Bob Jensen's Fraud Updates Between January 1 and March 31, 2006

Security threats and hoaxes --- http://www.trinity.edu/its/virus/

25 Hottest Urban Legends (hoaxes) --- http://www.snopes.com/info/top25uls.asp

Stay up on the latest and the oldest hoaxes --- http://www.snopes.com/
Cyber Museum of Scams and Frauds --- http://www.quatloos.com/

The Most Criminal Class Writes the Laws

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

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

Trial Bar Cleanup: Would you believe that many lawyers actually commit fraud?
It's amazing what a little courage from the bench can do to clean up the justice system. Now that word is out that most silicosis lawsuits are shams, ever more judges are helping to expose the corruption. The latest is Florida state Judge David Krathen, who in a recent hearing rebuked plaintiffs lawyers for inventing silicosis suits, and declared "mind-boggling" the effect that phony suits were having on the "economic well-being of this country." He vowed to ride herd on the claims in his court, separating the good cases from the fake.
"Trial Bar Cleanup," The Wall Street Journal, February 11, 2006; Page A8 --- http://online.wsj.com/article/SB113962426677871525.html?mod=opinion&ojcontent=otep

It was his illegal fraud for a good political cause says the Meathead
The question is what good might have been done with the $23 million he stole?

"When Rob Met Tobacco," The Wall Street Journal, March 30, 2006; Page A14 --- Click Here

Hollywood political activist Rob Reiner resigned yesterday as head of a California state commission that's been accused of misappropriating public funds. So perhaps now debate can shift back to the economic damage that would be caused by Mr. Reiner's universal preschool scheme.

Back in 1998, the director ("When Harry Met Sally") backed a successful ballot initiative that raised the state's tobacco tax by 50 cents a pack to pay for early childhood programs. Mr. Reiner was later appointed head of the commission that handles the proceeds, which have totaled some $3.4 billion. Hundreds of millions have gone to PR firms and others who helped him pass the 1998 initiative. That might be unabashed cronyism, but it's not necessarily illegal. However, it's also alleged that Mr. Reiner used $23 million of the tobacco loot to fund a new initiative on universal preschool that's qualified for the June 6 ballot. If Mr. Reiner was using taxpayer money to garner support for his new referendum, that violates state law.

Continued in article

The Never-Ending Saga of Merrill Lynch Fraud
The appeal has unsealed a trove of documents offering a rare glimpse of a Wall Street firm pursuing a tempting profit opportunity over the objections of internal watchdogs. On repeated occasions some Merrill employees voiced concern that the three brokers were doing something wrong and took steps to stop them. Yet their immediate bosses often pushed back, allowing the trading to continue.
"How Merrill, Defying Warnings, Let 3 Brokers Ignite a Scandal: Bosses Back Lucrative Trades By Stars, Then Fire Them; Big Defamation Judgment 'Rewards Outweigh the Risks'," by Susanne Craig and Tom Lauricella, The Wall Street Journal, March 27, 2006; Page A1 --- http://online.wsj.com/article/SB114342880710008788.html?mod=todays_us_page_one

For more tidbits on Merrill Lynch fraud search for "Merrill" at http://www.trinity.edu/rjensen/FraudRotten.htm

Debit Card Fraud Jumps
Several banks have reported that account information has been stolen and consumers have reported mysterious fraudulent account withdrawals. Litan told MSNBC, “This is the absolute worst hack that has happened, the biggest scam to date.” Using a debit card to steal cash is a more direct process for thieves. Stealing merchandise and converting it into cash can be a risky business. MSNBC reports this so-called “white card” fraud does not require interaction with clerks or other store staff. Careless PIN storage is to blame for these losses.
"Debit Card Fraud Jumps," AccounitngWeb, March 13, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101885

Bob Jensen's threads on ID theft are at http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's threads on computer and network security are at http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

Yawn, more fraud on top of a mountain of fraud at Merrill Lynch
Merrill Lynch & Co. has agreed in principle to pay $164 million to settle 23 class-action lawsuits related to its stock-research coverage of Internet companies during the tech-stock bubble era. The settlements leave Merrill with two suits still pending out of an initial 150 in which investors claimed to have been misled by the company's former top tech-stock analyst, Henry Blodget, and his team. The suits alleged that Mr. Blodget recommended 27 stocks to help Merrill win investment-banking assignments, even as he privately disparaged many of them.
Jed Horowitz, "Merrill to Settle Research Suits," The Wall Street Journal, February 18, 2006; Page B2 --- http://online.wsj.com/article/SB114020205518977166.html?mod=todays_us_money_and_investing

Bob Jensen's threads on security analysts' fraud are at http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

SEC fines Merrill Lynch Again and Again and Again and Again . . .
Merrill Lynch & Co. agreed to pay $2.5 million and to hire an independent consultant to settle allegations that it failed to promptly produce email records, the Securities and Exchange Commission said yesterday. Federal regulators had accused the New York brokerage firm of repeatedly failing to furnish email from October 2003 through February 2005. The SEC said Merrill Lynch had failed to retain certain business-related emails and that its policies and procedures designed for the prompt production of email were deficient.
Siobhan Hughes, "Merrill to Pay Fine Over Emails" The Wall Street Journal, March 14, 2006; Page C5 --- http://online.wsj.com/article/SB114229015078797024.html?mod=todays_us_money_and_investing

To find out more about the repeated fines paid by Merrill Lynch, search for "Merrill" at http://www.trinity.edu/rjensen/FraudRotten.htm

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

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

How Bear Stearns Got Greener
The strong earnings increase was also clouded by details of long-expected regulatory charges unveiled yesterday showing how three separate Bear units aided improper mutual-fund trading -- in some cases intentionally and despite thousands of complaints from the funds. Bear settled the charges by the Securities and Exchange Commission and the New York Stock Exchange, without admitting or denying wrongdoing, by agreeing to pay $250 million -- including $160 million in disgorgement of gains and a $90 million fine.
Randall Smith and Tom Lauricella, "Bear Stearns to Pay $250 Million Fine; Net Rises 36%," The Wall Street Journal, March 17, 2006; Page C3 --- http://online.wsj.com/article/SB114210497174995838.html?mod=todays_us_money_and_investing

Bob Jensen's mutual fund scandal threads are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Just Another Day on the Fraud Beat
"Executive Loses Case on Trading," by Gretchen Morgenson, The New York Times, February 11, 2006 --- http://www.nytimes.com/2006/02/11/business/11wall.html

Eliot Spitzer, the New York attorney general, sued the executive, Clark E. McLeod, and four other high-profile telecommunications executives in 2002, contending that they had steered investment banking business to Salomon Smith Barney in exchange for inflated ratings on their companies' stocks and hot new shares of other companies.

Mr. McLeod netted $9.96 million in profits on 34 stock allocations from 1997 to 2000, the court filings said. Salomon Smith Barney received more than $77 million in underwriting fees from McLeodUSA.

In a decision issued Thursday, Justice Richard B. Lowe III of New York State Supreme Court in Manhattan wrote that Mr. McLeod's acceptance of initial public offering shares from the same brokerage firm that his company used as an investment banker, a practice known as spinning, was "a sophisticated form of bribery."

Continued in article

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

KPMG Tax-Shelter Settlement May Be Revised Amid Opt-Outs
"This settlement could be in jeopardy," said attorney Edmundo Ramirez, whose client was one of 284 potential members of the KPMG class. Mr. Ramirez said his client rejected the original settlement, considering it "a sweetheart deal for KPMG."
Nathan Koppel, "KPMG Tax-Shelter Settlement May Be Revised Amid Opt-Outs," The Wall Street Journal, February 10, 2006; Page C4 --- http://online.wsj.com/article/SB113953761206570322.html?mod=todays_us_money_and_investing

Bob Jensen's threads on KPMG's happiness face and woeful face are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

"Judge Blasts Credibility of Ex-KPMG Ex," SmartPros, March 10, 2006 --- http://accounting.smartpros.com/x52122.xml

A federal judge on Wednesday agreed that former KPMG accounting executive David Greenberg can be freed on $25 million bail in his tax fraud case - but he attacked Greenberg's character and vowed to ruin his family financially should he decide to flee.

Greenberg is not expected to meet strict bail conditions for at least several days in what prosecutors call the largest criminal tax case in U.S. history, a fraud that helped rich people evade $2.5 billion in taxes.

Even as he set bail, U.S. District Judge Lewis A. Kaplan described Greenberg as "an extremely skilled individual who spent his whole life trying to figure out how to hide the pea."

He was referring to a version of a deceitful street game known as three-card monte, in which a pea is moved among three cups and viewers are asked to guess where the pea ended up.

The judge said Greenberg's finances were in such disarray that it was impossible to figure out where his assets were and how much he was worth.

"I have no idea how much went in, came out and remains," he said.

The judge warned Greenberg's family members that if he flees, the court would make sure they "will be financially ruined and stripped of everything they have."

He added, "If they're willing to take that risk, I'm willing to take that risk of non-appearance."

He also required Greenberg to live in Manhattan and submit to electronic monitoring.

The judge said Greenberg spent his professional career "scheming how to protect other people's assets from the United States government."

Greenberg is charged in an indictment accusing 17 former KPMG partners and managers with devising and marketing fraudulent tax shelters that cost the U.S. Treasury $2.5 billion.

The indictment says the ex-KPMG executives teamed with a former partner at a prominent law firm and another defendant to defraud the Internal Revenue Service by filing false income tax returns and by concealing the tax shelters from the IRS.

The judge said he was particularly disturbed that Greenberg apparently forged the signatures of his ex-wife and his father on papers establishing a limited liability company holding assets worth up to $13 million. He noted that the government has alleged Greenberg boasted that he could flee with money he controlled in the names of others.

Greenberg has denied the allegations. His lawyers declined to comment after Wednesday's hearing.

KPMG is a worldwide network of professional firms providing audit, tax and advisory services, according to its Web site. It operates in 144 countries and has more than 6,700 partners.

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

One Case in Which KPMG is Not in Favor of Transparency

"KPMG Aims to Cloak Details of Client's Case: Auditor's Settlement Offer Would Muzzle Targus Group Regarding Sanctions Order," by David Reilly, The Wall Street Journal, March 20, 2006; Page C3 --- Click Here

In trying to settle a lawsuit brought against it by a former client, KPMG LLP has proposed terms aimed at preventing other clients from learning the auditor was sanctioned by a judge in the matter.

KPMG has offered to settle for $22.5 million a suit filed against it by Targus Group International Inc., a California computer-case maker, according to a draft settlement proposal reviewed by The Wall Street Journal. Targus claimed the accounting giant was negligent in failing to detect alleged embezzlement by a former executive at the company. KPMG has disputed that claim.

The proposed settlement payout is small compared with the $465 million KPMG agreed to pay last year as part of a deferred-prosecution agreement reached with the Justice Department. That agreement, which helped the firm avoid a potentially catastrophic criminal indictment, related to KPMG's sale of questionable tax shelters.

But the nonmonetary settlement terms being proposed by KPMG to Targus underscore how big accounting firms are pursuing every means at their disposal to limit their litigation liability and curtail the ability of clients to bring cases against them. Other measures taken include terms that some auditors are writing into their engagement contracts that would limit the clients' ability to pursue legal action against them.

In the proposed settlement with Targus, KPMG wants details of the case sealed and wants Targus to ask the state judge who sanctioned KPMG to vacate, or overturn, that order, according to the settlement document. The order, filed last July, sanctioned KPMG for obstruction during pretrial proceedings, known as discovery, and fined it $30,000. The judge also instructed any jury hearing the case against KPMG to take into account the firm's failure to produce "requested documents in a full and timely manner." At the time, KPMG said that it complied with the judge's discovery orders and appealed the ruling. That appeal is pending in the California Court of Appeal.

Continued in article

Bob Jensen's threads on the two faces of KPMG are at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

The unfolding debit card scam that rocked Citibank this week is far from over, an analyst said Thursday as she called this first-time-ever mass theft of PINs "the worst consumer scam to date."
The scam has hit national banks like Bank of America, Wells Fargo, and Washington Mutual, as well as smaller banks, all of which have reissued debit cards in recent weeks, says a Gartner research vice president.
Gregg Keizer, "PIN Scandal 'Worst Hack Ever'; Citibank Only The Start," Information Week, March 9, 2006 --- http://www.informationweek.com/story/showArticle.jhtml?articleID=181502474

Bob Jensen's threads on ID theft are at http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

Pharmaceutical Companies and Medical Schools
The Association of American Medical Colleges announced Tuesday that it would create a special panel to examine potential conflicts of interest in the relationships between pharmaceutical companies and medical schools, teaching hospitals and their employees. Jordan J. Cohen, the association’s president, said its executive committee had agreed to establish the committee in the wake of an recent studies suggesting that the drug industry’s marketing efforts could undermine the objectivity of medical educators and future doctors.
Inside Higher Ed, February 22, 2006 --- http://www.insidehighered.com/news/2006/02/22/qt

Survey: Unrealistic Business Goals, Deadlines Cause Unethical Behavior
Pressure from management or the Board to meet unrealistic business objectives and deadlines is the leading factor most likely to cause unethical corporate behavior, according to a new survey on business ethics.
SmartPros, January 18, 2006 --- http://accounting.smartpros.com/x51403.xml

Bob Jensen's threads on professionalism in accounting are at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism

Not Your Typical Class Project at USC

"Class Project on Fraud," by Scott Jaschik, Inside Higher Ed, March 27, 2006 --- http://www.insidehighered.com/news/2006/03/27/arrest

The University of Southern California has put an instructor in its business school on leave after he was arrested by Federal Bureau of Investigation agents Friday on charges that he used students — without their knowledge — to defraud them and investors of more than $1.5 million.

Barry H. Landreth, the instructor, is being held in jail and could not be reached for comment. His lawyer told California reporters that he hadn’t had time to review the charges and so couldn’t respond to them.
Landreth, who earned a master’s degree in real estate development from the university in 2001, has worked in recent years as a part-time lecturer at Southern Cal’s public policy and business schools. University officials said that they couldn’t comment on the case except to confirm that he had been employed there, and that he was currently on leave, but had been teaching this semester.

But court documents filed by the FBI charge that Landreth used his classes to recruit unwitting assistants for his scheme. According to the FBI documents, Landreth recruited students in his courses to sell investments through a real estate company he ran, which he said had the rights to valuable property in Chicago and Las Vegas.

The students were told that they would be paid for their work and that investments they made would show huge returns. Several of the students invested their own money and family members’ money — sometimes in excess of $100,000 — as well as seeking funds from others.

According to the FBI, some of the students — who are identified only by first names in the court documents — began to suspect that something was wrong when they were not paid and the promised payoffs on their investments and those of their family members were not coming through. The documents portray the students as becoming increasingly concerned about the run-around they were receiving from Landreth and the excuses that didn’t make sense to them.

The charges against Landreth say that he didn’t invest the money he received, but instead spent the funds buying and caring for show horses.

Red Faced GM delays annual report because of accounting "errors"
Note mention of GM's argument with its auditors (Deloitte)
Also note the historical reference to fraud fighter Abe Briloff

"Now G.M. Has Woes on Audits ," by Floyd Norris, The New York Times, March 18, 2006 --- http://www.nytimes.com/2006/03/18/business/18place.html?_r=1&oref=slogin

There was a time when General Motors was seen as the paragon of financial quality. Its bonds were rated triple A, and it was known for the most conservative accounting. Let other companies use liberal accounting rules to make results look better; G.M. did not need such things.

The announcement late Thursday that General Motors would revise profit figures for every year of this decade, and would have to restate the 2005 earnings it had already reported, shows how far the icon has fallen. Less than a year after it lost its investment-grade bond rating, its bonds are viewed as middling even among junk bonds.

"You have to question what controls are in place," said Charles W. Mulford, an accounting professor at Georgia Tech. "When companies like G.M. are profitable, there is not a need to engage in aggressive accounting. What we are seeing now is a pattern of very aggressive accounting that took them well beyond the limits of generally accepted accounting principles."

. . .

At one hearing, G.M. told the accounting rule makers that it should not be required to follow revised pension accounting rules because they conflicted with its union contract. The rule makers were unimpressed. Today, G.M.'s generous pension policies are one reason it is in trouble.

In 1984 and 1986, when it made two major acquisitions, buying Electronic Data Systems and Hughes Aircraft, it used tracking stock, which it invented. Those shares were supposed to trade based on profits of the acquired subsidiaries. Abraham Briloff, an accounting professor at Baruch College, complained that G.M. was overstating those profits because they ignored good will charges, but G.M. made no changes.

Then in 1987, G.M. decided that it had been too conservative in evaluating the useful lives of many of its assets. By stretching out the depreciation of the assets, it increased pretax profits that year by more than $1 billion. But a few years later, it had to write down the value of many assets.

The latest announcement, coming just when G.M. had planned to file its annual report, seemed to indicate that the company may have been in an argument with its auditors from Deloitte & Touche. It cited consultations with Deloitte as a reason for one change. A Deloitte spokeswoman declined to comment.

Some of the changes may also have reflected changes at the top of the company. In December, G.M. announced that John M. Devine, who had been chief financial officer since 2001, would step aside and be succeeded in January by Frederick Henderson, who had been running the company's European operations. That move came weeks after the company said it had uncovered accounting errors that would be detailed in the annual report.

While the changes will raise its stated loss for 2005 by $2 billion, those additional losses do not affect cash flow and attracted less attention than the issue that was new, and that the company said had delayed the filing of its annual report.

"GM Board Seeks Probe of Mistakes In Bookkeeping: Last-Minute Error at GMAC Caught Directors by Surprise; Share Price Drops Nearly 5%," by Monica Langley and Lee Hawkins Jr., The Wall Street Journal, March 18, 2006; Page A1 --- http://online.wsj.com/article/SB114261055772101341.html?mod=todays_us_page_one

The board of General Motors Corp. called for an investigation into the cause of newly uncovered accounting errors that forced the troubled auto maker to delay filing its annual report and could postpone a critical sale of part or all of its financing arm, said people familiar with the matter.

During a hastily scheduled conference call Friday morning, directors expressed displeasure over the last-minute filing delay to Chairman and Chief Executive Rick Wagoner, who was calling in from Asia, and to Chief Financial Officer Frederick "Fritz" Henderson, these people said.

Philip Laskawy, the director in charge of the audit committee, asked for an analysis of the last-minute problem. Jerome B. York, the newly elected board member who represents billionaire Kirk Kerkorian, GM's largest shareholder, followed up by pushing for an in-depth review of what GM would do to fix its accounting problems.

Mr. Wagoner said little during the meeting and did not offer an explanation for the accounting issue or the delay, these people said. The directors' questions were answered by Mr. Henderson. Mr. Henderson, who just took over as CFO this year, told the board he hoped to have preliminary answers next week.

The unusual meeting came just hours after the late Thursday announcement in which GM said it had to delay filing its 10-K report to the Securities and Exchange Commission after discovering the accounting errors by a residential mortgage business owned by its finance arm, General Motors Acceptance Corp.

GM, which already faces an SEC probe into its accounting practices, also disclosed that its 10-K report, when filed, will outline a series of accounting mistakes that will force the car maker to restate its earnings from 2000 to the first quarter of 2005. GM also said it was widening by $2 billion the loss it reported for 2005.

GM shares sank 4.9% to $21.13 in 4 p.m. composite trading Friday on the New York Stock Exchange on news of its latest setback. In recent months the company has been struggling amid poor demand for its vehicles in North America and high labor and other costs.

Continued in article

From The Wall Street Journal Accounting Weekly Review, March 31, 2006

TITLE: GM Races to Correct Errors for Report to SEC
REPORTER: Lee Hawkins, Jr.
DATE: Mar 27, 2006
PAGE: A3
LINK: http://online.wsj.com/article/SB114341932643308634.html
TOPICS: Financial Accounting, Accounting, Accounting Changes and Error Corrections, Auditing, Auditor/Client Disagreements, Cash Flow

SUMMARY: "GM management has spent more than a week gathering details on the chain of events that led to a last-minute discovery of accounting errors in the financial statements of ResCap, MAC's residential-mortgage unit, which caused GM to miss its 10-K filing deadline March 16... The ResCap mistakes were discovered after GM's auditors refused to sign off on ResCap's financial statements " The accounting issues relate to classifying cash flows from proceeds of sale of mortgage loans as investing activities rather than operating activities. "GM and its chairman and chief executive, Rick Wagoner, are under pressure to fix the errors and offer a new statement by Friday, since missing that deadline could put GM at risk of violating covenants related to $32 billion in bonds." A related opinion page piece argues that Mr. Wagoner will likely face ouster by his Board this summer.

QUESTIONS:
1.) Describe the problematic accounting issue at GM's residential mortgage lending unit.

2.) Cite the specific accounting requirements indicating that cash flows from sales of mortgages should be shown as operating cash flows rather than investing cash flows. In your answer, refer to the nature of the industry in which ResCap operates as well as the specific references to the accounting literature.

3.) Why is it important to see cash flows categorized into operating, investing, and financing cash flows?

4.) Why do you think that ResCap's auditors refused to sign off on the classification of cash flows for sales of loans even though this was not the first year that these cash flows were shown in that way? Why do you think that the auditors had "signed off" on these transactions in the past?

5.) What other accounting issue is GM currently facing? Are the issues with reporting cash flows related to the issues requiring restatement of earnings? In your answer, address both the purely accounting issues as well as the nature of concerns in general with GM's reporting over this time period.

6.) Refer to the related article. How does the timing of the accounting and reporting issues at GM coincide with the timing of Mr. Wagoner's tenure there?

7.) How do GM's problems reflect fundamental problems of management in addition to concerns about the state of the automotive industry? How does that additional concern about management exacerbate negative opinions about the company?

8.) What is a forensic accountant? How would hiring one help GM with its current woes?

SMALL GROUP ASSIGNMENT: Establish 4 person groups. Have each group access the General Motors SEC filings

Have each group identify all forms filed with the SEC on March 28, 2006. The students should identify Form 8-K, Form 10-K, Form 10-Q/A and Form 10-K/A.

Answer the following questions:

1. What is the purpose of each filing?
2. Describe the contents of each filing and state how those contents support the purpose of the filing.
3. How are the changes identified in the WSJ articles presented in the filings? Specifically describe the ways in which those changes are presented (footnotes, tabular disclosures, restatements on the face of financial statements, etc.) 4. Identify the accounting standard requiring the treatments shown in each of the SEC filings, if applicable.

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES --- TITLE: General Malaise REPORTER: Paul Ingrassia PAGE: A16 ISSUE: Mar 27, 2006 LINK: http://online.wsj.com/article/SB114342678734408756.html

TITLE: U.S. Grand Jury Subpoenas GM Over Handling of Supplier Credits REPORTER: Lee Hawkins, Jr. PAGE: A3 ISSUE: Mar 29, 2006 LINK: http://online.wsj.com/article/SB114355217416310010.html

Fraud at Harvard
In a legal settlement reached last summer, Harvard agreed to pay $26.5 million

Questions
Did fraud by by a Harvard professor ultimately sink its President Summers?

"Did an Exposé Help Sink Harvard's President?" by Sara Ivry, The New York Times, February 27, 2006 --- http://www.nytimes.com/2006/02/27/business/media/27mclintick.html

"I was surprised that he was gone by February of '06," said Mr. McClintick, and "that it happened as rapidly as it did."
"How Harvard Lost Russia" was published in the January issue of Institutional Investor magazine, a subscription-only publication, about a month and a half before Dr. Summers's resignation, which he announced last Tuesday. The move came just two weeks after a Feb. 7 meeting when the president was challenged on several issues, including his reaction to events described in Mr. McClintick's article.

In roughly 18,500 words, (22,007 including sidebars), Mr. McClintick chronicled financial improprieties by those in charge of Harvard's Russia project, including Andrei Shleifer, a professor of economics who is a friend and protégé of Dr. Summers's, and Jonathan Hay, a Harvard-trained lawyer. The two men were accused of making personal investments in Russia at a time when they were working under contract to establish capitalism in the former Soviet nation.

Their behavior led the United States government to file civil charges against Harvard, Mr. Shleifer and Mr. Hay for fraud, breach of contract and making false claims. In a settlement reached last summer, Harvard agreed to pay $26.5 million. Mr. Hay was ordered to pay a fine based on his future earnings and Mr. Shleifer agreed to pay $2 million, though none of the parties admitted wrongdoing. Mr. Shleifer has not been subjected to any disciplinary action from Harvard.

Some Harvard watchers attribute that to Dr. Summers's influence, though he formally recused himself from the matter, and they see the entire affair, assiduously detailed by Mr. McClintick, as an indelible stain on Harvard's reputation.

Mr. McClintick, 65, a 1962 graduate of Harvard, is a former reporter for The Wall Street Journal and the author of several books, including "Indecent Exposure," which investigated financial scandal at Columbia Pictures. That book was a finalist for the National Book Award and helped solidify Mr. McClintick's reputation as a meticulous investigator.

Continued in article

Will Phil and Wendy Gramm forever go unpunished in the Enron scandal?
Enron trial unfolds, it's depressing that Phil and Wendy Gramm, the company's political enablers, are going unpunished and uncriticized.
Robert Scheer, "Enron's Enablers " The Nation, February 1, 2006 ---
http://www.thenation.com/doc/20060213/scheer0201

Back in 1993, when Enron was an upstart energy trader and Wendy Gramm occupied the position of chair of the CFTC, she granted the company, the biggest contributor to her husband's political campaigns, a very valuable ruling exempting its trading in futures contracts from federal government regulation.
She resigned her position six days later, not surprising given that she was a political appointee and Bill Clinton had just defeated her boss, the first President Bush. Five weeks after her resignation, she was appointed to Enron's board of directors, where she served on the delinquent audit committee until the collapse of the company.

There was perfect quid pro quo symmetry to Wendy Gramm's lucrative career: Bush appoints her to a government position where she secures Enron's profit margin; Lay, a close friend and political contributor to Bush, then takes care of her nicely once she leaves her government post.

Although she holds a doctorate in economics and often is cited as an expert on the deregulation policies she so ardently champions, Gramm insists that while serving on the audit committee she was ignorant of the corporation's accounting machinations. Despite her myopia, or because of it, she was rewarded with more than $1 million in compensation.

A similar claim of ignorance of Enron's shenanigans is the defense of her husband, who received $260,000 in campaign contributions from Enron before he pushed through legislation exempting companies like Enron from energy trading regulation.

"This act," Public Citizen noted, "allowed Enron to operate an unregulated power auction--EnronOnline--that quickly gained control over a significant share of California's electricity and natural gas market."

The gaming of the California market, documented in grotesque detail in the e-mails of Enron traders, led to stalled elevators, hospitals without power and an enormous debt inflicted on the state's taxpayers. It was only after the uproar over California's rolling blackouts, which Enron helped engineer, that the Federal Energy Regulatory Commission finally re-imposed regulatory control--and thereby began the ultimate unraveling of Enron's massive pyramid of fraud.

Jensen Comment
I've always been a bit harsh on Wendy Gramm because of the way she significantly helped Enron deregulate energy markets while she worked for the Government and later joined Enron's Board of Directors. In fairness, however, I must point out that while serving on the Board of Directors of Enron, Wendy Gramm's stock sales were exceedingly modest compared with the big winners --- http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales

Bob Jensen over the years has written quite a lot about Wendy Gramm --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronLinks

Seems a bit more than a $1,600 shower curtain that got a Stanford University president in hot water
Texas Southern University President Priscilla Slade has reimbursed the university more than $138,000 for the cost of landscaping her new home, according to records released Wednesday. Slade, who wrote the check Monday, is hoping to get back into the good graces of the university's board of regents before they meet Friday to discuss her future. She is also under scrutiny for charging roughly $87,000 to TSU for household furnishings, according to a source familiar with the inquiry. Although some board members have been strongly supportive of Slade, there are still unanswered questions about the source of the money and whether...
Matthew Tresaugue, "TSU head returns $138,000 to school: President hopes to ease concerns about expenses as regents prepare to discuss her future," chron.com, February 2, 2006 --- http://www.chron.com/disp/story.mpl/metropolitan/3630014.html

Also see "Kennedy: Where ideal meets reality in university life" ---
http://news-service.stanford.edu/news/1997/december3/duty123.html

The price of dealing with unregulated hedge funds
A group of current and former professional football players filed a civil lawsuit in Georgia state court against an Atlanta hedge-fund firm in which they had invested millions of dollars, accusing its principals of theft, forgery and fraud. In their suit, the investors say they put a total of about $15 million into funds managed by International Management Associates LLC, its affiliates and principal Kirk S. Wright. They allege that Mr. Wright, other principals and the firm have failed to honor withdrawal requests made Dec. 5, misled investors as to the funds' investment style and forged their names on checks that bounced when deposited in the investors' bank accounts.
"NFL Players Sue A Hedge Fund For Fraud, Theft: State Judge to Freeze All Assets Of International Management; 'Stick to Being Anesthesiologists'," by Ian McDonald and Valerie Bauerlein, The Wall Street Journal, February 18, 2006; Page B1 --- http://online.wsj.com/article/SB114022005094977567.html?mod=todays_us_money_and_investing

Bob Jensen's threads on hedge funds are under the H-terms at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms

Title Washing: How Car Titles Get Laundered
Unsuspectingly you may be purchasing a car that was flooded during a hurricane
Thousands of vehicles that sat in the murky waters left by hurricanes Katrina and Rita are starting to show up on the used-car market. Most states require that flooded cars be labeled as such on the title. But scam artists have found loopholes in the system. They re-register cars in states with looser title laws -- sometimes two or three states -- until the warning that the car was flooded is gone. This fraudulent practice is known as "title washing."
Jeff Brady, "Holes in Monitoring System Let Lemons Get Resold," NPR, January 31, 2006 --- http://www.npr.org/templates/story/story.php?storyId=5173717

Question
Is your church or favorite charity violating its tax exempt status?

Among the prohibited activities, the examiners found that charities and churches had distributed printed material supporting a preferred candidate and assembled improper voter guides or candidate ratings. Religious leaders had used the pulpit to endorse or oppose a particular candidate, and some groups had shown preferential treatment to candidates by letting them speak at functions. Other charities and churches had made improper cash contributions to a candidate's political campaign. The IRS said the cases covered "the full spectrum" of political viewpoints.
"IRS Finds Charities Overstep Into Politics," SmartPros, February 28, 2006 --- http://accounting.smartpros.com/x51953.xml

SEC Says NetEase, Former Officers Settled Action Over Accounting
The Securities and Exchange Commission filed a settled enforcement action against Chinese online-games operator NetEase.com Inc. and two former officers over alleged improper accounting in 2000 and 2001. The SEC alleged that NetEase "materially overstated its revenues and understated its net loss by improperly recognizing revenue."
"SEC Says NetEase, Former Officers Settled Action Over Accounting," The Wall Street Journal, February 28, 2006; Page B11 --- http://online.wsj.com/article/SB114109787795885039.html?mod=todays_us_marketplace

For details see http://corp.163.com/investor_eng/010904/010904_999.html

Fannie Mae Unearths More Accounting Problems
The new problems include improper accounting for certain investment securities and for some of the fees and obligations that arise from Fannie's guarantees of payments on mortgages bundled into securities and sold to investors world-wide. The newly disclosed problems also relate to accounting for the costs of dealing with houses acquired through foreclosures, for debt restructurings and for interest on delinquent loans, among other things.
James R. Hagerty, "Fannie Mae Unearths More Accounting Problems: Company Expects to Meet Its Capital Requirements; Market Share Drops Again," The Wall Street Journal, March 14, 2006; Page A3 --- http://online.wsj.com/article/SB114225528071896544.html?mod=todays_us_page_one

Bob Jensen's threads on accounting fraud at Fannie Mae are at
http://www.trinity.edu/rjensen/caseans/000index.htm

Tobacco Companies Don't Win Them All on Appeal
The Oregon Supreme Court affirmed a $79.5 million punitive-damage award against Philip Morris USA in favor of a smoker's widow, dealing a setback in the Marlboro maker's long-running battle against tobacco litigation. Philip Morris USA, a unit of Altria Group Inc., had appealed the 1999 award to Mayola Williams, who lost her husband, Jesse Williams, to lung cancer in 1997. She had sued Philip Morris for negligence and fraud, claiming the company waged a 40-year publicity campaign to undercut published concerns about the dangers of smoking. The damages award was based on the fraud claim only.
Vanessa O'Connell and Mary Ellen Lloyd, "Philip Morris Loses Appeal Of Oregon Damage Award," The Wall Street Journal, February 3, 2006; Page B3 ---
http://online.wsj.com/article/SB113890101036763407.html?mod=todays_us_marketplace

Accounting Fraud Can Cost Billions
AIG is close to a deal involving a payment of at least $1.5 billion to resolve accounting fraud and other allegations with federal and state authorities. The expected agreement could be the largest finance-industry regulatory settlement with a single company in U.S. history.
Kara Scannell and Ian McDonald, "AIG Close to Deal To Settle Charges, Pay $1.5 Billion," The Wall Street Journal, February 6, 2006; Page C1 ---
http://online.wsj.com/article/SB113919423276365730.html?mod=todays_us_money_and_investing

Bob Jensen's threads on insurance company and mutual fund frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm

German Bank to Settle Fraud Claims for $134 Million
Deutsche Bank AG said it expects to pay about $134 million as part of a settlement with federal, state, and self-regulatory agencies related to investigations into market-timing issues. The German bank also said its Scudder Distributors business has received a so-called Wells notice from the National Association of Securities Dealers regarding noncash compensation to "associated persons of NASD member firms." A Wells notice allows recipients to respond before the regulator takes civil action.
Gepffrey Rogow, "Deutsche Bank Offers Payment To Settle Market-Timing Probe, The Wall Street Journal, January 28, 2006; Page B13 --- http://online.wsj.com/article/SB113840210055558647.html?mod=todays_us_money_and_investing

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

ChoicePoint Case Spotlighted ID Thef
Data broker ChoicePoint Inc. yesterday agreed to pay a $10 million federal fine over security breaches that exposed more than 160,000 people to possible identity theft. Privacy experts praised the settlement as a warning to companies to get more serious about protecting sensitive information. The Alpharetta, Ga.-based company, one of the nation's largest buyers and sellers of personal information such as Social Security numbers, birth dates and addresses, also agreed to pay $5 million into a fund to compensate people who suffered as a result of the breaches.
Arshad Mohammed, "Record Fine for Data Breach: ChoicePoint Case Spotlighted ID Theft," The Washington Post, January 27, 2006 --- http://snipurl.com/WPjan26

Bob Jensen's threads on phishing and pharming are at http://www.trinity.edu/rjensen/ecommerce/000start.htm#Phishing

AIG Expected to Pay $1 Billion-Plus to Settle Probes
AIG is expected to pay more than $1 billion to settle state and federal civil-fraud charges alleging the giant insurer used improper accounting to polish its earnings. Former CEO Hank Greenberg is not included in the accord.
Ian McDonald and Monica Langley, "AIG Expected to Pay $1 Billion-Plus to Settle Probes: Huge Penalty Would Resolve Fraud Case Against Insurer But Wouldn't Cover Ex-CEO," The Wall Street Journal, January 13, 2006; Page A1 --- http://online.wsj.com/article/SB113712355453045791.html?mod=todays_us_page_one

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

Former Wal-Mart Top Executive Confesses to Fraud and Tax Evasion
Former Wal-Mart Stores Inc. Vice Chairman Thomas Coughlin has agreed to plead guilty later this month to federal wire-fraud and tax-evasion charges, according to people familiar with the proposed plea agreement he has struck with prosecutors. The deal, if it holds, will bring down the curtain on a bizarre chapter in Wal-Mart's history. Mr. Coughlin, a Wal-Mart legend who was a protégé and former hunting buddy of founder Sam Walton, left the company early last year amid accusations that he misappropriated as much as $500,000 from Wal-Mart through fraudulent reimbursements and improper use of gift cards.
James Bandler, "Former No. 2 At Wal-Mart Set To Plead Guilty: Thomas Coughlin to Admit To Fraud and Tax Evasion; Protégé of Sam Walton, The Wall Street Journal, January 7, 2006; Page A1 --- http://online.wsj.com/article/SB113658501190440131.html?mod=todays_us_page_one

It gets harder to get convictions for white collar crime
In Oregon this month, a judge dismissed criminal charges against three corporate executives, saying the Justice Department unconstitutionally pursued a stealth criminal investigation under the cloak of a less-threatening civil proceeding by the SEC. And in Alabama last year, a judge dismissed charges that former HealthSouth Corp. Chief Executive Richard Scrushy lied to the SEC, ruling that he should have been warned that the Justice Department already had opened a criminal investigation when the SEC questioned him. In both cases, the judges found the line between the agencies' roles had become improperly blurred.
Peter Lattman and Kara Scannell, "Slapping Down a Dynamic Duo: SEC and the Justice Department Fight Financial Crime Together, But Is It an Unfair Double-Team?" The Wall Street Journal, January 25, 2006; Page C1--- http://online.wsj.com/article/SB113815854524255591.html?mod=todays_us_money_and_investing

Bob Jensen's threads on white collar crime are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

How to Fight Global Crime and Corruption
Transparency International (News, Tools, etc.) --- http://www.transparency.org/

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

Cozy Relationships Between Physicians and Device Makers
The documents shed new light on a matter that has troubled the medical device industry for years: the assertion that companies employ a variety of financial ruses to pay doctors who use their devices, a practice that medical and legal experts say is unethical and possibly illegal. But despite industry efforts to clean up such practices, the documents and accusations made by former Medtronic employees suggest that the problem persists and may have gotten worse.
Reed Abelson, "Whistle-Blower Suit Says Device Maker Generously Rewards Doctors," The New York Times, January 24, 2006 --- http://www.nytimes.com/2006/01/24/business/24device.html

Deloitte Settles With a a Japanese Audit Client for More Than $200 Million
Deloitte & Touche LLP has paid about $100 million to a Japanese insurer to settle litigation related to the collapse of a giant aviation reinsurance pool, bringing the total paid by Deloitte in the case to well more than $200 million in what has become one of the costliest-ever legal settlements for an auditing firm.
Mark Maremont and Miho Inada, "Deloitte Pays Insurers More Than $200 Million," The Wall Street Journal, January 6, 2006; Page C3 --- http://online.wsj.com/article/SB113651878950639466.html?mod=todays_us_money_and_investing

Bob Jensen's threads on Deloitte's legal woes are at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

It's beginning to look like fraud and creative accounting at Delta Airlines
Creditors often have a hard time collecting from companies in bankruptcy, but a group of plane owners trying to retrieve three leased Boeing 767s claims Delta Air Lines is going too far. The aircraft owners, mostly investment banks such as Morgan Stanley and Natexis Banques Populaires SA of France, claimed in a court filing last week that Delta violated bankruptcy rules by disassembling the aircraft and storing the frames and engines in separate locations.
"Delta Air's Fight With Creditors Over Leased Jets Heads to Court," by Evan Perez, The Wall Street Journal, January 5, 2006; Page A2 --- http://online.wsj.com/article/SB113642163895438078.html?mod=todays_us_page_one

Jensen Comments
This reminds me of a clever ploy used by car thieves in San Antonio. One of the problems in stealing a car and then selling it in the U.S. in the vehicle's VIN number. What some thieves purportedly do is steal a luxury car and separate the body from the drive train. Then the body is abandoned where the police will find it. The police (possibly in cahoots with the thieves) then sell the body at a public auction. Keep in mind that the body has no engine or transmission. The thieves then buy the body and thereby acquire a legitimate ownership of the VIN number. Then they install the original drive train and sell the entire care for a handsome profit.

Accounting Issue: The Bright Line Problem
I'll just bet these aircraft were carried as operating leases rather than capital leases since airlines tend to push to the edge of bright line rules of FAS 13. How do you account for operating leases of assets that are disassembled for parts?

Bob Jensen's threads on how bright lines are used to hide debt with operating leases are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Leases

Did Enron change executive looting tendencies?
Despite an array of new and expensive laws and regulations that were adopted to tighten corporate oversight after the wave of scandals earlier in the decade, serious accounting problems continue to trouble publicly owned companies. In the last year, a record number have been forced to correct erroneous earnings statements, which often led to sharp stock declines. Moreover, for all the widespread criticism of high pay of executives at Enron and other companies that later proved derelict, studies show that there is still little overall correlation between the performance of many companies and the executive compensation set by their directors.
Stepen Labaton, "Four Years Later, Enron's Shadow Lingers as Change Comes Slowly," The New York Times, January 5, 2005 --- http://snipurl.com/NYT0105

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

"The Case for Cutting the Chief's Paycheck," by William J. Holstein, The New York Times, January 29, 2006 --- http://www.nytimes.com/2006/01/29/business/yourmoney/29advi.html

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

I thank Rachel McCarthy in the U.K. for pointing this link out to me.
"Government U-turn on Corporate Reporting Rules is a Farce say Ernst & Young Commentators," International Accountant, February 3, 2006 --- http://www.aia.org.uk/InternationalAccountant.htm?News/IAfullStory.php?id=50641

Gerald Russell, Senior Partner at Ernst & Young and Head of the Audit Quality Forum, says, "This has all the elements of a Brian Rix farce - now you see it, now you don’t. There was extensive consultation before the OFR was adopted - what on earth is the point of going through it all again? It would be much better to admit the error and reinstate the original position.

"It is in the interests of good reporting that companies cover what was in the original OFR, and many companies have already gone down the fuller disclosure route. The main problem is that there were no ‘safe harbour’ provisions and, naturally, directors are likely to be circumspect about what they might include in an OFR - but this is no reason for having abolished it."

Will Rainey, Head of the Financial Reporting Advisory at Ernst & Young, adds, "We had a law [OFR] and on the 12 of January it was repealed. Now we are in a consultation. What we really want is a proper process and some consistency – this has turned into a farce.”

Correcting this CEO IPO fraud is long overdue

"A Major Perk For Executives Takes a Big Hit: McLeod Ruling Makes It Tougher To Accept Lucrative IPO Shares; Broader Definition of 'Spinning'," by Michael Siconolfi, The Wall Street Journal, February 21, 2006; Page C1 ---
http://online.wsj.com/article/SB114048274500878570.html?mod=todays_europe_money_and_investing

Corporate executives, take note: The definition of improper stock trading in your brokerage account just got broader.

A New York state court recently found former telecommunications executive Clark E. McLeod liable for receiving hot new stocks in his personal brokerage account. The rationale: His company was sending business to the same securities firm, Citigroup Inc.'s Salomon Smith Barney, that doled him the new stocks.

That is a big change. Previously, "spinning" of initial public offerings of stock involved a direct quid pro quo. In a common form, securities firms allocated IPOs to the personal accounts of corporate executives, so the shares could then be sold, or "spun," for quick profits -- in exchange for business from the executives' companies.

IPO shares are coveted because they often surge on their first trading day. Spinning has raised concerns among investors that the IPO market is rigged.

Bottom line: Senior executives now could skate on thin legal ice if they receive IPO shares from a Wall Street firm with which their company at some point does business, and don't disclose it to their board or shareholders.

The ruling has broader ramifications. Even though Mr. McLeod lived and worked in Cedar Rapids, Iowa, the judge said the New York attorney general could bring the case because the transactions were made through a New York firm. Most securities firms do business in New York.

This is an "expansive interpretation" of corporate executives' duty, says Joseph Grundfest, a former commissioner at the Securities and Exchange Commission and now a law and business professor at Stanford University.

The ruling comes as the IPO market heats up again. So far this year, there have been 32 new stock issues brought to market, raising $5.8 billion; the average first-day gain has been 11%, according to Richard Peterson, a senior researcher at Thomson Financial, a New York financial-data provider.

Mr. McLeod, 59 years old, declined to comment. He will appeal the "completely novel" ruling, says one of his lawyers, Richard Werder, a partner at Jones Day.

A former mathematics and science teacher, Mr. McLeod started a long-distance company out of his garage in 1980. He eventually founded McLeod Inc., a telecom upstart now known as McLeodUSA Inc. that fell victim to the bursting of the technology-stock bubble. He left as chief executive in April 2002; McLeodUSA emerged from bankruptcy-law protection last month. He currently is CEO of Fiberutilities of Iowa, a utility-management company.

Continued in article

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

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

Question
Will it ever be possible to audit Pentagon spending?

Answer: Never!

"Pentagon Bookkeeping Stops Auditors," AccountingWeb, February 20, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101798

The Department of Defense (DOD) has failed its audit to the extent that auditors have stopped wasting money trying to audit their books, according to Black Enterprise. Problems with the Pentagon books has allowed the DOD to pay troops, civilian workers, and contractors the wrong amounts; to lose track of equipment, such as planes and tanks; and to document trillions of dollars in transactions improperly, according to Black Enterprise. Gregory D. Kutz, managing director of the General Accounting Office (GAO), told Congress last summer that these accounting problems would cost taxpayers $13 billion in 2005. The GAO is the investigative arm of Congress.

The “clean audit” of DOD books scheduled for 2007 is not in sight, according to Black Enterprise. The DOD has received a “clean opinion” on only 16 percent of its assets and 49 percent of its liabilities as of June 2005, according to Thomas B. Modly, deputy undersecretary of defense for financial management. Black Enterprise reported that Modly said the DOD hopes to settle their balance sheet on 47 percent of assets and 49 percent of liabilities by 2007. It might help to understand the problem by understanding the size of Pentagon operations. Black Enterprise reports it had in fiscal year 2005:

$1.3 trillion in assets

$1.9 trillion in liabilities

3 million in personnel

$635 billion in operational costs

2,569 facilities in the country and 807 outside of the United States

One of the other problems cited is that DOD has about 5.2 million items in its inventory, according to Modly. Wal-Mart only has 11,000 and Home Depot only has 50,000 inventory items, according to Black Enterprise. Another problem is the gridlock of some 4,150 different business operations, including 713 different human resources systems.

Jack Minnery, a Defense Finance and Accounting Service accountant, told Black Enterprise, “The Pentagon wasn’t in the business of making money, so they never needed an income statement. They expensed their assets like planes and buildings and such. They dished money out, and they never kept track of what they owned.” Minnery continued, “That’s one of the main reasons I don’t believe they’ll ever have a clean [audit].” Minnery complained about missing money in 2002 to earn his label as a whistle-blower.

Minnery told Black Enterprise, “Their systems can’t keep track of who they’ve sold stuff to, who owes them, who they owe.” Concerning the inter-service gaggle of ordering codes, Minnery said, “The Navy has a set of [codes], the Army has a set, the Air Force has a set. They don’t have the same number of digits, and they don’t match each other.”

In 1990, the GAO started assigning some government agencies to a “high risk” list. DOD’s supply chain and weapon systems acquisitions have remained on this list since that time and six other defense divisions made the list in 2005. Danielle Brian, executive director of the watchdog group Project on Government Oversight, told Black Enterprise, “Nothing’s gotten better. It keeps getting worse.” Knoxstudio.com reports that Jeffrey Steinhoff, GAO’s managing director for financial management and assurance, said, “They’re not close to the finish line. They have a long way to go.”

Untangling the mess has seemed elusive except “by making the business process support the war-fighter more effectively, we are seeing a significant amount of momentum,” according to Paul Brinkley, deputy undersecretary of defense for business transformation. Effective might be an overly optimistic opinion as Black Enterprise reports that the government spent $179 million on two automation systems meant to resolve disbursement problems that failed, according to the GAO.

Winslow T. Wheeler, director of a military reform project at the Center for Defense Information (CDI), told Black Enterprise, “We don’t know how badly managed it is. It’s not that DOD flunks audits, it’s that DOD’s books cannot be audited. DOD aspires for the position where it flunks an audit. If this were a public company, it would have gone belly up before World War II.” CDI is an independent monitor of the military.

In more wasteful news, Stuart Bowen, special inspector general for Iraq reconstruction, told Political Gateway that $8.8 billion is unaccounted for due to inadequate oversight from Coalition Provisional Authority (CPA) that “was relatively nonexistent.” Bowen is in charge of tracing the funds.

Frank Willis, the former number two official at the CPA transportation ministry, told Political Gateway that the CPA kept billions in cash to pay for its projects because Iraq is without the financial infrastructure that would support the use of checks or money orders. Willis said, “I would describe (the accounting system) as nonexistent.” Willis told a CBS interviewer, “Fresh, new, crisp, unspent, just-printed 100-dollar bills. It was the Wild West.”

In other wasteful news, the GAO has released a report finding that the Bush Administration spent more than $1.6 billion in public relations and media contracts over two and a half years, according to the California Chronicle. Congressman Henry A. Waxman, (D-Calif.), House Democratic Leader Nancy Pelosi, (D-Calif.), and Congressmen George Miller, (D-Calif.), and Elijah E. Cummings, (D-Md.), with other senior Democrats, released the report.

More bad news is continued at http://www.accountingweb.com/cgi-bin/item.cgi?id=101798

Question:
What has been one of the most massive, if not the most massive, fraud in the history of the U.S. (aside from Department of Defense ongoing fraud discussed above)?

Answer:
The attorney/physician rip off on phony asbestos health damage claims.

"Diagnosing for Dollars A court battle over silicosis shines a harsh light on mass medical screeners—the same people whose diagnoses have cost asbestos defendants billions," by Roger Parloff, Fortune, June 13, 2005, pp. 96-110 --- http://www.fortune.com/fortune/articles/0,15114,1066756,00.html

How, then, to account for this: Of 8,629 people diagnosed with silicosis now suing in federal court in Corpus Christi, 5,174—or 60%—are "asbestos retreads," i.e., people who have previously filed claims for asbestos-related disease.

That anomaly turns out to be just one of many in the Corpus Christi case that sorely challenge medical explanation. At a hearing in February, U.S. District Judge Janis Graham Jack characterized the evidence before her as raising "great red flags of fraud," and a federal grand jury in Manhattan is now looking into the situation, according to two people who have been subpoenaed.

The real importance of those proceedings, however, is not what they reveal about possible fraud in silica litigation but what they suggest about a possible fraud of vastly greater dimensions. It's one that may have been afflicting asbestos litigation for almost 20 years, resulting in billions of dollars of payments to claimants who weren't sick and to the attorneys who represented them. Asbestos litigation—the original mass tort—has bankrupted more than 60 companies and is expected to eventually cost defendants and their insurers more than $200 billion, of which $70 billion has already been paid.

The odor around asbestosis diagnosis has been so foul for so long that by 1999, professor Lester Brickman of the Benjamin N. Cardozo School of Law was referring to asbestos litigation as a "massively fraudulent enterprise." At the request of his defamation lawyer, Brickman says, he toned that down to "massive, specious claiming"

Continued in the article

Bob Jensen's working paper on the history of fraud in the U.S. is at http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

"SEC Shuts Down $50 Million Autosurf Ponzi Scam," by Gregg Keizer, InformationWeek, February 28, 2006 --- http://www.informationweek.com/story/showArticle.jhtml?articleID=181401317

The Securities and Exchange Commission has filed fraud charges against the owner of an Autosurf site who it accused of running a $50 million Ponzi scam and pocketing nearly $2 million.

Less than two weeks ago, the FBI opened an investigation into 12dailypro.com's promises of large returns on members' investments. In exchange for buying $6 units -- up to a maximum of $6,000 worth -- 12dailypro.com members were promised a 144 percent return within 12 days simply for viewing a dozen Web ads daily.

The SEC dubbed 12dailypro.com a "paid autosurf program" but said it was in reality an illegal Ponzi, a scam where income from incoming members is used to pay existing members' returns.

"The defendants falsely represented that upgraded membersSMQ-8217-SMQ earnings 'are financed not only [by] incoming member fees, but also with multiple income streams including advertising, and off-site investments,'" the SEC said in a statement issued Monday. "In fact, at least 95 percent of revenues have come from new investments in the form of membership fees from new or existing members. The other 'multiple income streams' from advertising revenues or off-site investments were either negligible or non-existent."

Johnson's scheme, said the SEC's complaint, had raised more than $50 million from over 300,000 members since mid-2005. Johnson, meanwhile, had transferred about $1.9 million from 12dailypro.com to her personal bank account, the SEC alleged.

The SEC asked the court to freeze Johnson's and 12dailypro.com's assets, as well as those of her payment providers, which included StormPay, an online payment service based in Tennessee that is under investigation by state authorities.

12dailypro essentially shut down after StormPay, which said it suspected an illegal scheme, turned off the payment spigot in late January. In less than two weeks, StormPay was hit with a denial-of-service (DoS) attack that knocked it offline for two days. The DoS attacker has not been identified.

"Nortel Offers $2.4 Billion to Settle Lawsuits ," Ian Austen, The New York Times, February 9, 2006 --- http://www.nytimes.com/2006/02/09/business/09nortel.html

Nortel Networks, the troubled maker of telecommunications equipment, offered about $2.4 billion in cash and stock Wednesday to settle two class-action lawsuits over an accounting debacle two years ago.

The announcement was the latest in a series of steps taken by Mike S. Zafirovski, the company's chief executive, to strengthen Nortel. The company is recovering from the collapse of the technology bubble in 2000 and from accounting irregularities, among them reporting sales that had not yet been made, that led to the firing of seven of its top executives in 2004. The company later restated four years of results.

If the settlement is accepted, Nortel would pay the plaintiffs $575 million cash and issue shares equal to about 14.5 percent of its outstanding equity. Nortel will take charges totaling about $2.47 billion to cover the cost of the settlement in the fourth quarter, which it has not yet reported. The $575 million payment will come out of Nortel's cash reserves, which now total $3 billion.

Nortel, based in Brampton, Ontario, is not acknowledging any wrongdoing under the settlement proposal, nor would the deal have any impact on criminal and securities investigations of the company in the United States and Canada.

"Our intent is to achieve a fair resolution of these lawsuits and avoid a prolonged, uncertain and costly litigation process," Harry J. Pearce, Nortel's chairman, wrote in a statement. "A final settlement would remove a significant impediment to Nortel's future success and allow Mike Zafirovski and the Nortel team to move forward."

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Nortel (NT :Nasdaq) this week joined a fast-growing string of public companies to say prior financial reports inflated real business trends - - - Nortel restate earnings for 2003 and earlier periods; Nortel already restated earnings for the past three years in October 2003
"Rash of Restatements Rattles," by K.C. Swanson, TheStreet.com, March 17, 2004 http://www.thestreet.com/tech/kcswanson/10149112.html

Jensen Comment
Nortel's external auditor is Deloitte, an auditing firm that seems to have a lot of patience with repeated restatements by Nortel.
Question What is "cookie jar" accounting?

Answer from http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
Earnings management, often revenue reporting manipulation, that entails the use of reserves to smooth earnings volatility.

Canada-Based Nortel Accounting Cookie Jar Accounting Update: Details Mistakes, Says Executives Will Return Millions in Bonus Payments. Five directors, including Chairman Lynton Wilson and former ambassador James Blanchard, who is also a former Michigan governor, will step down.

When auditors get fired
Network Associates fired PricewaterhouseCoopers, according to various news reports, after the auditor cited "material weakness" in its internal controls in the company's annual report
"Rash of Restatements Rattles," by K.C. Swanson, TheStreet.com, March 17, 2004 http://www.thestreet.com/tech/kcswanson/10149112.html

When auditors quit
Case in point: Last week Gateway (GTW:NYSE) said longtime auditor PricewaterhouseCoopers won't work for it anymore. PwC did the books back in 2000 and 2001 -- an era of aggressive accounting that still haunts Gateway, though it's now under different management.
"Rash of Restatements Rattles," by K.C. Swanson, TheStreet.com, March 17, 2004 http://www.thestreet.com/tech/kcswanson/10149112.html

Bob Jensen's threads on problems of auditing firms are at http://www.trinity.edu/rjensen/Fraud001.htm

Sarbanes-Oxley: What is too much of a seemingly good thing?

"Class-Action Sarbox," The Wall Street Journal, January 7, 2006; Page A6 --- http://online.wsj.com/article/SB113659722018040446.html?mod=opinion&ojcontent=otep

At first glance, the study from Stanford University and Cornerstone Research seems to be good news, noting that the number of class-action suits filed in 2005 dropped to 176 from 213 in 2004 -- a 17% decrease. Good-governance types are claiming this decline is a direct result of the 2002 Sarbanes-Oxley legislation working as intended, keeping companies on the straight and narrow.

Yet as any first-year Wall Street analyst knows, this minor legal reprieve is better attributed to last year's relatively stable stock market. Class-action suits arise out of booms and busts in equity markets: As share prices dive, plaintiffs' lawyers swarm. Yet with last year's stock market less volatile than at any point since 1996, the "strike suit" pickings were lean.

So what then accounts for those 176 suits? Try . . . Sarbanes-Oxley. It appears the tort bar is now using the law's strict financial-reporting requirements as its latest excuse to sue. A whopping 89% of the suits alleged misrepresentations in financial documents, while 82% claimed false forward-looking statements. Lawyers have certainly used financial documents as a reason to sue in the past, but this year's notable uptick in the number of suits filed that cite this cause of action suggests that the tort bar has found a whole new line of business.

The real news here is that lawyers managed to drum up so many results-related suits in a year when the stock market was stable and corporate earnings were strong. Just wait for the next economic downturn, when class-action lawyers will be able to exploit Sarbox's new "internal controls" documentation as a roadmap. Our guess is that we have only begun to discover the ways in which Sarbox will be a trial-bar bonanza.

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Jensen Comments
A useful reference site from Cornerstone is at http://www.cornerstone.com/fram_res.html
A Stanford University Press Release is at http://securities.stanford.edu/scac_press/20060103_CR_SCAC.pdf
The Stanford University Law School Class Action Clearinghouse is at http://securities.stanford.edu/

Widespread price scanner fraud and errors
Please verify that your cash register receipt records the prices promised.
You may be getting unknown charges to your credit card account.
I wonder if they ever undercharge? I doubt it!

"New Legislation Would Prevent Overpricing," by Suzanne Le Mignot, CBS2Chicago, February 4, 2006 --- http://cbs2chicago.com/local/local_story_035165905.html

It's called scanner scamming. The price on the scanner doesn't match the price on a store shelf, and consumers get overcharged.

As CBS 2's Suzanne Le Mignot explains, Illinois Lt. Gov. Pat Quinn is proposing a new retail consumer act that hits stores with a steep penalty if they are caught making a scanner error.

Bob Hinde reported that he bought two tomatoes at a Dominick's food store in Des Plaines, and he said he was charged a lot more than the tomatoes cost.

"This was so egregious," Hinde said. "It was a clerical error of $102.15."

Hinde added: "They were very embarrassed. They gave us our money back immediately. But this is a mistake easy to catch."

Hinde happens to be the former consumer protection administrator in Des Plaines. In that position, he was responsible for making sure the prices on store shelves matched those at the register.

"The ones you don't catch are the 50 cents. The dollar and a half. The $3," he said. "Today, mothers and fathers are both working -- (they) dash into stores, boom, pay, out again."

Continued in article

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

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

The Sad, Sad State of Corruption in Mexico
In 2005, a survey conducted by Transparency International showed that between 31 and 45% of Mexicans had someone in their family forced to pay a bribe to a public official in the past year. Corruption is an endemic aspect of Mexican government. Extending from the local police who routinely shake down people who commit minor infractions for cash all the way to top government officials who habitually cut deals with political cronies and drug traffickers to shape Mexican law. After endless decades, this culture of corruption has taken its toll. Over 20% of the Mexican population lives in poverty, only 62% of people have access to clean drinking water, 25% of the economy is illegal, and in the oil rich state of Chiapas; 40% of all homes have dirt floors and 21% have no electricity. All in a country with a $1 trillion gross domestic product.
Justin Darr, "America Versus Mexico's Ponzi Pyramid Scheme," GOPUSA," January 24, 2006 --- http://www.gopusa.com/commentary/guest/2006/jd_01241.shtml

Mexican Army Invades U.S. Border
Mexican soldiers and civilian smugglers had an armed standoff with nearly 30 U.S. law enforcement officials on the Rio Grande in Texas on Monday afternoon, according to Texas police and the FBI. Mexican military Humvees were towing what appeared to be thousands of pounds of marijuana across the border into the United States, said Chief Deputy Mike Doyal, of the Hudspeth County Sheriff's Department. Mexican Army troops had several mounted machine guns on the ground more than 200 yards inside the U.S. border -- near Neely's Crossing, about 50 miles east of El Paso -- when Border Patrol agents called for backup. Hudspeth County deputies and Texas Highway patrol officers arrived shortly afterward, Doyal said.
Sara A. Carter and Kenneth Todd Ruiz, "Police face Mexican military, smugglers Armed standoff along U.S. border," Daily Bulletin, January 24, 2006 --- http://www.dailybulletin.com/news/ci_3430815
Jensen Comment
In its favor, the Mexican Army also rushed troops to Mississippi to seriously help clean up some of the Katrina mess in Mississippi.

The Sad, Sad State of Corruption After Katrina
The FBI has uncovered fraud by public officials in the wake of Hurricane Katrina and has created a task force to investigate corruption as federal money pours into the Gulf Coast region, Mississippi's top agent said Monday. "We are seeing public officials facilitating some of the fraud," John G. Raucci, agent in charge in Mississippi, said in an interview with The Associated Press. "It's not widespread, I will say that, but we have seen it and we have begun addressing it."
"FBI Uncovers Post-Katrina Fraud," ABC News, January 23, 2006 --- http://abcnews.go.com/US/wireStory?id=1533999

Where does criminal money go? To the laundry!
An international money manager who catered to wealthy criminals in New York and around the globe has been nabbed for allegedly laundering a stunning $1 billion his clients accumulated doing everything from stock fraud to peddling the "date-rape" drug. Martin Tremblay, 43, billed his Bahamas-based Dominion Investments as a legitimate company offering "expertise" in "international tax planning, asset protection and other wealth preservation techniques." But, according to the feds, Tremblay, a Canadian citizen, lined his pockets by servicing an...
"MONEY MAN LAUNDERED $1B: FEDS," New York Post, January 24, 2006 --- http://www.nypost.com/news/regionalnews/62159.htm

Question
What can you do to prevent being taken on eBay?
(Word of Caution: Never open an email message that pretends to be from Pay-Pal)

Two brothers have published a book of "true tales of treachery, lies and fraud" from eBay. "Dawn of the eBay Deadbeats" contains stories written by eBay buyers and sellers. From stories of disappointing purchases to out-and-out fraud, the book is a manual of what can go wrong when buying and selling on auction sites. Brothers Stephen and Edward Klink co-wrote the book, illustrated by Clay Butler. The idea for the book sprung from a website Stephen Klink had created. A New Jersey police office, he founded eBayersThatSuck.com - a site that aims to help people avoid auction scams - after he himself was ripped off online.
Ina Steiner, "Dawn of the eBay Deadbeats: New Book Uncovers Online Auction Treachery," AuctionBytes.com, December 28, 2005 --- http://www.auctionbytes.com/cab/abn/y05/m12/i28/s01

"Beware of eBay deadbeats, author warns," PhysOrg, March 1, 2006 --- http://physorg.com/news11295.html

Imagine buying vintage Spiderman comics for $16,000 and receiving instead, a box of printer paper or losing a whopping $27,000 in purchasing a big rig that didn't exist in the first place. These are just many of the online auction fraud horror stories that brothers Edward and Steve Klink compiled from their eBay watchdog Web site eBayersThatSuck.com (E.T.S.).

Ebay Fraud Specialists - www.sherlockinvestigations.com
Sherlock helps you get back your cash. Contact us today!

World-Check - www.world-check.com
Leading KYC compliance database Heightened Risk People and Entities

In their book "Dawn of the eBay Deadbeats," some 70 strange-but-true stories were collected and retold with the help of illustrator Clay Butler.

The December 2005 publishing of the book comes just in time as the online auction giant has been criticized by consumer groups, most recently by the U.K. magazine "Computing Which?" for its passive and sometimes delayed approach in handling fraud reports.

At any given time, the site has 78 million listings, and 6 million new listings are added each day.

And while, eBay maintains that less than .01 percent of all listings end in a confirmed case of fraud, that could mean that of the 1.9 billion listings reported by eBay in 2005, that 190,000 cases were confirmed frauds in the last year.

Currently there are almost 900 horror stories from eBay fraud victims are on the E.T.S. site whose motto is "Winning the war on deadbeats."

And already the brothers are working on the next volume of horror stories, encouraging victims who want to get their tales to be told to get into contact with them.

United Press International spoke with Edward Klink about the recent book, their watchdog Web site, and the current state of eBay.

"We had collected hundreds of stories on the Web site and figured it was time to take these stories to a wider audience and let the victims have their say," Edward Klink said. "Plus with our combined backgrounds, Steve is a police officer and I'm a business writer, we felt we were ideally suited to get the job done."

Fraud on eBay can take on many forms including items paid for that vary from the description in the sale, unpaid items, and spoof eBay or Pay-Pal e-mails.

And like the many victims on their site, the brothers too have encountered the problem of auction fraud.

In 2003, Steve, a New Jersey police officer, won a set of "new" speakers, only to find that it looked as if they were "gnawed on by a wild animal."

"The seller said they weren't that way when mailed, and eBay said there was nothing they could do," Klink said. "Annoyed that he was stuck with the merchandise and given no recourse, Steve started www.ebayersthatsuck.com and stories began pouring in from around the world."

And the site has received a positive response since it's been up and running.

"People love it," Klink said. "On eBay, their official boards are closely monitored and talk about problems and scams and eBay's failings are not generally tolerated. So E.T.S. gives them an outlet. When it first came out Ebayersthatsuck.com was featured on Courttv.com and newspapers as far away as South Africa."

According to Klink, while eBay has what could be considered --"the ultimate business model" -- of collecting fees and delegating the marketing, selling, packaging, shipping, and customer service to eBay users, it's very easy for these same users to fall victim to fraud.

"I think consumers let their guard down when they are sitting at home and surfing the Web with their coffee," he said. "If a stranger offered them a $1,400 antique vase on the street they'd most likely walk away, but when that same vase is on the Internet for some reason the reaction is more, 'Say, now that looks interesting.'"

And have the brothers seen any improvements in eBay's handling of the fraud issue?

"eBay says it is a tiny fraction of all auctions," Klink said, "but the hundreds of people who told us their stories hate being in that tiny group and never thought they would be. Lots of fraud