Accounting Scandal Updates and Other Fraud Between January 1 and March 31, 2009
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- http://www.trinity.edu/rjensen/fraud.htm 

Bob Jensen's Enron Quiz (and answers) --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

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

Other Documents

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

What Accountants Need to Know --- http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow

Global Corruption (in legal systems) Report 2007 --- http://www.transparency.org/content/download/19093/263155

Tax Fraud Alerts from the IRS --- http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html

White Collar Fraud Site --- http://www.whitecollarfraud.com/
Note the column of links on the left.

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm

Essay

Appendix A: Impending Disaster in the U.S.

Appendix B: The Trillion Dollar Bet in 1993

Appendix C: Don't Blame Fair Value Accounting Standards This includes a bull crap case based on an article by the former head of the FDIC

Appendix D: The End of Investment Banking as We Know It

Appendix E: Your Money at Work, Fixing Others’ Mistakes (includes a great NPR public radio audio module)

Appendix F: Christopher Cox Waits Until Now to Tell Us His Horse Was Lame All Along S.E.C. Concedes Oversight Flaws Fueled Collapse And This is the Man Who Wants Accounting Standards to Have Fewer Rules

Appendix G: Why the $700 Billion Bailout Proposed by Paulson, Bush, and the Guilty-Feeling Leaders in Congress Won't Work

Appendix H: Where were the auditors? The aftermath will leave the large auditing firms in a precarious state?

Appendix I: 1999 Quote from The New York Times ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Appendix J:  Will the large auditing firms survive the 2008 banking meltdown?

Appendix K:  Why not bail out everybody and everything?

Appendix L:  The trouble with crony capitalism isn't capitalism. It's the cronies.

Appendix M:  Reinventing the American Dream

Appendix N: Accounting Fraud at Fannie Mae

Appendix O: If Greenspan Caused the Subprime Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?

Appendix P:  Meanwhile in the U.K., the Government Protects Reckless Bankers

Appendix Q: Bob Jensen's Primer on Derivatives (with great videos from CBS)

Appendix R:  Accounting Standard Setters Bending to Industry and Government Pressure to Hide the Value of Dogs

Appendix S: Fooling Some People All the Time

Appendix T:  Regulations Recommendations

Appendix U: Subprime: Borne of Sleaze, Bribery, and Lies

Appendix V: Implications for Educators, Colleges, and Students

Appendix W: The End

Appendix: X: How Scientists Help Cause Our Financial Crisis

Appendix Y:  The Bailout's Hidden Agenda Details

Appendix Z:  What's the rush to re-inflate the stock market?

Personal Note from Bob Jensen

 

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




Golleeey, just look at that woman's pair of shoes!
Gomer Pyle

"Bookkeeper accused of embezzling $10 million," by Kristina Davis, SignOnSanDiego.com, March 7, 2009 --- http://www3.signonsandiego.com/stories/2009/mar/07/bn07embezzle-shoes-north-county/

The bookkeeper for a North County manufacturing business was arrested on accusations of embezzling nearly $10 million from her employer to fund her lavish shoe collection, remodel her home, vacation in Italy and gamble, authorities said.

Sheriff's investigators say Annette Yeomans, 51, siphoned an average of $100,000 a month from Quality Woodworks, Inc., while she was chief financial officer from 2001 to 2007.

As a result, the San Marcos cabinetry business was forced to lay off employees and restructure their operations, said Sgt. Mark Varnau of the sheriff's Financial Crimes Unit.

Yeomans surrendered to authorities Friday morning and was booked into Vista jail on $10 million bail on suspicion of grand theft and embezzlement. It was unclear Saturday whether Yeomans had hired an attorney.

A nearly yearlong sheriff's investigation revealed that Yeomans would spend $25,000 on her credit card each week and then pay off the balance the following Monday with company funds.

Her purchases include spending nearly $25,000 to remodel her closet to house about 400 pairs of shoes valued at $240,000, as well as 160 designer purses valued at $2,000 each.

The posh dressing room included a crystal chandelier, granite-topped center island and 32-inch plasma television, Varnau said.

Investigators also found that Yeomans gambled heavily at local casinos and lost extensive amounts of money.

Varnau said Yeomans, who is scheduled to be arraigned Monday in Vista Superior Court, was able to hide her alleged crime from the company due to her position of trust.

But that ended when American Express noticed the pattern of payments made with company checks and made a phone call to the business.

Yeomans was fired last year and agreed to turn over her assets to the company, which has recovered about $2 million from the sale of her home, some cars and other property, Varnau said. Her husband was a cabinet installer at Quality Woodworks but was not suspected of any crime, Varnau said.



Marvene is a poor and unemployed elderly woman who lost her shack to foreclosure in 2008.
That's after Marvene stole over $100,000 when she refinanced her shack with a subprime mortgage in 2007.
Marvene wants to steal some more or at least get her shack back for free.
Both the Executive and Congressional branches of the U.S. Government want to give more to poor Marvene.
Why don't I feel the least bit sorry for poor Marvene?
Somehow I don't think she was the victim of unscrupulous mortgage brokers and property value appraisers.
More than likely she was a co-conspirator in need of $75,000 just to pay creditors bearing down in 2007.
She purchased the shack for $3,500 about 40 years ago --- http://online.wsj.com/article/SB123093614987850083.html


Marvene Halterman, an unemployed Arizona woman with a long history of creditors, took out a $103,000 mortgage on her 576 square-foot-house in 2007. Within a year she stopped making payments. Now the investors with an interest in the house will likely recoup only $15,000.
The Wall Street Journal slide show of indoor and outdoor pictures --- http://online.wsj.com/article/SB123093614987850083.html#articleTabs%3Dslideshow
Jensen Comment
The $15,000 is mostly the value of the lot since at the time the mortgage was granted the shack was virtually worthless even though corrupt mortgage brokers and appraisers put a fraudulent value on the shack. Bob Jensen's threads on these subprime mortgage frauds are at http://www.trinity.edu/rjensen/2008Bailout.htm
Probably the most common type of fraud in the Savings and Loan debacle of the 1980s was real estate investment fraud. The same can be said of the 21st Century subprime mortgage fraud. Welcome to fair value accounting that will soon have us relying upon real estate appraisers to revalue business real estate on business balance sheets --- http://www.trinity.edu/rjensen/Theory01.htm#FairValue

The Rest of Marvene's Story --- http://www.trinity.edu/rjensen/FraudMarvene.htm

Accounting Implications

CEO to his accountant:  "What is our net earnings this year?"
Accountant to CEO:  "What net earnings figure do you want to report?"

The sad thing is that Lehman, AIG, CitiBank, Bear Stearns, the Country Wide subsidiary of Bank America, Fannie Mae, Freddie Mac, etc. bought these
subprime mortgages at face value and their Big 4 auditors supposedly remained unaware of the millions upon millions of valuation frauds in the investments. Does professionalism in auditing have a stronger stench since Enron?
Where were the big-time auditors? --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' 
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the Americ an Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary mark et. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.


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

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


Seems that new Obama Presidential Cabinet workers are joining a tax avoidance club that's not very exclusive!

The Executive Office of President Bush, which includes the White House, had 58 employees who did not pay $319,978.

"Federal workers owe billions in unpaid taxes," by Mark Segrave, wtop.com, February 2008 publication of a September 2008 item ---
http://www.wtop.com/?nid=25&sid=1478352

From the U.S. Postal Service to the Executive Office of the President, thousands of federal workers have not paid their 2007 federal income taxes.

The Internal Revenue Service is trying to collect billions of dollars in unpaid taxes from nearly half a million federal employees. According to IRS records, 171,549 current federal workers did not voluntarily pay their federal income taxes in 2007. The same is true for 37,752 active duty military and nearly 200,000 retired civilian and military personnel.

Documents obtained by WTOP through the Freedom of Information Act show 449,531 federal employees and retirees did not pay their taxes for a total of $3,586,784,725 in taxes owed last year.

Each year the IRS tracks the voluntary compliance rate of all federal workers and retirees. The percentage of employees and retirees who are delinquent has gone up and down over the past five years, but the amount unpaid has increased each year topping $3.5 billion for the first time in 2007.

The agency with the most delinquent employees is the U.S. Postal Service. With more than 747,000 employees, the postal service is the largest employer in the federal government, but with a 4.16 percent delinquency rate, it is a full 1 percent above the average compliance rate this year.

The IRS would not provide comparable data for the general population. But a spokesperson for the IRS did supply the delinquency rate for IRS employees -- less than 1 percent. The IRS is the only federal agency where an employee can be fired for not paying his taxes.

The Executive Office of the President, which includes the White House, has 58 employees who did not pay $319,978.

The Federal Housing Finance Board comes in as the agency with the best compliance rate of all agencies with 100 or more employees. The FHFB had four of its 134 employees on the list of delinquents, three of them have now entered into voluntary payment plans with the IRS.

In fact, 152,554 of the delinquent feds have entered into payment plans. Nevertheless, $2.7 billion remains uncollected.

Other notable agencies with high delinquency rates include the Smithsonian Institution, where nearly 5.5 percent of the employees didn't pay their taxes. On Capitol Hill, more than 1,000 workers are on the list. The Government Printing Office has the highest percentage of delinquent employees with 7.23 percent.


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

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

The University of Pittsburgh and Carnegie Mellon University are suing two investment managers who allegedly took $114-million from the institutions and spent it on cars, horses, houses for their wives, and even teddy bears.

The two managers, Paul Greenwood and Stephen Walsh, are said to have taken a total of more than $500-million from the universities and other investors through their company, Westridge Capital Management, and they have also been charged with fraud by the Federal Bureau of Investigation. The universities named several associates of Mr. Greenwood and Mr. Walsh in the lawsuit.

According to the complaint, the universities became alarmed after the National Futures Association, a nonprofit organization that investigates member firms, tried to audit Mr. Greenwood and Mr. Walsh’s company. The association determined that that Mr. Greenwood and Mr. Walsh had taken hundreds of millions in loans from the investment funds. On February 12 the association suspended their membership after repeatedly trying, and failing, to contact them.

That step spurred the universities to try to locate their money. On February 18 they contacted the Securities and Exchange Commission and sought an investigation. According to their lawsuit, Carnegie Mellon had invested $49-million and the University of Pittsburgh had invested $65-million.

Today’s Pittsburgh Post-Gazette listed some of the things that Mr. Greenwood and Mr. Walsh had purchased with their investors’ money: rare books, Steiff teddy bears at up to $80,000 each, a horse farm, cars, and a $3-million residence for Mr. Walsh’s ex-wife.

Mr. Greenwood and Mr. Walsh were also handling money for retirement funds for teachers and public employees in Iowa, North Dakota, and Sacramento County, California. In the Post-Gazette, David Rosenfeld, an associate regional director of the SEC’s New York Regional Office, said the case represented “a truly egregious fraud of immense proportions.”

Mr. Walsh, it appears, had ties to another university as well. He is a member of the foundation board at the State University of New York at Buffalo, from which he graduated in 1966 with a political-science degree. In a written statement, officials at Buffalo said that he had not been an active board member for the past two years and that foundation policy forbade investing university money with any member of the board.

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

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

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

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

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

The Accused

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Rare books bought at auction;

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

• A horse farm;

• Cars;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It just gets deeper and deeper for Deloitte

Question
Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling Green, and Ohio Northern) invest hundreds of millions dollars in a fraudulent investment fund and what makes this fraud different from the Madoff and Stanford fund scandals?

One of the reasons is that the fraudulent Westridge Capital Management Fund was audited by the reputable Big Four firm of Deloitte. It seems to be Auditing 101 to verify that securities investments actually exist and have not be siphoned off illegally. Purportedly, Paul R. Greenwood and Stephen Walsh siphoned off hundreds of millions to fund their lavish personal lifestyles

Koch recently told state lawmakers that Iowa officials believed they had "covered the bases" but that "obviously, something went wrong." He and Cochrane, in an interview, said that there was no apparent problem with Westridge that would raise concerns. Numerous government regulatory agencies had audited the company and the venerable Deloitte and Touche firm was Westridge's auditor. The company's investment returns did not raise suspicion because they generally followed market trends: The firm gained and lost money when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud," McClatchy-Tribune News Service, March 16, 2009 ---
http://www.individual.com/story.php?story=97917687

As with the investors who lost $65 billion in the Madoff Fund, word of mouth from respected people and institutions seem to weigh more than factual analysis for countless investors? Rabbi Ragan says a good man runs this fund? If Carnegie-Mellon's investing in it it most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions in the Greenwood-Walsh Fund Fraud ---
http://www.nytimes.com/2009/02/26/business/26scam.html?scp=1&sq=paul greenwood&st=cse
The Pennsylvania Employees’ Retirement System  was saved in the nick of time from investing nearly a billion dollars in the fund upon discovering that the National Futures Association began an investigation of the Greenwood-Walsh Fund. For other duped investors it was too late.

But in some cases the auditing firm is reputable and has deep pockets.

"A 4th University Is Missing Money in Alleged $554-Million Swindle," by Paul Fain, Chronicle of Higher Education, March 19, 2009 --- Click Here

Ohio Northern University is the fourth higher-education institution to announce that it is seeking to recoup money in an alleged $554-million investment fraud, university officials said today. Ohio Northern’s endowment had $10-million invested with two Wall Street veterans who face criminal charges for allegedly using investors’ money as a “personal piggy bank,” spending at least $160-million on mansions, horses, rare books, and collectible toys.

Also tied up in the apparent swindle is $65-million from the University of Pittsburgh, $49-million from Carnegie Mellon University, and $15-million from Bowling Green State University. Securities lawyers say little value from the original investments will be recovered. Officials from all of the universities say the potential losses will have no immediate impact on their operations.

Most college endowments rely on outside investment consultants to help direct their money. Hartland & Company, a financial firm in Cleveland, steered the now-missing investments by Ohio Northern and Bowling Green to the firm running the allegedly-fraudulent scheme. Pitt and Carnegie Mellon relied on the advice of Wilshire Associates, a major California-based consulting firm.

Paul R. Greenwood and Stephen Walsh, the two Wall Street traders who owned the suspect firm, face charges of securities fraud, wire fraud, and conspiracy. Federal regulators have also sued the men, and are pursuing their assets.

 

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

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


It Just Gets Deeper and Deeper for KPMG

"Subprime Suit Accuses KPMG of Negligence:  A trustee for New Century Financial claims KPMG partners ignored lower ranks' concerns about the lender's accounting for loan reserves," by Sarah Johnson, CFO.com, April 2, 2009 --- http://www.cfo.com/article.cfm/13431126/c_2984368?f=FinanceProfessor/SBU

Two complaints filed in federal courts yesterday claim that KPMG auditors were complicit in allowing "aggressive accounting" to occur under their watch at New Century Financial, the mortgage lender that collapsed two years ago at the beginning of the subprime-mortgage mess.

The plaintiff, a New Century trustee, alleges that misstated financial reports were filed with the audit firm's rubber stamp because of its partners' fears of losing the lender's business. "KPMG acted as a cheerleader for management, not the public interest," one of the complaints says. The trustee further accuses the firm of "reckless and grossly negligent audits."

The plaintiff's law firm, Thomas Alexander & Forrester LLP, filed one action against KPMG LLP in California and another in New York against KPMG International. With the authority to "manage and control" its member firm, KPMG International failed to "ensure that audits under the KPMG name" lived up to the quality control and branding value that "it promised to the public," the lawsuit alleges.

Similar litigation has been unsuccessful in holding international auditing firms responsible for their affiliated but independent members. For example, a lawsuit that Thomas Alexander filed against BDO Seidman in a negligence case involving Banco Espirito Santo's financial statements resulted in a $521 million win for the plaintiff, pending an appeal. A case against BDO International is expected to go to trial later this year after an appeals court ruled that a jury should have decided whether it should have also been considered liable in the Banco case. Initially, a lower-court judge had dismissed the international organization from the case.

the international arm was intitially ruled as not being c, accused of also , the trial against BDO International for the same matter has yet to occur; courts have yet to decide whether BDO International could be held liable in the same matter after the international firm was but lawyers have been unable to get a judgment against BDO International in the same case. Steven Thomas, a partner at the law firm, did not immediately return CFO.com's request for comment.

KPMG resigned as New Century's auditor soon after the Irvine, California-based lender filed for bankruptcy protection in 2007. The auditor's role in the firm's failure has been questioned since then, by New Century's unsecured creditors and the bankruptcy court.

In the new lawsuit, KPMG LLP is accused of not giving credence to lower-level employees' concerns about their client's accounting flaws and not finishing its audit work before giving its final opinion — an account the firm disputes. In 2005, for instance, a partner was said to have "silenced" one of the firm's specialists who had questioned New Century's "incorrect accounting practice." The partner allegedly said, "I am very disappointed we are still discussing this.... The client thinks we are done. All we are going to do is piss everybody off."

Dan Ginsburg, KPMG LLP spokesman,says the above account is taken out of context and that the firm had followed its normal process; the firm's national office had already reviewed and signed off on the issue being disputed.

Furthermore, Ginsburg says any claims that the firm gave in to its client's demands "is unsupportable." He adds, "any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis. This was a business failure, not an accounting issue."

New Century's business was heavy on loaning subprime-level mortgages, but its accounting methods did not fully recognize the risk of doing so, the lawsuit alleges. It also says the firm violated GAAP by using inaccurate loan-reserve calculations by taking out certain factors to keep its liability numbers down and its net income falsely propped up. KPMG is accused of ignoring this GAAP violation and advising the firm on how to get around the rules. The complaint says this was a $300 million mistake.

In its most recent inspection of KPMG, the Public Company Accounting Oversight Board noted two occasions when the firm did not do enough audit work to be able to confidently trust its clients' allowances for loan losses.

Bob Jensen's threads on KPMG legal woes --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG


The original lawsuit against Capella University sounds a lot like fraud

"Capella U. Settles Lawsuit Against Former Student," by David Shieh, Chronicle of Higher Education, January 15. 2009 --- http://chronicle.com/wiredcampus/article/3559/capella-u-settles-lawsuit-against-former-student

Capella University announced today that it has settled a countersuit against a former student who sued the online university in June 2005, alleging an antidisability bias.

The countersuit, which was filed in 2005, claims that the the student, Jeff La Marca, defamed the university and interfered with its business relationships. Mr. La Marca posted online comments and images critical of the university and its lawyers during the course of the original litigation, the university said.

Mr. La Marca — whose original suit claimed that Capella had violated the Americans with Disabilities Act by using technology that did not accommodate his learning disabilities — has issued an apology and will hand over his Web sites to Capella for removal, the university said.

Mr. La Marca’s original suit was thrown out in November by a federal judge, who ruled that the student was not considered disabled under the Americans With Disabilities Act and that the institution had provided reasonable accommodation. As part of the settlement, Mr. La Marca has also withdrawn his appeal of that decision, the university said.

Bob Jensen's threads on handicap access in distance education are at http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped


As immigrant rights activists demand immigration reform from the Obama administration, it is critical to acknowledge that concrete reform cannot be achieved as long as the U.S. Citizenship & Immigration Services (USCIS) is riddled with corruption and criminal abuse. Crime and corruption at the USCIS formerly the Immigration and Nationalization Services, (INS) is the dirty secret few politicians dare mention within their vaulted rhetoric calling for urgent immigration reform that never materializes. Thus far, their hollow words and legislative tinkering over the last 20 years produced few results except costing taxpayers a fortune. Story here. Worse, this U.S. $2.6 billion agency, under the Clinton and Bush administrations, grew into a dysfunctional anti-lawful immigrant bureaucracy that invites corruption. The USCIS, often the antithesis of law and order, is a ticking bomb with potential to cause severe damage to America. Tasked to protect national security by keeping terrorists out, the USCIS’s responsibilities include granting visas, residency, and citizenship to law abiding foreign-born workers while balancing economic needs, and honouring America’s tradition as a nation of immigrants. But the USCIS’s checkered history is stained with bribery indictments.
Marinka Peschmann, "Crime and Corruption at the U.S. Citizenship & Immigration Services," Canada Free Press, January 21, 2009 --- http://canadafreepress.com/index.php/article/7787


More Headaches for PwC
Two Partners in India are Arrested

More Headaches for PwC
Two Partners in India are Arrested

"Price Waterhouse Auditors Arrested in Satyam Inquiry," by Harichandan Arakali and Saikat Chatterjee, Bloomberg News, January 24, 2009 --- http://www.bloomberg.com/apps/news?pid=20601087&sid=a5sa8Cqwaa_Q&refer=home#

PricewaterhouseCoopers LLP’s Indian affiliate, the auditor of Satyam Computer Services Ltd., said two partners were arrested by police as authorities extended the nation’s largest fraud inquiry.

Srinivas Talluri and S. Gopalakrishnan were remanded to judicial custody on charges of “conspiracy and co- participation,” A. Shivanarayana, a police spokesman in Andhra Pradesh state, said from the province’s capital Hyderabad, where Satyam is based. Price Waterhouse said in an e-mailed statement it didn’t know why two partners were detained.

Seven years after the implosion of Enron Corp. led to the dissolution of accounting firm Arthur Andersen LLP, the Satyam case has put PricewaterhouseCoopers in the spotlight. Indian police, fraud squad, markets regulator and accounting body have started investigations after Satyam founder Ramalinga Raju said Jan. 7 that he had fabricated $1 billion of assets.

“Over the last fortnight, the firm has fully cooperated in all inquiries and has provided the documents called for by the Indian authorities,” Price Waterhouse said today in a statement from New Delhi. “We greatly regret that two Price Waterhouse partners have been detained today for further questioning.”

PricewaterhouseCoopers LLP may also face scrutiny in the U.S. after Satyam’s New York-listed equities lost 82 percent of their market value in two weeks. The U.S. Securities and Exchange Commission is investigating whether Satyam misled investors and officials from the SEC plan to coordinate inquiries with counterparts in India.

Fudged Accounts

The auditing firm said Jan. 15 that its reports could no longer be relied on after former chairman Raju said he’d fudged the accounts. The Institute of Chartered Accountants of India, a statutory body which oversees auditors, will report on its investigation into Price Waterhouse on Feb. 11.

Prosecutors allege Satyam padded employee numbers to siphon off cash and forged documents to support fake bank deposits.

Satyam had about 33 billion rupees ($674 million) of “fictitious and non-existent” accounts, public prosecutor K. Ajay Kumar told a hearing on Jan. 22. The company had about 40,000 employees, compared with the 53,000 claimed by Satyam, he said.

India’s biggest corporate fraud investigation is being led by teams from the Andhra Pradesh state police’s criminal investigation department, the markets regulator, the independent accounting body and the government’s serious fraud office.

Separate Entity

Satyam’s state-appointed board has almost arranged funds to help tide over a cash crunch till the end of March, the company said yesterday. The board has hired KPMG and Deloitte Touche Tohmatsu to restate the accounts.

Satyam is struggling to raise cash to pay salaries after Raju said he had falsified accounts for several years. It is also battling to stop off customers from joining State Farm Mutual Automobile Insurance Co. in canceling contracts.

Price Waterhouse has offices in nine Indian cities, according to the firm’s Web site. The Indian operation is a separate legal identity from PricewaterhouseCoopers International Ltd., according to the Web site.

The auditor’s clients include Maruti Suzuki India Ltd., maker of half the cars in the country, and the local units of Colgate-Palmolive Co., the world’s largest toothpaste maker.

PricewaterhouseCoopers LLP has a “vigorous global network” allowing member firms to “operate simultaneously as the most local and the most global of businesses,” the firm says on its Web site. The site also includes a disclaimer that each member firm “is a separate and independent legal entity.”

Larsen & Toubro

Larsen & Toubro Ltd., India’s biggest engineering company, yesterday tripled its stake in Satyam to give it greater say in the rescue of the software exporter.

Continued in article

 

"Indian Prosecutors Allege Satyam Founder Siphoned Funds," by Eric Bellman and Niraj Sheth, The Wall Street Journal, January 23, 2009 --- http://online.wsj.com/article/SB123261715996005671.html?mod=todays_us_marketplace

The disgraced former chairman of Satyam Computer Services Ltd., B. Ramalinga Raju, used salary payments to 13,000 fictitious employees to siphon millions of dollars from the Indian outsourcer for land purchases, prosecutors said Thursday.

Prosecutors in the southern Indian city of Hyderabad, where the technology-outsourcing firm is based, told a criminal court that Satyam has only about 40,000 employees instead of the 53,000 it claims.

Prosecutors claimed the money, in the form of salaries paid to ghost employees, came to around $4 million a month. The money was diverted through front companies and through accounts belonging to one of Mr. Raju's brothers and his mother to buy thousands of acres of land, the prosecutors said.

Prosecutors said they are investigating but didn't allege that Mr. Raju's mother or brother were involved. They didn't offer further details on how the alleged diversion of funds took place.

Prosecutors made the claims in a hearing Thursday where the state police for the state of Andhra Pradesh asked for more time to interrogate Mr. Raju and Satyam's former chief financial officer, Srinivas Vadlamani, who is also in custody.

"The funds of Satyam have been diverted to many other companies," K. Ajay Kumar, assistant prosecutor, told a packed courtroom. Investigators need more time with Mr. Raju and Mr. Vadlamani to figure out where the money has gone, Mr. Kumar said.

Continued in article

PwC Auditors Apparently Let This Massive and Long-Term Accounting Fraud Go Undetected
Price Waterhouse, auditor to Satyam Computer Services Ltd. (500376.BY), Wednesday said it is examining the contents of Satyam Chairman B. Ramalinga Raju's statement in which he said Satyam's accounts were falsified. "We have learnt of the disclosure made by the chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality," Price Waterhouse said in an e-mailed statement.
"Price Waterhouse: Currently Examining Satyam Chmn's Statement," Lloyds, January 7, 2008 --- http://www.lloyds.com/dj/DowJonesArticle.aspx?id=416525

Earlier in the day, Satyam Chairman Raju resigned, admitting to falsifying company accounts and inflating revenue and profit figures over several years.

"Satyam Chief Admits Huge (multi-year accounting) Fraud," by Heather Timmons, The New York Times, January 7, 2008 --- http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html?_r=1&ref=business

Satyam Computer Services, a leading Indian outsourcing company that serves more than a third of the Fortune 500 companies, significantly inflated its earnings and assets for years, the chairman and co-founder said Wednesday, roiling Indian stock markets and throwing the industry into turmoil.

The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts as the company expanded from a handful of employees into a back-office giant with a work force of 53,000 and operations in 66 countries.

Mr. Raju said Wednesday that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed as assets for its second quarter, which ended in September, were nonexistent.

Revenue for the quarter was 20 percent lower than the 27 billion rupees reported, and the company’s operating margin was a fraction of what it declared, he said Wednesday in a letter to directors that was distributed by the Bombay Stock Exchange.

Satyam serves as the back office for some of the largest banks, manufacturers, health care and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé and the United States government. In some cases, Satyam is even responsible for clients’ finances and accounting.

The revelations could cause a major shake-up in India’s enormous outsourcing industry, analysts said, and may force many large companies to investigate and perhaps revamp their back offices.

“This development is going to have a major impact on Satyam’s business with its clients,” said analysts with Religare Hichens Harrison on Wednesday. In the short term “we will see lot of Satyam’s clients migrating to competition like Infosys, TCS and Wipro,” they said. Satyam is the fourth-largest outsourcing firm after the three named.

In the four-and-a-half page letter distributed by the Bombay stock exchange, Mr. Raju described a small discrepancy that grew beyond his control. “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

Mr. Raju said he had tried and failed to bridge the gap, including an effort in December to buy two construction firms in which the company’s founders held stakes. Speaking of a “deep regret” and a “tremendous burden,” Mr. Raju said that neither he nor the co-founder and managing director, B. Rama Raju, had “taken one rupee/dollar from the company.” He said the board had no knowledge of the situation, nor did his or the managing director’s families.

The size and scope of the fraud raises questions about regulatory oversight in India and beyond. In addition to India, Satyam has been listed on the New York Stock Exchange since 2001, and on Euronext since January of 2008. The company has been audited by PricewaterhouseCoopers since its listing on the New York Stock exchange.

Satyam has been under close scrutiny in recent months, after an October report that the company had been banned from World Bank contracts for installing spy software on some World Bank computers. Satyam denied the accusation but in December, the World Bank confirmed without elaboration on the cause that Satyam had been banned. Also in December, Satyam’s investors revolted after the company proposed buying two firms with ties to Mr. Raju’s sons.

On Dec. 30, analysts with Forrester Research warned that corporations that rely on Satyam might ultimately need to stop doing business with the company. “Firms should take the initial steps of reviewing the exit clauses in their current Satyam contracts,” in case management or direction of the company changed, Forrester said.

The scandal raised questions over accounting standards in India as a whole, as observers asked whether similar problems might lie buried elsewhere. The risk premium for Indian companies will rise in investors’ eyes, said Nilesh Jasani, India strategist at Credit Suisse.

R. K. Gupta, managing director at Taurus Asset Management in New Delhi, told Reuters: “If a company’s chairman himself says they built fictitious assets, who do you believe here?” The fraud has “put a question mark on the entire corporate governance system in India,” he said.

Continued in article

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

The huge accounting scandal at Satyam Computer Services Ltd., one of India's biggest information-technology firms, could lead to an overhaul of corporate-governance standards in the country and force changes in how Indian companies do business. Although some leading Indian companies have become international powerhouses in recent years, the general standard of corporate ethics and accounting have traditionally been poor in India.
Jackie Range and Joann S. Lublin, "Spotlight on India's Corporate Governance," The Wall Street Journal, January 8, 2008 ---
http://online.wsj.com/article_email/SB123134607361061165-lMyQjAxMDI5MzAxNzMwNDc2Wj.html


The Stella Awards were inspired by Stella Liebeck. In 1992, Stella, then 79, spilled a cup of McDonald's coffee onto her lap inside a moving car, burning herself. A New Mexico jury awarded her $2.9 million in damages (later reduced on appeal).
Stella Awards --- http://www.stellaawards.com/

Revealed: The most outrageous US lawsuits:  The most outrageous lawsuits filed in the past year have been revealed at the annual Stella Awards held in the US this week," London Telegraph, February 16, 2009 ---
http://www.telegraph.co.uk/news/newstopics/howaboutthat/4635058/Revealed-The-most-outrageous-US-lawsuits.html

The awards take a light-hearted look at the civil litigation industry that now costs more than $247 billion (£172bn) a year – the equivalent of $825 (£574) per person in the US.

They are named after Stella Liebeck of Albuquerque, New Mexico, who successfully sued McDonald's for $2.86 million (£2m) in 1992 after burning herself on coffee that was "too hot".

Among the cases featured this year was the Washington lawyer who is suing the dry cleaners who lost his trousers for $65 million (£45m) on the basis of "mental suffering, inconvenience and discomfort" and the woman who threw her drink at her boyfriend in a Philadelphia restaurant then slipped on the spilt liquid, broke her tailbone and successfully sued for $113,500 (£79,000).

The awards, which were set up seven years ago by California publisher and columnist Randy Cassingham, also include the case of Mrs Merv Grazinski of Oklahoma, who sued Winnebago for $1.75 million (£1.21m) after she crashed her motor home at 70mph while making a sandwich.

She argued the firm failed to inform her not to leave the wheel when she set it on cruise control.

Kara Walton, of Claymont, Delaware, gained a mention after she sued the owner of a nightclub for $12,000 (£8,350) because she fell from the bathroom window she was trying to sneak in through, knocking out her two front teeth.

Jerry Williams, of Little Rock, Arkansas, was awarded $14,500 (£10,000) plus medical expenses after being bitten on the bottom by his next door neighbour's beagle. The dog was on a chain and Mr Williams had hopped over a fence and repeatedly shot it with a pellet gun.

Criminals had a good year in court. Terrence Dickson of Bristol, Pennsylvania, won $500,000 (£350,000) from the insurance company of a family whose home he burgled when he was trapped inside the garage for eight days, while Carl Truman, 19, of Los Angeles, California, won $74,000 (£51,500) plus medical expenses when his neighbour ran over his hand as he tried to to steal his hubcaps.

Kathleen Robertson of Austin, Texas was awarded $80,000 (£55,700) plus medical costs against the owners of a store when she tripped over a running toddler and broke her ankle. The toddler was her own son.

Some lawyers are now warning that the number of frivolous lawsuits could even increase as the recession drives people to more inventive moneymaking methods.

California family law specialist Jim Fedalen warned: "When people are broke they get desperate and I have no doubt we're going to see a big increase in scams, such as people deliberately planting nasty objects in their sandwiches then trying to sue the burger joint.

"You'd be amazed at the companies who will shell out thousands, even when they suspect they're being conned, to avoid the adverse publicity of a court case. Juries tend to side with the plaintiffs and damages they sometimes award are in the realms of the ridiculous."


"Credit Default Swamp:  The Fed wants to give the blundering rating agencies even more power – this time over derivatives.." The Wall Street Journal, January 3, 2008 --- http://online.wsj.com/article/SB123094475030650613.html?mod=djemEditorialPage

Could the political campaign to blame the financial panic on unregulated derivatives be losing momentum? Let's hope so, because this might save us from making new mistakes in the name of fixing the wrong problems.

We now know that the predicted disaster for credit default swaps (CDS) following the Lehman Brothers bankruptcy never happened. The government also still hasn't explained how AIG's use of CDS to go long on housing would have destroyed the planet. And now the New York Federal Reserve's effort to regulate the CDS market is mired in a turf war. The Securities and Exchange Commission and the Commodity Futures Trading Commission have backed rival efforts in New York and Chicago.

But it is the New York Fed proposal that may pose the most immediate threat to taxpayers, because it is designed to include firms on at least one end of 90% of CDS contracts. After announcing its intention to begin by the end of 2008, the New York branch of the central bank is still awaiting approval from the Fed's Board of Governors to launch a central clearinghouse for CDS trades. Credit default swaps are essentially insurance against an organization defaulting on its debt, and they provide a real-time gauge of credit risk. This has proven particularly valuable because the Fed's method of judging risk -- relying on the ratings agencies S&P, Moody's and Fitch -- has been disastrous for investors.

Under pressure from the New York Fed, nine large CDS dealers -- giants like Goldman Sachs -- agreed to construct a central counterparty, which would backstop and monitor CDS trades. Called The Clearing Corp., it failed to catch on in the marketplace. So the big dealers recently gave an ownership stake to IntercontinentalExchange (ICE). In return, ICE agreed to make this government-created but privately owned institution work.

ICE has given the venture, now called ICE Trust, operational street cred, but the Fed-imposed architecture should still cause taxpayer concern. That's because it takes the widely dispersed risk in the CDS marketplace and attempts to centralize it in one institution. If not structured correctly, it may reward the participating firms with the weakest balance sheets. For this reason, some of the dealers who have resisted a central counterparty because it threatens their profits may now embrace it as a way to socialize their risks. What's more, if it allows these big Wall Street dealers to build an electronic trading platform on top of the central clearinghouse, the big banks could prevent pesky Internet start-ups from threatening their market share.

Here's how the New York Fed's central counterparty would change the market: Right now, CDS trades are conducted over-the-counter as private contracts between two parties. They are reported to the Trade Information Warehouse, so the market has some transparency, but nobody is on the hook besides the two parties to the agreement. This provides an incentive for each party to make an informed judgment on whether the counterparty can be relied upon to pay debts. The buyer of credit protection -- who is paying annual premiums for the right to be compensated if a company defaults on its bonds -- has every reason to study the balance sheet of the seller of a CDS contract.

In the New York Fed's judgment, the recent panic showed there wasn't enough transparency in CDS trades. This claim would have more credibility if the Fed would come clean about AIG. But in any case, the Fed's solution is to force CDS contracts into its central counterparty. There is a virtue here: A particular bank cannot throw out its collateral standards to please one large favored client, because the same standards apply to all participants. The nine large dealers plus perhaps four or five more participating firms would each contribute roughly $100 million to the central counterparty, and they'd have to cough up more money if failures burn through this cash reserve.

However, this system also introduces new risks, because all participants become liable for the potential failure of the weakest members. How does one appropriately judge the credit risk of a participant? ICE Trust and the Fed haven't released details. Sources tell us that participants will need to have a net worth of at least $1 billion, and, more ominously, that the Fed wants a high rating from a major credit-ratings agency as a crucial test of financial health.

If regulators learn nothing else from the housing debacle, they should recognize that their system of anointing certain firms to judge credit risk is structurally flawed and immensely expensive for investors. As Columbia's Charles Calomiris has explained on these pages, one reason the Basel II standards for bank capital failed is because they subcontracted risk assessments to the same ratings agencies that slapped AAA on dodgy mortgage paper.

Unfortunately, the Fed stubbornly refuses to learn this lesson. With its various lending facilities, the Fed continues to demand collateral rated exclusively by S&P, Moody's or Fitch. A rival ratings agency reports that the Fed recently rejected a request from a clearing bank to consider a ratings firm other than the big three.

No doubt ICE Trust has a strong incentive to monitor counterparty credit risk. Our concern is that the Fed's failed policy on credit ratings will increase risks even further if it is allowed to pollute the $30 trillion CDS market. The credit raters have shown they are usually the last to know if a bank is in trouble, yet under a credit-rating seal of approval such a bank could maintain the illusion that all is well. If you have trouble conceiving of such a scenario, reflect on the history of Enron, Bear Stearns, Lehman, Citigroup, the mortgage market, collateralized-debt obligations, etc. Now try to imagine how long it will take the Fed to commit taxpayer dollars if this central counterparty fails.

Any plan that seeks to minimize marketplace risks by concentrating them in one institution deserves skepticism. Relying on ratings from the big three to assess these risks would be an outrage.

Bob Jensen's Primer on Derivatives ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Primer
Also see how AIG and some other Wall Street firms were bailed out of their credit default swaps ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout


Added Insights on How the CDO Scandals Worked

February 9, 2009 message from Phillip Chiu [p_chill@hotmail.com]

Dear Professor Jensen,

I am writing on behalf of a group of investors numbering several tens of thousands in Hong Kong who believe they have been duped by Lehman Brothers in purchasing what is described as ‘credit-linked’ notes (a small portion is variously described as ‘equity-linked note’ and the like).

The complexity of the products only gradually came to light after the bankruptcy of Lehman Brothers last September, followed by the rather irresponsible conduct manifested by the refusal of the distributor banks and the regulators (the Securities and Futures Commission and the Hong Kong Monetary Authority) to answer queries relating to the approval and sales of such Notes.

The Notes were being sold indiscriminately to the public without any regard to suitability of the particular investor. By a rough estimate (profiles of the victimized investors have been withheld by the government), about 40% of the entire body of investors are retirees, elderly, uneducated or suffering from other handicaps.

We believe that the so-called credit-linked notes actually conceal poor quality synthetic CDO described as ‘underlying security’. Ostensibly the Notes are advertised as ‘credit-linked’ to a handful of well-known companies, but this is no more than a façade in order to obscure the all-important role played by the portfolios of credit derivatives. I attach the issue prospectus and programme prospectus of one of the many series for your ease of reference.

From your remarkable wealth of knowledge in white collar fraud, I wonder if you would be interested in having a look of the attachment and considering adding this scam in your website. Being mere amateurs in finance, we have been struggling to unravel the fraud without any assistance from the banks and the regulators. We would be most grateful for any advice from you such as similar deceptive practice (mischaracterizing highly risky derivatives as ‘security’ in order to mislead the investors in this instance), or any other aspects that you may consider we should pay attention to.

No details about the ‘underlying security’ was given in the prospectuses and Lehman sought to excuse the non-disclosure by asserting that final decision had not been made when the prospectus went to print. The intervals between each series of the Notes could be as short as one month which renders the assertion implausible. After all, some issuers of similar notes have adopted the practice of revealing an ‘expected portfolio’ and cognate details. We consider this a key aspect of intentional withholding of information. Your opinion on this would be very much appreciated.

May I thank you in advance for taking time to read our request.

Yours faithfully

Philip Chiu

Attachment 1 --- http://www.trinity.edu/rjensen/HongKongLehman01.pdf
Attachment 2 --- http://www.trinity.edu/rjensen/HongKongLehman02.pdf

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

You can read more about CDO scandals at http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout 

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


"Former BDO Seidman vice chair pleads guilty to tax fraud," AccountingWeb, March 20, 2009 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=107235 

Adrian Dicker, a United Kingdom chartered accountant and former vice chairman and board member at a major international accounting firm, has pleaded guilty to conspiring with certain tax shelter promoters to defraud the United States in connection with tax shelter transactions involving clients of the accounting firm and the law firm Jenkens & Gilchrist (J&G), the Justice Department and Internal Revenue Service (IRS) announced. In the hearing before U.S. Magistrate Judge Theodore H. Katz in the Southern District of New York, Dicker, who is a resident of Princeton Junction, NJ, also pleaded guilty to tax evasion in connection with a multi-million dollar tax shelter that Dicker helped sell to a client of the accounting firm.

According to the information and the guilty plea, between 1995 and 2000, Dicker was a partner in the New York office of the accounting firm which he identified during his guilty plea as BDO Seidman. From early 1999 through October 2000, Dicker was on the firm's Board of Directors, and through October 2003 he served as a retired partner director. From 1998 until 2000, Dicker was one of the leaders of the firm's "Tax Solutions Group" (TSG), a group led by the firm's chief executive officer, Dicker, and another New York-based tax partner. The activities of the TSG were devoted to designing, marketing, and implementing high-fee tax strategies for wealthy clients, including tax shelter transactions.

According to the information and the guilty plea, Dicker and the other two TSG managers used a bonus structure that handsomely rewarded the accounting firm personnel involved in the design, marketing, and implementation of the TSG's transactions, including: the individual who referred the client to TSG personnel; the TSG member who pitched and closed the sale; other TSG members; and TSG management. From July 1999, Dicker, the CEO, and the other TSG manager earned and shared equally 30 percent of the net profits of the TSG. Dicker earned approximately $6.7 million in net TSG profits, as well as salary and bonuses between 1998 and 2000. In addition, the CEO of the firm doled out additional bonuses from the profits earned as a result of the sale of the tax shelter products. Moreover, the firm made the sale of the tax shelter products a focal point of its aggressive "value added" product promotion activities, using a "Tax $ells" logo and other marketing hype to induce employees to generate additional tax shelter sales.

According to the information and the guilty plea, while serving as a manager of the TSG, Dicker, along with other TSG partners, engaged in the design, marketing, and implementation of two different tax shelter transactions with the Chicago office of the law firm of Jenkens & Gilchrist, as well as an international bank with its U.S. headquarters in New York. As a member of TSG and the accounting firm's tax opinion committee - which reviewed the tax opinions issued in connection with tax shelter transactions sold by the accounting firm and J&G - Dicker knew that the tax shelter transactions he helped vet and sell would be respected and allowed by the IRS only if the client had a substantial non-tax business purpose for entering the transaction, and the client had a reasonable possibility of making a profit through the transaction. Dicker and his co-conspirators knew and understood that the clients entering into the tax shelter transactions being marketed and sold with J&G had neither a substantial non-tax business purpose nor a reasonable possibility of earning a profit, given the large amount of fees being charged by the accounting firm and J&G to enter the transaction. Those fees were set by the co-conspirators as a percentage of the tax loss being sought by the tax shelter clients. Dicker also knew that the clients who purchased the tax shelter had no non-tax business reasons for entering into the transactions and their pre-planned steps.

According to the information and the guilty plea, in order to make it appear that the tax shelter clients of Dicker, other TSG members, and J&G had the requisite business purpose and possibility of profit, Dicker and his co-conspirators reviewed and approved the use of a legal opinion letter issued by J&G that contained false and fraudulent representations purportedly made by the clients about their motivations for entering into the transactions. In addition, Dicker and his co-conspirators created and used, or approved of the creation and use of, other documents in the transactions that were false, fraudulent, and misleading in order to paint a picture for the IRS that was patently untrue - that is, that the clients had a legitimate non-tax business purpose for entering the transaction and executing the preplanned steps of the transaction. Dicker also admitted during his plea that TSG members created and placed into client files certain paperwork that falsely conveyed fabricated business purposes and rationales for clients entering into the shelters. The false paperwork was created to mislead and defraud the IRS.

Continued in article

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


Question
Are many share repurchases motivated more out of executive greed than shareholder benefits?
In accounting classes, it might be stressed that increased executive compensation is one of the incentives of buying treasury stock.

"Controlled by the corporations:  Before we can deal with a financial crisis manufactured in boardrooms, we must curb corporate power over our legislators," by Prem Sikka, The Guardian, January 8, 2008 --- http://www.guardian.co.uk/commentisfree/2009/jan/08/financial-crisis-regulation

Repurchase of shares has the potential to enable company executives to make huge profits. A simple example would help to illustrate the point. Suppose a company has earnings of £100 and 100 shares. Now the earnings per share are £1. Suppose the company decides to use its surplus cash to buy back 50 shares. After repurchase, it has only 50 shares in circulation. So the earnings per share (EPS) are now £2. The significance of this is that many executive remuneration schemes link profits to EPS. Without creating an iota of additional wealth, directors can increase earnings per share, their bonuses and share options. The company pays out real cash to buy back its shares. Such cash could have been used to bolster capital, liquidity or research and development, or could even have been put away for a rainy day. In some cases, companies have taken on extra debts to buy back their own shares, which opens them up to higher interest charges and vulnerability. Of course, there is the forlorn hope that the reduction in the number of shares might make the remaining shares somehow more marketable, or that the repurchase of shares might assure markets and push up the share price.

One US
study estimated that about 100 companies a month were buying back their shares. Nearer home, Alliance & Leicester announced a £300m share buyback at nearly £12 a share. Soon afterwards it was rescued by Banco Santander at just £3.17 a share. HBOS had a £750m share buyback programme and has now been bailed out by the UK taxpayer. Barclays bought back 2m shares at 451p. In recent weeks, its share price has been about a third of that and the bank had to raise additional money from Middle East investors. Northern Rock also has a history of buying back its shares and had to be bailed out by the taxpayer as well.

Continued in article

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


"U. of Central Florida Associate Dean Faces Fraud and Theft," by Charles Huckabee, Chronicle of Higher Education, January 28, 2009 --- Click Here

Charges An associate dean at the University of Central Florida is facing fraud and theft charges after he allegedly charged $40,000 worth of home electronics to a university-issued credit card and tried to conceal the purchases from the university, The Orlando Sentinel reported.

The newspaper said Jamal Nayfeh, associate dean of the university’s College of Engineering, turned himself in at a local jail this afternoon and was expected to be released after posting bond.

A university spokesman, Grant Heston, said Mr. Nayfeh was suspended with pay this month after auditors discovered the purchases, made in December. The arrest affidavit says that Mr. Nayfeh gave the auditors an “altered receipt to make it appear that non-taggable business related items were purchased … rather than a home-entertainment system.”

According to the Sentinel, Mr. Nayfeh’s annual salary as associate dean is $181,000.


Mrs Madoff is also a book cooking fraud
"A Madoff Cookbook Has a Secret, Too," by Alison Leigh Cowan, The New York Times, January 14, 2009 --- http://www.nytimes.com/2009/01/15/business/15cook.html?_r=1

The picture comes from a 1996 cookbook called “The Great Chefs of America Cook Kosher: Over 175 Recipes From America’s Greatest Restaurants.” Mrs. Madoff and her friend, as co-authors, wrote in the book of a high-minded mission: exposing kosher palates to new sensations by collecting dishes from famous restaurant chefs that could be prepared in keeping with Jewish dietary restrictions.

For all the book’s talk of wanting to serve the interests of a “strictly Kosher” crowd, The Daily Mail in London recently reported that Ruth’s husband, Bernard, was quite fond of pork sausages, taboo under any definition of kosher cooking.

Karen MacNeil, a food and wine expert who was given the title of editor of the project, beneath the two executive editors — Mrs. Madoff and her friend Idee Schoenheimer — disclosed in an interview with The New York Times that she was paid to write the cookbook in its entirety. She said Mrs. Madoff “was interested in having her name on something that would allow for some sort of fun.”

Continued in article

Question
If Madoff's stock trades were faked for 28 years, where did the cash come from to pay some investors?

Larry Brown's Ponzi hypothetical is now turning into Ponzi reality

Madoff made off with $50 Billion!
Where did it go?
Who will pay it back?

A Tale of Four Investors
Forwarded by Dennis Beresford

Four investors made different investment decisions 10 years ago.  Investor one was extremely risk averse so he put $1 million in a safe deposit box.  Today he still has $1 million.  Investor two was a bit less risk averse so she bought $1 million of 6% Fanny Mae Preferred.  She put the $15,000 she received in dividends each quarter in a safe deposit box.  After receiving 40 dividends, she recently sold her investment for $20,000 so she now has $620,000 in her safe deposit box.  Investor three was less risk averse so he bought and held a $1 million well diversified U.S. stock portfolio which he recently sold for $1 million, putting the $1 million in his safe deposit box.  Investor four had a friend who knew someone who was able to invest her $1 million with Bernie Madoff.  Like clockwork, she received a $10,000 check each and every month for 120 months.  She cashed all the checks, putting the money in her safe deposit box.  She was outraged to learn that she will no longer receive her monthly checks.  Even worse, she lost all her principal.  She only has $1,200,000 in her safe deposit box. She hopes the government will bail her out.

 Lawrence D. Brown
J. Mack Robinson Distinguished Professor of Accounting
Georgia State University
December 18, 2008

 


"Madoff 'Victims' Do Math, Realize They Profited," SmartPros, January 2009 --- http://accounting.smartpros.com/x64396.xml

The many Bernard Madoff investors who withdrew money from their accounts over the years are now wrestling with an ethical and legal quandary. What they thought were profits was likely money stolen from other clients in what prosecutors are calling the largest Ponzi scheme in history. Now, they are confronting the possibility they may have to pay some of it back.

The issue came to the forefront this week as about 8,000 former Madoff clients began to receive letters inviting them to apply for up to $500,000 in aid from the Securities Investor Protection Corp.

Lawyers for investors have been warning clients to do some tough math before they apply for any funds set aside for the victims, and figure out whether they were a winner or loser in the scheme.

Hundreds and maybe thousands of investors in Madoff's funds have been withdrawing money from their accounts for many years. In many cases, those investors have withdrawn far more than their principal investment.

"I had a call yesterday from a guy who said, 'I've taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?'" said Steven Caruso, a New York attorney specializing in securities and investment fraud.

"I'm hard-pressed to give advice in that situation," Caruso said.

Among the options: Get in line with other victims looking for restitution. Keep quiet and hope nobody notices. Return the money. Or hire a lawyer and fight to keep profits that were probably fraudulent.

No one knows yet how many people will emerge as net winners in the scandal, but the numbers appear to be substantial. Many of Madoff's long-term investors have, over time, cashed out millions of dollars of their supposed profits, which routinely amounted to 11 percent to 15 percent per year.

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

"There are a lot of net winners," he said.

Asked for an example, Levitt said one caller, whom he declined to name, invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of "profits" as the years went by.

On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.

Other attorneys report getting similar calls.

Under federal law, the court-appointed trustee trying to unravel Madoff's business can demand that people who profited from the scheme return some or all of the money.

These so-called "clawbacks" are generally limited to payouts over the last six years, but could still amount to big bucks for some investors.

When a hedge fund run by the Bayou Group collapsed and was revealed to be a Ponzi scheme in 2005, the trustee handling the case sought court orders forcing investors to return false profits. Many experts anticipate a similar process in the Madoff case.

Applying for the aid could give the trustee evidence he needs to initiate a clawback claim. On the other hand, investors who ignore the letter would most likely forfeit any chance of recovering lost funds.

No matter how they respond, it may only be a matter of time before investors wiped out in the scandal turn on those who unknowingly enjoyed the fruits of the fraud.

"The sharks are all circling," Caruso said.

Some hedge funds that had billions of dollars invested with Madoff are already going through years worth of records, trying to figure out which of their investors withdrew more than they put in.

That data could be used by the fund managers to defend themselves against lawsuits, or go after clients deemed to have profited from the scheme and get them to return the cash.

The future is equally cloudy for investors who cashed out entirely before Madoff's arrest.

Continued in article

All Reported Trades in Madoff's Investment Fund Were Fakes for 28 Years:  How could the "auditors" not be complicit in the Ponzi fraud?
"BERNIE'S FAKE TRADES REGULATORS: NO TRACE OF MADOFF STOCK BUYS SINCE 1960s," by James Doran, The New York Post, January 16, 2009 --- http://www.nypost.com/seven/01162009/business/bernies_fake_trades_150467.htm

The mystery surrounding Bernard Madoff's alleged $50 billion Ponzi scheme deepened further yesterday after the securities industry's watchdog said there was no evidence that the accused swindler ever traded a single share on behalf of his clients, suggesting financial irregularities going back to the 1960s.

Officials at the Financial Industry Regulatory Authority, known as FINRA, told The Post that after examining more than 40 years' worth of financial records from Madoff's now-defunct broker dealer, there are no signs that Bernard L. Madoff Investment Securities ever traded shares on behalf of the investment-advisory business at the center of the scandal.

The startling findings contradict statements that Madoff's advisory clients received showing hundreds, if not thousands of trades, completed by the broker dealer every year.

"Our investigations of Bernard Madoff's broker dealership showed no evidence that any shares were ever traded on behalf of his investment advisory business," a FINRA spokesman said, adding that the regulator has looked at Madoff's books going back to 1960.

Ira Lee Sorkin, a Madoff lawyer, declined to comment.

Madoff was arrested last month after his sons said their father had confessed to them that his investment-advisory business was a Ponzi scheme that had bilked $50 billion out of wealthy friends, vulnerable charities and universities. Madoff remains free on $10 million bail.

While his advisory business is at the center of the scandal, all signs point to Madoff's broker dealer being a legitimate business that traded shares wholesale on behalf of investment banks, mutual funds and other institutions.

Madoff was previously vice chairman of FINRA's predecessor NASD. He was also a member of the Nasdaq stock exchange, where he served as chairman of its trading committee.

Richard Rampell, a Florida-based certified accountant who counts as clients several of Madoff's victims, said his review of dozens of statements supports FINRA's findings.

"Everything I saw on those statements told me that Madoff was clearing his own trades," he said. "There was no third party mentioned on any of those statements."

Steve Harbeck, CEO of Securities Industry Protection Corp., the outfit overseeing the Madoff bankruptcy to ensure clients get some sort of compensation, said his findings are similar to FINRA's.

"I do not have any evidence to contradict that," he said. "This is an amazing story that something like this could have gone on undetected for so long."

Harbeck added that he believed Madoff has been defrauding clients for at least 28 years. "I have seen evidence to that end and I have nothing to contradict it," he said.

Question
If Madoff's stock trades were faked for 28 years, where did the cash come from to pay some investors?

Answer
The definition of a Ponzi scheme depends upon new investors paying cash to pay earlier investors --- http://en.wikipedia.org/wiki/Ponzi
This almost eliminates the amount of $50 billion Madoff stole that can be recovered for the latest investors in his investment fund.

 

Why Madoff's Hedge Fund Could Be Audited by Non-registered Auditors
We all know that Bernie Madoff's brokerage firm was audited by an obscure 3-person accounting firm that is not registered with the Public Company Accounting Oversight Board.  This was permitted because the SEC exempted privately owned brokerage firms from the SOX requirement that firms are audited by registered accountants.  Floyd Norris reports, in today's NY Times, that the SEC has now quietly rescinded that exemption.  As a result, firms that audit broker-dealers for fiscal years that end December 2008 or later will have to be registered.  However, under another SOX provision, PCAOB is allowed to inspect only audits of publicly held companies.  NYTimes, Oversight for Auditor of Madoff.
"Why an Obscure Accounting Firm Could Audit Madoff's Records," Securities Law Professor Blog, January 9, 2008 ---
http://lawprofessors.typepad.com/securities/


Why Madoff's Hedge Fund Could Be Audited by Non-registered Auditors
We all know that Bernie Madoff's brokerage firm was audited by an obscure 3-person accounting firm that is not registered with the Public Company Accounting Oversight Board.  This was permitted because the SEC exempted privately owned brokerage firms from the SOX requirement that firms are audited by registered accountants.  Floyd Norris reports, in today's NY Times, that the SEC has now quietly rescinded that exemption.  As a result, firms that audit broker-dealers for fiscal years that end December 2008 or later will have to be registered.  However, under another SOX provision, PCAOB is allowed to inspect only audits of publicly held companies.  NYTimes, Oversight for Auditor of Madoff.
"Why an Obscure Accounting Firm Could Audit Madoff's Records," Securities Law Professor Blog, January 9, 2008 ---
http://lawprofessors.typepad.com/securities/


Evidence suggests that Bernard Madoff, the “prominent” Wall Street operator and former chairman of the NASDAQ stock market, had ties to the Russian Mafia, Moscow-based oligarchs, and the Genovese organized crime family. And, as reported by Deep Capture and Reuters, Madoff did not just orchestrate a $50 billion Ponzi scheme. He was also the principal architect of SEC rules that made it easier for “naked” short sellers to manufacture phantom stock and destroy public companies – a factor in the near total collapse of the American financial system.
Mark Mitchell, "Strange Occurrences and a Story about Naked Short Selling," Deep Capture, January 27, 2009 ---
http://www.deepcapture.com/strange-occurrences-and-a-story-about-naked-short-selling/

The main reason Brandeis University is selling its valued art collection
"It’s like a one-two-three punch: the economy tanks, they overbuilt at the peak of the market and their largest donor was hit dramatically by the Madoff scandal,” said Mark Williams, a Boston University senior lecturer who specializes in risk management and has studied Brandeis’s finances. Among the biggest donors to Brandeis are the philanthropist Carl Shapiro and his wife, Ruth. Carl Shapiro and his family foundation had losses of $545 million in Madoff’s alleged Ponzi scheme, according to the Boston Globe.
Forwarded by Caroline Becker
"Brandeis to Sell All (over 6,000 pieces) of Its Art," by Scott Jaschik, Inside Higher Ed, January 27, 2009 --- http://www.insidehighered.com/news/2009/01/27/brandeis
Jensen Comment
The meltdown of the stock market also clobbered the $700 million endowment of Brandeis University. It is not clear what, if any, of the University's endowment recovered from the Madoff fund before the fraud was disclosed ---
http://accounting.smartpros.com/x64396.xml

Re-arranging the deck chairs on the USS SEC
We understand why Ms. Schapiro would want to show some love to the staff after the blistering attack it received last Wednesday on the Hill. Said liberal New York Congressman Gary Ackerman, "You have totally and thoroughly failed in your mission." Then he went negative, referring to the SEC's difficulty in finding a part of the human anatomy "with two hands with the lights on." Mr. Markopolos added that his many interactions with the agency "led me to conclude that the SEC securities' lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed." . . . If Ms. Schapiro seeks to learn from the SEC's recent history, she might start by considering the most basic lesson from the Madoff incident. Private market participants spotted the fraud, while SEC lawyers couldn't seem to grasp it. Rather than giving her staff lawyers still more autonomy, she should instead be supervising them more closely, while trying to harness the intelligence of the marketplace. Meantime, investors should remember that their own skepticism and diversified investing remain their best defenses against fraudsters.
"Just Don't Mention Bernie:  Unleashing the SEC enforcers who were already unleashed," The Wall Street Journal, February 10, 2009 --- http://online.wsj.com/article/SB123423071487965895.html?mod=djemEditorialPage
Also see "High "Power Distance" at the SEC: Why Madoff Was Allowed to Take Investors Down with Him," by Tom Selling, The Accounting Onion, December 10, 2009 --- http://accountingonion.typepad.com/theaccountingonion/2009/02/high-power-dist.html 

I don't think we in the U.S. are as low a power distance society as we fashion ourselves, and the redistribution of wealth that has been occurring since the 1980s may be pushing us inexorably towards Colombia. Also, it wasn't difficult for me to think of a few examples of where the SEC in particular has been exhibiting symptoms characteristic of a high power distance country:
  • When asked why he robbed banks, Willie Sutton simply replied, "Because that's where the money is." Lately, it seems that the SEC staff (i.e., the "co-pilots,") has shied away from the big money, out of a mirror-image version of the self-interest (survival, in case of a staff member) that motivated Mr. Sutton. And that fear is not merely paranoia, as tangibly illustrated recently when a former SEC investigator was fired after pursuing evidence that John Mack, Morgan Stanley's CEO, allegedly had tipped off another investment company about a pending merger.
     
  • The Christopher Cox administration instituted an unprecedented policy that required the Enforcement staff to obtain a special set of approvals from the Commission in order to assess monetary penalties as punishment for securities fraud. Mary Schapiro, the new SEC chair, claims that the policy, among other deleterious effects, "discouraged staff from arguing for a penalty in a case that might deserve a penalty…" In other words, the co-pilots were "encouraged" to keep a lid on embarrassing news that reflected badly on members of the pilot class.
     
  • And, lest you should not labor under any illusion that enforcement of accounting rules is a level playing field, consider the case in 1992 (I think) when the SEC effectively handed out special permission to AT&T to account for its acquisition of NCR as a "pooling of interests." Quite evidently, the SEC staff could not bring the bad news to the "pilots" that the merger with NCR would not happen just because AT&T did not technically qualify for the accounting it so sorely "needed." To put it in the stark terms of today, the merger was simply "too big to fail." (And perhaps not coincidentally, acquiring NCR proved to be one of the biggest wastes of shareholder wealth in the history of AT&T.)

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


"Bank of America Accused in Ponzi Lawsuit," by Leslie Wayne, The New York Times, March 27, 2009 ---
http://www.nytimes.com/2009/03/28/business/28ponzi.html

Bank of America effectively set up a branch in a Long Island office that helped Nicholas Cosmo carry out a $380 million Ponzi scheme, according to a class-action lawsuit filed in federal court.

The lawsuit, filed in Federal District Court in Brooklyn late Thursday, contends that Bank of America “established, equipped and staffed” a branch office in the headquarters of Mr. Cosmo’s firm, Agape Merchant Advance. As a result, the lawsuit contends that the bank knowingly “assisted, facilitated and furthered” Mr. Cosmo’s fraudulent scheme.

“Bank of America was at the epicenter of this scheme,” said the lawsuit, which seeks $400 million in damages from the bank and other defendants. “Without Bank of America’s participation, the scheme would not have succeeded and grown to such an enormous size.”

Mr. Cosmo surrendered to authorities at a Long Island train station in January in connection with a suspected Ponzi scheme involving what Mr. Cosmo called “private bridge loans” that promised investors returns of 48 percent to 80 percent a year. Many of his 1,500 investors were blue-collar workers and civil servants.

Bank of America declined to comment, saying that it had not yet seen the suit.

According to the suit, representatives of Bank of America worked directly out of Mr. Cosmo’s West Hempstead office, which was about 30 miles from the branch where Agape and Mr. Cosmo maintained their bank accounts. In addition, Bank of America provided on-site representatives at Agape with bank equipment and computer systems that allowed direct access to the bank’s accounts and systems, the suit said.

“Essentially, Bank of America established a fully functional bank branch manned by its own representatives within Agape’s offices, which is contrary to normal banking practices,” the lawsuit said. As a result, the bank’s representatives had “actual knowledge” that Mr. Cosmo was “diverting money to his own account” and “engaging in virtually no legitimate business whatsoever.”

In a complaint filed against Mr. Cosmo in January by the Commodities Futures Trading Commission, the government contends that from 2004 to 2008, Mr. Cosmo operated a fraudulent trading scheme in which investors were solicited to provide short-term bridge loans but that the money instead went into commodities trading contracts that lost money.

This is the second time that Mr. Cosmo has been accused of fraud. He had previously served 21 months in federal prison in Allenwood, Pa., for mail fraud. Upon his release in 2000, his broker’s license was revoked. He founded Agape after leaving prison.

The lawsuit also names a number of futures and commodities trading firms that, the lawsuit said, “assisted Cosmo in running an illegal unregistered commodities pool.” The suit says that the trading firms should “never have accepted this business,” which violated “know your customer” duties that are required of these firms.

One of the firms named in the suit was MF Global. Diana DeSocio, a spokeswoman for MF Global, said that when the firm became aware of Mr. Cosmo’s background last October, it closed Mr. Cosmo’s account and notified regulators.

Ms. DeSocio added that the account that Mr. Cosmo had was an individual account and was not an account set up on behalf of his investors.


Jim Mahar pointed out the following behavioral accounting article.
"Executive Overconfidence and the Slippery Slope to Fraud," by Catherine M. Schrand amd Sarah L. C. Zechman, SSRN, December 30, 2008 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1265631

We propose that executive overconfidence increases the likelihood that a firm commits financial reporting fraud. A manager that faces an earnings shortfall is more likely to manage earnings to overcome it if he believes the shortfall is temporary and, hence, the earnings management will be a one-off event that likely will go undetected. If performance does not improve, however, the manager, faced with reversals of prior-period earnings management and continuing poor performance, may choose to engage in the type of egregious financial reporting that the SEC prosecutes. Overconfident managers with unrealistic beliefs about future performance are more likely to find themselves in this situation. Using industry-level proxies for executive overconfidence, we find industries that attract overconfident executives have a greater proportion of frauds. Our analysis that uses firm-level proxies for overconfidence suggests that there are two types of frauds: Those associated with moderate levels of overconfidence, perpetrated by executives who ex post fall down the slippery slope, and those perpetrated by executives with extreme overconfidence that commit fraud for opportunistic reasons ex ante. Analysis of individual executives supports the notion that there are two types of overconfident executives that engage in fraud. Those with opportunistic motives are more likely to be from a founding family, have greater commitment to the firm, earn more total and have a higher percent of variable cash compensation, and are less likely to have accounting experience. Finally, we document that a matched sample of non-fraud firms do not have stronger governance mechanisms that prevent fraud. This result mitigates the possibility that it is weak governance rather than executive overconfidence that is a significant determinant of fraud.

Jensen Comment
In spite of the case they make for "executive overconfidence," I still think the main causes are motive and opportunity. Executive compensation contracts that provide huge bonuses and stock option gains are the main cause, in my viewpoint, for earnings management with Frank Raines at Fannie Mae being Exhibit A --- http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

White collar crime generally pays even if chances are high of being caught --- http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


"Audit: More Bad Accounting in Veterans Health Care," AccountingWeb, January 23, 2009 --- http://accounting.smartpros.com/x65142.xml 

Two years after a politically embarrassing $1 billion shortfall that imperiled veterans health care, the Veterans Affairs Department is still lowballing budget estimates to Congress to keep its spending down, government investigators say.

The report by the Government Accountability Office, set to be released Friday, highlights the Bush administration's problems in planning for the treatment of veterans that President Barack Obama has pledged to fix. It found the VA's long-term budget plan for the rehabilitation of veterans in nursing homes, hospices and community centers to be flawed, failing to account for tens of thousands of patients and understating costs by millions of dollars.

In its strategic plan covering 2007 to 2013, the VA inflated the number of veterans it would treat at hospices and community centers based on a questionably low budget, the investigators concluded. At the same time, they said, the VA didn't account for roughly 25,000 - or nearly three-quarters - of its patients who receive treatment at nursing homes operated by the VA and state governments each year.

"VA's use, without explanation, of cost assumptions and a workload projection that appear unrealistic raises questions about both the reliability of VA's spending estimates and the extent to which VA is closing previously identified gaps in noninstitutional long-term care services," according to the 34-page draft report obtained by The Associated Press.

The VA did not immediately respond to a request for comment.

In the report, the VA acknowledged problems in its plan for long-term care, which accounts annually for more than $4 billion, or 12 percent of its total health care spending. In many cases, officials told the GAO they put in lower estimates in order to be "conservative" in their appropriations requests to Congress and to "stay within anticipated budgetary constraints."

As to the 25,000 nursing home patients unaccounted for, the VA explained it was usual clinical practice to provide short-term care of 90 days or less following hospitalization in a VA medical center, such as for those who had a stroke, to ensure patients are medically stable. But the VA had chosen not to budget for them because the government is not legally required to provide the care except in serious cases.

The GAO noted the VA was in the process of putting together an updated strategic plan. Retired Gen. Eric K. Shinseki, who was sworn in Wednesday as VA secretary, has promised to submit "credible and adequate" budget requests to Congress.

"VA supports GAO's overarching conclusion that the long-term care strategic planning and budgeting justification process should be clarified," wrote outgoing VA Secretary James Peake in a response dated Jan. 5. He said the department would put together an action plan within 60 days of the report's release.

The report comes amid an expected surge in demand from veterans for long-term rehabilitative and other care over the next several years. Roughly 40 percent of the veteran population is age 65 or older, compared to about 13 percent of the general population, with the number of elderly veterans expected to increase through 2014.

In 2005, the VA stunned Congress by suddenly announcing it faced a $1 billion shortfall after failing to take into account the additional cost of caring for veterans injured in Iraq and Afghanistan. The admission, which came months after the department insisted it was operating within its means and did not need additional money, drew harsh criticism from both parties.

The GAO later determined the VA repeatedly miscalculated - if not deliberately misled taxpayers - with questionable methods used to justify Bush administration cuts to health care amid the burgeoning Iraq war. In Friday's report, the GAO said it had found similarly unrealistic assumptions and projections in the VA's more recent budget estimates submitted in August 2007.

Continued in article


"Stewart Enterprises Consents to Order Regarding Revenue Recognition Policies," Securities Law Prof Blog, December 30, 2008 --- http://lawprofessors.typepad.com/securities/

On December 29, the SEC issued an Order Instituting Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order (Order) against Stewart Enterprises, Inc. (Stewart), Kenneth C. Budde, CPA (Budde) and Michael G. Hymel, CPA (Hymel).  The Order finds that, from 2001 through 2005, Stewart, the second largest publicly traded provider of death care services in the United States, and Budde, Stewart's former chief financial officer and chief executive officer, and Hymel, Stewart's former chief accounting officer, made repeated public filings with the Commission that materially misrepresented Stewart's revenue recognition policies and methodologies with respect to the sale of cemetery merchandise made prior to the need for a funeral (pre-need cemetery merchandise). Stewart misleadingly represented that it utilized a straightforward delivery method to recognize revenue for the sale of pre-need cemetery merchandise, by which, upon delivery, Stewart would recognize as revenue the full contract amount paid by the customer. However, Stewart could not actually identify the pre-need contract amount and instead created an estimate of the amount of revenue to be recognized. Stewart's failure to disclose this methodology of estimating revenues in its public filings with the Commission rendered its financial statements not in conformity with Generally Accepted Accounting Principles. Only when required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and informed by its outside auditor that it would no longer issue unqualified audit opinions if this estimated methodology continued to be used did Stewart finally shift to a revenue recognition system no longer reliant on estimates. Errors arising from the assumptions underlying Stewart's methodology for estimating revenues resulted in an overstatement of net revenue from 2001 through 2005 by more than $72 million, overstated annual net earnings before taxes during this period by amounts ranging from 10.76% to 38.76%, and were the primary basis for a subsequent material restatement of earnings.

Based on the above, the Order ordered Stewart to cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; ordered Budde to cease and desist from committing or causing any violations and any future violations of Exchange Act Rule 13a-14 and cease and desist from causing any violations and any future violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and ordered Hymel to cease and desist from causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Stewart, Budde and Hymel consented to the issuance of the Order without admitting or denying any of the findings contained therein. In the Matter of Stewart Enterprises, Inc., Kenneth C. Budde, CPA, and Michael G. Hymel, CPA.

In December 2008 the FASB and the IASB announced a new joint project on cleaning up much of mess in revenue recognition standards in IFRS ---
http://www.iasb.org/News/Press+Releases/IASB+and+FASB+propose+joint+approach+for+revenue+recognition.htm

Bob Jensen's threads on issues in revenue recognition and timing --- http://www.trinity.edu/rjensen/ecommerce/eitf01.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





    Other Links
    Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm 

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

    Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism 

    Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

    Bob Jensen's threads on ethics and accounting education are at 
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

    Incompetent and Corrupt Audits are Routine ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

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

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

     

     


     

    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

     

     

     

     

    Bob Jensen's home page is at http://www.trinity.edu/rjensen/