Accounting Scandal Updates and Other
Fraud Between April 1 and June 30, 2008
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 threads on fraud are at
What to do if you suspect identity theft ---
Identity Theft Resource Center ---
Why doesn't some of the information below appear prominently on Hannaford's
Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.
Hannaford is a large New England-based supermarket chain with a good
reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers
at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on
credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to
overlook this breach entirely ---
My opinion of Hannaford dropped to zero because there is no help on the
company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford
(even recorded messages might help)
Hannaford's is going to belatedly get a firewall and improve encryption of
networked credit card information (the company remains tight lipped regarding
whether it followed encryption rules up to now) ---
And when the
Vice President of Marketing gets quoted in
the press talking about the security breach, it means that
there is no CIO (Chief Information Officer) at the company.
It means their network was designed haphazardly with only a
minimal thought to security. What, they couldn’t get a
quote from the President of Marketing? How
does the dairy stocker in store 413 feel about the breach?
He probably knows as much about network security as the
All of this
means that as the days go on, you will see more and more
headlines talking about this breach being much worse than
originally thought. The number of fraud cases will climb
precipitously… and no one will be fired from Hannaford.
If you shop
there and have used a credit card, get a copy of your credit
By law, you
get one free credit report per year. You can contact them
Bob Jensen's threads on computing and networking security are at
What to do if you suspect identity theft ---
report (pdf) from
Transparency International (TI)
is a timely reminder of the failure of western governments to tackle corrupt
activities, which are primarily designed to secure unfair advantage.
the renowned international financier, once said that "international business is
generally the main source of corruption". Behind the facade of mission and
corporate social responsibility statements, companies and their executives seem
only too willing to indulge in bribery, corruption and a variety of antisocial
activities that affect the life chances of millions of citizens. The
government's inertia provides positive encouragement.
Prem Sikka, The Guardian,
June 27, 2008 ---
Ending a bitter public
fight over whether former New York Stock Exchange Chief Executive Dick Grasso
was paid too much, a state appeals court ruled that Mr. Grasso can keep every
penny collected from his $187.5 million multiyear compensation package. The
3-to-1 ruling by the Appellate Division of the New York State Supreme Court was
a vindication for the relentless Mr. Grasso, who was ousted after details of his
lucrative pay were revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall
Street Journal, July 2, 2008; Page A1 ---
The SEC's Module on Stock Options Compensation and Options Backdating
"S.E.C. Fines Marvell $10 Million," The New York Times, May 9,
The Marvell Technology Group, a maker of
semiconductors, agreed on Thursday to pay a $10 million civil fine to settle
regulators’ accusations of improper backdating of stock options.
The Securities and Exchange Commission announced
the settlement with the Silicon Valley company, which it said failed to
publicly disclose the employee stock option awards as expenses and backdated
the options to dates with lower stock prices. Marvell neither admitted nor
denied wrongdoing but did agree to refrain from future violations of the
The backdating scheme allowed the company to
overstate its profit by $362 million from fiscal years 2000 through 2006,
the S.E.C. said in its civil lawsuit.
Continued in article
Bob Jensen's Fraud Updates ---
Bob Jensen's threads on accounting for stock options are at
Enron Recovery Rate Hits 50 Percent
Enron Creditors Recovery Corp. said Monday that with
the latest distributions, creditors of the former Enron Corp. had received 50.3
cents on the dollar and creditors of Enron North America Corp. had gotten back
50 cents on the dollar. Both figures excluded gains, interest and dividends.
John J. Ray III, president and chairman of the recovery corporation, said
creditors had received "significantly more than originally was anticipated under
the plan." The recovery corporation said it made a distribution Monday totaling
about $4.17 billion to holders of unsecured and guaranty claims and distributed
$1.87 billion on May 13 to newly allowed unsecured and guaranty claims that
resulted from a settlement with Citigroup.
SmartPros, June 3, 2008 ---
Bob Jensen's threads on the Enron/Worldcom/Andersen scandal are at
Another Backdating Fine
From The Wall Street Journal Accounting Weekly Review on June 13, 2008
SEC, Analog Settle Case
Scannell and John Hechinger
The Wall Street Journal
May 31, 2008
Click here to view the full article on WSJ.com
Compensation, Financial Accounting, Financial Reporting, SEC,
Securities and Exchange Commission, Stock Options
Devices, Inc. has agreed to pay $3 million to settle charges
that it backdated stock options grants, "...but regulators
didn't charge the company with failing to disclose it issued
options before announcing good news," a practice known as
spring-loading for its design to generate profits on the options
for grantees. "The decision likely means the SEC won't charge
other companies with spring-loading....Paul Atkins, a
Republican, in a July 2006 speech defended the practice as a
legitimate and low-cost way for boards to efficiently compensate
APPLICATION: Teaching the implications of accounting for
stock options is just one aspect of using this case. Students
also may debate the pros and cons of many practices in granting
1. (Introductory) Summarize the accounting and
disclosure requirements for stock options. Refer to
authoritative accounting literature and include a description of
dates associated with stock option grants sufficient to discuss
the issues in the article.
2. (Introductory) What does it mean to "backdate" a
stock option award?
3. (Advanced) When Analog Devices and its Chief
Executive Jerald Fishman improperly back dated three stock
option grants, "...the SEC said the company failed to subtract
the cost of these stock options--as an expense--as required
under accounting rules." Why does the practice of backdating
result in avoiding expense? Would the practice be acceptable if
the accounting for it were to show compensation expense? How
should compensation expense be calculate?
4. (Introductory) What is the practice of
spring-loading stock options?
5. (Advanced) What is the implication of the SEC's
decision not to charge Analog Devises with spring-loading its
6. (Advanced) Why do you think that Analog Devices did
not have to restate its financial results? In your answer,
define the situations in which financial restatement must be
made and explain how such information must be published.
One SEC Commissioner, Paul Atkins, argues that the practice of
spring-loading is legitimate. Others argue that such awards
amount to trading on inside information. Hold a debate with
support for each of these positions. Be sure to plan to refute
some positions attributable to an argument opposing yours.
Potential resources include the SEC web site with speeches on
this topic. You may find the speech made by Commissioner Atkins
in July 2006 and referred to in the WSJ article on the SEC web
site at http://www.sec.gov/news/speech/2006/spch070606psa.htm
Reviewed By: Judy Beckman, University of Rhode Island
Bob Jensen's threads on options backdating scandals are at
A Man from Fidelity Who Had No Fidelity
The Securities and Exchange Commission accused a former
Fidelity Investments stock trader and a broker of profiting illegally by trading
on confidential information about orders to buy shares of Covad Communications
Group Inc. David Donovan, 45 years old, of Marblehead, Mass., was forced to
resign in March 2005 after Fidelity learned of the allegedly illegal trading,
which occurred in a three-month period in 2003, according to the SEC's
complaint. According to a civil lawsuit filed by the SEC on Wednesday, Mr.
Donovan obtained confidential information from Fidelity's order database that
Fidelity was buying and intended to continue buying a big chunk of Covad stock
for its advisory clients, a move which would likely drive up the price of the
San Jose, Calif., technology company.
Judith Burns, The Wall Street Journal, April 18, 2008 ---
Bob Jensen's fraud updates are at
Bob Jensen's "Rotten to the Core" threads are at
Is it really true that "lawyer ethics" is an oxymoron?
Milberg Loves to Sue CPA Firms and Their Corporate Clients
"Milberg Settles With Government: Law Firm Admits It Paid Kickbacks;
Fine of $75 Million," by Ashby Jones and Nathan Koppel, The Wall Street
Journal, June 17, 2008; Page B2 ---
The Vultures Feeding on Insolvency
"Insolvent abuse: Insolvency practitioners often charge huge fees,
leaving less money for the creditors. It's time this industry was properly
regulated," by Prem Sikka, The Guardian, April 14, 2008 ---
The current economic turmoil is expected to lead to
a steep rise in business and personal bankruptcies. Millions of innocent
people will lose their jobs, homes, savings, pensions and investments. The
bad news for millions is a boon for corporate undertakers, also known as
insolvency practitioners, who are poorly regulated, lack effective public
accountability and indulge in predatory practices.
Insolvency Act 1986, all UK personal and business
insolvencies must be handled by just 1,600
belonging to law and accountancy trade associations. They are regulated by
no fewer than seven self-interested groups rather than by any independent
regulator, leaving plenty of scope for duplication, waste and buck-passing.
Over half of all insolvency practitioners work for
big four accountancy firms. Within accountancy
firms, insolvency work is treated as a profit centre and employees are under
constant pressure to generate new business. Capitalism provides its own
victims, but profitable opportunities are also manufactured by
MPs have highlighted a longstanding insolvency
tactic. As many companies have seasonal cash flows
they rely upon bank loans and overdrafts to provide working capital. Unlike
banks in many other countries, UK banks do not become closely involved in
the oversight of the client companies. Instead, they periodically send in
accountants to report on the financial health of the borrowing company. If
accountants say all is well, they receive a one-off fee. If accountants say
all is not well and then persuade the bank to nominate them as the
administrators, receivers or liquidators, they can collect fees for many
years to come. Many a company has been
unnecessarily (pdf) put into liquidation and
thousands of jobs have been lost through such ploys. There is a clear
conflict of interests and in the words of the MP Austin Mitchell, it is "a
scandal that should have been dealt with". Major
accountancy firms charge up to £600 an hour for insolvency work.
Most insolvency practitioners are appointed by
secured creditors, usually banks. Generally, they owe a duty of care only to
the party appointing them and not to any other stakeholder. A creditors'
committee is supposed to supervise the work of liquidators, but most
creditors are too busy searching for other business and thus cannot spare
the time to supervise the practitioners. In practice, the creditors'
committee is dominated by the insolvency practitioner and the secured
Insolvency practitioners have the first claim on
the assets and cash of the bankrupt business or individuals. They need to be
paid before anyone else. Inevitably, only asset-rich companies become
bankrupt otherwise insolvency practitioners will not be able to collect
their fees. As fees paid to insolvency practitioners are related to the time
taken to finalise insolvency, they have economic incentives to prolong the
Following frauds by the late Robert Maxwell,
Maxwell Communications Corporation entered
receivership and then liquidation in December 1991. The insolvency has not
yet been finalised but some £92m in fees has been collected by accountants
and lawyers. One tranche of Maxwell assets was sold for £1,672,500, but
insolvency practitioners charged fees of £1,628,572, leaving £43,928 for
The Bank of Credit and Commerce International
went into liquidation in July 1991 and the UK
liquidators and their advisers have so far charged £282m in fees. The final
bill may well be around £500m. The BCCI liquidator also paid £75.3m to Bank
of England to cover the costs of a 12 year legal battle. The case was
described by the judge as built "not even on sand
but rather on air" and as "a grotesque and cynical
operation". Courts, the furniture chain, went into
administration in November 2004 and by January 2008, its administrators had
£23.7m in fees, charging up £600 an hour for its
labour. In October 2006,
Lexi Holdings, a property finance firm, went into
administration and by November 2007, the insolvency practitioners had raised
£12.6m through the sale of assets, but charged over £5m in fees. In November
2006, Farepak, the Christmas hamper business, collapsed and savers have been
told that they might be able to recover five pence in the pound, but by
September 2007, insolvency practitioners and their advisers racked up fees
of over £1.2m. The longevity of liquidation processes reduces the amounts
available to creditors.
In January 2008, a
Minister told parliament that 4,921 company
administrations or liquidations began between 10 and fifteen years ago and
had still not been finalised. Some 12,571 began more than 15 years ago but
had still not been finalised. Yet ever keen to appease big accountancy
firms, ministers have not launched an investigation into the efficiency,
accountability and performance of the insolvency industry.
The insolvency industry is out of control. It lacks
independent regulation, independent complaints investigation procedures and
an independent ombudsman to adjudicate on disputes between practitioners and
other stakeholders. The practitioners owe a duty of care to all stakeholders
and must be forced to make public all relevant information in their
possession. One hopes that with the deepening economic gloom parliamentary
committees will examine the role of this industry in the loss of jobs, homes
Bob Jensen's Rotten to the Core threads are at
She's In the Doghouse Now: Professors Who Cheat
A former assistant professor of accounting at the
University of Tampa has pleaded guilty to stealing $120,000 from the American
She was accused of writing 71 Spaniel Club checks to herself between July 2006
and March 2007 to feed an Internet gambling addiction. Instead of doing jail
time, Lippincott, now a part-time accounting professor at Nova Southeastern
University in Ft. lauderdale, FL, was sentenced to 15 years' probation. During
that time, she is required to pay $500 a month until June 2009 and $1,000 a
month after that until her probation ends, the Tampa Tribune reported. Some of
the money will go directly to the spaniel club; the rest will be used to repay
the club's insurance carrier.
AccounitngWeb, May 16, 2008 ---
Bob Jensen's fraud updates are at
She's Joined by Another Dog: Professors Who Cheat
This link appeared in the Financial Rounds blog on May 22, 2008 ---
"F**k I Hate Plagiarizers," by Jacqueline Passey, May 7, 2008 ---
So, I finished my marketing project slides and have
begun work on finishing the accounting project (an analysis of The Gap's
It turns out that one of my accounting project
group members --
you guessed it -- plagiarized her contribution to
The other group member and I initially were
suspicious because of the three pages she sent us, the third page was
written in the first person plural and thus was obviously taken from the
company's annual report. However, the plagiarizer wrote in her original
email, "The financial information is in draft form right now," so we decided
to give her the benefit of the doubt that perhaps this part was just her
research notes and she planned to rewrite and properly cite the information.
So, my reply to her email included the question,
"Is what you sent us so far a draft that you wrote or is it notes copied
from somewhere else or what?"
She replied, "the first 2 pages i wrote and the
bottom is info i found."
OK, so far, so good. She was not claiming to have
written the part that she very obviously hadn't written. Since I had the
much more pressing marketing project to deal with and the accounting project
isn't due until the 15th, I put off doing anything else with it for a week.
Well, I just started working on the accounting
project again, and since I still don't trust her, I started plugging phrases
into Google. It turns out that the entire two pages she claims to have
written herself are ripped off from Hoover's:
The Gap Company Description: She copied this
paragraph word-for-word with only the following minor changes:
- replaced "ubiquitous" with "ever-present"
- deleted the reference to poplin
- updated 3,100 to 3,150
- deleted the word "iconic"
- deleted the word "budgeteer"
- deleted the fragment "each also has its own
So of the 112 words in the paragraph, she changed
only 13 of them. This does not count as adequate paraphrasing.
Industry Overview: Clothing Stores: She copied the
"Industry Overview" and "Competitive Landscape" paragraphs word-for-word
with NO changes.
Industry Forecast: She copied the opening sentence
of the "Industry Forecast" section word-for-word with NO changes.
I'm not sure where she got her "Comparison to
Industry & Market" and "Top Competitors" tables from, but the weird
formatting strongly suggests that they were not created by her in Word (it's
a Word document) but were copy/pasted off a website as well.
She does cite the source she ripped off, "Hoover's
Handbook of World Business 2008", at the end of her document, but in no way
does changing only 13 out of 286 words (thus copying 95% of the source
word-for-word) count as "writing" something.
I am so fucking pissed. Because *I* would have
gotten an F on the project too (the professor has emphasized that plagiarism
would not be tolerated) if I'd believed her and turned in the paper with her
section left as is. This woman is not some stupid little freshman who
doesn't know better, she's on her last 12 credits of her MBA. She fucking
knows better and she decided to take the risk anyway and fuck the rest of us
over because she's too fucking lazy to ethically research and write two
I AM TURNING THE BITCH IN. I'm certain that my
other group member will support me on this and we will just complete the
project by ourselves.
Update: What really fucking sucks
is the plagiarizer is the one who picked The Gap as our paper topic. I
don't want to write a paper analyzing the fucking Gap. I don't even shop
there. I'd rather do Amazon. But the non-plagiarizer and I already have
1/3 to 1/2 a paper about The Gap so it'll take us less time to finish the
stupid thing than to start on a new company.
Update II: I heard back from the
professor: "Thank you very much for telling me this. You did the right
thing in breaking away into a separate group. There is nothing further that
you need to do." Dude, what are you doing up at 4am?
Bob Jensen's threads on Professors Who Cheat ---
Professors Who Cheat
"Charges of Insider Trading for a Wall Street Luminary," by Louise
Story, The New York Times, May 30, 2008 ---
John F. Marshall spent decades teaching at business
schools and watching his students parlay his lessons into fortunes on Wall
Street. But when he and another professor reached for some of those riches
themselves, events took a startling turn, the authorities say.
Dr. Marshall, a retired professor at St. John’s
University and a fixture on the Wall Street lecture circuit, was accused by
the Securities and Exchange Commission in March of passing inside
information about a multibillion-dollar corporate takeover to a professor at
Pace University. The Pace professor, Alan L. Tucker, made more than $1
million trading on the tips in 2007, according to the S.E.C. The Justice
Department has filed criminal charges.
The developments have stunned Dr. Marshall’s former
colleagues and students, who describe him as a meticulous scholar and a
generous, unassuming teacher. The accusations have also jolted Wall Street,
where Dr. Marshall is considered one of the wise men of financial
“I am just shocked beyond belief,” said Jennifer
Kim, a St. John’s graduate who was taught by Dr. Marshall. “If he wanted to,
he could have made money — lots of money — years ago.”
Suspicious trading has set off alarms at the S.E.C.
during the record rush of corporate takeovers in recent years. Since 2006,
the agency has filed more lawsuits related to insider trading than during
the entire decade of the 1990s.
But the usual suspects are bankers, analysts and
executives — not academicians like Dr. Marshall, the author of books like
“Financial Engineering: A Complete Guide to Financial Innovation.”
Yet, like many business school professors, Dr.
Marshall, 56, and Dr. Tucker, 47, built twin careers by hopscotching from
teaching to consulting. Dr. Marshall’s stature in the field of finance
eventually lead a board position at a fledgling electronic exchange for
stock options — a position the S.E.C. said he had used to pass illegal tips
to Dr. Tucker, a friend and business associate. The men declined to comment
for this article.
It’s a remarkable turnabout for Dr. Marshall, who
co-founded the leading professional society for practitioners of financial
engineering, the International Association of Financial Engineering, the
math-heavy discipline that revolutionized Wall Street in recent years.
Ms. Kim recalled how her former professor gave away
complex computer software to his students. Dr. Marshall helped establish a
graduate program in financial engineering at Polytechnic University in
Manhattan and fostered the explosive growth of financial derivatives. He
also became a popular lecturer at banks like Goldman Sachs, Deutsche Bank
and Merrill Lynch.
Few people on or off Wall Street moved in such
rarefied financial circles. During a long, distinguished career, Dr.
Marshall mixed with Nobel laureates like Myron S. Scholes, Fischer Black and
Franco Modigliani — whose pioneering theories transformed the world of
finance — while he himself lived modestly on Long Island.
“Everybody loves Jack Marshall” said David F.
DeRosa, president of DeRosa Research and Trading and a former Wall Street
trader. “He is like the uncle of derivatives.”
In an essay published in the 2007 book, “How I
Became a Quant,” Dr. Marshall wrote that his work on Wall Street had
informed his academic research.
“What I was seeing during the day in the Street was
growing increasingly at odds with what I saw being taught in business
schools,” Dr. Marshall wrote. “Most of academia was missing the great
transformation that was taking place in finance.”
He recruited Dr. Tucker to help edit the financial
engineering society’s journal, and together they proposed new types of
options that companies might use to protect themselves from economic
downturns. The pair also opened a small consulting firm in Port Jefferson,
Their work was notable for its real-world
applications, professional colleagues said.
“A lot of academics publish papers that have very
little to do with practical applications,” said Anthony Herbst, a retired
finance professor at the University of Texas in El Paso. “Jack Marshall
bridges the gap.”
Dr. Marshall retired from St. John’s in 2000 and
went on to help form the International Securities Exchange, the electronic
options exchange. He later became a member of its board and the chairman of
its finance and audit committee.
The trouble began in late 2006, when Eurex, a
German exchange, expressed interest in buying the I.S.E. According to the
S.E.C., Dr. Marshall tipped off Dr. Tucker about the deal, sharing insider
details of the proposed transaction through multiple phone calls.
Dr. Tucker later bought options giving him the
right to buy I.S.E. stock, as well as shares in the American exchange,
through an Ameritrade account, the S.E.C. said in its complaint. In e-mail
exchanges, Dr. Tucker referred to the scheme as “the program,” according to
the S.E.C. Dr. Marshall’s brother-in-law, Mark R. Larson, 45, bought shares
of I.S.E. stock based on the tips, S.E.C. says.
When Eurex agreed to buy I.S.E. for $67.50 a share
in 2007, the value of the I.S.E. stock and options soared, producing a
profit of $1.1 million. It is unclear if Dr. Marshall profited personally.
But the options trades set off alarms with market regulators because Dr.
Tucker was the only person buying some of the instruments just before the
Since the S.E.C. filed its complaint in March, the
men have fallen out of touch with friends and colleagues, longtime
acquaintances said. Dr. Tucker finished out the spring term teaching at Pace
but did not turn up at a recent finance conference he was scheduled to
attend in China. Dr. Marshall has resigned from the I.S.E.’s board. Recent
calls placed to his consulting firm on Long Island were unanswered.
At universities and on Wall Street, people who know
Dr. Marshall are dumbfounded.
Manuchehr Shahrokhi, a finance professor at
California State University at Fresno, said he was so surprised to hear
about the allegations that he looked up the S.E.C. complaint to
double-check. He could not reconcile the accusations with the man knew —
someone he once heard speak on ethics in the derivatives markets.
“You know, sometimes greed takes over your
knowledge and your skills and everything else. But he is not a greedy man,”
Dr. Shahrokhi said. “Really, the only conclusion I can come up with is it
must have been an accident. I do not believe that a person of his stature
would do this.”
Bob Jensen's threads on Professors Who Cheat ---
"8 Accused of Kickbacks, Fraud at Wall Street Brokerage Firms,"
SmartPros, May 23, 2008 ---
Bob Jensen's "Rotten to the Core" threads are at
Complicated Math by Design: Derivative Instruments Fraud in the 1990s and
Executive Compensation in the 21st Century
Before derivative financial instruments were well understood by buyers,
sellers of such instruments like Merrill Lynch and many other top investment
banking firms on Wall Street became fraudulent bucket shops selling derivatives
packages that were so needlessly mathematical and complicated that they
intentionally deceived buyers like pension and trust fund managers, When buyers
commenced to lose millions upon millions of dollars, the SEC commenced to
investigate one of the more serious set of scandals to ever hit wall street ---
If you want to cry and laugh at the same time watch this expert (John Grant) try
to understand a derivatives contract sold by Merrill Lynch to Orange County in
California that eventually cost the County over a billion dollars (and forced it
The video is an excerpt from a CBS Sixty Minute 1990sprogram (slow loading)
The point is that the investment banking firms in those days built in
complicated mathematics to deceive investors regarding the risk in the
investments these bankers were trying to sell in the 1990s. And it worked!
Investors lost millions.
In a similar manner in the 21st Century executives are trying to
circumvent the SEC's new compensation disclosure rules by making the
compensation contracts so complicated that nobody could comprehend what is being
"(New Math) x (SEC Rules) + Proxy=Confusion Firms Disclose Formulas Behind
Executive Pay, Leaving Many Baffled," by Phred Dvorak, The Wall Street
Journal, March 21, 2008; Page A1 ---
(but not quite as complicated as the investment banking formulas for fraud in
derivatives instruments selling)
The latest proxy statement from Applied Materials
Inc. tells exactly how the company set 2007 bonuses for top executives:
"Base Salary x Individual Target Percentage x
(Weighted Score + Total Stockholder Return Adder, if Achieved)."
Of some help may be Applied's definition of
"(Performance Measure 1 x Weight as Percentage) +
(Performance Measure 2 x Weight as Percentage)."
And so on.
As a maker of semiconductor equipment, Applied
Materials belongs to an industry of mathematical whizzes. Yet the complexity
of its proxy this year reflects a trend that extends far beyond Silicon
Valley. Even Deere & Co., the maker of tractors, has produced a proxy that
uses three formulas, four tables and a graph to illustrate the calculation
of executive bonuses.
This explosion of mathematics was sparked by the
Securities and Exchange Commission, which in 2006 began requiring more
information about how companies calculate executive pay. After the first
batch of proxies using the new rules arrived last year, the SEC told 350
companies they hadn't been specific enough.
Among those companies was Applied Materials. So
this year, it expanded by 76% the word count of its proxy's compensation
section. In all, the compensation section contains 16,245 words -- twice the
length of the U.S. Constitution and its 27 Amendments -- along with 10
formulas, 10 tables and 155 percent signs.
The result, according to some experts, is
unfathomable. "Can even the executives figure out what they have to do to
get these awards?" asks Carol Bowie, head of corporate-governance research
at RiskMetrics Group Inc., which helps investors sort through such filings.
The SEC has said that it wants disclosure to be
clear and concise, as well as comprehensive. But striking that balance is
difficult, companies say. So, many are erring on the side of detail.
"Bonus multiple x target bonus x base salary
earnings = payout," explains the new proxy from drug maker Eli Lilly & Co.,
which last year received a letter from the SEC calling its executive-pay
disclosure inadequate. Just in case that term "bonus multiple" isn't clear,
the proxy explains that it is "(0.25 x sales multiple) + (0.75 x adjusted
EPS multiple)." To find the sales and EPS multiples, investors must consult
Some firms may be throwing up their hands and
deluging the public with figures. "I know a couple of companies where the
frustration level with the SEC was so large that they said, 'Just put it all
in,'" says John A. Hill, a trustee at mutual-fund giant Putnam Funds. Mr.
Hill often chats about pay practices with officials of companies whose stock
Putnam investors own.
An SEC spokesman says it's too early to comment on
Even activist investors who pushed for more
disclosure on executive pay are scratching their heads. "There have been
some proxies when I've gone through and said, 'Wow, I have no idea what I
just read,'" says Scott Zdrazil, director of corporate governance at
union-owned Amalgamated Bank, which manages around $12 billion in
The Smell Test
Mr. Zdrazil says he uses a "smell test" to judge
whether companies are trying to obscure poor pay practices with lots of
detail, or just being wonky. "If you can clearly understand the algebra
involved, it passes," he says.
One that doesn't pass his test is software maker
Novell Inc. Its proxy tosses around such terms as "assigned weighted
quantitative performance objective achievement percentage," and describes a
two-step process for calculating executive bonuses:
First: "Bonus Funding Percentage x Weighted
Quantitative Performance Objectives Achievement x Qualitative Performance
Factor = Performance Factor."
Then: "Performance Factor x Target Bonus Percentage
x Base Salary = Recommended Bonus Amount."
Mr. Zdrazil says Novell fails to explain how
difficult it is for executives to achieve performance targets.
Asked about the formulas, Novell says it gave more
detail in response to the SEC's push and that its proxy statement complies
with SEC rules.
At first glance, the bonus formula at software
maker Adobe Systems Inc. seems straightforward: "Target Bonus x Unit
Multiplier x Individual Results."
But then comes the definition of unit multiplier.
Adobe says it is:
"Derived from aggregating the target bonus of all
participants in the Executive Bonus Plan multiplied by the funding level
determined under the funding matrix, and allocating a portion of the funding
level to each business or functional unit of Adobe based on that unit's
relative contribution to Adobe's success, and then dividing the allocated
funding level by the aggregate target bonuses of participants working within
each such unit." Got that?
After all that calculating, Adobe's top five
executives somehow received the exact same unit multiplier -- 200%. Adobe
says that was the highest possible percentage and that it reflects how well
the company performed.
Degree of Transparency
Adobe also says it "strives for a high degree of
transparency" in financial reporting, and that it added detail this year on
executive compensation "in that spirit, and in response to new SEC
Applied's bonus formula was created a decade ago by
an employee who majored in math, but the company hadn't previously included
it in its filings. General Counsel Joe Sweeney says the new compensation
discussion has won praise from investors and lawyers. Proxy adviser Glass
Lewis & Co., which says it has no financial relationship with Applied,
called the company's proxy "clear and concise."
But Applied shareholder Robert Friedman, a retired
computer programmer, isn't so sure. "This is too much," he says, munching on
a cookie and flipping through a proxy moments before the company's March 11
annual meeting. "I own about a dozen companies, and if I did this for every
For all its length, Applied's proxy doesn't reveal
some crucial information, such as the target to which the company would like
to see its market share increase. That number -- key to calculating the
CEO's bonus according to the formula -- must be kept from rivals, Mr.
Sweeney, the general counsel, says. For the same reason, the document also
excludes some information about other executives' performance goals. "I hate
to think how long the [compensation section] would have been if we had
included all the factors for all the individuals," says Mr. Sweeney.
So if some important factors remain secret, what's
the point of all the math? Mr. Sweeney says it is meant to give shareholders
a taste of the decision-making process.
Bob Jensen's threads on outrageous executive compensation are at
"Six defendants found guilty in Chicago tax fraud trial,"
AccountingWeb, May 21, 2008 ---
Six defendants were convicted Monday after
participating in a nationwide tax scheme that enabled 650 wealthy taxpayers
to cheat the government out of $60 million. Michael Vallone of Orland Park,
IL, Edward Bartoli of Clearwater, FL, Robert Hopper of Gadsden, AL, Timothy
Dunn of Chesterton, IN, William Cover of Naperville, IL, and Michael Dowd of
Glenview, IL were convicted of tax-fraud conspiracy and other charges after
the 11-week trial in U.S. District Court in Chicago.
According to the Chicago Sun Times, from 1994 to
2003, the six defendants organized, promoted, and sold domestic and
foreign/offshore trusts to clients, primarily self-employed individuals,
with the effect of diverting income into sham domestic and foreign trusts
through a now-defunct company on behalf of clients, hiding hundreds of
millions of dollars of income from the government.
The IRS uncovered the operation after engaging in
an undercover investigation code-named "Operation Trust Me." More than 30
convictions are still pending in the case with defendants in Florida,
Illinois, New York, Ohio, and West Virginia.
The six defendants in the Chicago trial were found
guilty of one count each of tax fraud conspiracy, i.e. conspiracy to defraud
the United States by impeding the IRs in the collection of tax revenue and
conspiracy to aid and assist the preparation and filing of false tax returns
on behalf of clients, in addition to being found guilty of other charges. In
addition, all six defendants were found guilty of tax fraud regarding their
own personal income tax returns.
Sentencing is expected to occur in August or