Accounting Scandal Updates and Other
Fraud Between January 1 and March 31, 2011
Bob Jensen's Main Fraud Document ---
Bob Jensen at
Bob Jensen's Enron Quiz (and answers) ---
Bob Jensen's Enron Updates are at ---
Many of the scandals are documented at
Resources to prevent and discover fraud
from the Association of Fraud Examiners ---
Self-study training for a career in
fraud examination ---
Source for United Kingdom
reporting on financial scandals and other news ---
Updates on the leading books on the
business and accounting scandals ---
I love Infectious Greed by Frank
American History of Fraud ---
Future of Auditing ---
"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 ---
What Accountants Need to Know ---
Global Corruption (in legal systems) Report 2007 ---
Tax Fraud Alerts from the IRS ---
White Collar Fraud Site ---
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
Bob Jensen's threads on fraud are at
From CNN: Clark Howard's Informative Advice About Shopping,
Financial Planning, and Warnings About Scams ---
Bob Jensen's warnings about scams ---
Bob Jensen's shopping helpers ---
The funny thing is that I never looked up this item before now. Jim Mahar noted
that it is a good link.
Accounting Scandals ---
Bob Jensen's threads on accounting scandals are in various documents:
Accounting Firms ---
Fraud Conclusion ---
Rotten to the Core ---
Fraud Updates ---
American History of Fraud ---
Fraud in General ---
Marie E. Thornton, a former vice president
for finance at Iona College, pleaded guilty on Wednesday to
embezzling more than $850,000 from Iona, a
Roman Catholic institution in New York state, the U.S. attorney’s
office in Manhattan said in a
news release. At a sentencing hearing
scheduled for May 13, Ms. Thornton could face up to 10 years in
prison and a fine of $250,000, or twice the gross gain or loss from
Bob Jensen's Fraud Updates ---
"Tax Havens Devastating To National Sovereignty," Southwerk,
January 13, 2011 ---
Thank you Nadine Sabai for the heads up.
The blog post is
a review of the book,
Nicholas Shaxson’s -
Treasure Islands: Uncovering the Damage of Offshore Banking and Tax
Tax havens are the ultimate source of strength
for our global elites. Just as European nobles once consolidated their
unaccountable powers in fortified castles, to better subjugate and extract
tribute from the surrounding peasantry, so financial capital has coalesced
in their modern equivalent today: the tax havens. In these fortified nodes
of secret, unaccountable political and economic power, financial and
criminal interests have come together to capture local political systems and
turn the havens into their own private law-making factories, protected
against outside interference by the world’s most powerful countries – most
especially Britain. Treasure Islands will, for the first time, show the
blood and guts of just how they do it.
The nations of the world are harmed by the evasion
of their laws and taxes made possible by tax havens. The tax money is
important but more important is the ability to threaten governments to force
actions that multinational corporations such as investment banks wish done.
These escape routes transform the merely
powerful into the untouchable. “Don’t tax or regulate us or we will flee
offshore!” the financiers cry, and elected politicians around the world
crawl on their bellies and capitulate. And so tax havens lead a global race
to the bottom to offer deeper secrecy, ever laxer financial regulations, and
ever more sophisticated tax loopholes. They have become the silent battering
rams of financial deregulation, forcing countries to remove financial
regulations, to cut taxes and restraints on the wealthy, and to shift all
the risks, costs and taxes onto the backs of the rest of us. In the process
democracy unravels and the offshore system pushes ever further onshore. The
world’s two most important tax havens today are United States and Britain.
But the world is not without means to
remedy the situation. In the late 1700′s piracy flourished because nations
found it advantageous to use them against their enemies. Pirates often
employed as privateers fattened the treasury of the nations hiring them and
did harm to their enemies.
But over time, it became obvious that the
benefits of piracy were outweighed by the faults.
So, nations by treaty and policy ran the
pirates out of business.
The United States in concert with the
European Union, China and other nations could by agreement make this kind of
tax haven impossible to maintain or at the very least difficult.
It has been a daunting task to motivate the
government of the United States to act against the interests of these larger
corporations particularly the financial ones, but the future of this nation
may well depend on those tax dollars and enforcing the national interest.
I wish to thank
homophilosophicus for calling my attention to
"Which of These Banks Was 2010's Most Shameless Corporate Outlaw?" by
Richard Escow, Huffington Post, December 30, 2010 ---
Their collective rap sheet includes fraud, sex
discrimination, collusion to bribe public officials... even laundering drug
money for Mexican drug cartels. One of them is accused of ripping off some
nuns! None of this criminal behavior has stopped them from sulking over a
presidential slight. Let's review the record for these corporate
malefactors, and then decide:
The Greatest Swindle in the History of the World ---
How Does This Work?
Microsoft's Bing, like many other companies online, offers affiliate
marketers a percentage commission for revenues they drive to the company.
When Zugo gets users to use Bing, those users will click on some number
of search ads. Bing will charge advertisers for those clicks, then give Zugo
a percentage of that revenue.
"Facebook's 3rd Biggest Advertiser is (Allegedly) a Bing Affiliate Scam
(With Updates)," ReadWriteWeb, January 18, 2011 ---
Matt Cutts is the head of Google's anti-webspam
team and tonight he
came across what looks like a huge trove of scammy,
spammy spam - on Facebook. And it involves Microsoft. Advertising
AdAge reported tonight on findings from
advertising analysts that Facebook sold an estimated $1.86 billion in
worldwide advertising for 2010, an amazing sum. Who's spending all that
money on Facebook ads? A long, long tail of self-serve advertisers for sure
- but near the head of the tail is someone that should have raised a whole
lot of red flags.
At the end of the
AdAge article is a passing mention that the 3rd
largest advertiser across all of Facebook, after AT&T and Match.com, is a
mysterious company listed as Make-my-baby.com. That site bought an estimated
million billion ad impressions in the third quarter
alone. It doesn't seem like a very nice company. Note:Statements
from Facebook and Microsoft are below.
Matt Cutts did something anyone could have done. He
visited Make-my-baby.com - but be careful if you do the same.
Updates: AdAge's Edmund Lee confirmed by email that his use
of the word million was a typo and it should have been billion. Thanks as
always to our eagle eyed commenters. See also Danny Sullivan of
SearchEngineLand, who used contacts at Bing to follow up on this story. It
appears that Comscore is denying the report that it found Make-my-ugly-baby
was the third largest advertiser, that Bing is making obtuse statements and
that the website in question has now vanished from the internet.
Microsoft also just sent us this response:
Distribution deals and affiliate programs are an
important part of how all search engines introduce their product to
customers. That said, we have been made aware of some practices from a
specific publisher that are not compliant with the guidelines, best
practices and principles put in place by Bing. As a result, the
relationship with this publisher will be terminated.
Further update at 11:20 PM PST: A
Facebook spokesperson contacted us and said that the company looked around
inside its system and concluded that "make-my-baby is not an advertiser at
all on Facebook and any affiliates that try to push people there we would
shut down. Those ads would not be allowed as part of our policy."
So Facebook says it's never heard of these people
and Bing says it has decided to terminate its relationship with them. It may
be relevant that Microsoft owns a meaningful amount of Facebook. Very
Yet Another Update: Below is the
Comscore chart that AdAge's Edmund Lee was referring to in his post, he says
by email. Here's the text description:
"...ComScore's third-quarter analysis, which looks at how many ad
impressions advertisers bought on Facebook and MySpace, though Facebook
accounts for almost all of the ad buys."
Conceivably, all those fabulous baby making ads
might be the stand-out success of MySpace. Or Facebook is being fooled by a
giant ad buyer.
What is it? It's a paper-doll-type site that lets you
put eyeglasses and mustaches on top of a funny looking baby's face. At least
that appears to be what it is; before you can do anything the site says you
have to install "a browser plug-in to present an enhanced experience." If
you do so, according to the fine print, your browser's default search and
home page will be switched to
Once you do so, the affiliate company behind the toolbar, called
will capture a slice of the revenue whenever you click on a search ad.
Apparently the whole thing is working out pretty
well for everyone involved. Zugo, or whatever company in a chain of
affiliates it is that's behind this, has found a toolbar promotion strategy
that converts very well. Enough people install this plug-in, and it captures
enough downstream revenue, that it pays off for the company to buy more
Facebook ads than any company on earth, except for AT&T and Match.com.
Bob Jensen's Fraud Updates are at
"Unveiling the Mystery of Forensic Accounting," by Marion Hecht and
MaryEllen Redmond, Accounting Today, December 28, 2010 ---
Thanks to Nadine Sabai for the heads up.
Bob Jensen's threads on accounting fraud ---
One Way a Professor Can Become a Felon
"Prof Accused of Billing University for Travel as Consultant," Inside
Highe Ed, February 4, 2011 ---
Dov Borovsky, a professor of entomology at the
University of Florida, was arrested last week on felony charges of grand
theft and fraud based on his expense reimbursement claims,
The Gainesville Sun reported. According to
authorities, Borovsky took three trips to Malaysia as a consultant to a
company based there, was reimbursed by the company for the travel, but also
submitted expense forms to the university for travel reimbursement. Borovsky,
whom the university has placed on leave, could not be reached for comment.
Bob Jensen's fraud updates are at
An Illustration of Future Free TV News on the Web
Non-Profit CEO Gets 10 Year Prison Sentence ---
"'Fatally flawed' accounting (IFRS) standards inflated RBS's worth:
The rules that govern British bank accounting may have over-inflated the capital
position of the Royal Bank of Scotland (RBS) by as much as £25bn, a leading
expert has warned.," by Louise Armitstead, The Telegraph, March 29, 2011
The International Financial Reporting Standards
(IFRS), which have been described as "fatally flawed", let RBS report a core
tier one ratio for 2010 more than 4pc higher than it would have been under
the UK's old accounting rules that were replaced in 2005.
The analysis comes ahead of the publication of a
House of Lords Economic Affairs Committee report into UK accounting
practices expected to be highly critical of the IFRS system.
According to RBS's latest accounts, which were
calculated using IFRS, the bank has tangible shareholder assets of £58bn and
core tier one capital of 10.7pc.
Tim Bush, a City veteran and member of the "Urgent
Issues Task Force" that scrutinizes the work of the Accounting Standards
Board, has calculated that under pre-2005 UK GAAP (Generally Accepted
Accounting Principles) rules, which governed accounting in Britain for over
100 years, RBS would have a tangible shareholder assets of £33bn and a core
tier one capital of just 6pc.
The criticism is of the IFRS framework. There is no
suggestion RBS or any other British bank has broken the accounting rules.
The radical difference in the numbers highlights
the problems described to the Lords Committee during the course of its
The Committee was told that IFRS, which was
introduced after the Enron scandal with the intention of producing less
subjective accounting practices, allows banks to disguise the build-up of
risks within banks because distressed loans are not reported until they
In one session, Iain Richards, of Aviva Investors,
said that IFRS had had "a material cost to the taxpayer and to shareholders"
because "as a result dividend distributions have been made and bonuses have
been paid that were imprudent."
Lord Lawson, the former Chancellor who now sits on
the Committee, has asked for a list of proposals on how to overhaul what he
described as "very serious problems" with British accounting.
Fellow committee member Lord Forsyth, who was also
a Tory minister and former deputy chairman of JP Morgan, said he believed Mr
Bush's view "explains why particular banks got into difficulty" during the
Separately the governor of the Bank of Ireland has
described the accounting rules for British and Irish banks as
Bob Jensen's threads on accounting standard controversies are at
"Little-Known Colleges Exploit Visa Loopholes to Make Millions Off Foreign
Students," by Tom Bartlett, Karin Fischer, and Josh Keller, Chronicle of
Higher Education, March 20, 2011 ---
Early on a Friday morning, four college students
stand shivering in the parking lot of an office complex in Sterling, Va. The
building itself is unremarkable, red brick and dark glass, but security
cameras are bolted to the walls, cement posts line the perimeter, and coils
of concertina wire surround the trash bins. This is a branch of U.S.
Immigration and Customs Enforcement, the investigative arm of the U.S.
Department of Homeland Security.
The students arrived more than an hour early for
their appointment. They haven't slept or eaten in two days, passing time
instead by obsessively organizing their documents and drinking cup after cup
of strong black tea. Their eyelids are at half- mast, their hands shoved in
jacket pockets. They are all Indian, all from the city of Hyderabad, and all
possibly in deep trouble.
These students, like roughly 1,500 others from
India, were enrolled at Tri-Valley University, a California institution that
was raided by federal agents in January. The government seized property,
threatened to deport students, and in legal filings called Tri-Valley a
"sham university" that admitted and collected tuition from foreign students
but didn't require them to attend class. (The president of Tri-Valley, Susan
Xiao-Ping Su, denies the charges.) Many students allegedly worked full-time,
low-level retail jobs—in one case, at a 7-Eleven in New Jersey—that were
passed off as career training so they could be employed while on student
visas. The university listed 553 students as living in a single two-bedroom
apartment near the college; in fact, students were spread out across the
country, from Texas to Illinois to Maryland.
As the students move inside and await their
interview, a deliveryman wheels in a hand truck stacked with nine boxes of
.44-caliber ammunition. On a table nearby rests a brochure titled "Targeting
Terrorists," which features the famous image of Mohammed Atta breezing
through airport security. When an agent emerges and asks who is going to be
first, the four students stare at the carpet. "Come on," the agent says,
trying to break the tension. "No one is going to beat you with a rubber
The joke does not go over well.
The raid on Tri-Valley received limited attention
in the United States, but it was and remains a big story in India, where
newspapers and television shows portray U.S. officials as callous, and
oversight of the student-visa program as incompetent. After weeks of bad
publicity, Secretary of State Hillary Rodham Clinton felt compelled to
assure Indian officials that the situation would be resolved fairly.
Meanwhile, immigration officials have pointed to the shuttering of
Tri-Valley as proof of their vigilance.
Continued in article
March 20, 2011 reply from Jagdish Gangolly
I have been following this item in the Indian
press. The American press has mostly ignored it; I suppose a few hundred
prospective illegals do not warrant attention, with millions of illegals
already inundating us.
The aspect that upset most Indians seems to be the
radio-tagging of these students (do all the illegals in the US who have
encountered the law radio-tagged? Was Ms. Su, obviously a flight risk,
radio-tagged?) Most people also seemed upset over the lack of regulation of
such outfits here in the US.
Many in India also have questioned the intentions
of these students for their not doing the homework before applying. Some
have gone to the extent of saying that students should be allowed to go to
the US only for studies at ivies, AAU and such reputed universities, but I
guess that goes against the Indians' sense of liberal democracy.
Bob Jensen's threads on for-profit universities operating in the gray zone
of fraud ---
Diploma Mill Frauds ---
"TARP Was No Win for the Taxpayers : Treasury's claim that the bank
bailouts will return a profit ignores the other, more costly programs enabling
the banks to repay their TARP funds," by Paul Atkins, Mark McWatters, and
Kenneth Troske, The Wall Street Journal, March 17, 2011 ---
Today the Senate Banking Committee will explore the
Troubled Asset Relief Program (TARP). Almost 30 months after its birth, TARP
is far from dead. More than 550 banks, AIG, GM, Chrysler and others still
have approximately $160 billion of taxpayer money outstanding.
Even so, the administration would have us believe
that TARP has been a success because it supposedly alleviated the financial
crisis and is (so far) being paid back at an apparent profit for taxpayers.
Perhaps because he helped invent TARP before he joined the Obama
administration, Treasury Secretary Timothy Geithner has called TARP the
"most effective government program in recent memory."
Treasury's view is misleading. First, it hides the
full story of the government's financial crisis effort, of which TARP is but
a minor part. Moreover, Treasury has not been content using rhetoric alone
to try to put TARP in the best light. The Special Inspector General for TARP
criticized Treasury in October for inadequately disclosing a change in its
valuation methodology that reduced a $45 billion loss in AIG to $5 billion,
making TARP losses appear smaller than they really are. This data
manipulation is only part of a much larger problem with Treasury's
representations regarding the supposed success of the bank bailout payments
that lie at the heart of TARP.
The focus on repayment fails to consider the huge
taxpayer costs from non-TARP programs that directly and indirectly enabled
many of the large banks to repay their TARP funds. These intertwined
programs, operated by the Treasury and the Federal Reserve, dwarf the size
of TARP and lack its accountability.
The financial crisis was born in the housing bubble
caused by the policies of Fannie Mae and Freddie Mac, the two bankrupt
government-sponsored entities (GSEs) charged with buying and packaging
mortgages into mortgage-backed securities (MBS). TARP banks own billions of
dollars worth of MBS and have remained liquid in part because the Federal
Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in
the securities markets—all outside TARP.
The Fed purchased the MBS at fair market value, but
this value reflects Treasury's bailout and continued support of the GSEs—also
done outside of TARP with taxpayer money. Had the GSEs failed, TARP
recipients probably would have been stuck with these MBS, writing them down
at significant loss. Their ability to pay back TARP funding would have been
hurt, and they might have had to obtain more TARP funds or go bust.
So the taxpayer-backed GSE guarantee enables the
Fed to prop up the market with taxpayer funds, in turn allowing the TARP
banks to "repay" their TARP funds. The bailout of the GSEs by Treasury thus
shifts potential losses from TARP to other programs that have less oversight
and public scrutiny. Any evaluation of TARP's success must take into account
the interaction among all government programs designed to prop-up the
financial system, and the shifting of costs among these programs.
The Congressional Budget Office estimates that
Treasury's bailout of the GSEs will cost the taxpayers approximately $380
billion through fiscal year 2021. If only one-fourth of CBO's estimate
ultimately benefits TARP recipients and other financial institutions,
taxpayers will have provided a subsidy to these institutions of
approximately $100 billion, which is not accounted for under TARP.
Also seldom mentioned are future costs resulting
from using TARP funds to rescue "systemically important" financial and other
firms. TARP exacerbates the "too big to fail" phenomenon by targeting much
of its funding toward large banks and automobile firms, solidifying the
market's belief in an implicit guarantee from the government for these
firms. As credit-rating agencies have recognized, these large firms can
borrow much more cheaply than their small-enough-to-fail competitors, which
will lead to less competition, a more concentrated financial sector, and
higher prices paid by consumers.
In addition, creating larger, more systemically
important financial firms increases the likelihood of future financial
crises because these firms have an incentive to invest in riskier projects
as a result of the implicit government guarantee. The additional costs borne
by consumers in the form of higher prices for financial services and the
additional costs that result from future financial crises need to be
included in any accounting of the costs of the TARP.
TARP was never where the real action was happening.
In fact, other Fed and FDIC programs added another $2 trillion of taxpayer
money at risk to the 19 stress-tested banks alone, on top of the $1.1
trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.
The government's efforts inside and outside of TARP
have sown the seeds for the next crisis and, unfortunately, last year's
2,319-page Dodd-Frank Act does nothing to fix these problems. Treasury must
be more transparent regarding TARP. The real myth that the Treasury
secretary should dispel is that TARP is a big win for the taxpayer.
Mr. Atkins was a member of the Congressional Oversight Panel from
2009-2010. Messrs. McWatters and Troske are current members of the panel.
The Commission's Final Report ---
Video: Charles Furgeson has produced a powerful documentary, “Inside
Job,” about the deep capture of financial (de)regulation ---
"How Wall Street Fleeced the World: The Searing New doc Inside Job
Indicts the Bankers and Their Washington Pals," by Mary Corliss and Richard
Corliss, Time Magazine, October 18, 2010 ---
Like some malefactor being grilled by Mike Wallace
in his 60 Minutes prime, Glenn Hubbard, dean of Columbia Business School,
gets hot under the third-degree light of Charles Ferguson's questioning in
Inside Job. Hubbard, who helped design George W. Bush's tax cuts on
investment gains and stock dividends, finally snaps, "You have three more
minutes. Give it your best shot." But he has already shot himself in the
Frederic Mishkin, a former Federal Reserve Board
governor and for now an economics professor at Columbia, begins stammering
when Ferguson quizzes him about when the Fed first became aware of the
danger of subprime loans. "I don't know the details... I'm not sure
exactly... We had a whole group of people looking at this." "Excuse me,"
Ferguson interrupts, "you can't be serious. If you would have looked, you
would have found things." (See the demise of Bernie Madoff.)
Ferguson—whose Oscar-nominated No End in Sight
analyzed the Bush Administration's slipshod planning of the Iraq
occupation—did look at the Fed, the Wall Street solons and the decisions
made by White House administrations over the past 30 years, and he found
plenty. Of the docufilms that have addressed the worldwide financial
collapse (Michael Moore's Capitalism: A Love Story, Leslie and Andrew
Cockburn's American Casino), this cogent, devastating synopsis is the
definitive indictment of the titans who swindled America and of their pals
in the federal government who enabled them.
With a Ph.D. in political science from MIT,
Ferguson is no knee-jerk anticapitalist. In the '90s, he and a partner
created a software company and sold it to Microsoft for $133 million. He is
at ease talking with his moneyed peers and brings a calm tone to the film
(narrated by Matt Damon). Yet you detect a growing anger as Ferguson digs
beneath the rubble, and his fury is infectious. If you're not enraged by the
end of this movie, you haven't been paying attention. (See "Protesting the
The seeds of the collapse took decades to flower.
By 2008, the financial landscape had become so deregulated that homeowners
and small investors had few laws to help them. Inflating the banking bubble
was a group effort—by billionaire CEOs with their private jets, by agencies
like Moody's and Standard & Poor's that kept giving impeccable ratings to
lousy financial products, by a Congress that overturned consumer-protection
laws and by Wall Street's fans in academe, who can earn hundreds of
thousands of dollars by writing papers favorable to Big Business or sitting
on the boards of firms like Goldman Sachs.
Who's Screwing Whom? In the spasm of moral
recrimination that followed the collapse, some blamed the bright kids who
passed up careers in science or medicine to make millions on Wall Street and
charged millions more on their expense accounts for cocaine and prostitutes.
After the savings-and-loan scandals of the late-'80s, according to Inside
Job, thousands of executives went to jail. This time, with the economy
bulking up on the steroids of derivatives and credit-default swaps, the only
person who has done any time is Kristin Davis, the madam of a bordello
patronized by Wall Streeters. Davis appears in the film, as does disgraced
ex--New York governor Eliot Spitzer; both seem almost virtuous when compared
with the big-money men. (See "The Case Against Goldman Sachs.")
The larger message of both No End in Sight and
Inside Job is that American optimism, the engine for the nation's expansion,
can have tragic results. The conquest of Iraq? A slam dunk. Gambling
billions on risky mortgages? No worry—the housing market always goes up.
Ignoring darker, more prescient scenarios, the geniuses in charge
constructed faith-based policies that enriched their pals; they stumbled
toward a precipice, and the rest of us fell off.
The shell game continues. Inside Job also details
how, in Obama's White House, finance-industry veterans devised a "recovery"
that further enriched their cronies without doing much for the average Joe.
Want proof? Look at the financial industry's fat profits of the past year
and then at your bank account, your pension plan, your own bottom line.
Video: Watch Columbia's Business School Economist and Dean Hubbard rap his
wrath for Ben Bernanke
The video is a
anti-Bernanke musical performance by the Dean of Columbia Business School ---
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks)
R. Glenn Hubbard (Dean of the Columbia Business School) ---
Bob Jensen's threads on the Bailout of Banksters and the Greatest Swindle
in the History of the World are at
"Professor of Entrepreneurism Arrested for Mortgage Fraud," Inside
Higher Ed, January 31, 2011 ---
State police charged John K. Dunn, a professor of
entrepreneurial management at the University of Rhode Island, with three
felony counts of obtaining money under false pretenses in connection with an
alleged mortgage fraud scheme, the
Providence Journal reported. Dunn, who is also
a lawyer, turned himself in after the warrant was issued for his arrest, the
paper reported. He did not enter a plea and was released on $10,000 personal
recognizance pending further court action, according to
Dunn is accused of obtaining hundreds of thousands of
dollars under false pretenses to buy three different properties in Rhode
What are Professor Dunn's possible defenses?
- He was investigating how difficult versus easy it is to conduct real
estate fraud in Rhode Island and intended to return all the money after his
research paper was accepted by a leading law journal.
- He wanted to illustrate to his students the the finer points of ethics
- He was trying to find housing for the homeless during this exceptionally
- He's legally insane. Voices in his head are responsible.
Grumpy Old Accountants
"What's Up with Cash Balances?" by: J. Edward Ketz and Anthony H.
Catanach Jr, SmartPros, March 2011 ---
The past decade has yielded a growing number of
cases of cash reporting problems among global firms. According to Audit
Analytics, corporate restatements in the United States for cash-related
reporting soared from 0.49 percent of all restatements in 2001 to over 13
percent in 2008.
Between 2002 and 2005, Grant Thornton auditors
failed to detect cash frauds totaling almost €4 billion at Parmalat, a
global Italian dairy and food corporation. In 2008, PricewaterhouseCoopers’
auditors missed a £1 billion in fraudulent cash balances at Satyam, the
Indian technology outsourcing giant. What’s going on?
Historically, cash has not been that hard to audit
or report, and junior accountants in their first and second years have
routinely been tasked with auditing balances and preparing disclosures for
these assets. After all, how hard can it be to audit and report cash
assets, when verification and valuation generally are not issues?
Why aren’t companies reporting cash in an ethical and transparent manner? As
analysts’ concern with earnings management has grown, they are devoting more
attention to reported cash flows. Global financial managers are aware of
this new focus and have responded accordingly by either creatively or
intentionally misreporting corporate cash flows.
Initially, most of the gimmickry related to inflating operating cash flows (OCF)
by simply misclassifying cash flows in the statement of cash flows (SCF).
Investing or financing cash inflows are reported as operating activities,
and operating cash outflows are included in the investing and financing
sections of the SCF. While such games continue even today, corporate
accountants continue to develop more sophisticated schemes to artificially
inflate cash balances and related flows. Managers now commonly achieve OCF
targets via asset liquidations, by delaying payments on payables, and even
by counting receivable collections as cash before they are actually
received, and employing special purpose entities.
Note the following 8-K disclosure recently filed by Orbitz Worldwide, a
leading global online travel company:
The Company determined that credit card
receipts in-transit at its foreign operations (which are generally
collected within two to three days) should have been classified as
“Accounts Receivable” rather than “Cash and Cash Equivalents.”
The Pep Boys, a large U.S. automobile
parts, tire, and service provider, also reported the following in its 10-K:
All credit and debit card
transactions that settle in less than seven days are also classified as
cash and cash equivalents.
Such practices clearly raise questions
about the quality of reported cash balances and OCF, and recently the games
have reached an all time low. Managers now have decided to simply change
the way they define cash in the balance sheet. Every accounting student
learns that a company reports as cash on their end-of-period balance sheet
the amount reflected in the company’s general ledger; however, a growing
number of companies are abandoning this generally accepted practice and now
inflate their reported balance sheet cash flows by adding back outstanding
checks (i.e., those than have not yet cleared the bank) written and mailed
before period-end. This practice not only increases reported cash balances,
but also overstates OCF since the outstanding checks are added to accounts
payable. Note the following example from the recent 10-K of Dick’s Sporting
Goods, a national U.S. sporting retailer:
Accounts payable at January 30,
2010 and January 31, 2009 include $74.2 million and $74.8 million,
respectively, of checks drawn in excess of cash balances not yet
presented for payment.
In this case, OCF were overstated by
89.16 percent in 2009 and 22.68 percent in 2010. Then there is the case of
Airgas, a nationwide distributor of gases, welding supplies, safety
products, and tools, that reports in its 2010 10-K:
Cash principally represents the
balance of customer checks that have not yet cleared through the banking
system…Cash overdrafts represent the balance of outstanding checks and
are classified with other current liabilities.
In this case, had the company reported
its outstanding checks appropriately, its cash balance would have been
negative at the end of 2010, and its OCF were overstated by $5.5 million as
Continued in article
Bob Jensen's Fraud Updates are at
"Boston Archdiocese, Daughters of St. Paul in dispute over pension funds,"
by Catholic News Service, The Catholic Review, March 2011 ---
"The sisters have asked the Supreme Judicial Court of Massachusetts to
order the fund’s trustees to provide a full accounting or rule that the
sisters were never part of the plan and must be reimbursed for their
contributions. The sisters also requested the archdiocese pay their legal
fees." "The nuns' lawyer, Michael McLaughlin, said they hesitated to sue the
trustees, particularly O'Malley, but felt they had no other choice." "The
lawsuit is also reportedly asking the court to review documents in
connection with the 2010 sale of Caritas Christi Health Care system, a chain
of catholic hospitals, to a for-profit...
Historically Rome provides for the care and well being of its aged priests but
not so much for the nuns ---
Bob Jensen's Fraud Updates are at
BDO = Big Dollars Out
"$91M awarded in Batchelor case: A jury in Miami awarded millions to the
estate and foundation of the late George Batchelor, settling a nine-year-old
lawsuit," Miami Herald, February 1, 2011 ---
A Circuit Court jury in Miami decided on Monday
that the accounting firm BDO Seidman should pay the late
philanthropist/aviation pioneer George Batchelor's estate and foundation $91
million for ``fraudulently'' concealing false information about a company in
which Batchelor had invested.
The award consists of $55 million in punitive and
$36 million in compensatory damages.
Steven Thomas of the Venice, Calif., firm Thomas,
Alexander & Forrester, is lead Batchelor attorney. He said he thought that
the punitive damage award was so hefty because ``BDO, right up to the end,
denied it had a public duty -- and public is literally their middle name:
A lawsuit filed in 2002 -- the year that Batchelor
died at age 81 -- alleged that BDO Seidman covered up erroneous financial
statements during an audit of Grand Court Lifestyles, a Boca Raton
owner/manager of ``senior'' communities. Batchelor had invested in Grand
Court, which filed for bankruptcy in 2000.
The jury decided that BDO owed the estate $34.4
million and the foundation $2.3 million in compensatory damages.
Thomas said that the entire award ``goes into the
Foundation, which means dozens of organizations in Miami that are funded by
the Foundation may be getting additional monies.''
Batchelor, who founded Arrow Air and Batch Air, had
given an estimated $100 million to South Florida causes that benefited
children, animals, the environment and medical facilities before he died.
The foundation continues supporting many of those charities.
In a written statement, the accounting firm said it
``strongly'' disagreed with the verdict and planned to appeal.
Continued in article
"Prosecutors on defensive in BDO Seidman fraud case," by Andrew
Longstreth, Reuters, February 4, 2011 ---
NEW YORK, Feb 4 (Reuters Legal) - Federal
prosecutors who ignited a legal firestorm five years ago for pressuring the
accounting firm KPMG to stop paying its former employees' legal fees are
facing the same accusations in another high-profile tax-fraud case.
BDO Seidman case has similarities to KPMG
The defendant in this case, Denis Field, ex-CEO of
BDO Seidman, the world's fifth largest accounting firm, claims Manhattan
prosecutors intimidated his former firm into curtailing and eventually
cutting off payments to his lawyers. In recently filed court papers, he
claims that the government deprived him of his constitutional right to
counsel and seeks dismissal of the case. Field alleges that among other
tactics, prosecutors threatened to indict the firm if it kept funding his
defense. During a hearing on Thursday, U.S. Judge William Pauley III of the
Southern District of New York, who is presiding over the case, closely
questioned prosecutors about the accusations. A ruling is expected soon.
The controversy touches on the common arrangement
among U.S. companies of paying the legal fees of executives. It raises the
question of whether a government attempt to meddle with this practice
amounts to depriving a defendant of his or her lawyer -- which could
constitute a violation of the right to counsel under the 6th Amendment.
The Field prosecution, in which he is charged with
creating phony tax shelters, is strikingly similar to the KPMG matter. That
case was thrown out in 2007 after U.S. Judge Lewis Kaplan found that
prosecutors had improperly "coerced" KPMG into cutting off the legal fees of
13 former KPMG partners and employees. "KPMG refused to pay because the
government held the proverbial gun to its head," Kaplan wrote.
Two of the prosecutors called out by Judge Kaplan
-- Stanley Okula and Shirah Neiman -- have also been involved in the Field
case, a fact that is prominently noted by Field's lawyers in their motion to
dismiss. "The reason for the government's conduct is obvious -- as with
KPMG, the prosecutors believed BDO 'should not pay the fees' of allegedly
culpable individuals," Field's lawyers argue. They cited the KPMG case no
fewer than 50 times in their brief. Okula and Neiman declined comment, as
did a spokesperson for the Manhattan U.S. Attorney's office.
Continued in article
Bob Jensen's threads on BDO are at
"UK banker jailed for insider trading," by Jane Croft and Brooke
Masters, Financial Times, February 2, 2011 ---
A high-flying banker who netted £590,000 by trading
on secret merger information he obtained at work has been jailed for more
than three years, in what a judge described as the “biggest prosecution for
insider trading ever brought” in Britain.
Christian Littlewood, who earned an annual salary
of more than £350,000 working for Dresdner Kleinwort and Shore Capital ,
received the longest UK sentence for insider dealing after pleading guilty
to illegal trading over a period of eight years.
The case marks the first successful criminal
prosecution brought by the Financial Services Authority against a banker who
was still working in the City at the time of his arrest. It is part of a
deliberate decision by the watchdog to prioritise cases against City
professionals and provide “credible deterrence” against market abuse.
Mr Littlewood’s Singaporean-born wife, Angie,
received a suspended prison sentence. Her friend, Helmy Omar Sa’aid, who did
much of the actual trading, was sentenced to two years in prison and faces
All three had previously pleaded guilty to eight
counts of insider trading in stocks such as Viridian Group and RCO Holdings
based on secret price-sensitive information supplied by Mr Littlewood. The
trio invested £2.15m in trades and netted £590,000 in profits.
Sentencing the trio, Mr Justice Leonard QC said
there was no doubt that the number of “unscrupulous investment bankers”
using inside information “exceeds the number of people prosecuted for such
The judge rejected Mr Littlewood’s attempt to
transfer culpability to his wife by arguing that he was not aware of the
scale of the trading conducted by her and Mr Sa’aid. Mr Justice Leonard
found that trading had been done by Mrs Littlewood “on behalf of the two of
Continued in article
Did Deloitte and PwC turn their eyes toward their billings and away from the
fraud that should've been obvious even to blind eyes?
USAID agrees that Deloitte should have aggressively
reported evidence of fraud at Kabul Bank to the Mission.
So now this brings up the issue of potential auditor
negligence rather than omission on part of a consultant to aggressively report
"Interesting Developments at Kabul Bank: USAID IG Report Says Deloitte Did
Not Report Fraud. But PwC Gave A Clean Audit," Big Four Blog, March
17, 2011 ---
The Office of Inspector General of the USAID did
release the much-anticipated audit report of Deloitte’s role in the Kabul
bank debacle. It’s a 23 page detailed report and a quick synopsis follows:
The OIG contends that BearingPoint and Deloitte
advisers embedded at Afghanistan Central Bank (DAB) did see several fraud
indications at Kabul Bank for over 2 years before the run on Kabul Bank in
early September 2010; but did not aggressively follow up on indications of
serious problems at Kabul Bank.
Further, the OIG contends that Deloitte advisers
did not report fraud indicators at Kabul Bank to USAID. In addition, the
mission did not have a policy requiring contractors and grantees to report
Finally, the OIG contends that USAID/Afghanistan’s
management of its task order with Deloitte was weak; and if senior program
managers and technical experts had been on staff at the mission, USAID could
have managed Deloitte better and ask deeper questions than just accepting
them at face value.
In a reply back to Timothy Cox, OIG/Afghanistan
Director, David McCloud, Acting Assistant to the Administrator, Office of
Afghanistan and Pakistan Affairs, makes several counter arguments:
That there was no indications of fraud, waste or
abuse by USAID or Deloitte.
Deloitte could not have stopped the massive fraud
that occurred at Kabul Bank.
USAID and Deloitte’s scope of work and mandate
under Component 2 of the Economic Growth and Governance Initiative task
order was to provide trainers and technical experts to build the capacity
of the Bank Supervision unit within the Central
Bank of the Government of Afghanistan, Afghanistan Bank, and not for
Deloitte itself to supervise private banks.
USAID agrees that Deloitte should have aggressively
reported evidence of fraud at Kabul Bank to the Mission.
And then, McCloud brings up an interesting twist by
introducing another Big Four firm, PwC, which performed an audit of Kabul
Bank, but did not bring up any discrepancies or evidence of fraud, which
perhaps delayed any potential investigations and prevented a true
understanding of the situation.
“The audit performed by an affiliate of
PricewaterhouseCoopers (PwC) was not directly mentioned in the body of the
OIG report but it was a significant source of information to the Central
Bank¡¦s examination staff. The resulting clean bill of financial health of
Kabul Bank issued by PwC may have acted to delay understanding of the
gravity of Kabul Bank’s true financial condition both among the examination
staff and the international community.
Continued in article
Bob Jensen's threads on accounting firm negligence can be found at
PCAOB advisory group
head calls for investigations into audit firms
Auditor rotation, annual reports recommended (Adds PCAOB comment)
"UPDATE 1-US urged to probe auditors' role in credit crisis," by Dena Aubin,
Reuters, March 16, 2011 ---
Audit firms that failed to flag risks ahead of the
financial crisis have not been held to account and an in-depth investigation
is needed, an advisory group to the U.S. auditor watchdog agency said on
Regulators in Europe and the United Kingdom are
probing the role of auditors in the 2008 crisis, but the United States has
lagged and needs to do more, said Barbara Roper, head of a working group for
the Public Company Accounting Oversight Board.
"Auditors failed to perform their basic watchdog
function in the financial crisis," Roper said at a PCAOB advisory group
meeting in Washington. "There's a need to figure out why they failed to
perform that function and what can be done to fix that problem."
The PCAOB was created after the Enron and WorldCom
accounting scandals to police audit firms. It oversees the work of the Big
Four auditors -- Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers --
and other auditors of public companies.
While auditors did not cause the financial crisis,
they gave stamps of approval to many companies' financial statements just
months before they failed, said Roper, director of investor protection for
the Consumer Federation of America.
She said the PCAOB should look at examples of
companies that failed or had to be bailed out and find out what went wrong
with the audits and why.
Lehman Brothers (LEHMQ.PK), American International
Group (AIG.N), Citigroup (C.N), Fannie Mae (FNMA.OB), and Freddie Mac (FMCC.OB),
among others, received unqualified audit opinions on their financial
statements months before their collapse or bailouts, Roper said.
"If the auditors were performing as they should and
this is the result we get, then there's a problem with the system," she
AUDITOR ROTATION RECOMMENDED
Audit firms also lack the basic independent
governance that most public companies around the globe have, Lynn Turner,
head of a PCAOB working group on audit firm governance, said at the meeting
He said these firms need more transparency. They
should have to file annual financial statements with the PCAOB, including
information about how they control quality globally, Turner said.
PCAOB members said they will consider all the
recommendations and report back on what they decide.
Asked for his response to the recommendations,
PCAOB chair James Doty told Reuters that the PCAOB had identified areas
where audits performed during the credit crisis needed to be stronger in a
report released in September. Some of the problem audits are being
investigated and disciplinary actions may result, he said.
"All of these activities, including what we heard
from the investor advisory group today, will give us insights into the root
causes of problems we identify and will inform our initiatives to strengthen
investor protection," he said.
Because the Big Four audit firms are private, they
are not required to file public financial statements, though they do report
their revenues annually.
Without seeing their financial statements, however,
it will be difficult for the PCAOB to properly regulate them, said Turner, a
former chief accountant for the Securities and Exchange Commission.
The PCAOB also should require companies to rotate
auditors periodically to break up cozy relationships between some companies
and their auditors, he said.
Audit partners, but not audit firms, have to be
rotated every five years currently.
Continued in article
Bob Jensen's threads on audit firm professionalism are at
Where were the auditors?
"Inside The Mind of An Inside Trader," by Francine McKenna,
re:TheAuditors, March 5, 2011 ---
No Big 4 audit firms or their partners have been
named in the insider trading scandal surrounding the now-defunct hedge fund
Galleon Management. But the
has accused one of the most prominent businessmen
ever implicated in such crimes, Rajat Gupta, a former
McKinsey & Company Global Managing
Mark O’Connor, CEO of
put together a research note for his subscribers that
gives us the details of the accusations. He also provides new insight into
why a guy like Gupta may have committed these alleged crimes.
Gupta is alleged to have tipped Galleon’s
Rajaratnam, a friend and business associate, providing him with
confidential information learned during board calls and in other aspects
of his duties on the Goldman and P&G boards. Gupta reportedly made calls
to Rajaratnam “within seconds” of leaving board sessions where
market-moving information was discussed.
complaint alleges that Rajaratnam then either
used the inside information on Goldman and P&G to execute trades on
behalf of some of Galleon’s hedge funds, or shared it with others at
Galleon, who then traded on it ahead of public disclosure. The SEC
claims the insider trading scheme generated more than $18 million in a
combination of illicit profits and loss avoidance.
The SEC also says that Gupta was, at the time
of the alleged disclosures of confidential non-public information, a
direct or indirect investor in at least some of Galleon’s hedge funds,
and had other business interests with Rajaratnam.
Gupta, as a McKinsey veteran, embodied the
“trusted advisor” consulting ethos and personified
the McKinsey “advisor to CEOs” business strategy and brand. The firm’s value
to its clients and its effectiveness as an advisor requires knowing their
secrets and holding them close to the vest.
Gupta was McKinsey & Company’s worldwide
Managing Director for 9 years from 1994 through 2003…Gupta, now 62,
stepped down as a McKinsey partner in 2007, and has since served as
Managing Director Emeritus, according to his profile at the
of Business (ISB). Gupta was
instrumental in co-founding ISB in 2001, and continues to serve as its
current Governing Board Chairman and Executive Board Chairman. He is
also a current or former board member (or trustee) of AMR Corp., the
parent of American Airlines; the Rockefeller Foundation; the University
of Chicago; Harman International Industries; Genpact India; the World
Economic Forum; the International Chamber of Commerce, World Business
Organization; New Silk Route and New Silk Route Private Equity; and the
Emergency Management and Research Institute. Galleon’s Rajaratnam was
also associated with the New Silk Route ventures, where Gupta continues
as Chairman. Rajaratnam is no longer associated with those entities.
Several media commentators have openly wondered
whether the accusations against Gupta, and earlier accusations in the same
scandal against McKinsey senior partner and Gupta protégé Anil Kumar, strike
a deadly blow to McKinsey.
Will Rajat Gupta Destroy
McKinsey? John Carney, NetNet, March 2, 2011
McKinsey’s clients are attracted by its
reputation for excellence and discretion—and its stellar network of
alumni. Its consultants often refuse to even disclose who their clients
If the charges against Gupta prove true, it
could be a mortal threat to the firm. Even if there’s no evidence that
confidentiality was breached while Gupta was at the firm, being led by a
man who would later leak insider information would be devastating. If
Gupta is shown to have engaged in similar actions while he was at
McKinsey, that could be the end for the Firm.
“At that point, I think we go the way of Arthur
Andersen,” another former McKinsey consultant said, referring to the
once-prestigious accounting company brought down by its connections to
Loose Lips, Reuters BreakingViews, Robert
Cyran and Rob Cox, March 3, 2011
McKinsey’s reputation rests on its ability to
keep secrets. Consultancies, unlike investment banks, don’t provide
access to financial markets. All they offer is counsel, which relies
partly on confidences revealed by their clients. According to McKinsey,
“Our clients should never doubt that we will treat any information they
give us with absolute discretion.” The allegations against Gupta make it
hard for clients not to wonder.
It’s understandable that, in the heat of this
moment, some might naïvely compare the consequences of the criminal
indictment of an audit firm with civil charges against an individual, albeit
one who trades on – pun intended – his association with a prestigious
professional services firm.
It’s not the same thing.
Extrapolating Gupta’s behavior to McKinsey as a
whole is a stretch. I’m no McKinsey apologist but one man, even a former
Global Managing Director, does not make this firm.
On the contrary. The firm made him and he’s the one
whose currency is now worth less.
Bob Jensen's Fraud Updates ---
"Merrill Traded On Client Data: SEC," by Jean Eaglesham, Dan
Fitzpatrick, and Randall Smith, The Wall Street Journal, January 26, 2011
On the fifth floor of Merrill Lynch & Co.'s
headquarters at the World Financial Center in lower Manhattan, a small team
of traders who bought and sold securities with the firm's own money for two
years were close enough to see the computer screens of traders taking orders
from clients and overhear their phone calls.
The Securities and Exchange Commission said Tuesday
that the proprietary-trading desk, which traded electronic messages with its
nearby counterparts, was illegally spoon-fed information about what
Merrill's clients were doing, and then copied an unspecified number of
trades between 2003 and 2005. Merrill also encouraged market-making traders
to generate and share "trading ideas" with the proprietary-trading desk,
according to the SEC.
Merrill, acquired by Bank of America Corp. in 2009,
agreed to pay $10 million to settle the accusations, which also included
charging institutional investors undisclosed trading fees. Merrill neither
admitted nor denied wrongdoing.
Such enforcement cases are rare, and the Merrill
settlement is likely to fuel longstanding suspicions among many investors
that Wall Street firms tap the continuous flow of orders from customers for
their own benefit. Securities firms are lobbying U.S. regulators over the
wording of the "Volcker rule," part of last year's Dodd-Frank financial law
that is expected to force banks to wind down or sell their
In a statement, Bank of America said the "matter
involved issues from 2002 to 2007 at Merrill Lynch." The proprietary-trading
desk, which had one to three employees and authority to trade more than $1
billion of Merrill's capital, was shut down in 2005 "for business reasons"
after the SEC began investigating, according to people familiar with the
The employees involved in the trading no longer
work at Bank of America, these people said.
Bank of America said Merrill has "adopted a number
of policy changes to ensure separation of proprietary and other trading and
to address the SEC's concerns."
Merrill Lynch also voluntarily implemented enhanced
training and supervision to improve the principal-trading processes at the
The SEC accused Merrill of numerous regulatory
breakdowns, ranging from supervision failures to cheating customers.
"One of our goals in a case like this is to make
sure that the problems we find are fixed going forward," said Scott Friestad,
an associate director in the SEC's enforcement division. The Merrill case is
"one of the few times that the [SEC] has ever charged a large Wall Street
firm with misconduct involving the activities of a proprietary-trading
The traders involved in the matter weren't
identified in documents released by the SEC. People familiar with the
situation said the proprietary traders, who worked on what Merrill called
its Equity Strategy Desk, were led by Robert H. May.
Mr. May was among four traders from Bank of America
hired last week by boutique-trading firm First New York Securities Inc.
Mr. May couldn't be reached to comment. Neil
Bloomgarden, who reported to Mr. May, now works at Morgan Stanley. He and
the firm declined to comment.
Bank of America hasn't announced plans to shut down
or sell its remaining proprietary-trading desk.
As a result of the investigation, though, the
company has physically separated such traders from the rest of the trading
floor. Merrill also separates client orders from other trades to eliminate
any mingling with positions taken by market makers who buy and sell on
behalf of clients.
The SEC cited four examples in which Merrill
traders on the proprietary-trading desk bought or sold shares within minutes
of a similar order for a customer, according to the agency. Customers of
Merrill were assured by the firm that information about their orders would
be kept confidential, and the company's code of ethics requires employees to
"not discuss the business affairs of any client with any other person,
except on a strict need-to-know-basis," the SEC said Tuesday. The number of
trades detailed by the SEC was small.
In September 2003, an unidentified institutional
client placed an order to sell about 40,000 shares of Teva Pharmaceutical
Industries Ltd., according to the SEC filing. Three minutes later, a
market-making trader "sent an instant message to an ESD trader informing him
about the trade," the filing said. The proprietary trader then sold 10,000
shares in the company for Merrill's own account.
"[I] always like to do what the smart guys are
doing," one Merrill proprietary trader wrote in an electronic message,
according to the SEC filing.
Continued in article
Do a word search for "Merrill" and count the many times Merrill Lynch has
engaged in securities fraud (and actually this is just an ad hoc sampling in Bob
Jensen's archives). Merrill really was rotten to the core.
"Man with a ‘Passion’ for Charter Buses Managed to Dupe Moss Adams,
Deloitte in Washington’s Largest Ponzi Scheme," by Caleb Newquist, Going
Concern, January 20, 2011 ---
Cringe] Oops. To be fair, auditors can’t be
expected to be hand-writing experts…can they? Mr. Calvert seems to think so
and told the Seattle Times that he plans on suing Moss Adams and Deloitte
for their roles. Oh, right! How do they fit in?
Continued in article
Bob Jensen's Fraud Updates are at
Bob Jensen's threads on Deloitte are at
Infographic: The Fraud of Bernie Madoff ---
Thank you Nadine Sabai for the heads up.
You can read more about Friehling at
He was never licensed as an auditor and lost his CPA certificate after
pleading guilty ---
His sentencing keeps getting postponed and is now scheduled for March 18,
Madofff of course got 150 years and seems to be totally unrepentant. Some
criminals just seem to be born without consciences and are incapable of
remorse. Of course he's in a comfortable Club Fed where he purportedly
somewhat enjoys prison life and sees his loyal wife quite often. I wish he
had been sent to a NY state prison like Attica ---
Life would not be so cushy in Club Attica.
You can read quite a lot about Bernie at
Madoff was a prominent philanthropist, but this was largely a ruse to get
other rich people to invest in his Ponzi hedge fund. As far as I can tell
there's not one thing good about Bernie Madoff that offsets his scheming
evil. Well yes, there is one good thing. The evidence against him was so
overwhelming that at least he did not prolong his punishment for years in
court with the highest priced lawyers in the State of New York. Some of
those lawyers could've tied up the case of
Hun for ten years or more.
My threads on Bernie are at
Bob Jensen's threads on the Madoff Ponzi scheme ---
"Worthless Stocks from China" When a retiree in Texas discovered
that some Chinese companies listed in the U.S. are frauds, he unleashed an army
of short-sellers," by Dune Lawrence, Business Week, January 11, 2011 ---
Bird's involvement would evolve from irritation
that a company could get away with making a claim that so obviously
defies basic business logic to the conviction that many pieces of the
Chinese miracle that trade in the U.S. are, in his words, "flat-ass"
frauds. And what started as a retiree looking into a company has turned
into a dispute that has drawn in other shorts, the Securities and
Exchange Commission, auditors, and, according to recent reports, the
U.S. House Committee on Financial Services. It has also revealed
significant flaws in U.S. markets and how they are regulated. Although
the stocks trade on U.S. exchanges, and thus project a sense of having
to play by American rules, the assets and the principals of many of the
companies reside in China. The companies operate on their terms, leaving
injured parties and the SEC powerless. Bird says the carnage is just
beginning. "The whole thing has no place to go but to blow up," he says.
"That's a rational position for an investor to start with, that every
one of these Chinese reverse mergers is a fraud."
Which once again demonstrates that fraud in financial reporting greatly harms or
may totally destroy capitalism. Early on frauds can badly damage the capital
raising ability of legitimate Chinese ventures.
This makes me wonder what proportion of these frauds were audited by
affiliates of the Big Four in China. It might make a good student project to see
what can be gleaned, if anything, from the audit reports.
January 15, 2011 reply from Ramesh Fernando
In reality, the Shanghai and Shenzhen market are
nothing but ponzi schemes. The majority of stocks (red chips) are favoured
by the Chinese Communist Party (CCP) and have some money pumped into them,
when there whole revenue model(with no worry about P&L statements) is based
on false estimates. The SEC's equal in China is totally corrupt and led by
CCP people. As long as the CCP continues in power in China, I would
recommend that no investor put their money there. Much better more liquid
and better regulated markets exist in India and other parts of Asia. It's
true the SEC is letting this fraud continue but you need many more
inspectors at the SEC to watch over all the markets. The Canadian market,
especially the natural resources stock like gold excluding Barrick Gold,
GoldCorp or Kinross (they are much more legitimate being large companies )
are full of ponzi schemes. I wish the SEC would put pressure on the Ontario
Security Commission as well as other provincial securities commissions to
regulate all this false reporting.
February 16, 2011 message from David Albrecht on February 16, 2011
Fascinating look at accounting/auditing in China by
auditor now professor.
Teaching Case on Supply Chains and Value Chains
Not Really 'Made in China'
by: Andrew Batson
Dec 16, 2010
Click here to view the full article on WSJ.com
strategy, Supply Chains
SUMMARY: "One widely
touted solution for current U.S. economic woes is for America to produce
more of the high-tech gadgets that the rest of the world craves. Yet two
academic researchers have found that Apple Inc.'s iPhone-one of the most
iconic U.S. technology products-actually added $1.9 billion to the U.S.
trade deficit with China last year. How is this possible? Though the iPhone
is entirely designed and owned by a U.S. company, and is made largely of
parts produced by other countries, it is physically assembled in China. Both
countries' trade statistics therefore consider the iPhone a Chinese export
to the U.S. So a U.S. consumer who buys what is often considered an American
product will add to the U.S. trade deficit with China."
CLASSROOM APPLICATION: The
article is useful in a managerial accounting class or an MBA class.
Questions ask students to discuss the concepts of product cost, period cost,
value chains, and supply chains, then consider the impact of these
accounting concepts as they are used in discussing issues in the world
1. (Advanced) What are the three cost components of any product?
2. (Advanced) What other period costs also contribute to production
of any product such as the iPhone and the iPad discussed in this article?
3. (Introductory) What component of the iPhone and iPad product
costs and period costs are incurred in China? In the U.S.? In other parts of
4. (Advanced) What is a value chain? How do both product costs and
period costs reflect amounts in the value chain for a product?
5. (Advanced) What is a supply chain? How is the functioning of
today's global supply chain impacting the statistics traditionally used to
assess international trade?
6. (Introductory) How do the researchers cited in the article use
the components of a value chain to improve analysis of global supply chains?
"Not Really 'Made in China'," by: Andrew Batson, The Wall Street Journal,
December 16, 2010 ---
One widely touted solution for current U.S.
economic woes is for America to come up with more of the high-tech gadgets
that the rest of the world craves.
Yet two academic researchers estimate that Apple
Inc.'s iPhone—one of the best-selling U.S. technology products—actually
added $1.9 billion to the U.S. trade deficit with China last year.
How is this possible? The researchers say
traditional ways of measuring global trade produce the number but fail to
reflect the complexities of global commerce where the design, manufacturing
and assembly of products often involve several countries.
"A distorted picture" is the result, they say, one
that exaggerates trade imbalances between nations.
Trade statistics in both countries consider the
iPhone a Chinese export to the U.S., even though it is entirely designed and
owned by a U.S. company, and is made largely of parts produced in several
Asian and European countries. China's contribution is the last
step—assembling and shipping the phones.
So the entire $178.96 estimated wholesale cost of
the shipped phone is credited to China, even though the value of the work
performed by the Chinese workers at Hon Hai Precision Industry Co. accounts
for just 3.6%, or $6.50, of the total, the researchers calculated in a
report published this month.
A spokeswoman for Apple said the company declined
to comment on the research.
The result is that according to official
statistics, "even high-tech products invented by U.S. companies will not
increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers
at the Asian Development Bank Institute, a think tank in Tokyo, in their
This isn't a problem with high-tech products, but
with how exports and imports are measured, they say.
The research adds to a growing debate about
traditional trade statistics that could have real-world consequences.
Conventional trade figures are the basis for political battles waging in
Washington and Brussels over what to do about China's currency policies and
its allegedly unfair trading practices.
"What we call 'Made in China' is indeed assembled
in China, but what makes up the commercial value of the product comes from
the numerous countries," Pascal Lamy, the director-general of the World
Trade Organization, said in a speech in October. "The concept of country of
origin for manufactured goods has gradually become obsolete."
Mr. Lamy said if trade statistics were adjusted to
reflect the actual value contributed to a product by different countries,
the size of the U.S. trade deficit with China—$226.88 billion, according to
U.S. figures—would be cut in half.
To correct for that bias is difficult because it
requires detailed knowledge of how products are put together.
Continued in article
Bob Jensen's threads on managerial accounting are at
Can Europe Be Saved?
Spreading Infection: An interactive chart on the
state of Europe's economies ---
THE fear that Greece's sovereign-debt crisis might
presage similar episodes elsewhere in the euro zone has been borne out. In
November, Ireland joined Greece in intensive care, becoming the first
euro-zone country to apply for funds from the rescue scheme agreed in May
2010 in concert with the IMF. Sovereign-bond spreads (the extra interest
compared with bonds issued by Germany, the safest credit) have risen sharply
in other euro-zone countries, notably Portugal, but also in Spain. Promises
to tackle budget deficits through public spending cuts and tax increases
have offered little reassurance to bondholders, who know that austerity will
hold back already-weak GDP growth.
The interactive graphic above (updated January 12th
2011) illustrates some of the problems that the European economy faces. GDP
picked up in most countries through 2010 but there were marked differences
in performance. Germany was especially sprightly: its economy rose by almost
4% in the year to the third quarter. But GDP in Greece has crashed under the
weight of austerity; Ireland has yet to emerge convincingly from a deep
recession; and Spain’s economy is barely growing. It is notable that GDP
countries outside the euro, such as Britain, Poland and especially Sweden
grew at a faster rate than the euro-zone average in the year to the third
Continued in article
'The Euro Area's Debt Crisis: Bite the Bullet," The Economist,
January 13, 2011 ---
In the first of three articles on the euro zone’s
sovereign-debt woes, we present our estimate of the burdens on the currency
club’s four most troubled members.
THE euro zone’s strategy for tackling its
sovereign-debt crisis is failing. A makeshift scheme was put in place in May
to help countries that cannot otherwise borrow at tolerable interest rates.
That lowered but did not remove the risk that a country may default for want
of short-term funds. But the bond market’s nerves have been shredded again
by the likelihood that from 2013, when a permanent bail-out mechanism is due
to be in place, it will be easier to restructure an insolvent country’s
debts. More worrying still for private investors, this seems set to give
official creditors preference over others.
As a result, bail-outs are making private investors
less rather than more keen to hold a troubled country’s bonds. As old debts
are refinanced and new deficits funded by the European rescue pot and the
IMF, the share of such a country’s debt held by official sources will
steadily rise. That will leave a shrinking pool of private investors to bear
losses if debts are restructured. And the smaller that pool becomes, the
larger the loss that each investor will have to accept. Bond purchases by
the European Central Bank (ECB) aimed at stabilising markets have further
diminished the stock in private hands.
This perverse dynamic argues for a restructuring of
insolvent countries’ debts sooner rather than later. But when is a debt
burden too heavy to be borne? A first indicator against which to make that
judgment is the ratio of gross public debt to GDP. Most rich economies,
including the euro area’s most troubled, have large budget deficits and so
will be adding to their debts for years. Today’s toll is not so important.
What matters is how big the debt burden will be when it stabilises.
Continued in article
Leader: It is time for insolvent euro-zone
countries to restructure their debts
Firm demand for Portugal's bonds cannot mask its
Quantifying the difficulties of Spain’s banking
An interactive chart on the state of Europe's
Our correspondents on what a debt restructuring
would mean for the euro zone
Discussion: Is it time for European debt
Note the Off Balance Sheet Financing, especially in Greece (also like the
"Can Europe Be Saved?" by Paul Krugman, The New York Times,
January 12, 2011 ---
THERE’S SOMETHING peculiarly apt about the fact
that the current European crisis began in Greece. For Europe’s woes have all
the aspects of a classical Greek tragedy, in which a man of noble character
is undone by the fatal flaw of hubris.
. . .
The answer, unfortunately, was that currency unions
have costs as well as benefits. And the case for a single European currency
was much weaker than the case for a single European market — a fact that
European leaders chose to ignore.
. . .
What does this have to do with the case for or
against the euro? Well, when the single European currency was first
proposed, an obvious question was whether it would work as well as the
dollar does here in America. And the answer, clearly, was no — for exactly
the reasons the Ireland-Nevada comparison illustrates. Europe isn’t fiscally
integrated: German taxpayers don’t automatically pick up part of the tab for
Greek pensions or Irish bank bailouts. And while Europeans have the legal
right to move freely in search of jobs, in practice imperfect cultural
integration — above all, the lack of a common language — makes workers less
geographically mobile than their American counterparts.
. . .
In Greece the story is straightforward: the
government behaved irresponsibly, lied about it and got caught.
During the years of easy borrowing, Greece’s
conservative government ran up a lot of debt — more than it admitted.
When the government changed hands in 2009, the
accounting fictions came to light; suddenly it was revealed that Greece had
both a much bigger deficit and substantially more debt than anyone had
realized. Investors, understandably, took flight.
. . .
Toughing it out: Troubled European economies could,
conceivably, reassure creditors by showing sufficient willingness to endure
pain and thereby avoid either default or devaluation. The role models here
are the Baltic nations: Estonia, Lithuania and Latvia. These countries are
small and poor by European standards; they want very badly to gain the
long-term advantages they believe will accrue from joining the euro and
becoming part of a greater Europe. And so they have been willing to endure
very harsh fiscal austerity while wages gradually come down in the hope of
restoring competitiveness — a process known in Eurospeak as “internal
. . .
In any case, the odds are that the current
tough-it-out strategy won’t work even in the narrow sense of avoiding
default and devaluation — and the fact that it won’t work will become
obvious sooner rather than later. At that point, Europe’s stronger nations
will have to make a choice.
It has been 60 years since the Schuman declaration
started Europe on the road to greater unity. Until now the journey along
that road, however slow, has always been in the right direction. But that
will no longer be true if the euro project fails. A failed euro wouldn’t
send Europe back to the days of minefields and barbed wire — but it would
represent a possibly irreversible blow to hopes of true European federation.
So will Europe’s strong nations let that happen? Or
will they accept the responsibility, and possibly the cost, of being their
neighbors’ keepers? The whole world is waiting for the answer.
Bob Jensen's threads on entitlements are at
"Prisoners stole millions from the IRS in 2009," by Kevin McCoy,
USA Today, February 17, 2011 ---
Prisoners in Florida, Georgia and California lead
the nation's inmate population in scamming payments from an unlikely
benefactor: the IRS.
Seemingly proving the adage that crime pays, even
behind bars, prisoners in the three states received nearly $19 million in
IRS refunds during 2009 after filing false or fraudulent tax returns,
according to an IRS report to Congress that was included in a federal audit
released in January.
Continued in article
Florida also leads the nation in Medicare fraud such as phony medical equipment
billings where Cuban immigrants (possibly aided by the Cuban government) are
often masters of deception.---
Sort of makes me wonder how much of the IRS refunding fraud in Florida makes
finds its ultimate home in Cuba.
Is there a developing country where doing business does not require bribery?
"IBM Settles Bribery Charges," by Jessica Holzer and Shaynki Raice,
The Wall Street Journal, March 19, 2011 ---
U.S. regulators accused International Business
Machines Corp. of a decade-long campaign of bribery in Asia, saying
employees handed over shopping bags stuffed with cash in South Korea and
arranged junkets for government officials in China in exchange for millions
of dollars in contracts.
The Armonk, N.Y., technology giant agreed to pay
$10 million to settle the civil charges, which allege "widespread" payment
of bribes by more than 100 employees of IBM subsidiaries and a joint venture
from 1998 to 2009. In exchange for the payments, the Securities and Exchange
Commission said, IBM received contracts for computer gear.
IBM, which neither admitted nor denied the charges,
said it holds employees to high ethical standards and has taken "appropriate
remedial action" to address the issues raised by the U.S. government, though
it wouldn't be more specific.
The charges ding Big Blue's reputation at a time
when the company is looking to countries like China, India and Brazil to
fuel much of its growth. IBM's emerging market revenue rose 16% last year
and accounted for more than a fifth of the company's $99.9 billion total.
As U.S. companies move more aggressively abroad,
the federal government has been stepping up its pursuit of cases under the
Foreign Corrupt Practices Act, levying large fines and bringing criminal
charges against executives. The act outlaws corporations listed on U.S.
stock exchanges from bribing foreign officials.
The SEC expanded its team of FCPA investigators
about a year ago. The Justice Department, which can bring criminal charges,
has beefed up its FCPA unit as well and last year carried out 22 FCPA
enforcement actions against corporations. A Justice Department spokeswoman
wouldn't comment on whether it was investigating.
The SEC complaint alleges that managers employed by
an IBM subsidiary and joint venture in South Korea paid government officials
the equivalent of $207,000 in cash bribes from 1998 to 2003 to secure the
sale of mainframes and personal computers to the government.
In some instances, IBM employees also provided
entertainment to government officials, including depositing payments into
the bank account of a "hostess in a drink shop," according to the SEC
The complaint details bribes totaling hundreds of
thousands of dollars in cash, laptop computers, cameras, travel and
entertainment expenses that were routinely gifted to government officials by
IBM employees over the course of a decade in exchange for millions of
dollars of government business.
From 1998 to 2002, the SEC alleges, IBM employees
in South Korea paid off 16 South Korean government officials, including
stuffing cash into shopping bags and IBM envelopes and handing them over in
secret meetings in parking lots near an official's office and home. Another
official was met in the parking lot of a Japanese restaurant, the SEC
The bribes were made in exchange for a variety of
types of business, including winning bids for government contracts or to act
as the preferred supplier for computers and storage equipment, the SEC
In September 2000, a subsidiary of IBM in South
Korea sold $1.3 million worth of personal computers to the South Korean
government that were later found to have problems, the complaint said.
Despite those problems, IBM won a contract to supply computers after the
company paid an official $14,320 in cash, according to the SEC.
IBM sold its personal-computer business to China's
Lenovo Group Ltd. in 2005.
In China, two key IBM officials and more than 100
employees engaged in a travel scam to provide personal vacations to Chinese
government officials from 2004 to as late as early 2009, the SEC alleged.
IBM employees created slush funds at travel
agencies and created fake invoices to pay for personal vacations and
sightseeing for government officials, according to the SEC.
The settlement included $5.3 million in disgorged
profit, $2.7 million in interest and a penalty of $2 million. The payment is
relatively small for an FCPA civil case, which may reflect that the alleged
bribes, while pervasive, weren't very large.
The SEC alleged in its complaint that IBM's
internal controls weren't sufficient to spot or prevent the alleged bribes.
IBM didn't keep accurate records, in some cases recording the payments as
legitimate business expenses, the SEC said.
Fines in civil FCPA cases can often top $100
million. In cases that involve criminal charges as well, total fines can
reach into the several hundreds of millions of dollars.
IBM says it has added $10 billion in annual revenue
from its business in emerging markets since 2000. The company wants emerging
markets to account for 30% of its revenue by 2015.
The tech industry has been hit with other FCPA
investigations. U.S. authorities are looking at whether Hewlett-Packard Co.
employees in Russia, Germany, Austria and Serbia paid kickbacks to
distributors and customers, H-P disclosed last year. H-P has said it was
cooperating with U.S. officials and German officials, who were carrying out
their own investigation.
Continued in article
Bob Jensen's Fraud Updates are at
Wasteful Pork Barrel Legislation Department (this time in the State of
"TLP: Like Shooting Fish in a Pork Barrel," by Adrienne Gonzalez,
Jr. Deputy Accountant Blog, January 18, 2011 ---
Benford's Law: How a mathematical phenomenon can help CPAs uncover fraud and
A century-old observation about the distribution of significant digits is now
being used to detect fraud.
Thanks to Miguel for the heads up on January 22, 2011---
"The Difficulty of Faking Data," tpHill.net ---
Jensen's Archives ---
Benford's Law: It's interesting to read the "Silly" comments that follow the
Law And A Theory of Everything: A new relationship between Benford's Law and
the statistics of fundamental physics may hint at a deeper theory of everything,"
MIT's Technology Review. May 7, 2010 ---
In 1938, the physicist Frank Benford made an extraordinary discovery about
numbers. He found that in many lists of numbers drawn from real data, the
leading digit is far more likely to be a 1 than a 9. In fact, the
distribution of first digits follows a logarithmic law. So the first digit
is likely to be 1 about 30 per cent of time while the number 9 appears only
five per cent of the time.
That's an unsettling and counterintuitive discovery. Why aren't numbers
evenly distributed in such lists? One answer is that if numbers have this
type of distribution then it must be scale invariant. So switching a data
set measured in inches to one measured in centimetres should not change the
distribution. If that's the case, then the only form such a distribution can
take is logarithmic.
But while this is a powerful argument, it does nothing to explan the
existence of the distribution in the first place.
Then there is the fact that Benford Law seems to apply only to certain types
of data. Physicists have found that it crops up in an amazing variety of
data sets. Here are just a few: the areas of lakes, the lengths of rivers,
the physical constants, stock market indices, file sizes in a personal
computer and so on.
However, there are many data sets that do not follow Benford's law, such as
lottery and telephone numbers.
What's the difference between these data sets that makes Benford's law apply
or not? It's hard to escape the feeling that something deeper must be going
Today, Lijing Shao and Bo-Qiang Ma at Peking University in China provide a
new insight into the nature of Benford's law. They examine how Benford's law
applies to three kinds of statistical distributions widely used in physics.
These are: the Boltzmann-Gibbs distribution which is a probability measure
used to describe the distribution of the states of a system; the Fermi-Dirac
distribution which is a measure of the energies of single particles that
obey the Pauli exclusion principle (ie fermions); and finally the
Bose-Einstein distribution, a measure of the energies of single particles
that do not obey the Pauli exclusion principle (ie bosons).
Lijing and Bo-Qiang say that the Boltzmann-Gibbs and Fermi-Dirac
distributions distributions both fluctuate in a periodic manner around the
Benford distribution with respect to the temperature of the system. The Bose
Einstein distribution, on the other hand, conforms to benford's Law exactly
whatever the temperature is.
What to make of this discovery? Lijing and Bo-Qiang say that logarithmic
distributions are a general feature of statistical physics and so "might be
a more fundamental principle behind the complexity of the nature".
That's an intriguing idea. Could it be that Benford's law hints at some kind
underlying theory that governs the nature of many physical systems? Perhaps.
But what then of data sets that do not conform to Benford's law? Any decent
explanation will need to explain why some data sets follow the law and
others don't and it seems that Lijing and Bo-Qiang are as far as ever from
It's interesting to read the "Silly" comments that follow the article.
Got Your Number: How a mathematical phenomenon can help CPAs uncover fraud and
other irregularities," by Mark J. Nigrini, Journal of Accountancy, May 1999
BENFORD'S LAW PROVIDES A DATA
analysis method that can help alert CPAs to possible errors,
potential fraud, manipulative biases, costly processing
inefficiencies or other irregularities.
PHYSICIST AT GE RESEARCH LABORATORIES
in the 1920s, Frank Benford found that numbers with low first
digits occurred more frequently in the world and calculated the
expected frequencies of the digits in tabulated data.
CPAs CAN USE BENFORD'S DISCOVERY
in business applications ranging from accounts payable to Y2K
problems. In addition, subset tests identify small lists of
serious anomalies in large data sets, making an analysis more
DIGITAL ANALYSIS IS WELL SUITED
to finding errors and irregularities in large data sets when
auditors need computer assisted technologies to direct their
attention to anomalies.
MARK J. NIGRINI, CA (SA), PhD, MBA, is an assistant professor at
the Edwin L. Cox School of Business, Southern Methodist
University, Dallas, and a Research Fellow at the Ernst & Young
Center for Auditing Research and Advanced Technology, University
of Kansas, Lawrence.
Video Lecure by Nobel Laureate Robert Merton
The Future of Finance
In his keynote address, Robert Merton chooses not
to focus on the financial crisis. It is clear to him there were “fools and
knaves,” as well as “many structural elements that would have happened even
if people were well behaved and well informed” -- risks are simply “embedded
in our systems.” Instead, Merton explores how financial engineering is
essential in preparing for the inevitable next crisis, and in solving
critical challenges. “The world has changed; we can’t go back. Let’s talk
about what we should do going forward.”
To illustrate society’s need for financial
innovation, Merton uses “a live case study:” the vast problem of retirement
funding. In the past decade, stock market declines and falling interest
rates have hit mainstream employer pension plans hard. Municipal pension
plans may be underfunded to the tune of three trillion dollars. (“It makes
the S&L crisis look like nothing.”) But people seek, and are due, “the
standard of living during retirement they enjoyed in the latter part of
their work life.”
Generally, determining this standard of living
means adding up likely medical, housing and general consumption costs, and
Merton describes how to target such retirement income. The main ways to
achieve the desired goal are by saving more, working longer or taking more
risk. Merton would like to design a software-based tool for ordinary people,
simple on the user end, complex on the provider end, which would serve as a
“next generation pension solution,” offering a way to manipulate the key
variables in retirement income and demonstrate potential financial outcomes.
This tool would help users continuously optimize risk to help them reach
their retirement funding goals.
There are regulatory obstacles now to the
implementation of such a method on a widespread basis, and a gap between how
managers, advisers and financial institutions think about pension assets,
and what Merton has in mind. Nevertheless, he says, “What we need to do for
most of the people who don’t have extra money and must do the most with
their assets is deliver a simple, easy to use, and if they don’t use it
still gets them there, solution.” Merton acknowledges those who think the
giant problem of pension funding can be solved by what’s already available
-- bond and equity markets, bank loans – and who hanker “to get rid of all
the complexity, go back to 1930, ’50 or ’80.” From his perspective, this
means “throwing away a lot of what you could do, because the market-proven
strategies people have developed and used…can do a much better job for
Contributing to the pension crisis has been a willingness of the accounting and
auditing profession to allow both the public and private sectors to deceive
taxpayers and investors about the extend to which contracted pension obligations
are off the balance sheet and not even disclosed properly.
The sad state of governmental accounting ---
Off Balance Sheet Financing (OBSF) ---
"The Casino Next Door: How slot machines snuck into the mall, along
with money laundering, bribery, shootouts, and billions in profits," by
Felix Gellette, Business Week, April 21, 2011 ---
Inside a one-story building on the edge of a strip
mall in Central Florida, Joy Baker calculates the sum total of her morning
bets. It's almost noon, and she's down $5. Not bad. Her husband, Tony, sits
a few feet away. "This is the most fun we've had in 20 years," says Joy, who
is 78 and retired. "At our age, we can't hike. You can't pay him to go to
the movies. This gives us a reason to get up in the morning."
Tony concurs. "We enjoy this," he says. "We will be
very bitter if the politicians take this away from us. I will take it
It's a Wednesday morning in mid-March, and the
Bakers are sitting inside Jacks, a new type of neighborhood business that is
flourishing in shopping malls throughout Florida—and across America. Jacks
bills itself as a "Business Center and Internet Cafe," but it looks more
like a pop-up casino.
Jacks is about the size of a neighborhood deli.
There is a bar next door and a convenience store around the corner. Inside,
jumbo playing cards decorate the walls. The room is filled with about 30
desktop computers. Here and there, men and women sit in office chairs and
tap at the computers. They are playing "sweepstakes" games that mimic the
look and feel of traditional slot machines. Rows of symbols—cherries, lucky
sevens, four-leaf clovers—tumble with every click of the mouse.
John Pate, a 50-year-old wearing a Harley-Davidson
T-shirt, says he is wagering the equivalent of 60 cents a spin. "This place
is pretty laid-back," says Pate. "You can come here and get your mind off
everything. You're not going to win the mortgage. You're not going to lose
the mortgage. It's pretty harmless."
Continued in article
It's a question of whether online porn sites are more dangerous than online
gambling sites. From the standpoint of probability theory, online gambling sites
are probably more dangerous to visit because of the denominator effect --- there
are fewer gambling sites relative to the millions upon millions of porn sites.
But both types of sites can do great damage to your computer and to your bank
account and to your credit score.
From a psychological research standpoint, it's interesting to study what
onsite gambling offers that patrons find lacking in online gambling sites.
Jensen's threads on accounting theory are at
Last night on television news a clip was played of a robber in what I think
was a book store. The robber was extremely polite and apologetic when claiming
he would not be doing this if his kids were not hungry. But he insisted on
taking all the cash in the drawer rather than the $40 offered by the store
On the way out the door the polite robber promised that when he got a job and
was back on his feet again he would pay all of the stolen money back.
Would the store owner have committed such a robbery if the roles were
Are ethics and morality variables that depend upon situational circumstances?
How does Sprite or Pepsi soda fit into the following lecture on morality?
What is heteronomy?
Video: Immanuel Kant Assumes Categorical Imperatives in a World of
Relativity (where we're slaves to our varying necessities)
Professor Sandel @ Harvard University
Here is Professor Sandel’s video introducing Immanuel Kant’s philosophy of
ethics. In my opinion, one of the best lectures on ethics. Below is an extract
for the one hour lesson --- |
I'm not normally a big fan of Tom Selleck films. But this winter Erika and I
have really enjoyed the mystery series in which Selleck plays the role of a
crusty alcoholic chief of police, Jesse Stone, in a town of last resort
called Paradise. When asked if he shoots to kill or just wound, his automatic
response is the categorical imperative "to kill" followed by reasoning decided
early in his law enforcement career. Although we've not seen the entire series
as of yet, to date all of his victims do not live to see another day.
"F.D.I.C. Sues Ex-Chief of Big Bank That Failed," by Eric Dash, The
New York Times, March 17, 2011 ---
The Federal Deposit Insurance Corporation sued the
former chief executive of Washington Mutual and two of his top lieutenants,
accusing them of reckless lending before the 2008 collapse of what was the
nation’s largest savings bank.
F.D.I.C. Sues Ex-Chief of Big Bank That Failed By
ERIC DASH Published: March 17, 2011
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The Federal Deposit Insurance Corporation sued the
former chief executive of Washington Mutual and two of his top lieutenants,
accusing them of reckless lending before the 2008 collapse of what was the
nation’s largest savings bank.
The civil lawsuit, seeking to recover $900 million,
is the first against a major bank chief executive by the regulator and
follows escalating public pressure to hold bankers accountable for actions
leading up to the financial crisis.
Kerry K. Killinger, Washington Mutual’s longtime
chief executive, led the bank on a “lending spree” knowing that the housing
market was in a bubble and failed to put in place the proper risk management
systems and internal controls, according to a complaint filed on Thursday in
federal court in Seattle.
David C. Schneider, WaMu’s president of home
lending, and Stephen J. Rotella, its chief operation officer, were also
accused of negligence for their roles in developing and leading the bank’s
aggressive growth strategy.
“They focused on short-term gains to increase their
own compensation, with reckless disregard for WaMu’s long-term safety and
soundness,” the agency said in the 63-page complaint. “The F.D.I.C. brings
this complaint to hold these highly paid senior executives, who were chiefly
responsible for WaMu’s higher-risk home lending program, accountable for the
In addition, the complaint says that Mr. Killinger
and his wife, Linda, set up two trusts in August 2008 to keep his homes in
California and Washington out of the reach of the bank’s creditors. Months
earlier, in the spring of 2008, Mr. Rotella and his wife, Esther, made
similar arrangements. The F.D.I.C. is seeking to freeze the assets of both
couples and named the wives as defendants in the lawsuit.
In unusually vigorous denials, Mr. Killinger and
Mr. Rotella came out swinging against the F.D.I.C. Mr. Killinger said the
agency’s claims were “baseless and unworthy of the government” and its legal
conclusions were “political theater.” Mr. Rotella said the action “runs
counter to the facts about my relatively short time at the company,” calling
it “unfair and an abuse of power.” He said the trust was for normal estate
planning purposes and was set up before the bank’s downfall. Mr. Schneider,
who is represented by the same lawyer as Mr. Rotella, did not release a
Although the F.D.I.C. is mainly known for its role
in shuttering failed lenders, the agency has a legal obligation to bring
lawsuits against former directors and officers when it finds evidence of
So far, the F.D.I.C. has brought claims against 158
individuals at about 20 small banks that failed during the recent crisis.
The agency is seeking a total of more than $2.6 billion in damages. But the
$900 million case against the former WaMu officials is its biggest and most
prominent action to date.
Federal regulators have come under fire for failing
to hold executives responsible for their involvement in the worst financial
crisis since the Great Depression. Last fall, the Securities and Exchange
Commission reached a settlement with Angelo R. Mozilo, the former chief
executive of Countrywide Financial, to pay a $22.5 million penalty over
misleading investors about the financial condition of the giant mortgage
The New York attorney general’s office has brought
a civil suit against Kenneth D. Lewis over improper disclosures related to
the 2008 rescue of Merrill Lynch by Bank of America, of which he was chief
Continued in article
A massive shareholder lawsuit is also pending against WaMu's auditor,
WaMu's loan loss reserves were not only massively understated, WaMu should've
been audited as a non-going concern ---
More Headaches for Deloitte After Auditing the Biggest Bank to Ever Fail
"Investigation finds fraud in WaMu lending: Senate report: Failed bank’s own
action couldn’t stop deceptive practices," by Marcy Gordon, MSNBC, April 12,
The mortgage lending
operations of Washington Mutual Inc., the biggest U.S. bank ever to fail,
were threaded through with fraud, Senate investigators have found.
And the bank's own probes
failed to stem the deceptive practices, the investigators said in a report
on the 2008 failure of WaMu.
The panel said the bank's
pay system rewarded loan officers for the volume and speed of the subprime
mortgage loans they closed. Extra bonuses even went to loan officers who
overcharged borrowers on their loans or levied stiff penalties for
prepayment, according to the report being released Tuesday by the
investigative panel of the Senate Homeland Security and Governmental Affairs
Sen. Carl Levin, D-Mich.,
the chairman, said Monday the panel won't decide until after hearings this
week whether to make a formal referral to the Justice Department for
possible criminal prosecution. Justice, the FBI and the Securities and
Exchange Commission opened investigations into Washington Mutual soon after
its collapse in September 2008.
The report said the top WaMu
producers, loan officers and sales executives who made high-risk loans or
packaged them into securities for sale to Wall Street, were eligible for the
bank's President's Club, with trips to swank resorts, such as to Maui in
Fueled by the housing boom,
Seattle-based Washington Mutual's sales to investors of packaged subprime
mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006.
The 119-year-old thrift, with $307 billion in assets, collapsed in September
2008. It was sold for $1.9 billion to JPMorgan Chase & Co. in a deal
brokered by the Federal Deposit Insurance Corp.
Jennifer Zuccarelli, a
spokeswoman for JPMorgan Chase, declined to comment on the subcommittee
WaMu was one of the biggest
makers of so-called "option ARM" mortgages. These mortgages allowed
borrowers to make payments so low that loan debt actually increased every
The Senate subcommittee
investigated the Washington Mutual failure for a year and a half. It focused
on the thrift as a case study for the financial crisis that brought the
recession and the loss of jobs or homes for millions of Americans.
The panel is holding
hearings Tuesday and Friday to take testimony from former senior executives
of Washington Mutual, including ex-CEO Kerry Killinger, and former and
current federal regulators.
Washington Mutual "was one
of the worst," Levin told reporters Monday. "This was a Main Street bank
that got taken in by these Wall Street profits that were offered to it."
The investors who bought the
mortgage securities from Washington Mutual weren't informed of the
fraudulent practices, the Senate investigators found. WaMu "dumped the
polluted water" of toxic mortgage securities into the stream of the U.S.
financial system, Levin said.
In some cases, sales
associates in WaMu offices in California fabricated loan documents, cutting
and pasting false names on borrowers' bank statements. The company's own
probe in 2005, three years before the bank collapsed, found that two top
producing offices — in Downey and Montebello, Calif. — had levels of fraud
exceeding 58 percent and 83 percent of the loans. Employees violated the
bank's policies on verifying borrowers' qualifications and reviewing loans.
Washington Mutual was
repeatedly criticized over the years by its internal auditors and federal
regulators for sloppy lending that resulted in high default rates by
borrowers, according to the report. Violations were so serious that in 2007,
Washington Mutual closed its big affiliate Long Beach Mortgage Co. as a
separate entity and took over its subprime lending operations.
Senior executives of the
bank were aware of the prevalence of fraud, the Senate investigators found.
In late 2006, Washington
Mutual's primary regulator, the U.S. Office of Thrift Supervision, allowed
the bank an additional year to comply with new, stricter guidelines for
issuing subprime loans.
According to an internal
bank e-mail cited in the report, Washington Mutual would have lost about a
third of the volume of its subprime loans if it applied the stricter
Deloitte is Included in the Shareholder Lawsuit Against Washington Mutual
"Feds Investigating WaMu Collapse," SmartPros, October 16, 2008 ---
Oct. 16, 2008 (The Seattle
Times) — U.S. Attorney Jeffrey Sullivan's office [Wednesday] announced that
it is conducting an investigation of Washington Mutual and the events
leading up to its takeover by the FDIC and sale to JP Morgan Chase.
Said Sullivan in a
statement: "Due to the intense public interest in the failure of Washington
Mutual, I want to assure our community that federal law enforcement is
examining activities at the bank to determine if any federal laws were
Sullivan's task force
includes investigators from the FBI, Federal Deposit Insurance Corp.'s
Office of Inspector General, Securities and Exchange Commission and the
Internal Revenue Service Criminal Investigations division.
Sullivan's office asks that
anyone with information for the task force call 1-866-915-8299; or e-mail
"For more than 100 years
Washington Mutual was a highly regarded financial institution headquartered
in Seattle," Sullivan said. "Given the significant losses to investors,
employees, and our community, it is fully appropriate that we scrutinize the
activities of the bank, its leaders, and others to determine if any federal
laws were violated."
WaMu was seized by the FDIC
on Sept. 25, and its banking operations were sold to JPMorgan Chase,
prompting a Chapter 11 bankruptcy filing by Washington Mutual Inc., the
bank's holding company. The takeover was preceded by an effort to sell the
entire company, but no firm bids emerged.
The Associated Press
reported Sept. 23 that the FBI is investigating four other major U.S.
financial institutions whose collapse helped trigger the $700 billion
bailout plan by the Bush administration.
The AP report cited two
unnamed law-enforcement officials who said that the FBI is looking at
potential fraud by mortgage-finance giants Fannie Mae and Freddie Mac, and
insurer American International Group (AIG). Additionally, a senior
law-enforcement official said Lehman Brothers Holdings is under
investigation. The inquiries will focus on the financial institutions and
the individuals who ran them, the senior law-enforcement official said.
FBI Director Robert Mueller
said in September that about two dozen large financial firms were under
investigation. He did not name any of the companies but said the FBI also
was looking at whether any of them have misrepresented their assets.
"Federal Official Confirms Probe Into Washington Mutual's Collapse,"
by Pierre Thomas and Lauren Pearle, ABC News, October 15, 2008 ---
federal government is
investigating whether the
leadership of shuttered bank
Washington Mutual broke
federal laws in the run-up
to its collapse,
the largest in U.S. history
. . .
Eighty-nine former WaMu
employees are confidential witnesses in a
shareholder class action lawsuit against
the bank, and some former insiders
spoke exclusively to ABC News,
describing their claims that
the bank ignored key advice from its own risk
management team so they could maximize profits
during the housing boom.
court documents, the insiders said the company's
risk managers, the "gatekeepers" who were supposed
to protect the bank from taking undue risks, were
ignored, marginalized and, in some cases, fired. At
the same time, some of the bank's lenders and
underwriters, who sold mortgages directly to home
owners, said they felt pressure to sell as many
loans as possible and push risky, but lucrative,
loans onto all borrowers, according to insiders who
spoke to ABC News.
Continued in article
Allegedly "Deloitte Failed to Audit WaMu in Accordance with GAAS" (see
Page 351) ---
Deloitte issued unqualified opinions and is a defendant in this lawsuit (see
In particular note Paragraphs 893-901 with respect to the alleged negligence of
More on Deloitte's woes in the wake of the WaMu collapse ---
"What Caused the Bubble? Mission accomplished: Phil Angelides succeeds in
not upsetting the politicians," by Holman W, Jenkins, Jr., The Wall
Street Journal, January 29. 2011 ---
The 2008 financial crisis happened because no one
prevented it. Those who might have stopped it didn't. They are to blame.
Greedy bankers, incompetent managers and
inattentive regulators created the greatest financial breakdown in nearly a
century. Doesn't that make you feel better? After all, how likely is it that
some human beings will be greedy at exactly the same time others are
incompetent and still others are inattentive?
You could almost defend the Financial Crisis
Inquiry Commission's (FCIC) new report if the question had been who, in
hindsight, might have prevented the crisis. Alas, the answer is always going
to be the Fed, which has the power to stop just about any macro trend in the
financial markets if it really wants to. But the commission was asked to
explain why the bubble happened. In that sense, its report doesn't seem even
to know what a proper answer might look like, as if presented with the
question "What is 2 + 2?" and responding "Toledo" or "feral cat."
The dissenters at least propose answers that might
be answers. Peter Wallison focuses on U.S. housing policy, a diagnosis that
has the advantage of being actionable.
The other dissent, by Keith Hennessey, Bill Thomas
and Douglas Holtz-Eakin, sees 10 causal factors, but emphasizes the
pan-global nature of the housing bubble, which it attributes to ungovernable
global capital flows.
That is also true, but less actionable.
Let's try our hand at an answer that, like Mr.
Wallison's, attempts to be useful.
The Fed will make errors. International capital
flows will sometimes be disruptive. Speculators will be attracted to hot
markets. Bubbles will be a feature of financial life: Building a bunch of
new houses is not necessarily a bad idea; only when too many others do the
same does it become a bad idea. On that point, not the least of the
commission's failings was its persistent mistaking of effects for causes,
such as when banks finally began treating their mortgage portfolios as hot
potatoes to be got rid of.
If all that can't be changed, what can? How about
the incentives that invited various parties to shovel capital into housing
without worrying about the consequences?
The central banks of China, Russia and various
Asian and Arab nations knew nothing about U.S. housing. They poured hundreds
of billions into it only because Fannie and Freddie were perceived as
federally guaranteed and paid a slightly higher yield than U.S. Treasury
bonds. (And one of the first U.S. actions in the crisis was to assure China
it wouldn't lose money.)
Borrowers in most states are allowed to walk away
from their mortgages, surrendering only their downpayments (if any) while
dumping their soured housing bets on a bank. Change that even slightly and
mortgage brokers and home builders would find it a lot harder to coax people
into more house than they can afford.
Mortgage middlemen who don't have "skin in the
game" and feckless rating agencies have also been routine targets of blame.
But both are basically ticket punchers for large institutions that should
have and would have been assessing their own risk, except that their own
creditors, including depositors, judged them "too big to fail," creating a
milieu where they could prosper without being either transparent or
cautious. We haven't even tried to fix this, say by requiring banks to take
on a class of debtholder who would agree to be converted to equity in a
bailout. Then there'd be at least one sophisticated marketplace demanding
assurance that a bank is being run in a safe and sound manner. (Sadly, the
commission's report only reinforces the notion that regulators are
responsible for keeping your money safe, not you.)
The FCIC Chairman Phil Angelides is not stupid, but
he is a politician. His report contains tidbits that will be useful to
historians and economists. But it's also a report that "explains" poorly.
His highly calculated sound bite, peddled from one interview to the next,
that the crisis was "avoidable" is worthless, a nonrevelation. Everything
that happens could be said to happen because somebody didn't prevent it. So
what? Saying so is saying nothing.
Mr. Angelides has gone around trying to convince
audiences that the commission's finding was hard hitting. It wasn't. It was
soft hitting. More than any other goal, it strives mainly to say nothing
that would actually be inconvenient to Barack Obama, Harry Reid, Barney
Frank or even most Republicans in Congress. In that, it succeeded.
And then the subprime crisis was followed by the biggest swindle in the history
of the world ---
At this point time in 2011 there's only marginal benefit in identifying all
the groups like credit agencies and CPA audit firms that violated
professionalism leading up to the subprime crisis. The credit agencies,
auditors, Wall Street investment banks, Fannie Mae, and Freddie Mack were all
just hogs feeding on the trough of bad and good loans originating on Main
Streets of every town in the United States.
If the Folks on Main Street that Approved the Mortgage Loans in the First
Stage Had to Bear the Bad Debt Risks There Would've Been No Poison to Feed Upon
by the Hogs With Their Noses in the Trough Up to and Including Wall Street and
Fannie and Freddie.
If the Folks on Main Street that Approved the Mortgage Loans in the First
Stage Had to Bear the Bad Debt Risks All Would've Been Avoided
The most interesting question in my mind is what might've prevented the poison (uncollectability)
in the real estate loans from being concocted in the first place. What
might've prevented it was for those that approved the loans (Main Street banks
and mortgage companies in towns throughout the United States) to have to bear
all or a big share of the losses when borrowers they approved defaulted.
Instead those lenders that approved the loans easily passed those loans up
the system without any responsibility for their reckless approval of the
loans in the first place. It's easy to blame Barney Frank for making it
easier for poor people to borrow more than they could ever repay. But the fact
of the matter is that the original lenders like Countrywide were approving
subprime mortgages to high income people that also could not afford their
payments once the higher prime rates kicked in under terms of the subprime
contracts. If lenders like Countrywide had to bear a major share of the bad debt
losses the lenders themselves would've been more responsible about only
approving mortgages that had a high probability of not going into default.
Instead Countrywide and the other Main Street lenders got off scott free until
the real estate bubble finally burst.
And why would a high income couple refinance a fixed rate mortgage with a
risky subprime mortgage that they could not afford when the higher rates kicked
in down the road? The answer is that the hot real estate market before the crash
made that couple greedy. They believed that if they took out a subprime loan
with a very low rate of interest temporarily that they could turn over their
home for a relatively huge profit and then upgrade to a much nicer mansion on
the hill from the profits earned prior to when the subprime rates kicked into
When the real estate bubble burst this couple got left holding the bag and
received foreclosure notices on the homes that they had gambled away. And the
Wall Street investment banks, Fannie, and Freddie got stuck with all the poison
that the Main Street banks and mortgage companies had recklessly approved
without any risk of recourse for their recklessness.
If the Folks on Main Street that Approved the Mortgage Loans in the First
Stage Had to Bear the Bad Debt Risks There Would've Been No Poison to Feed Upon
by the Hogs With Their Noses in the Trough Up to and Including Wall Street and
Fannie and Freddie.
Bob Jensen's threads on this entire mess are at
"Deloitte’s Troubles Bubble To Surface," by Francine McKenna,
re:TheAuditors, January 31, 2011 ---
Mainstream media, and the Financial Crisis Inquiry
Commission, are focused mainly on Ernst & Young as the auditor whipping boy
of the financial crisis. That’s really by default not by design and is
thinly justified. No one has given fly-over journalists anything on a silver
platter that would draw in the rest. Not that there aren’t a number of
reasons to look hard at all of them. They are feigning outrage in the UK.
But here in the US, we treat the audit firms as untouchable.
That doesn’t stop me from highlighting all the
reasons why the rest of the Big 4 should be scrutinized as much or, perhaps,
even more than Ernst & Young for their role in the crisis. And, of course,
you know I believe there’s more than their behavior during the crisis to
warrant significant scrutiny of the industry’s model and its methods. The
popular perception is Ernst & Young is the most vulnerable of the largest
firms because of its troubles with Lehman, but that’s more a public
relations problem than a fact-based conclusion.
Granted, Ernst & Young hasn’t been very good at
crisis communications. In fact, they’ve really sucked at it since last
March. Their delay in responding to the original Lehman Bankruptcy
Examiner’s report and the suit filed by the New York Attorney General is a
case study in how not to respond. Because that’s what they did. Not respond.
They either didn’t respond at all to journalists or issued the standard
auditor response to any lawsuit. That’s the one with two sentences, or one
long one, that includes the phrases “according to GAAP”, “followed all
standards”, “stand by our work”, and “we just stand there”.
Give me a few minutes and I can make a case for
PricewaterhouseCoopers as the one teetering on the edge of the abyss
instead. Or KPMG.
But today, let’s talk about Deloitte.
A few weeks ago I detailed the case of Arnold
McClellan, the Deloitte Tax partner who is accused of using his knowledge of
Deloitte client private equity firm Hellman & Friedman’s acquisitions to
pass insider trading tips to his UK relatives. Deloitte, the firm, is
cooperating with FSA, SEC, and DOJ investigations of these allegations, as
they did in the SEC’s investigations of their other partner inside trader –
former Deloitte Vice Chairman Tom Flanagan. Mr. Flanagan’s case was settled
with the SEC last summer and McClellan’s will eventually be settled, too. In
both cases, Deloitte’s cooperation will save them from fines and sanctions
or even a consent decree requiring them to clean up their compliance act.
How does that translate into trouble for Deloitte?
After all, they’re skating away as a firm from major insider trading
scandals, looking like the good firm. Well…Two serious insider trading
cases, both involving partners and high profile target companies, playing
out during the same time frame equals holes in Deloitte’s internal
compliance processes you can drive a Mack truck through. Whether the SEC or
Deloitte admit it publicly, the heat is on and it’s only a matter of time
before another case bobs to the surface. Or more than one.
How many times can Deloitte claim the firm is being
“duped” by its own partners? Eventually there will be an egregious case
where the firm has to pay a fine or worse. I’m sure there’s already a lot
more headaches in the annual independence process for partners and their
families. If not, both the SEC and the firm are playing with fire.
Last week I wrote in Forbes about the victory for
class action plaintiffs suing Bear Stearns executives and Deloitte for Bear
Stearns’ part in the financial crisis. It’s a major accomplishment to get a
crisis suit past the motions to dismiss, in general but especially
significant, in particular, when thesuit also names the auditor as a
defendant. Deloitte will now be subject to discovery and a trial – if they
don’t settle first – to refute allegations they performed “no audit at all”
at Bear Stearns.
That was the gist of allegations in the UK’s House
of Lords regarding Deloitte’s audit of Royal Bank of Scotland. That failed
bank was nationalized by the British government and never received a “going
concern” qualification in enough time to warn anyone.
Continued in article
In spite of the mention of Ernst & Young above, it is my general feeling that
Francine has it in for Deloitte more than the other three of the Big Four
oligopoly. Of course she hammers at all of the Big Four now and then. But
Deloitte seems to ruffle her feathers more than the rest.
Deloitte is the only one of the Big Four that did not sell or spin off its
huge consulting division. However, I don't think, since the days of Andersen,
that consulting is the main threat to auditor independence. The main threat, in
my viewpoint, is that in certain practice offices in all the Big Four audit
firms there are some audit clients too big to not get clean audit opinions.
Bob Jensen's threads on Deloitte and the rest are at
One of Deloitte's worst audits had to be Washington Mutual just prior to when
this enormous bank with what was probably the worst lending practices of all the
failed banks got a clean opinion with badly underestimated loan losses from
Deloitte. Instead WaMu should've gotten a going concern signal from the auditors
before it went belly up!
"Recidivism and Risk Management: Barry Minkow Goes Back to the Slammer,"
by Jim Peterson, re:Balance, March 24, 2011 ---
A question for those charged with risk management
and fraud prevention:
What’s your company policy on employing or doing
business with ostensibly reformed white-collar criminals?
And is a re-think indicated by the news that Barry
Minkow, wunderkind among securities swindlers for the scam at ZZZZ Best in
the 1980’s, for which he served seven years of a double-digit sentence on 57
counts, is negotiating a securities-fraud plea bargain under which he now
faces fives fresh years of jail time (here).
My concern is a prosaic one – not Hollywood’s
question whether his return to federal housing means that the pending Minkow
bio-pic requires re-shooting of a new ending (here), or whether the February
burglary of $50,000 at the Community Bible Church where he recently resigned
as pastor (here) bears any of his felonious fingerprints (here).
It’s only this: Given the rate of relapse among
those described by English essayist Charles Lamb as “so crooked that if
they’d swallow a spike, they’d void out a corkscrew,” should a company
concerned for its reputation and fiscal soundness ever yield to sentiment
and invite such a fox back into its henhouse?
Experience over the years counsels against it.
Examples in my own catalog include the large-company CEO convict, who
finagled a reduced sentence via a convenient medical excuse, and was no
sooner paroled to a halfway house than he took over its single pay-phone to
peddle the rosy promises of new oil deals. Or the youthful CFO applicant who
persuaded an employer of his time-served maturation, following bucket-shop
charges; the naïve advice of the audit firm partner was to “keep the kid
away from the cash” – unavailing to prevent a scandalous and catastrophic
collapse and a portfolio of lengthy prison sentences for the entire
Continued in article
Steve Albrecht (former American Accounting Association President and
Professor of Accounting at Brigham Young University) conducted interviews when
Barry Minkow was still in prison. You can read Steve's account of the ZZZZ Best
Why is there so much investment fraud?
What we have is a perfect fraud storm. In places across
the country with an appreciating housing market, low interest rates, and
consumers dissatisfied with Wall Street returns, you'll find people ripe for
"Ten Questions for Barry Minkow," CFO Staff, by CFO Magazine, January
2005, Page 20 ---
The current head of the Fraud Discovery Institute, Barry Minkow, also served
more than seven years in prison for the infamous ZZZZ Best scam.
Barry Minkow says he plans to be remembered for
more than the ZZZZ Best Co. fraud. The 38-year-old Minkow served more than
seven years in prison for the infamous 1980s scam. But he hopes that his
current efforts as head of the Fraud Discovery Institute and as pastor of
The Community Bible Church in San Diego will supersede his activities as CEO
of the carpet-cleaning company. This month his new book, Cleaning Up
(Nelson Current), debuts.
1. Currently, you are fighting the very crime
you were convicted of. Isn't that ironic?
No one failed worse than I did at such a young age. Sure, you can adjust the
dollar amounts and say it was $10 billion with Bernie Ebbers at WorldCom,
but it doesn't matter. I was CEO of a public company and I failed. [ZZZZ
Best] was a fully reporting public company with a stock that went from $12
to $80. And at 21, I got a 25-year sentence and a $26 million restitution
order, and that's [since been] turned into $1 billion in fraud uncoverings.
2. What can other white-collar criminals glean
from your mistakes?
Jeff Skilling's and Andy Fastow's best days are ahead of them...if they
admit they did wrong, do whatever they can to pay back their victims, and
use the same talents they used to defraud people to help them.
3. When you speak to executives about fraud,
what's your main message?
When I speak to executives, I wear my orange prison jumpsuit. It's
gimmicky... [but] the best way to stop fraud is to talk people out of
perpetrating it in the first place by doing two things: increasing the
perception of detection and increasing the perception of prosecution.
4. Are you surprised that the fraud techniques
you used are still out there?
It doesn't surprise me at all. Long before Enron was touring people on phony
trading floors, ZZZZ Best was touring people on buildings for restoration
jobs that we never did. Now the variation on a theme is always there, but
here's what we do: we lie about what we owe and we lie about what we earn.
5. On what do you blame the rash of corporate
fraud in recent years?
It's a mentality called right equals forward motion and wrong is anyone who
gets in my way. You see, we used to endorse character and integrity, but
today the business ethic that reigns is achievement. And whenever you
establish the worth of someone based on what they can do and not on who they
are, you have created the environment for fraud.
6. Are you skeptical of efforts, such as
Sarbanes-Oxley, to legislate ethics?
Let me tell you why this legislation is brilliant. Sarbox hit at a common
denominator of corporate fraud: bypassing systems of internal controls. I
would not have been able to perpetrate the ZZZZ Best fraud if I had not been
able to bypass the system of internal controls. And you know who are heroes
now — the internal auditors and the Public Company Accounting Oversight
Board. Unless you're a perpetrator, you don't know how good these moves are.
7. Should the sentencing guidelines for
white-collar criminals be overhauled?
Yes, and judges should have more discretion. My judge is the one who said
that I had no conscience. Two years ago, he dismissed my $26 million
restitution order, dismissed me from probation three years early, and told
me to go out and fight corporate fraud. [But] I don't care if anyone goes to
jail. The number-one thing white-collar criminals need to do is give the
money back to those hurt the most.
8. When will you be satisfied that you've repaid
your debt to society?
I won't be. Union Bank had a $7 million loan [against ZZZZ Best], and I have
a long way to go. But I haven't missed a payment in nine years. They've
gotten over $100,000 this year alone.
9. Why is there so much investment fraud?
What we have is a perfect fraud storm. In places across the country with an
appreciating housing market, low interest rates, and consumers dissatisfied
with Wall Street returns, you'll find people ripe for [perpetrators].
10. What do you say to those who doubt your
conversion to the straight and narrow?
There's this great phrase in the Bible: "When the man's ways please the
Lord, he makes even his enemies be at peace with him." The biggest critics
of Barry Minkow should be law enforcement. They absolutely know if someone
is a fake or real. But they've been my biggest supporters.
Read more about Barry Minkow and the infamous ZZZZ Best accounting fraud at
Financial Accounting by W. Steve Albrecht, Earl K. Stice, James D. Stice
About those nondisclosure agreements in journal subscription contracts
"Cornell U. Library Takes a Stand With Journal Vendors: Prices Will Be Made
Public," by Jennifer Howard, Chronicle of Higher Education, March
24, 2011 ---
Librarians have long complained about the
nondisclosure agreements, or NDA's, that some publishers and vendors require
them to sign, making it difficult to share information about how much they
pay to subscribe to journal databases and other scholarly material. Some
state universities' libraries have been able to reveal licensing terms
anyway because their institutions are subject to sunshine laws. Now one
major private institution, Cornell University, has publicly declared it's
had enough of confidentiality agreements, too.
"To promote openness and fairness among libraries
licensing scholarly resources, Cornell University Library will not enter
into vendor contracts that require nondisclosure of pricing information or
other information that does not constitute a trade secret," the library said
statement posted on
its Web site. "The more that libraries are able to communicate with one
another about vendor offers, the better they are able to weigh the costs and
benefits of any individual offer. An open market will result in better
Anne R. Kenney, Cornell's university librarian,
said that with purchasing decisions under close scrutiny, it felt like the
right moment to take a stand. Enough major publishers have agreed to drop
nondisclosure clauses "that it was time to bite the bullet and make that a
principle moving forward," she said. "Publishers are beginning to get it."
At the end of its statement, the Cornell library
listed some of the publishers that do not request confidentiality clauses
when they negotiate licenses. They include the American Physical Society,
the American Chemical Society, Cambridge University Press, EBSCO, Elsevier,
Oxford University Press, ProQuest, Sage, Taylor & Francis, and Wiley. (If a
publisher does not appear on the list, that doesn't necessarily mean it
requires NDA's, just that it hasn't been in recent contract negotiations
with Cornell's library.)
Ms. Kenney said that Cornell is joining "a
groundswell among academic libraries to start to routinely ask for the
removal of NDA's." In June 2009, the Association of Research Libraries urged
its members to steer clear of
"Part of our rationale in going public with this is
to make evident that private institutions are also starting to feel that
this is not a good way of doing business," Ms. Kenney said.
Support for the
Several librarians at other universities said their
institutions had taken positions similar to Cornell's, even if they haven't
publicly posted their policy on NDA's. "Yes, we have taken a similar
approach for the past year," said Winston Tabb, the dean of university
libraries and museums at the Johns Hopkins University. He wrote in an e-mail
that "we believe that transparency is appropriate for libraries generally;
and in particular that we should not agree to withhold information about how
we are spending an increasingly huge—and ever-growing—percentage of our
stretched library budgets."
Continued in article
Bob Jensen's threads on prestigious journal rip offs of college libraries
What absurd government-subsidized "electric" heavy-weight car will go a "paltry"
25 miles before the low-mileage, premium-fuel big gas engine kicks in?
"Chevy Volt: The Car From Atlas Shrugged Motors," by Patrick
Michaels, Forbes, March 16, 2011 ---
The Chevrolet Volt is beginning to look like it was
manufactured by Atlas
Shrugged Motors, where (according to Ayn Rand)
the government mandates everything politically correct, rewards its cronies
and produces junk steel.
This is the car that subsidies built. General
Motors lobbied for a $7,500 tax refund for all buyers, under the shaky (if
not false) promise that it was producing the first all-electric
At least that's what we were once told. Sitting in
a Volt that would not start at the 2010 Detroit Auto Show, a GM engineer
swore to me that the internal combustion engine in the machine only served
as a generator, kicking in when the overnight-charged lithium-ion batteries
began to run down. GM has continually revised downward its estimates of how
far the machine would go before the gas engine fired, and now says 25 to 50
It turns out that the premium-fuel fired engine
does drive the wheels--when the battery is very low or when the vehicle is
at most freeway speeds. So the Volt really isn't a pure electric car after
all. I'm sure that the people who designed the car knew how it ran, and so
did their managers.
Why then the need to keep this so quiet? It's
doubtful that GM would have gotten such a subsidy if it had been revealed
that the car would do much of its freeway cruising with a gas engine
powering the wheels. While the Volt is more complicated than the Prius, and
has a longer battery-only range, a hybrid is a hybrid, and the Prius no
longer qualifies for a tax credit.
n other words, GM was desperate for customers for
what they perceived would be an unpopular vehicle before one even hit the
road. It had hoped to lure more if buyers subtracted the $7,500 from the
$41,000 sticker price. Instead, as Consumer Reports found out, the car was
very pricey. The version they tested cost $43,700 plus a $5,000 dealer
markup ("Don't worry," I can hear the salesperson saying, "you'll get more
than that back in your tax credit!"), or a whopping $48,700 minus the
This is one reason that Volt sales are anemic: 326
in December, 321 in January, and 281 in February. GM announced a production
run of 100,000 in the first two years. Who is going to buy all these cars?
Another reason they aren't exactly flying off the
lots is because, well, they have some problems. In a telling attempt to
preserve battery power, the heater is exceedingly weak. Consumer Reports
averaged a paltry 25 miles of electric-only running, in part because it was
testing in cold Connecticut. (My engineer at the Auto Show said cold weather
would have little effect.)
It will be interesting to see what the range is on
a hot, traffic-jammed summer day, when the air conditioner will really tax
the batteries. When the gas engine came on, Consumer Reports got about 30
miles to the gallon of premium fuel; which, in terms of additional cost of
high-test gas, drives the effective mileage closer to 27 mpg. A conventional
Honda ( HMC - news - people ) Accord, which seats 5 (instead of the Volt's
4), gets 34 mpg on the highway, and costs less than half of what CR paid,
even with the tax break.
Continued in article
Keep in mind that those 25 miles of all-electric driving are not free. In most
instances the expensive batteries are powered by polluting hydrocarbon electric
plants that don't charge electric cars for free. And in some instances, drivers
will have to take out second mortgages on their homes in order to replace the
expensive Volt batteries after five years of frustration filling their tanks at
From Huffington Post
The most creative and manipulative accountants in the public sector would not
have used adopted the ploys used by governmental accountants and teachers'
unions to hide horrible performance?
"[R]eally, when you get down to it, the guys at
Enron never would have done this.
Remedying state budget crises will take better
accounting, better tools, and more respect for leaders who step up to address
these problems, Gates argued. "We need to reward politicians," he said.
"Whenever they say there are these long-term problems, we can't say, 'Oh, you're
the messenger with bad news? We just shot you.'"
"Bill Gates On States' Accounting: 'The Guys At Enron Never Would Have Done
This'." by Bianca Boscar, Huffington Post, March 3. 2011 ---
During a second appearance onstage at the annual
TED conference, Bill Gates spoke out against worsening state budget deficits
caused by accounting "tricks" he said would make Enron's former executives
The Microsoft co-founder and philanthropist said
state budgets have received a puzzling lack of scrutiny and have been
"riddled with gimmicks" aimed at deferring or disguising the true costs of
public employees' health care and pension obligations, citing California's
ongoing budget crisis as an example of creative deficit spending and the
subsequent cuts to education spending as an unacceptable cost.
"[R]eally, when you get down to it, the guys at
Enron never would have done this. This is so blatant, so extreme," Gates
said of state governments' accounting practices generally. "Is anyone paying
attention to some of the things these guys do? They borrow money -- they're
not supposed to, but they figure out a way -- they make you pay more in
withholding to help their cashflow out, they sell off the assets, they defer
the payments, they sell off the revenues from tobacco."
Gates argued that government accounting practices
should be more like private accounting. "The amount of IQ and good numeric
analysis both inside Google and Microsoft and outside ... really is quite
phenomenal. Everybody has an opinion. There's great feedback and the numbers
are used to make the decision," he said. "If you go over to the education
spending and health care spending ... you don't have that type of
involvement on a number that's more important in terms of equity and in
terms of learning."
The former Microsoft chief executive, now the
co-chair of the Bill & Melinda Gates Foundation, said youth and education
programs stand to lose the most as a result of the gaping holes in state
"It really is the young versus the old to some
degree. If you don't solve what you're doing in health care, you're going to
be deinvesting in the young," Gates said. "With the kind of cuts we're
talking about, it will be far, far harder to get these incentives for
excellence or to move over to use technology in the new way."
Remedying state budget crises will take better
accounting, better tools, and more respect for leaders who step up to
address these problems, Gates argued. "We need to reward politicians," he
said. "Whenever they say there are these long-term problems, we can't say,
'Oh, you're the messenger with bad news? We just shot you.'"
The bottom line, according to Gates: "We need to
care about state budgets because they are critical for our kids and our
Get the latest updates from TED
Take Home 1
Bill Gates claims that good teachers are the most important ingredient of
learning in schools (although I don't think he underestimates the even greater
importance of the home environment). He therefore recommends both increasing
class sizes of good teachers and rewarding them accordingly for the added effort
needed to handle larger classes. Bob Jensen conditionally supports this if the
good teachers get the added support needed such as multiple teachers aids and
Take Home 2
Get the bad teachers out of the system and, at a minimum, stop rewarding them
with automatic raises based on seniority alone. Bob Jensen thinks that
protectionism of bad teachers or uncaring teachers or absentee teachers is
probably the most harmful program of teachers' unions when coupled with
protectionist game playing by unions to protect bad schools along with bad
Take Home 3
Bill Gates claims it has never been demonstrated that advanced degrees in
education that are automatically rewarded with lifetime pay raises are
instrumental in improving teaching and learning. Bob Jensen agrees. I've
witnessed to many masters programs in education that are tantamount to summer
vacations for teachers.
Bob Jensen's threads on the controversies of higher education ---
Bob Jensen's threads on the horrid state of governmental accounting are at
On the Dark Side
For nearly two decades I've updated a Web document called "The Dark Side" in
which I post things that worry me about advances in education and communication
Business Week now has a very long cover story that fits right into "The Dark
Side." I don't consider myself a prude or a religious nut. But this trend in
networking most certainly discourages me about how technology sometimes eats
away at morality and good name of technology. This is yet another dark side
tidbit on the evils of technology that goes along with ID theft, malware
spreading, Internet frauds, porn, plagiarism, malicious hacking, and the like. I
was a bit surprised to find this article in Business Week rather than
Newsweek or Time Magazine.
The infidelity economy may be "alive, well, and profitable." But so is porn!
Those of you teaching about advances in social networking should also cover
the emerging dark sides of social networking.
"Cheating, Incorporated: At Ashley Madison's website for "dating,"
the infidelity economy is alive, well, and profitable," by Sheelah Kolhatkar
, Business Week, February 10, 2011 ---
Do you want to have an affair?
After hearing an ad on Howard Stern's radio show or
seeing a schlocky commercial on late-night TV, you might find yourself on
AshleyMadison.com—the premier "dating" website for aspiring adulterers. Type
in the URL, and as the page loads a gauzy violet backdrop appears with a
fuzzy image of a half-dressed couple going at it beyond a hotel doorway.
"Join FREE & change your life today. Guaranteed!"
Setting up a profile costs nothing and takes about
12 seconds. First you check off your availability status: "attached male
seeking females," "attached female seeking males," or, even though the
concept of the site is that all users are in relationships and therefore
equally invested in secrecy, "single female seeking males." Next you're
asked for location, date of birth, height and weight, and whether you're
looking for something "short term," "long term," "Cyber affair/Erotic Chat,"
"Whatever Excites Me," and so on. If you're like me, you choose a handle
based on the cupcake you most recently ate—"redvelvet2"—and then shave a few
years and pounds off your numbers.
Once you provide an e-mail address that your spouse
would presumably never have access to, you're thrust into Ashley Madison's
low-tech pink and purple interface. And then, if you're a woman, the
Continued in article
February 12, 2011 reply from Francine McKenna
Maybe you forgot it was
that terrible Ashley Madison.com site, the one that advertises on CNBC
and wanted to advertise on the Superbowl that lured the poor Ernst &
Young partner into a debauched life of inside trading and illicit love
Bad, bad internets...
In the fall of 2004, a fortysomething investment
banker named Donna Murdoch logged into Ashley Madison, the discreet
dating website married people visit "when divorce is not an option," and
introduced herself to James Gansman, a partner at Ernst & Young in New
York. The two struck up a relationship, meeting occasionally in hotels
in Philly, New York, and California, and talking on the phone about
their lives: James told Donna about how he was kicking ass at work,
Donna told James about how she was struggling with her subprime mortgage.
Eventually the two settled into a
comfortable day-to-day routine in their respective offices in New
York and Philadelphia, staring at the same Yahoo Finance screen.
Sweet. Bill and Melinda Gates used to do kind of
the same thing when they were long-distance dating. They'd see the same
movies in different places and then talk about them on the phone. We
just though we'd mention that, because that's the kind of information we
have trapped inside our brains, and we hope that by releasing it we can
make room for other things. Anyway, Donna and James's relationship did not go
the way of Bill and Melinda's.
Eventually, their conversations about
business grew more specific.
Mr. Gansman led Ms. Murdoch in a
guessing game about which deals he was working on, she said. "The
game was that I wouldn't be looking and he would give me hints: The
market cap of two billion or market cap of 400 billion, and here's
what they do, and he'd read it to me, and ultimately make sure I
guessed," Ms. Murdoch testified. Before long, the guessing game fell
away. Mr. Gansman told her more directly about upcoming deals of
Ernst clients, she said.
She made $400, 000 off the deal, and the SEC
noticed. He made nothing, and now he's going to jail. The end.
Insider Affair: An SEC Trial of the Heart [WSJ
February 12, 2011 reply from Jagdish Gangolly
The forensic practices at the Big 4 are WAY ahead
of the accounting academia in using the technology to cover the dark side of
social networking in e-discovery. We in the accounting academia have been
too busy regressing to take note.
I know of at least two who used it extensively in
fraud examination as far back as 2008. They demonstrated its use to me while
I was designing our fraud examination course.
One commercial product that is popular is attenex.
Bob Jensen's threads on social networking are at
Bob Jensen's threads on The Dark Side ---
Bob Jensen's threads on Education Technology ---
"Washington’s Financial Disaster," by Frank Partnoy, The New York
Times, January 29, 2011 ---
THE long-awaited Financial Crisis Inquiry
Commission report, finally published on Thursday, was supposed to be the
economic equivalent of the 9/11 commission report. But instead of a lucid
narrative explaining what happened when the economy imploded in 2008, why,
and who was to blame, the report is a confusing and contradictory mess, part
rehash, part mishmash, as impenetrable as the collateralized debt
obligations at the core of the crisis.
The main reason so much time, money and ink were
wasted — politics — is apparent just from eyeballing the report, or really
the three reports. There is a 410-page volume signed by the commission’s six
Democrats, a leaner 10-pronged dissent from three of the four Republicans,
and a nearly 100-page dissent-from-the-dissent filed by Peter J. Wallison, a
fellow at the American Enterprise Institute. The primary volume contains
familiar vignettes on topics like deregulation, excess pay and poor risk
management, and is infused with populist rhetoric and an anti-Wall Street
tone. The dissent, which explores such root causes as the housing bubble and
excess debt, is less lively. And then there is Mr. Wallison’s screed against
the government’s subsidizing of mortgage loans.
These documents resemble not an investigative
trilogy but a left-leaning essay collection, a right-leaning PowerPoint
presentation and a colorful far-right magazine. And the confusion only
continued during a press conference on Thursday in which the commissioners
had little to show and nothing to tell. There was certainly no Richard
Feynman dipping an O ring in ice water to show how the space shuttle
Challenger went down.
That we ended up with a political split is not
entirely surprising, given the structure and composition of the commission.
Congress shackled it by requiring bipartisan approval for subpoenas, yet
also appointed strongly partisan figures. It was only a matter of time
before the group fractured. When Republicans proposed removing the term
“Wall Street” from the report, saying it was too pejorative and imprecise,
the peace ended. And the public is still without a full factual account.
For example, most experts say credit ratings and
derivatives were central to the crisis. Yet on these issues, the reports are
like three blind men feeling different parts of an elephant. The Democrats
focused on the credit rating agencies’ conflicts of interest; the
Republicans blamed investors for not looking beyond ratings. The Democrats
stressed the dangers of deregulated shadow markets; the Republicans blamed
contagion, the risk that the failure of one derivatives counterparty could
cause the other banks to topple. Mr. Wallison played down both topics. None
of these ideas is new. All are incomplete.
Another problem was the commission’s sprawling,
ambiguous mission. Congress required that it study 22 topics, but
appropriated just $8 million for the job. The pressure to cover this wide
turf was intense and led to infighting and resignations. The 19 hearings
themselves were unfocused, more theater than investigation.
In the end, the commission was the opposite of
Ferdinand Pecora’s famous Congressional investigation in 1933. Pecora’s
10-day inquisition of banking leaders was supposed to be this commission’s
exemplar. But Pecora, a former assistant district attorney from New York,
was backed by new evidence of widespread fraud and insider dealings,
shocking documents that the public had never seen or imagined. His fierce
cross-examination of Charles E. Mitchell, the head of National City Bank,
Citigroup’s predecessor, put a face on the crisis.
This commission’s investigation was spiritless and
sometimes plain wrong. Richard Fuld, the former head of Lehman Brothers, was
thrown softballs, like “Can you talk a bit about the risk management
practices at Lehman Brothers, and why you didn’t see this coming?” Other
bankers were scolded, as when Phil Angelides, the commission’s chairman,
admonished Lloyd Blankfein, the chief executive of Goldman Sachs, for
practices akin to “selling a car with faulty brakes and then buying an
insurance policy on the buyer of those cars.” But he couldn’t back up this
rebuke with new evidence.
The report then oversteps the facts in its
demonization of Goldman, claiming that Goldman “retained” $2.9 billion of
the A.I.G. bailout money as “proprietary trades.” Few dispute that Goldman,
on behalf of its clients, took both sides of trades and benefited from the
A.I.G. bailout. But a Goldman spokesman told me that the report’s assertion
was false and that these trades were neither proprietary nor a windfall. The
commission’s staff apparently didn’t consider Goldman’s losing trades with
other clients, because they were focused only on deals with A.I.G. If they
wanted to tar Mr. Blankfein, they should have gotten their facts right.
Lawmakers would have been wiser to listen to
Senator Richard Shelby of Alabama, who in early 2009 proposed a bipartisan
investigation by the banking committee. That way seasoned prosecutors could
have issued subpoenas, cross-examined witnesses and developed cases.
Instead, a few months later, Congress opted for this commission, the last
act of which was to coyly recommend a few cases to prosecutors, who already
have been accumulating evidence the commissioners have never seen.
There is still hope. Few people remember that the
early investigations of the 1929 crash also failed due to political battles
and ambiguous missions. Ferdinand Pecora was Congress’s fourth chief
counsel, not its first, and he did not complete his work until five years
after the crisis. Congress should try again.
Frank Partnoy is a law professor at the University of San Diego and the
author of “The Match King: Ivar Kreuger, the Financial Genius Behind a
Century of Wall Street Scandals.”
Professor Partnoy is one of my all-time fraud fighting heroes. He was at one
time an insider in marketing Wall Street financial instrument derivatives
products and, while he was one of the bad guys, became conscience-stricken about
how the bad guys work. Although his many books are somewhat repetitive, his
books are among the best in exposing how the Wall Street investment banks are
rotten to the core.
Frank Partnoy has been a a strong advocate of regulation of the derivatives
markets even before Enron's energy trading scams came to light. His testimony
before the U.S. Senate about Enron's infamous Footnote 16 ---
I quote Professor Partnoy's books frequently in my Timeline of Derivative
Financial Instruments Frauds ---