lawmakers but has escaped public scrutiny because it’s kept under wraps. 

Judicial Watch has extensively investigated Chicago corruption, most recently the conflicted ties of top White House officials to the city, including Barack and Michelle Obama as well as top administration officials like Chief of Staff Rahm Emanual and Senior Advisor David Axelrod. In November Judicial Watch sued Chicago Mayor Richard Daley's office to obtain records related to the president’s failed bid to bring the Olympics to the city.

Bob Jensen's threads on the sad state of governmental accounting are at
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

Bob Jensen's threads on political corruption are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/fraudUpdates.htm

"How to Guard Against Stimulus Fraud:  Based on past experience, thieves may rip off the taxpayers for $100 billion," by Daniel J. Castleman, The Wall Street Journal, January 13, 2010 ---
http://online.wsj.com/article/SB10001424052748703948504574648331267709784.html#mod=djemEditorialPage

The Obama administration—and state and local governments—should brace themselves for fraud on an Olympic scale as hundreds of billions of taxpayer dollars continue to pour into job creation efforts.

Where there are government handouts, fraud, waste and abuse are rarely far behind. The sheer scale of the first and expected second stimulus packages combined with the multitiered distribution channel—from Washington to the states to community agencies to contractors and finally to workers—are simply irresistible catnip to con men and thieves.

There are already warning signs. The Department of Energy's inspector general said in a report in December that staffing shortages and other internal weaknesses all but guarantee that at least some of the agency's $37 billion economic-stimulus funds will be misused. A tenfold increase in funding for an obscure federal program that installs insulation in homes has state attorneys general quietly admitting there is little hope of keeping track of the money.

While I was in charge of investigations at the Manhattan District Attorney's office, we brought case after case where kickbacks, bid-rigging, false invoicing schemes and outright theft routinely amounted to a tenth of the contract value. This was true in industries as diverse as the maintenance of luxury co-ops and condos, interior construction and renovation of office buildings, court construction projects, dormitory construction projects, even the distribution of copy paper. In one insurance fraud case, the schemers actually referred to themselves as the "Ten Percenters."

Based on past experience, the cost of fraud involving federal government stimulus outlays of more than $850 billion and climbing could easily reach $100 billion. Who will prevent this? Probably no one, particularly at the state and local level.

New York, for instance, has an aggressive inspector general's office, with experienced and dedicated professionals. But, it is already woefully understaffed—with a head count of only 62 people—to police the state's already existing agencies and programs. There is simply no way that office can effectively scrutinize the influx of $31 billion in state stimulus money.

There is a solution however, which is to set aside a small percentage of the money distributed to fund fraud prevention and detection programs. This will ensure that states and municipalities can protect projects from fraud without tapping already thinly stretched resources.

Meaningful fraud prevention, detection and investigation can be funded by setting aside no more than 2% of the stimulus money received. For example, if a county is to receive $50 million for an infrastructure project, $1 million should be set aside to fund antifraud efforts; if it costs less, the remainder can be returned to the project's budget.

While the most obvious option might be to simply pump the fraud prevention funds into pre-existing law enforcement agencies, that would be a mistake. Government agencies take too long to staff up and rarely staff down.

A better idea is to tap the former government prosecutors, regulators and detectives with experience in fraud investigations now working in the private sector. If these resources can be harnessed, effective watchdog programs can be put in place in a timely manner. Competition between private-sector bidders will also lower the cost.

Some might object to providing a "windfall" to private companies. Any such concern is misplaced. One should not look at the 2% spent, but rather the 8% potentially saved. Moreover, consider the alternative: law enforcement agencies swamped trying to stem the tide of corruption on a shoestring and a prayer.

There will always be individuals who will rip off money meant for public projects. In the aftermath of the 9/11 attacks, and Hurricane Katrina hundreds of people were prosecuted for trying to steal relief funds. But the stimulus funding represents the kind of payday even the most ambitious fraudster could never have imagined

To avoid a stimulus fraud Olympics that will be impossible to clean up, it is better to spend a little now to save a lot later. The savings could put honest people to work and fraudsters out of business.

Mr. Castleman, a former chief assistant Manhattan district attorney, is a managing director at FTI Consulting.

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on The Sad State of Governmental Accounting and Accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

The Most Criminal Class is Writing the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

"Why the Success of "Obama Care" Could Be Riskier Than Failure," by William D. Eggers and John O'Leary, Harvard Business School Blog, December 23, 2009 --- http://blogs.hbr.org/cs/2009/12/why_the_success_of_obama_care.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

When President Obama launched his health reform effort, more than anything he wanted to avoid the mistakes of the 1993-1994 attempt at health care reform. His advisors have said repeatedly over these past months that they want something passed.

Now it appears they will get their wish. It's certainly true that one way "Obama Care" could fail — the one everybody has been worrying about — is by never being passed into law. Another way it can fail, however, is if a poorly designed bill passes and then wreaks havoc during implementation. Indeed, this sort of design and execution failure could do greater lasting damage to the goals of health care reform than mere failure to pass a bill.

The Obama administration, and all reform-minded public agencies and organizations, would do well to avoid some of the mistakes of 2004, when an all-Republican Congress and White House rammed through a Medicare prescription drug benefit. The messy, ill-considered implementation of what in essence was a massive giveaway program generated huge initial ill-will among seniors, the very group the benefit was designed to serve.

Ultimately, the GOP's Medicare prescription drug reform stands as a model for achieving short-term legislative success that creates an implementation nightmare. In more general terms, those pushing for change saw official approval as the finish line rather than, more accurately, as the starting line.

Here are some of the key risks that the 2004 Congress should have had in mind in their push to get Medicare reform done — and which should be front-of-mind for change-leaders now:

The risk of ramming it through. The process by which Medicare Part D became legislative reality wasn't pretty. It involved low-balled cost estimates, an unprecedented all-night vote, and high-pressure tactics from Republicans to sway votes that cost Tom DeLay an ethics rebuke. With all the high-stakes political gamesmanship, any actual review of the proposed policy for "implementability" was minimal to non-existent. A related lesson as the Democrats now drive health care and other reforms through Congress: political memory rarely fades. Cut-throat tactics lead inexorably to future in-kind retribution. Public leaders must stop the vicious cycle in which avenging political battle scars trumps practical lessons learned from prior missteps of execution.

Forgetting who you're designing the reform for. Seniors were totally confused by their new "benefit." "This whole program is so complicated that I've stayed awake thinking, 'How can a brain come up with anything like this?'" lamented a seventy-nine-year old, retired business manager. Americans do not normally lie awake pondering the design of a federal program. But the Medicare prescription drug program was something special. "I have a PhD, and it's too complicated to suit me," said a seventy-three-year old retired, chemist.

Giving the nation's elderly voters apoplexy was not what Republicans had intended. But lawmakers had designed the legislation primarily to curry favor with other "stakeholders" — big pharmaceutical firms, health plans, employers, rural hospitals, and senior advocates such as the AARP — instead of designing it to work in the real world for the "end consumer" of the reform, i.e. everyday senior citizens.

The number of plans the typical senior had to sort through depended on where he or she lived. In Colorado, retirees faced a choice of 55 plans from 24 companies. Residents of Pennsylvania selected from 66 plans.

"The program is so poorly designed and is creating so much confusion that it's having a negative effect on most beneficiaries," said one pharmacist. "It's making people cynical about the whole process — the new program, the government's help."

Unrealistic timeline and scale. "No company would ever launch countrywide a new product to 40 million people all at once," explained Kathleen Harrington, the Bush political appointee at the Centers for Medicare and Medicaid Services who led the launch of Medicare Part D. "No one would ever say that you have to get all of the platforms, all of the systems developed for this and working within six months." Nobody except Congress, who in fact tried to do this, giving scant consideration to implementation challenges and the inherent difficulty in changing a well-established system.

The launch from hell. The computer system cobbled together to support the new benefit crashed the very first day coverage took effect. System errors slapped seniors with excessive charges or denied them their drugs altogether. Computer glitches generated calls to the telephone hotlines, which quickly became overloaded.

While eventually the program was turned around thanks to some heroic efforts by senior federal executives, the days and weeks following the January 2006 opening of benefit enrollment were a disaster — caused primarily by a dysfunctional design process and lack of an implementation mindset.

Lessons learned. Both Medicare Part D, as well as what we have seen of the current, huge effort toward health care reform, highlight why government has such a hard time dealing with complex problems. But the basic truth is simple: ultimately, to be successful, a health reform bill has to do two things — it has to pass through Congress, and it has to actually work in the real world.

These two considerations often work against each other. For political reasons, artificial deadlines are introduced. To appease interest groups, regulations are altered, or goodies buried in the bill. These measures are almost always taken to secure passage, but with little (or not enough) thought given to how they might hinder implementation.

Given the problems that arose in the comparatively simple launch of a new drug benefit to seniors, policymakers should be examining every risk inherent in implementing any serious overhaul of one-seventh of our economy. The legislative process needs to produce health care reform that can work in the real world or the backlash from a failed implementation will be furious.

William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

Bob Jensen's threads on health care are at
http://www.trinity.edu/rjensen/Health.htm

"Public Policy as Public Corruption," by Michael Gerson, Townhall, December  23, 2009 ---
http://townhall.com/columnists/MichaelGerson/2009/12/23/public_policy_as_public_corruption

"Several Democrats, including some closed allied to Speaker Nancy Pelosi, are the subject of ethics complaints," by Holly Bailey, Newsweek Magazine, October 3, 2009 --- http://www.newsweek.com/id/216687

Nancy Pelosi likes to brag that she's "drained the swamp" when it comes to corruption in the House, but ethics problems could come back to haunt Democrats in 2010. Democrats are currently the subject of 12 of the 16 complaints pending before the House ethics committee. Two of the lawmakers under scrutiny—Reps. Jack Murtha and Charlie Rangel—have close ties to Pelosi, who has come under criticism for not asking them to resign their committee posts. Murtha, chairman of a key defense-appropriations subcommittee, is is not formally under investigation but the ethics committee is reviewing political contributions he and other House lawmakers received from lobbying firm whose clients received millions of dollars in Defense earmarks. Rangel, chairman of the Ways and Means Committee, is facing scrutiny for not fully disclosing assets. The ethics committee is also looking into ties between Rangel and a developer who leased rent-controlled apartments to the congressman, and whether Rangel improperly used his House office to raise funds for a public policy institute in his name. Rangel and Murtha deny any wrongdoing. (Another lawmaker under investigation: Rep. Jesse Jackson Jr., who, according to the committee, "may have offered to raise funds" for then–Illinois governor Rod Blagojevich in exchange for the president's Senate seat—a charge Jackson denies. The panel deferred its probe at the request of the Justice Department, which is conducting its own inquiry.)

Pelosi has said little about Rangel's ethics problems, or those involving other Democrats; a Pelosi spokesman, Brendan Daly, e-mails NEWSWEEK, "The speaker has said that [Rangel] should not step aside while the independent, bipartisan ethics committee is investigating."

But watchdog groups, not to mention Republicans, are calling Pelosi hypocritical (as if they weren't equally hypocritical) since Democrats won back control of the House by, in part, trashing the GOP's ethics lapses. Republicans already plan to use the ethics issue against Democrats in 2010. Though Rangel and Murtha aren't as known as Tom DeLay, the GOP poster boy for scandal in 2006, the party aims to change that: this week the House GOP plans to introduce a resolution calling on Rangel to resign his committee post.

Pelosi "promised to run the most ethical Congress in history," says Ken Spain, a spokesman for the National Republican Congressional Committee, "and instead of cracking down on corruption, she promotes it (to garner votes in Congress)." Daly responds, "Since Democrats took control of Congress, we have strengthened the ethics process." (Daly has some magnificent ocean front property for sale in Arizona.)

"Can morality be brought to market?" by Prem Sikka, The Guardian, October 7, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/oct/07/bae-business-ethics-morality-markets

The BAE bribery scandal has once again brought discussions of business ethics to the fore. Politicians also claim to be interested in promoting morality in markets, but have not explained how this can be achieved.

There is no shortage of companies wrapping themselves in claims of ethical conduct to disarm critics. BAE boasts a global code of conduct, which claims that "its leaders will act ethically, promote ethical conduct both within the company and in the markets in which we operate". In the light of the revelations about the way the company secured its business contracts, such claims must be doubted.

BAE is not alone. There is a huge gap between corporate talk and action, and a few illustrations would help to highlight this gap. KPMG is one of the world's biggest accountancy firms. Its global code of conduct states that the firm is committed to "acting lawfully and ethically, and encouraging this behaviour in the marketplace … maintaining independence and objectivity, and avoiding conflicts of interest". Yet the firm created an extensive organisational structure to devise tax avoidance and tax evasion schemes. Former managers have been found guilty of tax evasion and the firm was fined $456m for "criminal wrongdoing".

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.

UBS, a leading bank, has been fined $780m by the US authorities for facilitating tax evasion, but it told the world that "UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards."

British Airways paid a fine of £270m after admitting price fixing on fuel surcharges on its long-haul flights while its code of conduct promised that it would behave responsibly and ethically towards its customers.

These are just a tiny sample that shows that corporations say one thing but do something completely different. This hypocrisy is manufactured by corporate culture, and unless that process is changed there is no prospect of securing moral corporations or markets.

The key issue is that companies cannot buck the systemic pressures to produce ever higher profits. Capitalism is not accompanied by any moral guidance on how high these profits have to be, but shareholders always demand more. Markets do not ask any questions about the quality of profits or the human consequences of ever-rising returns. Behind a wall of secrecy, company directors devise plans to fleece taxpayers and customers to increase profits, and are rewarded through profit-related remuneration schemes. The social system provides incentives for unethical behaviour.

Within companies, daily routines encourage employees to prioritise profit-making even if that is unethical. For example, tax departments within major accountancy firms operate as profit centres. The performance of their employees is assessed at regular intervals, and those generating profits are rewarded with salary increases and career advancements. In time, the routines of devising tax avoidance schemes and other financial dodges become firmly established norms, and employees are desensitised to the consequences.

With increasing public scepticism, and pressure from consumer groups and non-governmental organisations (NGOs), companies manage their image by publishing high-sounding statements. Ethics itself has become big business, and armies of consultants and advisers are available for hire to enable companies to manage their image. No questions are raised about the internal culture or the economic incentives for misbehaviour. It is far cheaper for companies to publish glossy brochures than to pay taxes or improve customer and public welfare. The payment of fines has become just another business cost.

Making capitalism ethical is a tough task – and possibly a hopeless one. Any policy for encouraging ethical corporate conduct has to change the nature of capitalism and corporations so that companies are run for the benefit of all stakeholders, rather than just shareholders. Pressures to change corporate culture could be facilitated by closing down persistently offending companies, imposing personal penalties on offending executives and offering bounties to whistleblowers.

Some Great Role Models --- Ha! Ha!
"Dozens in Congress under ethics inquiry:
AN ACCIDENTAL DISCLOSURE Document was found on file-sharing network," by Ellen Nakashima and Paul Kane, The Washington Post, October 30, 2009 --- Click Here

The report appears to have been inadvertently placed on a publicly accessible computer network, and it was provided to The Washington Post by a source not connected to the congressional investigations. The committee said Thursday night that the document was released by a low-level staffer.

The ethics committee is one of the most secretive panels in Congress, and its members and staff members sign oaths not to disclose any activities related to its past or present investigations. Watchdog groups have accused the committee of not actively pursuing inquiries; the newly disclosed document indicates the panel is conducting far more investigations than it had revealed.

Shortly after 6 p.m. Thursday, the committee chairman, Zoe Lofgren (D-Calif.), interrupted a series of House votes to alert lawmakers about the breach. She cautioned that some of the panel's activities are preliminary and not a conclusive sign of inappropriate behavior.

"No inference should be made as to any member," she said.

Rep. Jo Bonner (Ala.), the committee's ranking Republican, said the breach was an isolated incident.

The 22-page "Committee on Standards Weekly Summary Report" gives brief summaries of ethics panel investigations of the conduct of 19 lawmakers and a few staff members. It also outlines the work of the new Office of Congressional Ethics, a quasi-independent body that initiates investigations and provides recommendations to the ethics committee. The document indicated that the office was reviewing the activities of 14 other lawmakers. Some were under review by both ethics bodies.

A broader inquiry

Ethics committee investigations are not uncommon. Most result in private letters that either exonerate or reprimand a member. In some rare instances, the censure is more severe.

Many of the broad outlines of the cases cited in the July document are known -- the committee announced over the summer that it was reviewing lawmakers with connections to the now-closed PMA Group, a lobbying firm. But the document indicates that the inquiry was broader than initially believed. It included a review of seven lawmakers on the House Appropriations defense subcommittee who have steered federal money to the firm's clients and have also received large campaign contributions.

The document also disclosed that:

-- Ethics committee staff members have interviewed House Ways and Means Chairman Charles B. Rangel (D-N.Y.) about one element of the complex investigation of his personal finances, as well as the lawmaker's top aide and his son. Rangel said he spoke with ethics committee staff members regarding a conference that he and four other members of the Congressional Black Caucus attended last November in St. Martin. The trip initially was said to be sponsored by a nonprofit foundation run by a newspaper. But the three-day event, at a luxury resort, was underwritten by major corporations such as Citigroup, Pfizer and AT&T. Rules passed in 2007, shortly after Democrats reclaimed the majority following a wave of corruption cases against Republicans, bar private companies from paying for congressional travel.

Rangel said he has not discussed other parts of the investigation of his finances with the committee. "I'm waiting for that, anxiously," he said.

The Justice Department has told the ethics panel to suspend a probe of Rep. Alan B. Mollohan (D-W.Va.), whose personal finances federal investigators began reviewing in early 2006 after complaints from a conservative group that he was not fully revealing his real estate holdings. There has been no public action on that inquiry for several years. But the department's request in early July to the committee suggests that the case continues to draw the attention of federal investigators, who often ask that the House and Senate ethics panels refrain from taking action against members whom the department is already investigating.

Mollohan said that he was not aware of any ongoing interest by the Justice Department in his case and that he and his attorneys have not heard from federal investigators. "The answer is no," he said.

-- The committee on June 9 authorized issuance of subpoenas to the Justice Department, the National Security Agency and the FBI for "certain intercepted communications" regarding Rep. Jane Harman (D-Calif.). As was reported earlier this year, Harman was heard in a 2005 conversation agreeing to an Israeli operative's request to try to obtain leniency for two pro-Israel lobbyists in exchange for the agent's help in lobbying House Speaker Nancy Pelosi (D-Calif.) to name her chairman of the intelligence committee. The department, a former U.S. official said, declined to respond to the subpoena.

Harman said that the ethics committee has not contacted her and that she has no knowledge that the subpoena was ever issued. "I don't believe that's true," she said. "As far as I'm concerned, this smear has been over for three years."

In June 2009, a Justice Department official wrote in a letter to an attorney for Harman that she was "neither a subject nor a target" of a criminal investigation.

Because of the secretive nature of the ethics committee, it was difficult to assess the current status of the investigations cited in the July document. The panel said Thursday, however, that it is ending a probe of Rep. Sam Graves (R-Mo.) after finding no ethical violations, and that it is investigating the financial connections of two California Democrats.

The committee did not detail the two newly disclosed investigations. However, according to the July document, Rep. Maxine Waters, a high-ranking member of the House Financial Services Committee, came under scrutiny because of activities involving OneUnited Bank of Massachusetts, in which her husband owns at least $250,000 in stock.

Waters arranged a September 2008 meeting at the Treasury Department where OneUnited executives asked for government money. In December, Treasury selected OneUnited as an early participant in the bank bailout program, injecting $12.1 million.

The other, Rep. Laura Richardson, may have failed to mention property, income and liabilities on financial disclosure forms.

File-sharing

The committee's review of investigations became available on file-sharing networks because of a junior staff member's use of the software while working from home, Lofgren and Bonner said in a statement issued Thursday night. The staffer was fired, a congressional aide said.

The committee "is taking all appropriate steps to deal with this issue," they said, noting that neither the committee nor the House's information systems were breached in any way.

"Peer-to-peer" technology has previously caused inadvertent breaches of sensitive financial, defense-related and personal data from government and commercial networks, and it is prohibited on House networks.

House administration rules require that if a lawmaker or staff member takes work home, "all users of House sensitive information must protect the confidentiality of sensitive information" from unauthorized disclosure.

Leo Wise, chief counsel for the Office of Congressional Ethics, declined to comment, citing office policy against confirming or denying the existence of investigations. A Justice Department spokeswoman also declined to comment, citing a similar policy.

The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

This is the way most fraud arises on Wall Street and it does not take even a high school education to understand how it works
"Former RNC Finance Chair pleads guilty to $1 million bribery," by Mark Hemingway, Washington Examiner, December 4, 2009 ---
http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Former-RNC-Finance-Chair-pleads-guilty-to-1-million-bribery-78554297.html

Elliott Broidy, the former Finance Chairman of the Republican National Committee, plead guilty yesterday to offering $1 million bribes to officials with New York state's pension funds. In return, Broidy got a $250 million investement in the Wall Street firm he worked for:

Broidy, who also resigned as chairman of Markstone Capital Partners, the private equity firm, admitted that he had paid for luxury trips to hotels in Israel and Italy for pension staffers and their relatives -- including first-class flights and a helicopter tour. Broidy funneled the money through charities and submitted false receipts to the state comptroller's office to cover his tracks.

The California financier, who was the GOP finance chairman in 2008, also paid thousands of dollars toward rent and other expenses for former "Mod Squad" star Peggy Lipton, who was dating a high-ranking New York pension official at the time.

Broidy now faces up to four years in jail and has to return some $18 million. Since the scandal with New York's pension fund broke, it has so far led to five guilty pleas and $100 million in public funds have been returned. However, Pro-Publica -- which has been doggedly covering the story -- notes that nothing has been done to prevent future corruption:

The system that allowed corruption to flourish in New York, where $110 billion in retirement savings are controlled by a sole trustee with no board oversight, is still in place.

Bob Jensen's Fraud Updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

Are there any truly honest local, state, and Federal officials ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

"Obama Administration Steers Lucrative No-Bid Contract for Afghan Work to Dem Donor," Free Republic, January 25, 2010 ---
http://www.freerepublic.com/focus/f-news/2436733/posts

Despite President Obama's long history of criticizing the Bush administration for "sweetheart deals" with favored contractors, the Obama administration this month awarded a $25 million federal contract for work in Afghanistan to a company owned by a Democratic campaign contributor without entertaining competitive bids, Fox News has learned. The contract, awarded on Jan. 4 to Checchi & Company Consulting, Inc., a Washington-based firm owned by economist and Democratic donor Vincent V. Checchi, will pay the firm $24,673,427 to provide "rule of law stabilization services" in war-torn Afghanistan.

"Big government's business cronies," by John Stossel, WorldNetDaily, February 3, 2010 ---
http://www.wnd.com/index.php?fa=PAGE.view&pageId=123960

Many window-making companies struggle because of the recession's effect on home building. But one little window company, Serious Materials, is "booming," says Fortune. "On a roll," according to Inc. magazine, which put Serious' CEO on its cover, with a story titled: "How to Build a Great Company."

The Minnesota Freedom Foundation tells me that this same little window company also gets serious attention from the most visible people in America.

Vice President Joe Biden appeared at the opening of one of its plants. CEO Kevin Surace thanked him for his "unwavering support." "Without you and the recovery ("stimulus") act, this would not have been possible," Surace said.

Biden returned the compliment: "You are not just churning out windows; you are making some of the most energy-efficient windows in the world. I would argue the most energy-efficient windows in the world."

Gee, other window-makers say their windows are just as energy efficient, but the vice president didn't visit them.

Biden laid it on pretty thick for Serious Materials: "This is a story of how a new economy predicated on innovation and efficiency is not only helping us today but inspiring a better tomorrow."

Serious doesn't just have the vice president in his corner. It's got President Obama himself.

Milton Friedman's classic "Capitalism and Freedom" explains how individual liberty can only thrive when accompanied by economic liberty

Company board member Paul Holland had the rare of honor of introducing Obama at a "green energy" event. Obama then said: "Serious Materials just reopened ... a manufacturing plant outside of Pittsburgh. These workers will now have a new mission: producing some of the most energy-efficient windows in the world."

How many companies get endorsed by the president of the United States?

When the CEO said that opening his factory wouldn't have been possible without the Obama administration, he may have known something we didn't. Last month, Obama announced a new set of tax credits for so-called green companies. One window company was on the list: Serious Materials. This must be one very special company.

But wait, it gets even more interesting.

On my Fox Business Network show on "crony capitalism," I displayed a picture of administration officials and so-called "energy leaders" taken at the U.S. Department of Energy. Standing front and center was Cathy Zoi, who oversees $16.8 billion in stimulus funds, much of it for weatherization programs that benefit Serious.

The interesting twist is that Zoi happens to be the wife of Robin Roy, who happens to be vice president of "policy" at Serious Windows.

Of all the window companies in America, maybe it's a coincidence that the one that gets presidential and vice presidential attention and a special tax credit is one whose company executives give thousands of dollars to the Obama campaign and where the policy officer spends nights at home with the Energy Department's weatherization boss.

Or maybe not.

There may be nothing illegal about this. Zoi did disclose her marriage and said she would recuse herself from any matter that had a predictable effect on her financial interests.

But it sure looks funny to me, and it's odd that the liberal media have so much interest in this one company. Rachel Maddow of MSNBC, usually not a big promoter of corporate growth, gushed about how Serious Materials is an example of how the "stimulus" is working.

When we asked the company about all this, a spokeswoman said, "We don't comment on the personal lives of our employees." Later she called to say that my story is "full of lies."

But she wouldn't say what those lies are.

On its website, Serious Materials says it did not get a taxpayer subsidy. But that's just playing with terms. What it got was a tax credit, an opportunity that its competitors did not get: to keep money it would have paid in taxes. Let's not be misled. Government is as manipulative with selective tax credits as it is with cash subsidies. It would be more efficient to cut taxes across the board. Why should there be favoritism?

Because politicians like it. Big, complicated government gives them opportunities to do favors for their friends.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/fraudUpdates.htm

The Greatest Swindle in the History of the World
Paulson and Geithner Lied Big Time

"The Ugly AIG Post-Mortem:  The TARP Inspector General's report has a lot more to say about the rating agencies than it does about Goldman Sachs," by Holman Jenkins, The Wall Street Journal, November 24m 2009 --- Click Here

A year later, the myrmidons of the media have gotten around to the question of why, after the government took over AIG, it paid 100 cents on the dollar to honor the collateral demands of AIG's subprime insurance counterparties.

By all means, read TARP Inspector General Neil Barofsky's report on the AIG bailout—but read it honestly.

It does not say AIG's bailout was a "backdoor bailout" of Goldman Sachs. It does not say the Fed was remiss in failing to require Goldman and other counterparties to settle AIG claims for pennies on the dollar.

It does not for a moment doubt the veracity of officials who say their concern was to stem a systemic panic that might have done lasting damage to the U.S. standard of living.

To be sure, Mr. Barofsky has some criticisms to offer, but the biggest floats inchoate between the lines of a widely overlooked section headed "lessons learned," which focuses on the credit rating agencies. The section notes not only the role of the rating agencies, with their "inherently conflicted business model," in authoring the subprime mess in the first place—but also the role of their credit downgrades in tipping AIG into a liquidity crisis, in undermining the Fed's first attempt at an AIG rescue, and in the decision of government officials "not to pursue a more aggressive negotiating policy to seek concessions from" AIG's counterparties.

Though not quite spelling it out, Mr. Barofsky here brushes close to the last great unanswered question about the AIG bailout. Namely: With the government now standing behind AIG, why not just tell Goldman et al. to waive their collateral demands since they now had the world's best IOU—Uncle Sam's?

Congress might not technically have put its full faith and credit behind AIG, but if banks agreed to accept this argument, and Treasury and Fed insisted on it, and the SEC upheld it, the rating agencies would likely have gone along. No cash would have had to change hands at all.

This didn't happen, let's guess, because the officials—Hank Paulson, Tim Geithner and Ben Bernanke—were reluctant to invent legal and policy authority out of whole cloth to overrule the ratings agencies—lo, the same considerations that also figured in their reluctance to dictate unilateral haircuts to holders of AIG subprime insurance.

Of course, the thinking now is that these officials, in bailing out AIG, woulda, shoulda, coulda used their political clout to force such haircuts, but quailed when the banks, evil Goldman most of all, insisted on 100 cents on the dollar.

This story, in its gross simplification, is certainly wrong. Goldman and others weren't in the business of voluntarily relinquishing valuable claims. But the reality is, in the heat of the crisis, they would have acceded to any terms the government dictated. Washington's game at the time, however, wasn't to nickel-and-dime the visible cash transfers to AIG. It was playing for bigger stakes—stopping a panic by asserting the government's bottomless resources to uphold the IOUs of financial institutions.

What's more, if successful, these efforts were certain to cause the AIG-guaranteed securities to rebound in value—as they have. Money has already flowed back to AIG and the Fed (which bought some of the subprime securities to dissolve the AIG insurance agreements) and is likely to continue to do so for the simple reason that the underlying payment streams are intact.

Never mind: The preoccupation with the Goldman payments amounts to a misguided kind of cash literalism. For the taxpayer has assumed much huger liabilities to keep homeowners in their homes, to keep mortgage payments flowing to investors, to fatten the earnings of financial firms, etc., etc. These liabilities dwarf the AIG collateral calls, inevitably benefit Goldman and other firms, and represent the real cost of our failure to create a financial system in which investors (a category that includes a lot more than just Goldman) live and die by the risks they voluntarily take without taxpayers standing behind them.

No, Moody's and S&P are not the cause of this policy failure—yet Mr. Barofsky's half-articulated choice to focus on them is profound. For the role the agencies have come to play in our financial system amounts to a direct, if feckless and weak, attempt to contain the incentives that flow from the government's guaranteeing of so many kinds of private liabilities, from the pension system and bank deposits to housing loans and student loans.

The rating agencies' role as gatekeepers to these guarantees is, and was, corrupting, but the solution surely is to pare back the guarantees themselves. Overreliance on rating agencies, with their "inherently conflicted business model," was ultimately a product of too much government interference in the allocation of credit in the first place.

The Mother of Future Lawsuits Directly Against Credit Rating Agencies and I, ndirectly Against Auditing Firms

It has been shown how Moody's and some other credit rating agencies sold AAA ratings for securities and tranches that did not deserve such ratings --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

My friend Larry sent me the following link indicating that a lawsuit in Ohio may shake up the credit rating fraudsters.
Will 49 other states and thousands of pension funds follow suit?
Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.
http://www.nytimes.com/2009/11/21/business/21ratings.html?em

Jensen Comment
The credit raters will rely heavily on the claim that they relied on the external auditors who, in turn, are being sued for playing along with fraudulent banks that grossly underestimated loan loss reserves on poisoned subprime loan portfolios and poisoned tranches sold to investors --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bad things happen in court where three or more parties start blaming each other for billions of dollars of losses that in many cases led to total bank failures and the wiping out of all the shareholders in those banks, including the pension funds that invested in those banks. A real test is the massive lawsuit against Deloitte's auditors in the huge Washington Mutual (WaMu) shareholder lawsuit.

"Ohio Sues Rating Firms for Losses in Funds," by David Segal, The New York Times, November 20m 2009 --- Click Here

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

“Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

"Rating agencies lose free-speech claim," by Jonathon Stempel, Reuters, September 3, 2009 ---
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE5824KN20090903

There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by down grading your bonds. And believe me, it’s not clear sometimes who’s more powerful.  The most that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out.
Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert of Financial Matters:  Two Thumbs Down for Credit Reporting Agencies," Washington University Law Quarterly, Volume 77, No. 3, 1999 --- http://www.trinity.edu/rjensen/FraudCongressPartnoyWULawReview.htm 

Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html

"How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 --- http://www.mcclatchydc.com/homepage/story/77244.html

Paulson and Geithner Lied Big Time:  The Greatest Swindle in the History of the World
What was their real motive in the greatest fraud conspiracy in the history of the world?
Bombshell:  In 2008 and early 2009, Treasury Secretary leaders Paulson and Geithner told the media and Congress that AIG needed a global bailout due to not having cash reserves to meet credit default swap (systematic risk) obligations and insurance policy payoffs. On November 19, 2009 in Congressional testimony Geithner now admits that all this was a pack of lies. However, he refuses to resign as requested by some Senators.

"AIG and Systemic Risk Geithner says credit-default swaps weren't the problem, after all," Editors of The Wall Street Journal, November 20, 2009 --- Click Here

TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.

Hello?

For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

Both Treasury and the Fed say they think it would have been inappropriate for the government to muscle counterparties to accept haircuts, though the New York Fed tried to persuade them to accept less than par. Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?

Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might not have been able to pay claims to its insurance policy holders: "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world."

Yet, if there is one thing that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulated subsidiaries—where there was no CDS trading—then the Beltway narrative implodes.

Interestingly, in Treasury's official response to the Barofsky report, Assistant Secretary Herbert Allison explains why the department acted to prevent an AIG bankruptcy. He mentions the "global scope of AIG, its importance to the American retirement system, and its presence in the commercial paper and other financial markets." He does not mention CDS.

All of this would seem to be relevant to the financial reform that Treasury wants to plow through Congress. For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for restructuring the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure.

More broadly, lawmakers now have an opportunity to dig deeper into the nature of moral hazard and the restoration of a healthy financial system. Barney Frank and Chris Dodd are pushing to give regulators "resolution authority" for struggling firms. Under both of their bills, this would mean unlimited ability to spend unlimited taxpayer sums to prevent an unlimited universe of firms from failing.

Americans know that's not the answer, but what is the best solution to the too-big-to-fail problem? And how exactly does one measure systemic risk? To answer these questions, it's essential that we first learn the lessons of 2008. This is where reports like Mr. Barofsky's are valuable, telling us things that the government doesn't want us to know.

In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's report, Mr. Geithner said, "It's a great strength of our country, that you're going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight." He added, "Now, you're going to see a lot of conviction in this, a lot of strong views—a lot of it untainted by experience."

Mr. Geithner has a point about Monday-morning quarterbacking. He and others had to make difficult choices in the autumn of 2008 with incomplete information and often with little time to think, much less to reflect. But that was last year. The task now is to learn the lessons of that crisis and minimize the moral hazard so we can reduce the chances that the panic and bailout happen again.

This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

Jensen Comment
One of the first teller of lies was the highly respected Gretchen Morgenson of The New York Times who was repeating the lies told to her and Congress by the Treasury and the Fed. This was when I first believed that the problem at AIG was failing to have capital reserves to meet CDS obligations. I really believed Morgenson's lies in 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
 

Here's what I wrote in 2008 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Credit Default Swap (CDS)
This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

"Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 --- http://www.nytimes.com/2008/09/21/business/21gret.html
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 --- http://www.nytimes.com/2009/03/08/business/08gret.html

What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

You tube had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" --- http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
In particular note this video by Paddy Hirsch --- http://www.youtube.com/watch?v=kaui9e_4vXU
Paddy has some other YouTube videos about the financial crisis.

Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Bob Jensen's threads on why the infamous "Bailout" won't work --- http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity

More on the unfunded entitlements that Congress simply added to Social Security and Medicare hemorrhages
This may well affect payroll tax increases in the future

"Determining which employees are disabled under the new ADA regulations," AccountingWeb, November 19, 2009 ---
http://www.accountingweb.com/topic/cfo/determining-which-employees-are-disabled-under-new-ada-regulations

Wading into the depths of the Americans with Disabilities Act of 1990 to determine who is disabled and who is not has never been a simple task for employers or their employees. On January 1, 2009 amendments to the Act took effect but the new amendments left many unanswered questions. Now, as instructed by Congress, the U.S. Equal Employment Commission has proposed rules designed to bring some clarity to both employers and employees.

Whether that actually occurs remains to be seen, but it is imperative for companies to become familiar with the proposed rules, which represent some significant departures from the past. Why? Consider several scenarios and try to determine in which cases an employee is considered disabled and must be offered a reasonable accommodation:

A: An employee with post-traumatic stress disorder; B: An employee with cancer who is currently in remission; C: An employee with asthma that they treat with an inhaler; or D: An employee who wears contact lenses.

According to the EEOC's proposed rules, the answers are yes, yes, yes, and no. The rules are still being debated, but employers must make sure they understand which impairments may qualify as a disability, which may not and how to determine what falls into either category.

The Revised ADA Regulations

When the ADA Amendments Act of 2008 (ADAAA) took effect at the beginning of 2009, it brought some significant changes to the way that disabilities could be interpreted, even though it made few changes to the definition of a disability.

Under the ADAAA, a disability remains "an impairment that substantially limits one or more major life activities, a record of such an impairment, or being regarded as having such an impairment."

However, the new law made several important changes, which have spurred the EEOC's proposed rules. Those changes include:

Expanding the definition of major life activities to include walking, reading, and many major bodily functions, such as the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions. Ordering employers to not consider mitigating measures other than regular eyeglasses or contact lenses when determining whether an individual has a disability. Clarifying that an impairment that is episodic or in remission is a disability if it would substantially limit a major life activity when the impairment is active – that is, employees are disabled even if they are not showing symptoms of their disease, if the disease would qualify as a disability when the employee is experiencing symptoms.

The EEOC Weighs In

When the law was passed, the EEOC was directed to evaluate how employers should interpret the changes in the ADAAA, employees, and job applicants. In September, the commission did so when it issued its Notice of Proposed Rulemaking. According to the commission, the proposed rules – like the amended ADA – are meant to offer broad coverage to disabled individuals to the maximum extent allowed. The intent of the EEOC seems clear – the issue should be less about whether an employee or job applicant has a disability and more about whether discrimination has occurred.

The EEOC has also included a specific laundry list of impairments that "consistently meet" the definition of a disability – a list that is far more extensive than in the past. There are several other important aspects of the proposed rules, which are still being debated. Those aspects include:

Along with the list of impairments that consistently meet the definition of a disability, the proposed rules include examples of impairments that require more analysis to determine whether they are, in fact, disabilities, since these impairments may cause more difficulties for some than others. Impairments that are episodic or in remission, including epilepsy, cancer, and many kinds of psychiatric impairments, are disabilities if they would "substantially limit" major life activities when active. "Major life activities" include caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, sitting, reaching, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, interacting with others, and working.

Three of these – reaching, interacting with others, and sitting – are seen for the first time in the proposed rules and are not listed in the ADAAA. This is not an exhaustive list, according to the commission.

The proposed rules also include a specific, non-exhaustive list of major bodily functions that constitute major life activities, including several – special sense organs and skin, genitourinary, cardiovascular, hemic, lymphatic, and musculoskeletal – that are new under the EEOC proposed rules.

· The proposed rules change the definition of "substantially limits." Under the new regulations, a person is regarded as disabled if an impairment substantially limits his or her ability to perform a major life activity compared to what "most people in the general population" could perform. This is a change from the old regulations, which define a disability as one that substantially limits how a person can perform a major life activity compared to "average person in the general population" can perform an activity.

According to the EEOC, an impairment doesn't need to prevent or severely restrict an individual from performing a major life activity. Those tests were too demanding, according to the proposed rules. Now, employers should rely on a common-sense assessment, based on how an employee's or applicant's ability to perform a major life function compares with most people in the general population.

In good news for employers, the proposed rules do say that temporary, non-chronic impairments that do not last long and that leave little or no residual effects are usually not considered disabilities. Prior factors for considering whether an impairment is substantially limiting, such as the nature, severity and duration of the impairment, as well as long-term and permanent effects, have been removed.

According to the EEOC, at most, an extra one million workers may consider themselves to be disabled under the proposed rules. While that may not seem like many to the commission, businesses must prepare themselves.

Education and communication are the most important steps employers can take to prevent discriminations lawsuits from those claiming disabilities. Employers must educate themselves about the proposed rules and how those may change when they are ultimately approved.

Employers must also educate their employees about changes to the ADA and the EEOC's interpretation of the act. Human resources personnel, managers, and supervisors should be trained to respond to employees who seek a reasonable accommodation to their impairment. Employees should receive training, so they know the correct channels to go through if they believe an impairment qualifies as a disability. Formalized training, with employee sign-offs, can help to protect employers from discrimination claims.

They should be working with legal counsel to update all of their training manuals and employee handbooks, in light of the new regulations and proposed rules.

With the shift to a broader definition of disability, employers must brace for the possibility of an increasing number of claims. They must also work to ensure that they are not inadvertently discriminating against anyone who now qualifies as disabled.

Bob Jensen's threads on unfunded entitlements ---
http://www.trinity.edu/rjensen/entitlements.htm

"Pay-to-Play Torts Pension middlemen get investigated; lawyers get a pass," The Wall Street Journal, October 31, 2009 ---
http://online.wsj.com/article/SB10001424052748704107204574473310387443816.html?mod=djemEditorialPage

Pay-to-play schemes involving public officials and the pension funds they oversee are finally getting the hard look they deserve. Some 36 states are investigating how financial brokers and other middlemen have used kickbacks and campaign contributions to gain access to retirement funds. Now if only plaintiffs law firms would get the same scrutiny.

Like investment funds, class-action law firms hire intermediaries to help win state business. But the more common practice is for plaintiffs lawyers to make campaign contributions to public officials with the goal of being selected by those same officials to represent the pension fund in securities litigation.

These enormous state funds are among the world's largest institutional investors, and they frequently sue companies on behalf of shareholders. The role of pension funds in such suits became all the more important after the securities-law reform of 1995 that limited the ability of some plaintiffs to file shareholder lawsuits. So plaintiffs law firms have worked especially hard to turn these pension funds into business partners in their pursuit of class action riches.

The law firms typically agree to take the cases on a contingency basis that means no fees up front but a huge share (30% or more) of any settlement or jury verdict. However, attorneys suing on the government's behalf are supposed to be neutral actors whose goal is justice, not lining their own pockets. When for-profit lawyers are involved with a contingency fee at the end of the lawsuit rainbow, the incentives shift toward settling to get a big payday.

This month, the New York Daily News reported that the lawyers representing New York state's $116.5 billion pension fund have received more than a half-billion dollars in contingency fees over the past decade. Meanwhile, state Comptroller Thomas DiNapoli, the fund's sole trustee, "has raked in more than $200,000 in campaign cash from law firms looking to represent the state's pension fund in big-money suits," the paper reported. Attorneys from one Manhattan firm, Labaton Sucharow, gave Mr. DiNapoli $47,500 in December 2008, only months after he chose the firm as lead counsel in a class action suit against Countrywide Financial. Mr. DiNapoli's office says firms that give money don't get preferential treatment.

The Empire State is hardly unusual. Labaton Sucharow has given more than $58,000 to Massachusetts State Treasurer Timothy Cahill, who recently announced his gubernatorial bid. The Labaton firm is representing state and county pension funds in more than a dozen security class action lawsuits.

The Louisiana State Employees' Retirement System is among the most litigious in the nation. John Kennedy, the state treasurer who helps decide when Louisiana's major pension funds should bring a law suit, has received tens of thousands of dollars in political donations from Bernstein Litowitz, which has offices in New York, New Orleans and San Diego and was the country's top-grossing securities class-action firm in 2008. The law firm has represented Louisiana's public pension funds at least 13 times since 2004, and its partners donated nearly $30,000 to Mr. Kennedy's two most recent campaigns, even though he ran unopposed both times.

In Mississippi, the state attorney general determines when the public employees retirement fund should bring a securities class action and which outside firms will represent the fund. Would you be shocked to learn that AG Jim Hood has frequently chosen law firms that have donated to his campaigns?

Mr. Hood is also partial to Bernstein Litowitz. On February 21, 2006, he chose the firm to represent the Mississippi Public Employees Retirement Fund in a securities class action against Delphi Corporation—just days after receiving $25,000 in donations from Bernstein Litowitz attorneys. The suit was eventually settled, and the lawyers on the case received $40.5 million in fees. Mr. Hood's campaign would appear to deserve a raise.

Back in New York, Attorney General Andrew Cuomo has garnered banner headlines and much praise for his pay-to-play pension fund probe that has already led to four guilty pleas by investors and politicians. Good for him. Yet when asked about pursuing the trial bar for similar behavior, his office says it has no jurisdiction to go after law firms in class action suits. He could at least turn down their campaign money, however.

Mr. Cuomo's campaign happens to have received $200,000 from securities law firms. Perhaps it's merely a coincidence that the expected candidate for governor in 2010 doesn't want to investigate his funders. Mr. Cuomo recently proposed legislation that puts restrictions on campaign donations from investment firms seeking pension business. His proposal does not seek the same restrictions on securities law firms. Perhaps that's another coincidence.

If Mr. Cuomo won't investigate pay-to-play torts on his own, then someone else should investigate Mr. Cuomo's relationship with these pay-to-play law firms.

Once again, the power of pork to sustain incumbents gets its best demonstration in the person of John Murtha (D-PA). The acknowledged king of earmarks in the House gains the attention of the New York Times editorial board today, which notes the cozy and lucrative relationship between more than two dozen contractors in Murtha's district and the hundreds of millions of dollars in pork he provided them. It also highlights what roughly amounts to a commission on the sale of Murtha's power as an appropriator: Mr. Murtha led all House members this year, securing $162 million in district favors, according to the watchdog group Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to create the National Defense Center for Environmental Excellence in Johnstown to develop anti-pollution technology for the military. Since then, it has garnered more than $670 million in contracts and earmarks. Meanwhile it is managed by another contractor Mr. Murtha helped create, Concurrent Technologies, a research operation that somehow was allowed to be set up as a tax-exempt charity, according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed; the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 --- http://www.captainsquartersblog.com/mt/archives/016617.php