Accounting Scandal Updates and Other Fraud Between January 1 and March 31, 2008
Bob Jensen at Trinity University

Bob Jensen's Enron Updates are at --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

Other Documents

• Scandal Updates --- http://www.trinity.edu/rjensen/fraud.htm#ScandalUpdates  

• Bob Jensen's Enron Quiz --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

• What's Right and What's Wrong With SPEs, SPVs, and VIEs --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

• Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

• Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

• Electronic Business Controversies --- http://www.trinity.edu/rjensen/ecommerce/000start.htm

• Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm 

• The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm 

• Fraud References --- http://www.trinity.edu/rjensen/fraud.htm#References 

• Fraudulent Dealer Tricks:  An Interactive DHTML Illustration ---  http://www.trinity.edu/rjensen/FraudDealerTricks.htm 
  This includes a summary of ten unethical tricks of the trade by automobile dealers.

• Selected Scandals in the Largest Remaining Public Accounting Firms --- http://www.trinity.edu/rjensen/fraud.htm#others 

• Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.htm 

Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp 

Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp 

Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk 

Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

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

Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 --- http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

Accounting and finance professors should use this video every semester in class!
The best explanation ever of the sub-prime (meaning lending to borrowers with much less than prime credit ratings) mortgage greed and fraud.
The best explanation ever about securitized financial instruments and worldwide banding frauds using such instruments.
The best explanation ever about how greedy employees will cheat on their employers and their customers.

"House Of Cards: The Mortgage Mess Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on CBS, January 27, 2008 --- http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515.shtml
For a few days the video may be available free.
The transcript will probably be available for a longer period of time.

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

Richard "Dickie" Scruggs, a founding father of the modern mega-tort class-action industry, pleaded guilty yesterday to trying to bribe a judge. It is notable but perhaps unsurprising in this particular week, when we have already seen one famous figure, New York Governor Eliot Spitzer, brought down by his own sense of invulnerability to the law or common sense. In the 1990s, Mr. Scruggs famously got corporate defendants, and whole industries, to make mammoth settlements in lieu of fighting the thousands of plaintiffs the Mississippi tort lawyer had gathered into a class-action lawsuit. Mr. Scruggs was a legal entrepreneur, who figured out that the combined weight of endless plaintiffs and bad publicity would force even the richest corporations to plead for a settlement. It was his further insight that his percentage of the take, aka contingency fees, would make him and his associates rich as Croesus. The trappings of wealth that attended the class-action plaintiffs bar are the stuff of legend.
"Dickie's Plea," The Wall Street Journal, March 15, 2008; Page A10 --- http://online.wsj.com/article/SB120553770906338151.html?mod=djemEditorialPage

"Former Banker Convicted of Insider Trading," by Michael J. de la Merced, The New York Times, February 5, 2008 --- http://www.nytimes.com/2008/02/05/business/05insider.html?_r=1&ref=business&oref=slogin

A former Credit Suisse banker accused of leaking confidential information about several major deals, including the $45 billion buyout of TXU, as part of a $7.5 million insider trading scheme was convicted Monday in Federal District Court in Manhattan

After three days of deliberation, the jury found the former banker, Hafiz Muhammad Zubair Naseem, 37, guilty of one count of conspiracy and 28 counts of insider trading for relaying insider information to Ajaz Rahim, a high-level banker in Pakistan and once Mr. Naseem’s boss.

From the beginning, the case against Mr. Naseem was notable for its scope and the way it coincided with a two-year boom in mergers. In the last two years, prosecutors have filed insider trading cases, some involving broad schemes, involving bankers at nearly all the top securities firms.

But none roped in financiers as high-ranking as Mr. Rahim, the former head of investment banking at Faysal Bank in Karachi and one of the most successful traders in Pakistan. And few involved deals as big as the acquisition of TXU, the Texas power giant that was bought by Kohlberg Kravis Roberts and TPG Capital.

“We respectfully disagree with the jury’s verdict,” a lawyer for Mr. Naseem, Michael F. Bachner, said Monday, adding that Mr. Naseem would file an appeal.

Mr. Naseem came to the United States in 2002 to earn a business degree at New York University. He worked briefly at JPMorgan Chase before moving to Credit Suisse’s energy group in March 2006.

Prosecutors said that Mr. Naseem used his position as a banker almost immediately to feed information about deals to Mr. Rahim, who traded on the tips before the mergers were announced. They offered as evidence scores of phone calls Mr. Naseem made and e-mail messages he sent from his office, including one message that read, “Let the fun begin.”

Beginning in the fall of 2006, regulators at the New York Stock Exchange were tracking suspicious trading in the options of Trammell Crow before its purchase by the CB Richard Ellis Group. The investigation eventually widened to nine deals, including the TXU buyout and Express Scripts’ failed bid for Caremark Rx. Credit Suisse was an adviser on all nine deals.

Lawyers for Mr. Naseem have derided prosecutors’ evidence as circumstantial at best.

Mr. Rahim, who also faces charges, remains in Pakistan. But Mr. Naseem has borne the brunt of the government’s case. He was initially denied bail after prosecutors deemed him a flight risk. Mr. Naseem later posted a $1 million bond but was mostly confined to his home in Rye Brook, N.Y.

Continued in article

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

The Justice Racer Cannot Beat a Snail:  Andersen's David Duncan Finally Has Closure

"Andersen Figure Settles Charges: Former Head of Enron Team Barred From Some Professional Duties," by Kristen Hays, SmartPros, January 29, 2008 --- http://accounting.smartpros.com/x60631.xml 

The former head of one-time Big Five auditing firm Arthur Andersen's Enron accounting team has settled civil charges that he recklessly failed to recognize that the risky yet lucrative client cooked its books.

David Duncan, who testified against his former employer after Andersen cast him aside as a rogue accountant, didn't admit or deny wrongdoing in a settlement with the Securities and Exchange Commission announced Monday.

The SEC said in the settlement that he violated securities laws and barred him from ever practicing as an accountant in a role that involves signing a public company's financial statements, such as a chief accounting officer. But he could be a company director or another kind of officer and was not assessed any fines or otherwise sanctioned.

Three other former partners at the firm have been temporarily prohibited from acting as accountants before the SEC in separate settlements unveiled Monday.

Andersen crumbled amid the Enron scandal after the accounting firm was indicted, tried and found guilty -- a conviction that eventually was overturned on appeal.

The settlements came six years after Andersen came under fire for approving fudged financial statements while collecting tens of millions of dollars in fees from Enron each year.

Greg Faragasso, an assistant director of enforcement for the SEC, said Monday that the agency focused on wrongdoers at Enron first and moved on to gatekeepers accused of allowing fraud to thrive at the company.

"When auditors of public companies fail to do their jobs properly, investors can get hurt, as happened quite dramatically in the Enron matter," he said.

Barry Flynn, Duncan's longtime lawyer, said his client has made "every effort" to cooperate with authorities and take responsibility for his role as Andersen's head Enron auditor.

That included pleading guilty to obstruction of justice in April 2002, testifying against his former employer and waiting for years to be sentenced until he withdrew his plea with no opposition from prosecutors.

"After six years of government investigations and assertions, surrounding his and Andersen's activities, it was decided that it was time to get these matters behind him," Flynn said.

Duncan, 48, has worked as a consultant in recent years.

He was a chief target in the early days of the government's Enron investigation as head of a team of 100 auditors who oversaw Enron's books. In the fall of 2001, he and his staff shredded and destroyed tons of Enron-related paper and electronic audit documents as the SEC began asking questions about Enron's finances.

Andersen fired Duncan in January 2002, saying he led "an expedited effort to destroy documents" after learning that the SEC had asked Enron for information about financial accounting and reporting.

The firm also disciplined several other partners, including the three at the center of the other settlements announced Monday. They are Thomas Bauer, 54, who oversaw the books of Enron's trading franchise; Michael Odom, 65, former practice director of the Gulf region for Andersen; and Michael Lowther, 51, the former partner in charge of Andersen's energy audit division.

Their settlement agreements said that they weren't skeptical enough of risky Enron transactions that skirted accounting rules. Odom and Lowther were barred from accounting before the SEC for two years, and Bauer for three years. None was fined.

Their lawyer, Jim Farrell, declined to comment Monday.

Duncan's firing and the other disciplinary moves were part of Andersen's failed effort to avoid prosecution. But the firm was indicted on charges of obstruction of justice in March 2002, and Duncan later pleaded guilty to the same charge.

In Andersen's trial, Duncan recalled how he advised his staff to follow a little-known company policy that required retention of final audit documents and destruction of drafts and other extraneous paper.

That meeting came 11 days after Nancy Temple, a former in-house lawyer for Andersen, had sent an e-mail to Odom advising that "it would be helpful" that the staff be reminded of the policy.

Duncan testified that he didn't believe their actions were illegal at the time, but after months of meetings with investigators, he decided he had committed a crime.

Bauer and Temple invoked their 5th Amendment rights not to testify in the Andersen trial. However, Bauer testified against former Enron Chairman Ken Lay and CEO Jeff Skilling in their 2006 fraud and conspiracy trial.

Andersen insisted that the document destruction took place as required by policy and wasn't criminal, but the firm was convicted in June 2002.

Three years later the U.S. Supreme Court unanimously overturned the conviction because U.S. District Judge Melinda Harmon in Houston gave jurors an instruction that allowed them to convict without having to find that the firm had criminal intent.

That ruling paved the way for Duncan -- the only individual at Andersen charged with a crime -- to withdraw his guilty plea in December 2005.

In his plea, he said he instructed his staff to comply with Andersen's document policy, knowing the destroyed documents would be unavailable to the SEC. But he didn't say he knew he was acting wrongfully.

I draw some conclusions about David Duncan (they're not pretty) at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

My Enron timeline is at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronTimeline

My thread on the Enron/Worldcom scandals are at http://www.trinity.edu/rjensen/FraudEnron.htm

What to do if you suspect identity theft --- http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

Identity Theft Resource Center --- http://www.idtheftcenter.org/

Question
Why doesn't some of the information below appear prominently on Hannaford's Website?
Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.

Hannaford is a large New England-based supermarket chain with a good reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to overlook this breach entirely --- http://www.hanaford.com/
My opinion of Hannaford dropped to zero because there is no help on the company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford (even recorded messages might help)

Hannaford's is going to belatedly get a firewall and improve encryption of networked credit card information (the company remains tight lipped regarding whether it followed encryption rules up to now) --- http://www.geeksaresexy.net/2008/03/18/hannaford-data-breach-is-likely-much-worse-than-reported/ 

And when the Vice President of Marketing gets quoted in the press talking about the security breach, it means that there is no CIO (Chief Information Officer) at the company.  It means their network was designed haphazardly with only a minimal thought to security.  What, they couldn’t get a quote from the President of Marketing?  How does the dairy stocker in store 413 feel about the breach?  He probably knows as much about network security as the Marketing VP.

All of this means that as the days go on, you will see more and more headlines talking about this breach being much worse than originally thought. The number of fraud cases will climb precipitously… and no one will be fired from Hannaford.

If you shop there and have used a credit card, get a copy of your credit report ASAP.

By law, you get one free credit report per year. You can contact them below.

Equifax: 800-685-1111; www.equifax.com

Experian: 888-EXPERIAN (888-397-3742); www.experian.com

TransUnion: 800-916-8800; www.transunion.com

Also see http://www.geeksaresexy.net/2008/03/19/followup-hannaford-used-rapid7-for-security/

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

What to do if you suspect identity theft --- http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

I'm sorry," Reyes said. "There is much that I regret. If I could turn back the clock, I would."
As pointed out in the Opinion Journal, January 18, 2008 Reyes' choice of words is truly ironic since he was convicted of options "backdating." When he committed the fraud he truly did turn the clock back. Now he would like to turn it back again since he got caught.

From The Wall Street Journal Accounting Weekly Review, January 18, 2008

Brocade Ex-CEO Gets 21 Months in Prison by Justin Scheck and Steve Stecklow The Wall Street Journal Jan 17, 2008 Page: A3 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB120050817585095031.html?mod=djem_jiewr_ac   TOPICS: Accounting, Financial Accounting, Financial Reporting, Stock Options SUMMARY: Gregory Reyes, the former chief executive of Brocade Communications Systems Inc. was the first to go on trial and be convicted over the improper dating of stock-option awards. The backdating scandal came to light from academic accounting research that was brought to the attention of the WSJ. Executives committing this fraudulent activity were awarded stock options that were backdated to a point at which the companies' stock prices were lower, often the lowest of the year or quarter. The related article describes the practice as "illegal if not accounted for properly." Mr. Reyes had faced a potential 20 year sentence, but that "...was reduced late last year when Judge Breyer ruled there was no quantifiable loss of money to the company." CLASSROOM APPLICATION: Accounting for stock options and related disclosures QUESTIONS:  1.) Summarize the accounting and disclosure requirements for stock options. Refer to authoritative accounting literature and include a description of dates associated with stock option grants sufficient to discuss the issues in the article. 2.) What does it mean to "back date" a stock option award? 3.) The related article describes the practice of backdating stock options as "illegal if not accounted for properly." What accounting would have been appropriate? You may refer to your answer to question 1 as necessary. 4.) The potential sentence and fine to Mr. Reyes was reduced by the judge in the case because he "ruled there was no quantifiable loss of money to the company." What are the costs of stock option to the issuing company? To its shareholders? Support your answer.   Reviewed By: Judy Beckman, University of Rhode Island   RELATED ARTICLES:  Brocade Ex-CEO Seeks To Overturn Conviction by Justin Scheck Dec 13, 2007 Page: A15

Bob Jensen's threads on backdating frauds are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

SEC reaches settlement with Monster's McKelvey for stock options backdating
McKelvey caused Monster to misrepresent in its periodic filings and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award, when that was not the case. McKelvey also caused Monster to file materially misstated financial statements with the Commission in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles. As a result, Monster overstated its aggregate pretax operating income by approximately $339.5 million, for fiscal years 1997 through 2005. Although McKelvey did not receive backdated options, he benefited from the scheme by granting backdated options to four individuals that he personally employed, including three pilots and a mechanic. Under the settlement, McKelvey will be permanently enjoined from violating Section 17(a) of the Securities Act of 1933, and Sections 10(b), 13(b)(5) and 14(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13a-14, 13b2-1, 13b2-2 and 14a-9, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Additionally, McKelvey will pay $275,989.72 in disgorgement and prejudgment interest, and will be barred from serving as an officer or director of a public company. The settlement does not include a civil penalty due to overriding personal circumstances related to McKelvey. McKelvey agreed to the settlement without admitting or denying the allegations in the complaint.
AccountingWeb, January 29, 2008 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=104543

Bob Jensen's threads on options backdating are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

"My Life in Crime: Chronicles of a Forensic Accountant," by William C. Barrett III, SmartPros, January 2008 ---
http://accounting.smartpros.com/x59274.xml

The profession of forensic accounting is like any other industry niche: You evolve to a plateau where track record and honed skills permit you to "hold out" as a professional. Then, like any other business, you starve a lot before you become an overnight sensation -- in demand and truly at the top of your practice in providing value -- both on scene and in the courtroom.

Here are a few of the cases I have directed to give you an idea of how well-developed professional skepticism prevails to reveal the fraudster -- usually a well-educated, respected member of the community, quite adept at concealing and perpetuating fraud by bending others to his or her will.

Continued in article at http://accounting.smartpros.com/x59274.xml

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

Just when it appeared House Republicans had turned the corner on earmark reform, party leaders did the unthinkable. They picked pork-loving Rep. Jo Bonner (R-Ala.) for the vacant seat on the Appropriations Committee, bypassing conservatives such as Reps. Jeff Flake (R-Ariz.) and Marilyn Musgrave (R-Colo.). In doing so, the Republicans missed a golden opportunity to show they were committed to real reform.Bonner may talk a good game when it comes to earmark reform. His record, however, is abysmal. The three-term Republican scored just 2% on the Club for Growth’s 2007 RePORK Card, meaning he voted for just one of the 50 anti-pork amendments offered by conservatives. That’s the same score as liberal Reps. Steny Hoyer (D-Md.), Bill Jefferson (D-La.) and Jim Moran (D-Va.). Musgrave, meanwhile, notched a score of 94%. And Flake not only supported all 50 amendments, he introduced many of them.
Robert Bluey, "Backtracking on Earmark Reform," Townhall, February 17, 2008 --- Click Here

The former treasurer of a Republican Congressional fund-raising committee may have stolen hundreds of thousands of dollars by submitting elaborately forged audit reports for five years using the letterhead of a legitimate auditing firm, a lawyer for the committee said Thursday. Robert K. Kelner, a lawyer with Covington & Burling, who was brought in by the National Republican Congressional Committee to investigate accounting irregularities, said a new audit showed that the committee had $740,000 less on hand than it believed. Mr. Kelner said it was unclear whether that amount represented money siphoned off by the former treasurer, Christopher J. Ward. Mr. Ward, who is under investigation by the Federal Bureau of Investigation, had the authority to make transfers of committee money on his own, Mr. Kelner said . . . Mr. Kelner lamented the fact that the finances of the Republican committee had been set up to allow Mr. Ward to authorize wire transfers of money unilaterally.
Neal A. Lewis, "Sham Audits May Have Hid Theft by G.O.P. Committee Treasurer, Lawyer Says," The New York Times, March 14, 2008 --- http://www.nytimes.com/2008/03/14/us/politics/14repubs.html?_r=1&oref=slogin

Jensen Comment
The first line of defense against fraud is internal control. This committee had no such control.

Question
This is some of the best material ever for legal-writer John Grisham --- http://en.wikipedia.org/wiki/John_Grisham
But will he have the courage to venture into this ethical snakepit?

"Lawsuit, Inc.," The Wall Street Journal, February 25, 2008; Page A14 --- http://online.wsj.com/article/SB120389878913889385.html

Should state Attorneys General be able to outsource their legal work to for-profit tort lawyers, who then funnel a share of their winnings back to the AGs? That's become a sleazy practice in many states, and it is finally coming under scrutiny -- notably in Mississippi, home of Dickie Scruggs, Attorney General Jim Hood, and other legal pillars.

The Mississippi Senate recently passed a bill requiring Mr. Hood to pursue competitive bidding before signing contracts of more than $500,000 with private lawyers. The legislation also requires a review board to examine contracts, and limits contingency fees to $1 million. Mr. Hood is trying to block the law in the state House, and no wonder considering how sweet this business has been for him and his legal pals.

We've recently examined documents from the AG's office detailing which law firms he has retained. We then cross-referenced those names with campaign finance records. The results show that some of Mr. Hood's largest campaign donors are the very firms to which he's awarded the most lucrative state contracts.

The documents show Mr. Hood has retained at least 27 firms as outside counsel to pursue at least 20 state lawsuits over five years. The law firms are thus able to employ the full power of the state on their behalf, while Mr. Hood can multiply the number of targets.

Those targets are invariably deep corporate pockets: Eli Lilly, State Farm, Coca-Cola, Merck, Boston Scientific, Vioxx and others. The vast majority of the legal contracts were awarded on a contingency fee basis, meaning the law firm is entitled to a big percentage of any money that it can wring from defendants. The amounts can be rich, such as the $14 million payout that lawyer Joey Langston shared with the Lundy, Davis firm in an MCI/WorldCom settlement.

These firms are only too happy to return the favor to Mr. Hood via campaign contributions. Campaign finance records show that these 27 law firms -- or partners in those firms -- made $543,000 in itemized campaign contributions to Mr. Hood over the past two election cycles.

The firm of Pittman, Germany, Roberts & Welsh was hired by Mr. Hood on a contingency basis to prosecute State Farm. According to finance documents, partner Crymes Pittman donated $68,570 to Mr. Hood's campaign, and other Pittman partners chipped in $33,500 more.

Partners in the Langston Law Firm gave more than $130,000 to elect Mr. Hood, having been retained to sue Eli Lilly. Lead partner Joey Langston has separately pleaded guilty to conspiracy to corruptly influence a judge.

Among others: The Wolf Popper firm from New York was retained to pursue Sonus Networks, a telecommunications firm; Wolf Popper and its partners gave $27,500 to Mr. Hood's campaign. Bernstein, Litowitz sued at least four different companies for the AG, and the firm and its partners chipped in $41,500. Partners at Schiffren, Barroway went after Coca-Cola and Viacom, and donated $37,500.

Then there are the law firms that have piggybacked their class action suits on Mr. Hood's state prosecutions. Mr. Scruggs and his Katrina litigation partners realized a nearly $80 million windfall after Mr. Hood used his powers to pressure State Farm into settling both the state and Scruggs suits. Mr. Scruggs gave $33,000 to Mr. Hood in the 2007 election cycle. (Mr. Scruggs and his son Zach have been indicted in an unrelated bribery case, and claim to be innocent.) David Nutt, a partner in Mr. Scruggs's Katrina litigation, also gave $25,500 to Mr. Hood's campaign last year.

The Mississippi AG has also benefited from the national network of trial lawyers and its ability to funnel money into the state. We've examined finance records of the Democratic Attorneys General Association, a so-called 527 group that helps elect liberal prosecutors. In 2007, law firms that have benefited from Mr. Hood gave the organization $572,000, and in turn the group wrote campaign checks in 2007 to Mr. Hood for $550,000. Guess who supplied no less than $400,000 to the group? Messrs. Scruggs and Langston.

Add all of this up, and in 2007 alone Mr. Hood received some $790,000 from partners and law firms that have benefited financially from his office. That is more than half of all of Mr. Hood's itemized contributions for 2007.

This kind of quid pro quo is legal in Mississippi and most other states. However, if this kind of sweetheart arrangement existed between a public official and business interests, you can bet Mr. Hood would be screaming about corruption. Yet Mr. Hood and his trial bar partners are fighting even Mississippi's modest attempt to require more transparency in their contracts. The AG says it's all part of a plot to undermine his attempts to "recoup the taxpayers' money from corporate wrongdoers."

The real issue is the way this AG-tort bar mutual financial interest creates perverse incentives that skew the cause of justice. A decision to prosecute is an awesome power, and it ought to be motivated by evidence and the law, not by the profit motives of private tort lawyers and the campaign needs of an ambitious Attorney General. Government is supposed to act on behalf of the public interest, not for the personal profit of trial lawyers. The tort bar-AG cabal deserves to be exposed nationwide.

The Most Criminal Class Writes the Laws --- http://online.wsj.com/article/SB120389878913889385.html

The FEI has a new 16-page fraud checklist that can be downloaded for $50. Access to an online database is $129 --- Click Here

"New research provides resources on fraud prevention and financial reporting," AccountingWeb, January 18, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104443

Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), has announced the release of two important new pieces of research designed to aid public company management and corporate boards in the efficient evaluation of their assessment of reporting issues and internal controls. A new FERF Study, entitled "What's New in Financial Reporting: Financial Statement Notes from Annual Reports," examines disclosures from 2006 annual reports for the 100 largest publicly-traded companies which used particularly innovative techniques to clearly address difficult accounting issues. The study identifies and analyzes recent reporting trends and common practices in financial statements.

The report illustrates how companies addressed specific accounting issues recently promulgated by the Financial Accounting Standards Board (FASB), and by the Securities and Exchange Commission (SEC), and in doing so, uncovered a number of trends, which included:

• Most of the disclosures selected appear to have been developed specifically for a company's own operations and industry standards, rather than "boilerplate" disclosures.

• Four accounting areas identified with a considerable variation in disclosures. The examples cited in these areas used innovative techniques to clearly address difficult accounting issues.
   

  1. Commitments and contingencies
      
  2. Derivatives and financial instruments
      
  3. Goodwill and intangibles
      
  4. Revenue recognition

Twenty-five out of 100 filers in the 2006 reporting season reported tangible asset impairments as a critical accounting policy.
 

Many companies report condensed consolidating cash flows statements as part of their segment disclosures, although not required by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

 

To further facilitate use of this report as a reference tool, all of the financial statement footnotes gathered for the study are available to members on the Financial Executives International Web site.

"FERF undertook this study to provide our members with an illustration of how companies have used innovative techniques to clearly address difficult accounting concerns," said Cheryl Graziano, vice president, research and operations for FERF. "Recent accounting issues publicized by the FASB and the SEC have had a direct impact on members of the financial community, and the report shows that many companies are taking action."

"We hope that all financial executives can utilize the report as both a quick update to summarize recent trends in the most annual reporting season, as well as a reference to address common accounting issues. The convenience of the online database will provide executives with a readily handy tool when drafting their own annual reports," said Graziano.

A second piece of research by FEI, entitled the "FERF Fraud Risk Checklist," provides boards of directors and management with a series of questions to help in assessing the potential risk factors associated with fraudulent financial reporting and the misappropriation of assets. These questions were developed from a number of key sources on financial fraud and offer executives a single framework in which to evaluate their company's reporting, while providing a sample structure for management to use in documenting its thought process and conclusions.

"Making improvements to compliance with Sarbanes Oxley is a daily practice for financial executives, and the first step in efficient evaluation of internal controls is the proper assessment of potential exposures or risks associated with fraud," said Michael Cangemi, president and CEO, Financial Executives International. "Through conversations with members of the financial community, we learned that, while this type of risk assessment is a routine skill for auditors, many members of management are not always familiar with this concept. This checklist combines knowledge from the leading resources on fraud to help financial management take a proactive step in evaluating their company's practices and identifying areas for improvement."

The annual report study, including the full report and access to the online database, and the fraud checklist, are available for purchase on the FEI Web site

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

From Jim Mahar's blog on January 25, 2008 ---

Saturday, January 26, 2008

Kerviel joins ranks of master rogue traders:

"In being identified as the lone wolf behind French investment bank Société Générale's staggering $7.1-billion loss Thursday, Jérôme Kerviel joined the ranks of a rare and elite handful of rogue traders whose audacious transactions have single-handedly brought some of the world's financial powerhouses to their knees.

This notorious company includes Nick Leeson, who brought down Britain's Barings Bank in 1995 by blowing $1.4-billion, Yasuo Hamanaka, who squandered $2.6-billion on fraudulent copper deals for Sumitomo Corp. of Japan in 1998, John Rusnak, who frittered away $750-million through unauthorized currency trading for Allied Irish Bank in 2002 and Brian Hunter of Calgary, who oversaw the loss of $6-billion on hedge fund bets at Amaranth Advisors in 2006.

Report on the Transparency International Global Corruption Barometer 2007 ---
http://www.transparency.org/content/download/27256/410704/file/GCB_2007_report_en_02-12-2007.pdf

EXECUTIVE SUMMARY – GLOBAL CORRUPTION BAROMETER 2007...................2

PAYING BRIBES AROUND THE WORLD CONTINUES TO BE ALL TOO COMMON ......3

Figure 1. Demands for bribery, by region 3

Table 1. Countries most affected by bribery 4

Figure 2. Experience of bribery worldwide, selected services 5

Table 2. Percentage of respondents reporting that they paid a bribe to obtain a service 5

Figure 3. Experience with bribery, by service 6

Figure 4. Selected Services: Percentage of respondents who paid a bribe, by region 7

Figure 5. Comparing Bribery: 2006 and 2007 8

CORRUPTION IN KEY INSTITUTIONS: POLITICAL PARTIES AND THE

LEGISLATURE VIEWED AS MOST CORRUPT............................................................8

Figure 6. Perceived levels of corruption in key institutions, worldwide 9

Figure 7. Perceived levels of corruption in key institutions, comparing 2004 and 2007 10

EXPERIENCE V. PERCEPTIONS OF CORRUPTION – DO THEY ALIGN?...................10

Figure 8. Corruption Perceptions Index v. citizens’ experience with bribery 11

LEVELS OF CORRUPTION EXPECTED TO RISE OVER THE NEXT THREE YEARS....11

Figure 9. Corruption will get worse, worldwide 11

Figure 10. Expectations about the future: Comparing 2003 and 2007 12

PUBLIC SCEPTICISM OF GOVERNMENT EFFORTS TO FIGHT CORRUPTION – IN

MOST PLACES .......................................................................................................13

Table 3. How effectively is government fighting corruption? The country view 13

CONCLUSIONS ......................................................................................................13

APPENDIX 1: THE GLOBAL CORRUPTION BAROMETER 2007 QUESTIONNAIRE15

APPENDIX 2: THE GLOBAL CORRUPTION BAROMETER – ABOUT THE SURVEY17

APPENDIX 3: REGIONAL GROUPINGS..................................................................20

GLOBAL CORRUPTION BAROMETER 2007..........................................................20

APPENDIX 4: COUNTRY TABLES..........................................................................21

Table 4.1: Respondents who paid a bribe to obtain services 21

Table 4.2: Corruption’s impact on different sectors and institutions 22

Table 4.3: Views of corruption in the future 23

Table 4.4: Respondents' evaluation of their government's efforts to fight corruption 24

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

"In Lawsuit, College Board Accuses Company of Circulating Copyright-Protected SAT Questions,"  by Elizabeth R. Farrell,  Chronicle of Higher Education, February 25, 2008 --- Click Here

A test-preparation company in Texas is being sued by the College Board for what it calls "one of the largest cases of a security breach in our company's history," according to Edna Johnson, a senior vice president of the nonprofit group, which owns the SAT.

In a lawsuit filed last week in U.S. District Court in Dallas, the College Board is seeking unspecified damages against the company, Karen Dillard's College Prep LP, which it says illegally obtained copies of SAT and PSAT tests before they were available to the public. The lawsuit also accuses the company of violating copyright-protection laws by circulating and selling materials that included test questions owned by the College Board.

The lawsuit arose after a former employee of the test-preparation company reported information to the College Board. Karen Dillard, the owner of the company, said the employee was disgruntled but would not elaborate on why.

Ms. Dillard did not deny that one of her employees obtained a copy of the SAT that was administered in November 2006 before the test was given. But Ms. Dillard said her company did not use any questions from that test in preparatory materials it provided to clients.

The lawsuit states that the employee got the test from his brother, the principal of a high school in Plano, Tex. The principal has been put on paid leave while the Plano school district investigates the matter, according to the Associated Press.

Copyright Confusion

In reference to the copyright allegations in the lawsuit, Ms. Dillard said in an interview on Friday that she had believed she was lawfully allowed to use materials she had purchased from the College Board before 2005.

Part of the confusion may stem from a shift in the College Board's policies regarding circulation of previous test materials. Until 2005, the company would sell copies of previously given SAT's to companies. After the SAT was revamped that year, the College Board no longer sold those materials. At that time, the company also began to offer its own online test-preparation course to students, which now costs $69.95.

"We believe part of the motivation of the College Board in bringing this lawsuit," Ms. Dillard said, "is to drive test-preparation companies like ours out of business so they can dominate the industry with their own test-preparation materials, which are for sale."

Ms. Dillard said she also thinks that the College Board is going to great efforts to publicize the lawsuit to make an example out of her company. To support that point, she said that Justin Pope, a higher-education reporter for the Associated Press, received a copy of the lawsuit and contacted her for comment before it was filed.

When contacted by The Chronicle, Mr. Pope said he could not confirm how or when he received the lawsuit, and could not comment further about the matter.

The lawsuit is the culmination of a four-month investigation by lawyers for the College Board. Two lawyers from the firm Wilmer Cutler Pickering Hale and Dorr LLP, along with a representative for the Educational Testing Service, which administers the SAT, visited Ms. Dillard's office several months ago.

Ms. Dillard said that, at that time, her company fully cooperated with all requests for information and interviews with employees, and that she also provided personal financial records to the lawyers.

Ms. Dillard also said that her company offered to settle the matter for $300,000, but that lawyers for the College Board made a counteroffer of $1.25-million, a sum her company could not afford.

Ms. Johnson, of the College Board, said she could not comment on any offers made in settlement negotiations.

Continued in article

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

Fraud Alert on Purchasing/Selling Carbon Offsets

"Carbon Offsets: Government Warns of Fraud Risk," by Christopher Joyce, NPR, January 3, 2008 ---
http://www.npr.org/templates/story/story.php?storyId=17814838

There is something new to feel guilty about: carbon.

This new form of remorse is found among people who think that their lifestyle — driving, plane trips or maybe just leaf-blowing — adds too much climate-warming carbon dioxide to the air.

The guilty can now buy something called a "carbon offset." Essentially, you pay someone else to reduce or "offset" carbon emissions equal to your own.

It's a booming new trade, but the federal government is worried that consumers are getting ripped off. The Federal Trade Commission has announced it will investigate the offset business.

For the consumer, buying an offset is pretty straightforward. You go to a broker and pay a few bucks for every ton of CO2 you want to offset. The average amount each American adds to the air is about 20 tons annually.

The broker promises that your money will pay for a project somewhere that will reduce carbon emissions, say, by growing trees that soak up that CO2 or building a solar energy plant.

Pankaj Bhatia of the World Resources Institute, an environmental think tank, says the business is hot. In fact, trade in this offset market is figured to be about $100 million a year and growing fast.

Bhatia's job is to assess carbon footprints — how much carbon you or your business emits. He says he's been very busy.

"Today, I got a phone call from a group that is managing concerts," he says, "and they wanted to know how they could quantify emissions from the transportation by helicopters of their equipment." The concert promoters wanted to buy offsets to neutralize the CO2 their concert produced.

How Much and For What?

But how do people know they are getting what they are paying for? After all, this is a market that trades in a gas, or more accurately, units of a gas that are not produced.

In the United States, the trading is voluntary and nobody is in charge. That worries people whose job it is to protect consumers.

"Our concern is that because these claims are very hard to substantiate and consumers can't easily tell they're getting what they pay for, there is the real possibility of fraud in this market," says Jim Kohm of the FTC's enforcement division.

Kohm says he does not know yet if there is much fraudulent carbon trading. But he is suspicious. "There's been an explosion in green marketing," he says. "There are claims that we didn't see in the market 10 years ago. Carbon offsets are one of those new claims."

There is a raft of new "carbon-neutral" products. For instance, there are potato chips and rock concerts that are advertised as "clean" because their makers or sponsors have bought offsets to counterbalance their emissions.

What the FTC Is Looking For

One of the things the FTC will investigate is "double selling," Kohm says. "So, for example, if I have solar panels on top of my store and then I sell somebody else the right to claim that carbon scrubbing, I can't then claim the carbon scrubbing for myself, as well."

"And if somebody were selling that two or three times, then that would be a deceptive practice that the FTC would need to take action on."

Another hangup is whether the carbon savings you are buying would have happened anyway. For example, what if a company cuts back on the electricity it uses simply to save money? Can that company then claim it has created an offset and then sell it? Climate experts say no. The offset market, they say, is meant to pay for carbon reductions that would not have happened otherwise.

Some environmental groups say that instead of buying carbon offsets, Americans should do the hard work themselves: use less electricity, switch from coal to wind power, drive less.

Continued in article

Question
Why shouldn't you trust the bond raters assigning letter grades to credit risk?

"Triple-A Trouble," by Justin Fox, Time Magazine, March 24, 2008, Page 32 --- http://www.time.com/time/magazine/article/0,9171,1722275,00.html

The People at Moody's and Standard & Poor's are used to catching flak when debt markets blow up. Why didn't they see the bankruptcy of California's Orange County coming in 1994? Why did they fail to account for the currency risks brewing in Thailand and Indonesia and South Korea in 1997? And how was it that they were still rating Enron's debt as investment grade four days before the company went belly-up in 2001?

The furor over such missteps usually fades quickly. After a congressional hearing or two, the ratings agencies have always been allowed to go their merry and profitable way. And why not? Inability to see into the future isn't a crime, plus there has usually been someone else available to take the fall--like Arthur Andersen in the Enron case.

This time around, though, the ratings agencies didn't just fail to see a financial calamity coming. They helped cause it. Why did collateralized debt obligations (CDOs) based partly on risky subprime mortgages lead to so much trouble? Because Moody's and S&P awarded them dubiously generous letter grades. It's the same story for the mostly incomprehensible tizzy over bond insurance.

What can we do about this? There's actually a simple answer: just declare our independence from bond ratings.

The practice of giving letter grades to bonds to reflect their riskiness was pioneered by John Moody in 1909. But the industry took its current form only in the early 1970s. That's when Moody's and its competitors switched from selling research to investors to charging bond issuers to rate their goods. This approach wasn't unheard of: you have to advertise in Good Housekeeping to get the Good Housekeeping Seal of Approval. What made it problematic was that at about the same time, the Securities and Exchange Commission (SEC) exalted the status of the ratings by writing them into the rules governing securities firms' capital holdings. Since then, the use of bond ratings in regulation has only grown. Many institutional investors are banned from owning non-investment-grade bonds. Bank-capital requirements--the cash and equivalents banks need to keep on hand--give more weight to highly graded securities. And this is increasingly the case not just in the U.S. but around the world.

What all this amounts to, argues Frank Partnoy, a derivatives salesman turned University of San Diego law professor, who is one of the sharpest critics of the ratings status quo, is a "regulatory license" for the ratings agencies. It's certainly a license to print money. Moody's, the lone ratings firm for which data are available, made $702 million in after-tax profit last year, up from $289 million just five years before. Its operating profit margin was a stunning 50% of revenue. By comparison, Google's was 30%.

To keep that profit machine going, Moody's and S&P have to keep finding new things to rate. And they're under intense pressure from issuers and investors alike to get as many securities as possible into the top ratings categories. The result is grade inflation, especially in new products like CDOs. That's how banks and investors around the world ended up owning billions of dollars in triple-A mortgage junk. It also helps explain the growth of bond insurers, companies that used their own triple-A ratings to bump ever more bond issues into the top categories--even as their businesses ceased to be triple-A safe.

One way to combat these tendencies would be to subject the raters to tight regulation by the sec. But that understaffed agency is unlikely to be up to the task, especially since it's not clear what exactly the task would be.

Which leaves the alternative suggested by Partnoy and several economists: cleansing the federal code of its reliance on bond ratings. Among the simplest fixes would be removing the ban on pension funds' holding debt securities rated lower than BBB. The funds can make far riskier investments in stocks and hedge funds, after all. Bank-capital requirements do have to take into account the quality of securities, but there are market-based measures that could at least partly replace ratings.

"The experiment we ran with government relying on the ratings agencies to do its job has failed," Partnoy says. Time for a new experiment.

Bob Jensen's threads on dubious bond raters are at http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Question
Did the Motion Picture Association of America Lie on Purpose?

A week ago today, the Motion Picture Association of America (MPAA) issued what had to be a hugely embarrassing news release acknowledging that an aggressively promoted and widely cited research report commissioned by the MPAA in 2005 significantly overstated the Internet-based peer-to-peer piracy of college students: “The 2005 study had incorrectly concluded that 44 percent of the motion picture industry’s domestic losses were attributable to piracy by college students. The 2007 study will report that number to be approximately 15 percent.” The MPAA release attributes the bad data to an “isolated error,” adding that it takes the error seriously and plans to hire an independent reviewer “to validate” the numbers in a forthcoming edition of an updated report. We should applaud the MPAA for going public with a painful press release about what some have tagged the “300 percent error.” Unfortunately, the MPAA has yet to release the actual reports that generated either the 44 percent or 15 percent claims about the role of college students in digital piracy; the public data are limited to PowerPoint graphics in PDF format on the association’s web site. Perhaps as part of its efforts to validate the numbers in the new report the MPAA will also make public the complete document, not just the summary graphics. (Academics do know something about peer review.)
Kenneth C. Greene, "The Movie Industry’s 300% Error," Inside Higher Ed, January 29, 2008 --- http://www.insidehighered.com/views/2008/01/29/green

Federal Audit Finds Fault With Fafsa Oversight
An audit released last week by the U.S. Department of Education has found that more than $1.51-billion in federal student aid was distributed in 2004-5 to students whose loan applications were questionable or erroneous. That figure, however, may overestimate the number of students affected.The audit checked common error codes that could be generated on the Free Application for Federal Student Aid form. The errors include not being registered with Selective Service, answering “yes” to a drug-conviction question, or being unable to verify U.S. citizenship.
JJ Hermes, Chronicle of Higher Education, January 15, 2008 --- Click Here

Questions
Complicated Math by Design:  Derivative Instruments Fraud in the 1990s and Executive Compensation in the 21^st Century

Before derivative financial instruments were well understood by buyers, sellers of such instruments like Merrill Lynch and many other top investment banking firms on Wall Street became fraudulent bucket shops selling derivatives packages that were so needlessly mathematical and complicated that they intentionally deceived buyers like pension and trust fund managers, When buyers commenced to lose millions upon millions of dollars, the SEC commenced to investigate one of the more serious set of scandals to ever hit wall street --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
If you want to cry and laugh at the same time watch this expert (John Grant) try to understand a derivatives contract sold by Merrill Lynch to Orange County in California that eventually cost the County over a billion dollars (and forced it into bankruptcy.

The video is an excerpt from a CBS Sixty Minute 1990sprogram (slow loading) ---
http://www.trinity.edu/rjensen/acct5341/Calgary/CDfiles/video\FAS133/SIXTY01.avi

The point is that the investment banking firms in those days built in complicated mathematics to deceive investors regarding the risk in the investments these bankers were trying to sell in the 1990s. And it worked! Investors lost millions.

In a similar manner in the 21^st Century executives are trying to circumvent the SEC's new compensation disclosure rules by making the compensation contracts so complicated that nobody could comprehend what is being disclosed.

"(New Math) x (SEC Rules) + Proxy=Confusion Firms Disclose Formulas Behind Executive Pay, Leaving Many Baffled," by Phred Dvorak, The Wall Street Journal, March 21, 2008; Page A1 --- http://online.wsj.com/article/SB120604424097452677.html?mod=todays_us_page_one
(but not quite as complicated as the investment banking formulas for fraud in derivatives instruments selling)

The latest proxy statement from Applied Materials Inc. tells exactly how the company set 2007 bonuses for top executives:

"Base Salary x Individual Target Percentage x (Weighted Score + Total Stockholder Return Adder, if Achieved)."

Of some help may be Applied's definition of weighted score:

"(Performance Measure 1 x Weight as Percentage) + (Performance Measure 2 x Weight as Percentage)."

And so on.

As a maker of semiconductor equipment, Applied Materials belongs to an industry of mathematical whizzes. Yet the complexity of its proxy this year reflects a trend that extends far beyond Silicon Valley. Even Deere & Co., the maker of tractors, has produced a proxy that uses three formulas, four tables and a graph to illustrate the calculation of executive bonuses.

This explosion of mathematics was sparked by the Securities and Exchange Commission, which in 2006 began requiring more information about how companies calculate executive pay. After the first batch of proxies using the new rules arrived last year, the SEC told 350 companies they hadn't been specific enough.

Among those companies was Applied Materials. So this year, it expanded by 76% the word count of its proxy's compensation section. In all, the compensation section contains 16,245 words -- twice the length of the U.S. Constitution and its 27 Amendments -- along with 10 formulas, 10 tables and 155 percent signs.

The result, according to some experts, is unfathomable. "Can even the executives figure out what they have to do to get these awards?" asks Carol Bowie, head of corporate-governance research at RiskMetrics Group Inc., which helps investors sort through such filings.

The SEC has said that it wants disclosure to be clear and concise, as well as comprehensive. But striking that balance is difficult, companies say. So, many are erring on the side of detail.

"Bonus multiple x target bonus x base salary earnings = payout," explains the new proxy from drug maker Eli Lilly & Co., which last year received a letter from the SEC calling its executive-pay disclosure inadequate. Just in case that term "bonus multiple" isn't clear, the proxy explains that it is "(0.25 x sales multiple) + (0.75 x adjusted EPS multiple)." To find the sales and EPS multiples, investors must consult graphs.

Some firms may be throwing up their hands and deluging the public with figures. "I know a couple of companies where the frustration level with the SEC was so large that they said, 'Just put it all in,'" says John A. Hill, a trustee at mutual-fund giant Putnam Funds. Mr. Hill often chats about pay practices with officials of companies whose stock Putnam investors own.

An SEC spokesman says it's too early to comment on 2008 proxies.

Even activist investors who pushed for more disclosure on executive pay are scratching their heads. "There have been some proxies when I've gone through and said, 'Wow, I have no idea what I just read,'" says Scott Zdrazil, director of corporate governance at union-owned Amalgamated Bank, which manages around $12 billion in pension-fund assets.

The Smell Test

Mr. Zdrazil says he uses a "smell test" to judge whether companies are trying to obscure poor pay practices with lots of detail, or just being wonky. "If you can clearly understand the algebra involved, it passes," he says.

One that doesn't pass his test is software maker Novell Inc. Its proxy tosses around such terms as "assigned weighted quantitative performance objective achievement percentage," and describes a two-step process for calculating executive bonuses:

First: "Bonus Funding Percentage x Weighted Quantitative Performance Objectives Achievement x Qualitative Performance Factor = Performance Factor."

Then: "Performance Factor x Target Bonus Percentage x Base Salary = Recommended Bonus Amount."

Mr. Zdrazil says Novell fails to explain how difficult it is for executives to achieve performance targets.

Asked about the formulas, Novell says it gave more detail in response to the SEC's push and that its proxy statement complies with SEC rules.

At first glance, the bonus formula at software maker Adobe Systems Inc. seems straightforward: "Target Bonus x Unit Multiplier x Individual Results."

But then comes the definition of unit multiplier. Adobe says it is:

"Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit." Got that?

After all that calculating, Adobe's top five executives somehow received the exact same unit multiplier -- 200%. Adobe says that was the highest possible percentage and that it reflects how well the company performed.

Degree of Transparency

Adobe also says it "strives for a high degree of transparency" in financial reporting, and that it added detail this year on executive compensation "in that spirit, and in response to new SEC requirements."

Applied's bonus formula was created a decade ago by an employee who majored in math, but the company hadn't previously included it in its filings. General Counsel Joe Sweeney says the new compensation discussion has won praise from investors and lawyers. Proxy adviser Glass Lewis & Co., which says it has no financial relationship with Applied, called the company's proxy "clear and concise."

But Applied shareholder Robert Friedman, a retired computer programmer, isn't so sure. "This is too much," he says, munching on a cookie and flipping through a proxy moments before the company's March 11 annual meeting. "I own about a dozen companies, and if I did this for every company..."

For all its length, Applied's proxy doesn't reveal some crucial information, such as the target to which the company would like to see its market share increase. That number -- key to calculating the CEO's bonus according to the formula -- must be kept from rivals, Mr. Sweeney, the general counsel, says. For the same reason, the document also excludes some information about other executives' performance goals. "I hate to think how long the [compensation section] would have been if we had included all the factors for all the individuals," says Mr. Sweeney.

So if some important factors remain secret, what's the point of all the math? Mr. Sweeney says it is meant to give shareholders a taste of the decision-making process.

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

Allegations of Conflict of Interest for Top Business School Admissions Officers
Three senior admissions officials of prominent American universities sit on an advisory board of a Japanese company that helps applicants in Japan get into top M.B.A. programs in the United States — including programs at their universities. The officials confirmed their involvement and that they receive a free annual trip to meetings in Japan for their services, which are boasted about on the Japanese company’s Web site. One of the officials said that there is also pay involved, but declined to say how much. One official said he couldn’t answer questions about his pay. And one official denied being paid except for the free trip to Japan.
Scott Jaschik, "New Conflict of Interest Allegations," Inside Higher Ed, January 30, 2008 --- http://www.insidehighered.com/news/2008/01/30/agos

"Questions, Not Answers, on Conflicts of Interest," by Doug Lederman, Inside Higher Ed, January 28, 2008 --- http://www.insidehighered.com/news/2008/01/28/conflicts 

College leaders have been criticized in some quarters for not taking conflicts of interest seriously. The largest association representing higher education took a first pass at remedying that Friday with a working paper aimed at helping campus administrators deal with real and perceived financial conflicts.

But the document from the American Council on Education, which generally shuns strong stands in favor of laying out questions campus officials should ask in contemplating their own situations — avoiding, for example, the list of do’s and don’ts contained in the code of conduct adopted under pressure last year by the National Association of Student Financial Aid Administrators — is unlikely to satisfy those who were hoping for a full-throated statement of principle.

The “Working Paper on Conflict of Interest” was prepared by a panel of college presidents, association heads and lawyers assembled by ACE after a September meeting on conflicts of interest. The council had gathered higher education officials to discuss whether and how they should respond, broadly, to the perception that conflicts of interest were rife or spreading in higher education. The conversation and the intensified attention to financial conflicts were prompted largely by 2007’s various inquiries into the student loan industry, and by the perception that some of the same conflicts of interest inherent in the financial aid world exist in other college and university operations.

After the September meeting, David Ward, the departing president of the American Council on Education, said he expected the working group he appointed to create not a list of things to do and not to do, but a list of “diagnostic questions” about potential conflicts, framed in such a way that “if the answer to [the questions] was no, that’s an indication that you might have a problem” with a particular situation. ACE’s desire, he said, was to give campus officials a document to “illuminate principles” that should guide them as they confront arrangements that might seem to fall into a gray area.

The document released just before 5 p.m. on Friday, which was produced by an eight-member panel whose members are listed below, hews closely to that approach. Because colleges have such diverse structures, cultures and missions, the panel writes in its introduction, “[t]here is thus likely no one conflict of interest policy that would fit all of the institutions. Accordingly, the purpose of this statement is not to prescribe a single approach to conflicts management. Rather, this statement aims to provide tools that each institution may use to inform its own thinking about these issues.”

The paper starts from the premise that colleges must, to meet their many needs while remaining financially viable, engage in partnerships and financial arrangements with outside entities, including businesses, that may create real or perceived conflicts of interest. And it notes that the environment in which the legality and, importantly, the morality of those arrangements will be judged can change over time, as some financial aid officials believe they did in the student loan world over the last few years.

“Transactions once deemed acceptable may now be the subject of questions about whether, for example, they are at arm’s length,” the panel writes.

While the paper generally avoids dictating what colleges should and should not do in specific instances, it does lay out a set of “basic precepts that are universal or nearly universal among higher education institutions” to “form a baseline for management of conflict of interest.” Foremost among these precepts is the idea that a faculty or staff member or trustee must disclose “known significant financial interests” in an outside organization with which the institution is affiliated, and that institutional officials should review those disclosures and have “procedures to address identified conflicts.”

That is as far as the committee went in laying out a common view of how colleges and universities should approach conflicts of interest; the rest of the paper lays out a long set of questions that institutions might ask in reviewing various situations, including their relationships with vendors ("Under what circumstances, if any, is it appropriate for an administrator, faculty member, or trustee to own stock or have another financial interest in a vendor?"); their conflicts policies ("Under what circumstances should institutional policy give the persons disclosing conflicts of interest discretion to decide whether a particular interest needs to be disclosed?"); and institutional conflicts involving commercial arrangements ("Does the transaction entail the actuality or perception that the institution is profiting to the detriment of students or other constituents?")

Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said he found it “more than a little surprising that the paper doesn’t clearly enough recommend avoidance of actual or apparent conflicts where that is at all practicable, and appears to view disclosure — even of avoidable and more appropriately avoided conflicts — as meeting an adequate threshold of ethical conduct.”

Continued in article

Bob Jensen's threads on accountability in higher education are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

We hang the petty thieves and appoint the great ones to public office.
Aesop

"Holding back the banks:  Predatory banking practices are likely to continue while political parties are too close to corporations and regulators lack teeth," by Prem Sikka, The Guardian (in the U.K.), February 15, 2008 ---
http://commentisfree.guardian.co.uk/prem_sikka_/2008/02/holding_back_the_banks.html

Politicians and regulators have been slow to wake up to the destructive impact of banks on the rest of society. Their lust for profits and financial engineering has brought us the sub-prime crisis and possibly a recession. Billions of pounds have been wiped off the value of people's savings, pensions and investments.

Despite this, banks are set to make record profits (in the U.K.) and their executives will be collecting bumper salaries and bonuses. These profits are boosted by preying on customers in debt, making exorbitant charges and failing to pass on the benefit of cuts in interest rates. Banks indulge in insider trading, exploit charity laws and have sold suspect payment protection insurance policies. As usual, the annual financial reports published by banks will be opaque and will provide no clues to their antisocial practices.

Some governments are now also waking up to the involvement of banks in organised tax avoidance and evasion. Banks have long been at the heart of the tax avoidance industry. In 2003, the US Senate Permanent Subcommittee on Investigations concluded (pdf) that the development and sale of potentially abusive and illegal tax shelters have become a lucrative business for accounting firms, banks, investment advisory firms and law firms. Banks use clever avoidance schemes, transfer pricing schemes and offshore (pdf) entities, not only to avoid their own taxes but also to help their rich clients do the same.

The role of banks in enabling Enron, the disgraced US energy giant, to avoid taxes worldwide, is well documented (pdf) by the US Senate joint committee on taxation. Enron used complex corporate structures and transactions to avoid taxes in the US and many other countries. The Senate Committee noted (see pages 10 and 107) that some of the complex schemes were devised by Bankers Trust, Chase Manhattan and Deutsche Bank, among others. Another Senate report (pdf) found that resources were also provided by the Salomon Smith Barney unit of Citigroup and JP Morgan Chase & Co.

The involvement of banks is essential as they can front corporate structures and have the resources - actually our savings and pension contributions - to provide finance for the complex layering of transactions. After examining the scale of tax evasion schemes by KPMG, the US Senate committee concluded (pdf) that complex tax avoidance schemes could not have been executed without the active and willing participation of banks. It noted (page 9) that "major banks, such as Deutsche Bank, HVB, UBS, and NatWest, provided purported loans for tens of millions of dollars essential to the orchestrated transactions," and a subsequent report (pdf) (page111) added "which the banks knew were tax motivated, involved little or no credit risk, and facilitated potentially abusive or illegal tax shelters".

The Senate report (pdf) noted (page 112) that Deutsche Bank provided some $10.8bn of credit lines, HVB Bank $2.5bn and UBS provided several billion Swiss francs, to operationalise complex avoidance schemes. NatWest was also a key player and provided about $1bn (see page 72 [pdf]) of credit lines.

Deutsche Bank has been the subject of a US criminal investigation and in 2007 it reached an out-of-court settlement with several wealthy investors, who had been sold aggressive US tax shelters.

Some predatory practices have also been identified in other countries. In 2004, after a six-year investigation, the National Irish Bank was fined £42m for tax evasion. The bank's personnel promoted offshore investment policies as a secure destination for funds that had not been declared to the revenue commissioners. A government report found that almost the entire former senior management at the bank played some role in tax evasion scams. The external auditors, KPMG, and the bank's own audit committee were also found to have played a role in allowing tax evasion.

In the UK, successive governments have shown little interest in mounting an investigation into the role of banks in tax avoidance though some banks have been persuaded to inform authorities of the offshore accounts held by private individuals. No questions have been asked about how banks avoid their taxes and how they lubricate the giant and destructive tax avoidance industry. When asked "if he will commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use," the chancellor of the exchequer replied: "There are no plans to commission research on the levels of use of offshore tax havens by UK banks and the economic effects of that use."

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"Bringing banks to book Financial institutions are not going to voluntarily embrace honesty and social responsibility - there is little evidence they do so now," by Prem Sikka, The Guardian, February 27, 2008 --- http://commentisfree.guardian.co.uk/prem_sikka_/2008/02/bringing_banks_to_book.html

Anyone visiting the websites of banks or browsing through their annual reports will find no shortage of claims of "corporate social responsibility". Yet their practices rarely come anywhere near their claims.

In pursuit of higher profits and bumper executive rewards, banks have inflicted both the credit crunch and sub-prime crisis on us. Their sub-prime activities may also be steeped in fraud and mis-selling of mortgage securities. They have developed onshore and offshore structures and practices to engage in insider trading, corruption, sham tax-avoidance transactions and tax evasion. Money laundering is another money-spinner.

Worldwide over $2tn are estimated to be laundered each year. The laundered amounts fund private armies, terrorism, narcotics, smuggling, corruption, tax evasion and criminal activity and generally threaten quality of life. Large amounts of money cannot be laundered without the involvement of accountants, lawyers, financial advisers and banks.

The US is the world's biggest laundry and European countries are not far behind. Banks are required to have internal controls and systems to monitor suspicious transactions and report them to regulators. As with any form of regulation, corporations enjoy considerable discretion about what they record and report. Profits come above everything else.

A US government report (see page 31) noted that "the New York branch of ABN AMRO, a banking institution, did not have anti-money laundering program and had failed to monitor approximately $3.2 billion - involving accounts of US shell companies and institutions in Russian and other former republics of the Soviet Union".

A US Senate report on the Riggs Bank noted that it had developed novel strategies for concealing its trade with General Augusto Pinochet, former Chilean dictator. It noted (page 2) that the bank "disregarded its anti-money laundering (AML) obligations ... despite frequent warnings from ... regulators, and allowed or, at times, actively facilitated suspicious financial activity". The committee chairman Senator Carl Levin stated that "the 'Don't ask, Don't tell policy' at Riggs allowed the bank to pursue profits at the expense of proper controls ... Million-dollar cash deposits, offshore shell corporations, suspicious wire transfers, alteration of account names - all the classic signs of money laundering and foreign corruption made their appearance at Riggs Bank".

The Senate committee report (see page 7) stated that:

"Over the past 25 years, multiple financial institutions operating in the United States, including Riggs Bank, Citigroup, Banco de Chile-United States, Espirito Santo Bank in Miami, and others, enabled [former Chilean dictator] Augusto Pinochet to construct a web of at least 125 US bank and securities accounts, involving millions of dollars, which he used to move funds and transact business. In many cases, these accounts were disguised by using a variant of the Pinochet name, an alias, the name of an offshore entity, or the name of a third party willing to serve as a conduit for Pinochet funds."

The Senate report stated (page 28) that "In addition to opening multiple accounts for Mr Pinochet in the United States and London, Riggs took several actions consistent with helping Mr Pinochet evade a court order attempting to freeze his bank accounts and escape notice by law enforcement". Riggs bank's files and papers (see page 27) contained "no reference to or acknowledgment of the ongoing controversies and litigation associating Mr Pinochet with human rights abuses, corruption, arms sales, and drug trafficking. It makes no reference to attachment proceedings that took place the prior year, in which the Bermuda government froze certain assets belonging to Mr Pinochet pursuant to a Spanish court order - even though ... senior Riggs officials obtained a memorandum summarizing those proceedings from outside legal Counsel."

The bank's profile did not identify Pinochet by name and at times he is referred to (see