Accounting Scandal Updates and Other Fraud Between July 1 and September 30, 2008
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- 

Bob Jensen's Enron Quiz (and answers) ---

Bob Jensen's Enron Updates are at --- 

Other Documents

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 Partnoy --- 

Bob Jensen's 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 ---,,id=121259,00.html

White Collar Fraud Site ---
Note the column of links on the left.

Bob Jensen's threads on fraud are at

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---

"The odds are better in Las Vegas than on Wall Street"
This is the same fraud as the one committed by Max in the Broadway show called The Producers (watch the Bloomberg video of how the fraud works)
Max sold over 100% of the shares in his play.
A fraudulent market manipulation contributed to the Wall Street meltdown
Phantom Shares and Market Manipulation (Bloomberg News video on naked short selling) ---

FBI Corporate Fraud Chart in August 2008 ---

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 Website?
Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.

Hannaford is a large New England-based supermarket chain with a good reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to overlook this breach entirely ---
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 Marketing VP.

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

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

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

Equifax: 800-685-1111;

Experian: 888-EXPERIAN (888-397-3742);

TransUnion: 800-916-8800;

Also see

Bob Jensen's threads on computing and networking security are at

What to do if you suspect identity theft ---

Identity Theft Resource Center ---

FBI Corporate Fraud Chart in August 2008 ---

From Smart Stops of the Web, Journal of accountancy, October 2008 ---


Search no further than the AICPA’s offering of antifraud and forensic accounting resources. Click “Tools and Aids” to download Managing the Business Risk of Fraud: A Practical Guide, which outlines principles for establishing effective fraud risk management. The paper was released jointly by the AICPA, the Association of Certified Fraud Examiners and The Institute of Internal Auditors (see “Highlights,” page 16). The site also offers fraud detection and prevention tips, including an “Indicia of Fraud” checklist and case studies. There’s also information on the newly created Certified in Financial Forensics (CFF) credential (see “News Digest,” Aug. 08, page 30) and upcoming Web seminars.

Think of the most outrageous business fraud scheme you’ve ever heard of— you’re likely to find it, plus hundreds of other white-collar crime cases—at this site from the FBI. Look under “Don’t Be Cheated” for a fraud awareness test or click on “Know Your Frauds” for access to the FBI’s analysis of common fraud schemes, including the prime bank note scheme, telemarketing fraud and up-and-coming Internet scams. CPAs and financial professionals can access details on options backdating, securities scams and investment fraud under “Interesting Cases” or learn about the FBI’s major programs involving corporate, hedge fund and bankruptcy fraud.

Jim Kaplan, a government auditor and author of The Auditor’s Guide to Internet Resources, 2nd Edition, hosts this Internet portal for auditors, which provides fraud policies, procedures, codes of ethics and articles on a range of topics, including internal auditing, fraud risk mitigation and preventing embezzlement. The site also features a newsfeed, piping in daily fraud news from around the world..

Bob Jensen's threads on fraud are at


Why did Bob Jensen cut up his "free airlines mileage" credit cards?

Using such cards is now a bad deal relative to cards that provide cash discounts on nearly all purchases. In the past this added mileage from credit cards was a good deal and helped Erika and I get a number of free trips to Europe and elsewhere. Now these airline-miles credit cards are more of a scam, especially cards that charge an annual fee. The problem is the increased barriers airlines are putting up for redemption of the miles, especially the almost certain likelihood that one or more legs of your planned itinerary will not have free seating available.

My advice:  Get a free credit card that offers cash discounts on almost all purchases. Shop around! There are some good deals in this regard and bad deals for airline miles. The airlines now have so many billions in outstanding liabilities for free miles that they are increasingly being creative on how to avoid providing free redemptions. Also the huge reduction in the numbers of flights scheduled by most all airlines is another bummer.

About the only good deal remaining for free miles, at least for me, is the Southwest Airlines free ticket deal, and you don't need any particular credit card to get this deal. Southwest Airlines, to my knowledge, is the only major airline to consistently earn a profit year-to-year. There are a lot of reasons why!

"Gauging the Worth of a Frequent-Flier Credit Card," by Ron Lieber, The New York Times, August 16, 2008 --- Click Here

One after the other in recent weeks, airlines have altered their frequent-flier mile programs, adding fees, taking away bonuses and raising the number of miles you need for some free tickets.

But lost in fliers’ frustration over the changes is this: It may make more sense to change the credit card you use, not the airline you fly.

Consumers are currently holding about 45 million credit cards issued by United States banks that reward their users with frequent-flier miles, according to The Nilson Report, a payments systems newsletter. That number has held steady for three years.

This may be the year that number starts dropping. After a certain point, it will no longer make sense for many people to pay the annual fees that mileage cards usually charge and pay new fees to book tickets or upgrades. Will they also want to spend tens or hundreds of thousands of dollars on a card just so they can try to redeem miles for a single free plane ticket?

I’ve come up with five questions to ask yourself if you’ve still got a mileage credit card at the top of your wallet, and a number of alternatives for different types of cards. But first, some snippets from the program changes, just in case you’ve missed them:

US Airways has stopped giving bonus miles to members of its Dividend Miles program who have elite status, and the airline also added reward booking fees that range from $25 to $50.

American added a new online booking fee for rewards tickets and is about to raise the number of miles required for many flights. Moreover, its customers will soon have to pay new or increased co-payments much of the time, along with their frequent-flier miles, for upgrades to the front of the plane.

Delta added its own surcharges and also raised the number of miles customers will need to redeem for many free flights. Perhaps most interestingly, it introduced a three-tier price chart. For flights to 49 states (not including Hawaii) and Canada, for example, you could end up trading 25,000, 40,000 or 60,000 miles for a round-trip flight.

That 25,000-mile price for a free ticket has become somewhat sacred. The major airlines have increased the prices in miles for many other tickets, but not this one. How many people will give up on finding available seats at the 25,000 level, then hand over 40,000 or 60,000 miles? It’s hard to say, but Delta probably hopes that it is a lot.

The availability question gets to the heart of the matter. How hard is it to get free seats? And is it getting harder? The frustrating thing about this whole game is that we don’t really know the answers.

We don’t know how often average fliers get their first (or 10th) choice of flight or destination when trying to use their miles or just give up and buy the ticket. The airlines don’t tell us how many seats are available on any given flight or if more will become available later. Joe Brancatelli, proprietor of the business travel site, refers to frequent-flier programs as unregulated lotteries, which gets it about right.

Are fewer seats available for reasonable amounts of miles? Well, most major airlines are reducing the number of seats they fly, often by double-digit percentages. Flights are extremely crowded. But the airlines keep selling their miles to credit card companies and others that want to give them away to their own customers.

That means more miles are chasing fewer seats, even if the airlines aren’t reducing the number of seats on each flight that customers can book with a reasonable amount of miles.

It’s tempting to throw up your hands in despair at the lack of information. But there are several questions that can help you determine whether you want to keep adding miles from credit card spending to the miles you earn on the plane. Start with these:

DO YOU CARRY A BALANCE? If you don’t pay your bill in full each month, you’re excused from this discussion. You’ll do better by using cards with lower interest rates than frequent-flier mile cards, which generally have pretty high rates.

ARE YOUR CHILDREN IN SCHOOL? If they are, you’ll be fighting everyone else who wants to travel at the same time. The airlines, knowing your desperation to get out of town, may make fewer free seats available during school vacations, since the airline will probably sell all the seats on those flights anyway.

DO YOU HAVE ELITE STATUS? Some airlines — like American, Northwest, United and Continental — carve out additional inventory of free seats at their lower mileage levels for some or all customers with elite status. That inventory, plus the bonus miles that most airlines still offer to elite members, make a mileage credit card more attractive.

ARE YOU A BIG SPENDER? If you’re wealthy, or can run business expenses through your card, you can earn six figures in miles from card spending alone each year. A huge mileage balance gives you the ability to exchange those miles for premium-class overseas tickets, which could cost $10,000 or more if you bought them with cash. Miles are worth a lot more if you redeem them for this sort of travel.

Continued in article

Bob Jensen's threads on the dirty secrets of credit card companies are at

Absurd claims are being made that the 2008 U.S. economic meltdown might have been avoided without fair value accounting
But then maybe it's not so clear cut for fair value accounting in the real world:  Fair Value Theory vs. Fair Value Fraud


In the current environment, I am an ardent supporter of those who would resist calls to suspend fair value accounting rules. But, when I was at the SEC, I had a front-row seat on what was perhaps one of the most brazen abuses of fair value accounting in history. I was reminded of it by Joseph Stiglitz's recent commentary on, in which he characterized the mortgage securitization craze as just another pyramid scheme. Keep that in mind as I tell you the story of Stephen Hoffenberg's $400 million fraud.
Tom Selling, "The Anti-Fair Value Lobby Has a Point (Even if They Don't Know It)" The Accounting Onion, September 22, 2008 ---

But, how could fair value accounting be the device by which one scheme was kept alive, yet could have prevented another? Like the Hoffenberg case, there is no question that the two main ingredients of the current fraud were lack of transparency into what was going on, and accounting tricks to give the illusion that all was well. The difference is that in the case of our present extreme unction, it was the ability to hide actual losses (as opposed to create fictitious gains) by not using fair value accounting for junk assets. The answer for the apparent paradox lies in a significant flaw in 'fair value' accounting.


And another big difference between Towers and the current crisis is that Hoffenberg got 20 years. Today's CEOs are smart enough to take their money and run.


Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---


Here's an Example of Devious Contract Writing on Wall Street
Remember those abusive tax shelters of all the Big Four accounting firms, especially the shelters for which KPMG paid a $456 million fine? ---

Another KPMG defendant pleads guilty of selling KPMG's bogus tax shelters
One of the five remaining defendants in the government's high-profile tax-shelter case against former KPMG LLP employees is expected to plead guilty ahead of a criminal trial set to begin in October, according to a person familiar with the situation. The defendant, David Amir Makov, is expected to enter his guilty plea in federal court in Manhattan this week, this person said. It is unclear how Mr. Makov's guilty plea will affect the trial for the remaining four defendants. Mr. Makov's plea deal with federal prosecutors was reported yesterday by the New York Times. A spokeswoman for the U.S. attorney in the Southern District of New York, which is overseeing the case, declined to comment. An attorney for Mr. Makov couldn't be reached. Mr. Makov would be the second person to plead guilty in the case. He is one of two people who didn't work at KPMG, but his guilty plea should give the government's case a boost. Federal prosecutors indicted 19 individuals on tax-fraud charges in 2005 for their roles in the sale and marketing of bogus shelters . . . KPMG admitted to criminal wrongdoing but avoided indictment that could have put the tax giant out of business. Instead, the firm reached a deferred-prosecution agreement that included a $456 million penalty. Last week, the federal court in Manhattan received $150,000 from Mr. Makov as part of a bail modification agreement that allows him to travel to Israel. 
Paul Davies, "KPMG Defendant to Plead Guilty," The Wall Street Journal, August 21, 2007; Page A11 --- Click Here

From The Wall Street Journal Weekly Accounting Review on September 19, 2008

Street Firms Accused of Tax Scheme
by Jesse Drucker
The Wall Street Journal

Sep 11, 2008
Online Exclusive
Click here to view the full article on



TOPICS: Accounting, Corporate Taxation, Hedge Funds, IRS, Tax Evasion, Taxation, Treasury Department, Withholding

SUMMARY: Some Wall Street firms marketed allegedly abusive deals that helped foreign hedge-fund investors avoid U.S. taxes, a probe found.

CLASSROOM APPLICATION: With all of the publicity surrounding some of the country's biggest investment banks and brokerage houses these days, our students might be interested to read that those firms developed some fairly sophisticated tax evasion schemes to benefit foreign hedge-fund investors. In this article, the schemes are explained, and a discussion of the law and evidence is included.

1. (Advanced) How were the big investment banks and brokerage firms violating tax law? What type of taxes were they avoiding?

2. (Advanced) Please explain the details of the example of the scheme detailed in the article. What did the emails indicate? What did the attorneys advise in regard to the plan?

3. (Advanced) What are the specifics of the law involved? What are the estimated losses for the government? Why do you think the firms proceeded with the plans?

4. (Advanced) What is the current news about many of these firms? How do you think the information in this particular article relates to the bigger problems the firms are now having?

5. (Advanced) What evidence does the government have against these businesses? Is the evidence light or substantial? What about this evidence surprises you most?

6. (Introductory) What are the responses from the firms? Do you think that the firms have a strong or weak defensive position?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Street Firms Accused of Tax Scheme," by Jesse Drucker, The Wall Street Journal, September 11, 2008 ---

Some of the country's biggest investment banks and brokerage firms -- including Morgan Stanley, Lehman Brothers Holdings Inc., Citigroup Inc. and Merrill Lynch & Co. -- marketed allegedly abusive transactions that helped foreign hedge-fund investors avoid billions of dollars in U.S. taxes over the past decade, according to a report by Senate investigators.

The yearlong probe, which relied in part on internal bank documents and emails, concludes that Wall Street firms actively competed with one another in dreaming up complex transactions that allowed hedge funds to avoid withholding taxes imposed on dividends paid by U.S. companies.

Some of the internal emails show that bank officials and hedge-fund managers were concerned the deals might run afoul of the Internal Revenue Service. (See the text of the report.)

The report is scheduled to be released Thursday at a hearing in Washington by the Senate Permanent Subcommittee on Investigations, which is examining what it says is $100 billion a year lost to offshore tax abuses.

The report is critical not only of banks and hedge funds, but also of the IRS and the Treasury Department for what the committee calls a failure to enforce the tax law governing this area.

Foreign investors, such as offshore hedge funds, are liable for a tax on the dividends they receive from U.S. investments, generally at a rate of 30%.

However, Senate investigators found that the investment banks commonly entered into arrangements to give the hedge funds the economic value of dividends, without actually triggering a withholding tax on dividend payments.

In one common transaction, an offshore hedge fund would sell its stock to a U.S. investment bank just before a dividend was to be paid, and simultaneously enter into a swap arrangement with that bank to retain the economics of stock ownership.

The investment bank would pay the hedge fund a "dividend equivalent," but didn't withhold any taxes because the hedge fund technically didn't own the shares. A few days later, the hedge fund would repurchase the stock from the investment bank.

A series of emails reviewed by Senate investigators suggest that some banks and their clients had concerns about how the IRS would view the transactions. In one email, a Lehman official said: "Personally, I would not prepare anything and leave a trail." A Lehman spokesman declined to comment.

One potential hedge-fund client of Merrill told the firm that the outside law firm it had consulted expressed concerns, particularly when the deals were used repeatedly. According to the attorney, "repeated use, coincidentally around dividend payment time, would provide a strong case for the IRS to assert tax evasion. So yes, looking at it in a vacuum, it works, it is the repeated 'overuse', e.g. pigs trying to be hogs, that proves problematic."

The report says a $32 billion special dividend by Microsoft Corp. in 2004 spurred many of the big banks to sell products that would allow their hedge-fund clients to avoid paying the associated taxes.

Merrill stopped doing some of the deals after the committee began its investigation, according to an internal bank email cited in the report.

"We believe we acted in good faith when we advised our clients, and believe we acted appropriately under existing tax law," said a Merrill spokesman.

Citigroup voluntarily approached the IRS and paid $24 million in withholding taxes after an internal audit, investigators found. The report questions why the bank didn't pay taxes on other deals as well. A Citigroup spokesman said its "tax treatment of the transactions at issue is proper under applicable tax law."

Data from Morgan Stanley indicate that over one seven-year period, the transactions helped clients avoid taxes of more than $300 million, according to the report. A Morgan Stanley spokeswoman said: "We believe that Morgan Stanley's trading at issue fully complied and continues to comply with all relevant tax laws and regulations."

Investigators cited an internal analysis prepared by hedge fund Maverick Capital Management estimating that such deals helped it avoid $95 million in taxes over an eight-year period. A Maverick spokeswoman didn't respond to requests for comment.

The Senate committee has conducted several investigations into abusive tax deals. The "IRS has been looking at this for years," said Sen. Carl Levin (D., Mich.), the committee's chairman. "The time for looking is over."

An IRS spokesman said the agency has "a number of open investigations under way involving the kinds of issues that were identified in the report."

Bob Jensen's fraud updates are at

Bob Jensen's Rotten to the Core threads are at

"Government Losses on 9.5-Percent Loan Loophole May Exceed $1-Billion," by Paul Baskin, Chronicle of Higher Education, September 18, 2008 ---

A group of 14 student-loan companies that benefited from a federal subsidy loophole collected nearly three times the amount they may have been entitled to claim without the maneuver, according to a set of independent audits of their operations.

If those audit findings are representative of all loan companies that received subsidies under a program that guaranteed some lenders a 9.5-percent return on their loans, it would mean the government lost nearly $1.2-billion in improper payments over a six-year period.

That's about twice the loss previously suggested by outside estimates after the Bush administration agreed last year to let the loan companies keep all the money they had taken so far through the loophole, with the understanding that they wouldn't take any more (The Chronicle, January 28, 2008).

"I'm astounded by the audits so far," said Rep. Thomas E. Petri, a Wisconsin Republican who serves on the House education committee. The findings should prompt the Education Department to demand audits of all other lenders to find out how much was lost, Mr. Petri said.

Yet executives of some of the loan companies that took payments under the 9.5-percent interest-rate program—a group that consists mostly of state-chartered agencies and other nonprofit corporations—said they saw little reason for concern.

Loan agencies "across the nation have moved forward beyond the 9.5 loan issue," said Patricia Beard, chief executive of the South Texas Higher Education Authority. Anyone concerned about the welfare of student borrowers should instead devote "attention to something that matters to the nation," such as the overall downturn in capital markets, Ms. Beard said.

A Break Became a Windfall

The losses stem from the government's program of providing subsidy payments to private lenders that issue student loans. One element of that program, created in 1980 at a time of relatively high interest rates, promised nonprofit lenders a fixed 9.5-percent rate of return.

That subsidy rate became a financial windfall for those lenders in later years when market rates fell. Some lenders extended that advantage through a "recycling" process in which they passed new loan money through old accounts, thereby claiming them to the Education Department as eligible for the expired 9.5-percent subsidy rate.

After years of deliberations on how to handle that type of activity, the Education Department ruled in January 2007 that the largest user of the recycling tactic, Nelnet, a for-profit Nebraska student loan company formed in 1998 from a nonprofit lender, had been allowed to receive $323-million more in subsidy payments than it should have (The Chronicle, February 2, 2007).

In what the department described as a settlement, it let Nelnet keep the $323-million but required the company to forgo expected future payments under the 9.5-percent program, estimated at $882-million. The department then agreed to let any other loan companies keep billing through the 9.5-percent program if they provided an independent audit proving they were not claiming the subsidy on any improperly recycled loan money (The Chronicle, February 6).

Nelnet and other lenders had repeatedly asked the Education Department as early as 2002 for confirmation that the recycling tactic was legal. In a letter of May 29, 2003, Terry J. Heimes, president of Nelnet Education Loan Funding, a corporate subsidiary, described the company's approach and pleaded for a response.

"We intend to proceed under the analysis described above and assume its correctness, unless we are directed otherwise by you," Mr. Heimes wrote to Angela S. Roca-Baker, an official in the department's Office of Federal Student Aid, according to a September 2006 audit of the case by the department's inspector general.

Continued in article

"College Administrator’s Dual Roles Are a Focus of Student Loan Inquiry," by Sam Dillon, The New York Times, April 13, 2007 ---

  • Walter C. Cathie, a vice president at Widener University, spent years working his way up the ranks of various colleges and forging a reputation as a nationally known financial aid administrator. Then he made a business out of it.

    He created a consulting company, Key West Higher Education Associates, named after his vacation home in Florida. The firm specializes in conferences that bring college deans of finance together with lenders eager to court them.

    The program for the next conference, slated for June at the Marriott Inner Harbor at Camden Yards in Baltimore, lists seven lenders as sponsors. One sponsor said it would pay $20,000 to participate. Scheduled presentations include “what needs to be done in Washington to fight back against the continued attacks on student lenders” and the “economics and ethics of aid packaging.”

    Investigations into student lending abuses are broadening in Washington and Albany. Mr. Cathie is still at Widener, and his roles as university official and entrepreneur have put him center stage, as a prime example of how university administrators who advise students have become cozy with lenders.

    Widener, with campuses in Pennsylvania and Delaware, put Mr. Cathie on leave this week after New York’s attorney general requested documents relating to his consulting firm and told the university that one lender, Student Loan Xpress, had paid Key West $80,000 to participate in four conferences.

    Mr. Cathie said in an interview yesterday that he still hoped to pull off the June event. “Though who knows, if nobody comes, I guess it’ll implode,” he said.

    Several of the scheduled speakers said in interviews that they were canceling.

    “Yes, I’ve made money,” he said, “but I haven’t done anything illegal. So I’d sure like this story to get out, that — you know, Walter Cathie is a giving individual, that he’s been very open, that he’s always taken the profits and given back to students.”

    He said he had donated some consulting profits to a scholarship fund in his father’s name at Carnegie Mellon University, where he worked for 21 years. “I’ve been in this business a long time, I’ve always been a student advocate, and I haven’t done anything wrong,” Mr. Cathie said.

    Others say his case illustrates how some officials have become so entwined with lenders that they have become oblivious to conflicts of interest.

    “The allegations made against Mr. Cathie and his institution point at the structural corruption of the student lending system,” said Barmak Nassirian, a director of the American Association of Collegiate Registrars and Admissions Officers.

    The system has become so complex, and involves so much money, Mr. Nassirian said, “the temptation has become too great for many of the players to take a little bite for themselves.”

    The program for the conference in June lists corporate sponsors. One is Student Loan Xpress, whose president, according to documents obtained by the United States Senate, provided company stock to officials at several universities and at the Department of Education.

    Another is Education Finance Partners Inc., which Attorney General Andrew M. Cuomo of New York has accused of making payments to 60 colleges for loan volume. Neither company returned calls for comment.

    The program lists as a speaker Dick Willey, chief executive of the Pennsylvania Higher Education Assistance Authority, a state loan agency facing calls for reform after reports that board members, spouses and employees have spent $768,000 on pedicures, meals and other such expenses since 2000.

    Mr. Willey’s spokesman, Keith New, said that Mr. Willey would not speak at the conference, but that the agency intended to sponsor it with a “platinum level” commitment of $20,000.

    Mr. Cathie came to Widener in 1997, initially as its dean of financial aid, after years at Allegheny College, Carnegie Mellon and Wabash College in Indiana, building a background in enrollment management and financial aid.

    In 1990, well into his tenure at Carnegie Mellon, Mr. Cathie and his boss, William Elliott, an admissions official who is today Carnegie Mellon’s vice president for enrollment, began organizing annual conferences for college administrators to debate policy issues, both men said.

    They named their conferences the Fitzwilliam Audit after the Fitzwilliam Inn in New Hampshire, where they were held, Mr. Cathie said.

    Continued in article

    Bob Jensen's Rotten to the Core threads are at

    Bob Jensen's threads on higher education controversies are at

    Another Case of Academic Fraud Involving Athletes

    For the fourth time in a little over a year, the National Collegiate Athletic Association’s Division I Committee on Infractions has punished a big-time sports program for academic wrongdoing. And in punishing the University of New Mexico for engaging in academic fraud on Wednesday, the NCAA panel linked the shenanigans back to a single source, much to the dismay of the institution singled out. In its report on the case, the NCAA infractions panel found that two since-fired assistant football coaches at New Mexico, operating without the knowledge of officials at the university, had arranged in 2004 for one then-football player and three prospective players to take correspondence courses from an unidentified instructor they knew at another institution. According to the NCAA, the athlete who was already enrolled at New Mexico actually completed the work in the correspondence course, but the situation still violated NCAA rules against “extra benefits” — over and above those available to the typical student — because the former coaches arranged for him to take the course.
    Inside Higher Ed, August 21, 2008 ---

    Bob Jensen's threads on college athletics scandals are at

    An Almost Unbelievable Ponzi Fraud at the University of Miami

    Federal officials are investigating an apparent ponzi scheme in which a University of Miami alumnus is alleged to have used university employees and facilities for meetings in which he may have obtained tens of millions of dollars from investors who may now have lost their funds, CNN reported. Andres Pimstein, who reportedly has confessed to the scheme, declined to comment. A spokeswoman for the university said that no funds from Miami were involved, that a few current or former employees may have been involved, and that the university was cooperating fully with the investigation.
    Inside Higher Ed, August 21, 2008 ---

    Bob Jensen's Fraud Updates are at

    An Almost Unbelievable Ponzi Fraud at the University of Miami

    Federal officials are investigating an apparent ponzi scheme in which a University of Miami alumnus is alleged to have used university employees and facilities for meetings in which he may have obtained tens of millions of dollars from investors who may now have lost their funds, CNN reported. Andres Pimstein, who reportedly has confessed to the scheme, declined to comment. A spokeswoman for the university said that no funds from Miami were involved, that a few current or former employees may have been involved, and that the university was cooperating fully with the investigation.
    Inside Higher Ed, August 21, 2008 ---

    Bob Jensen's Fraud Updates are at

    "Senator Grassley Pressures Universities on Conflicts of Interest," by Jeffrey Brainard, Chronicle of Higher Education, August 8, 2008 ---

    University scientists should have their grants yanked by the National Institutes of Health if they fail to report financial conflicts of interest, said U.S. Sen. Charles E. Grassley.

    In an exclusive interview last week with The Chronicle, the Republican from Iowa said an aggressive campaign by the agency would forestall legislation forcing it to act.

    "I'm on a campaign to make sure existing requirements of NIH and universities" are followed, "and I don't think we have to pass any law to do that," he said.

    Recently, Senator Grassley has singled out several institutions — Harvard and Stanford Universities, and the University of Cincinnati — after his office determined that some scientists had underreported their own financial interests in research projects supported by the NIH. Senator Grassley is seeking details from about 20 more institutions about financial conflicts among scientists.

    Since 1995 an NIH regulation has required scientists to report to their universities any "significant financial interests" they hold in research projects financed by the agency. The universities, in turn, are required to tell the NIH whether they were able to manage or eliminate the conflicts in order to avoid bias in the research findings.

    A January report by the inspector general of the Department of Health and Human Services, the NIH's parent agency, said the NIH rarely checks up on the universities' reports. Senator Grassley's investigators also found discrepancies when they asked pharmaceutical companies to list their payments to researchers and then asked universities to describe financial disclosures by those same scientists.

    Mr. Grassley said that rather than leaning on the universities themselves, he expects to use the NIH as the lever to pressure them.

    "If University X isn't doing their job, they pull one grant; that's all they'd have to do; it would send a very clear signal," the senator said. He added that he had little control over university practices, "but I've got oversight over the NIH, and I want them to do their job."

    The agency says that it is. In a letter last week to Senator Grassley, the NIH's director, Elias A. Zerhouni, wrote that the agency was working to ensure that its oversight of financial conflicts "is both vigorous and effective."

    Senator Grassley said the NIH has informed his staff that it believes it lacks the legal authority to revoke a grant for failures to report. But the senator disagrees.

    "If you don't have the authority to do it, I'll work to get you the authority to do it," he said. But the NIH needn't wait for that, he said. "What university is going to sue the NIH because they pulled a grant because the university wasn't doing what NIH says they have to do anyway? … That's like being caught with your hand in the cookie jar."

    Mr. Grassley said he thinks the NIH has failed to ride herd on universities adequately because the agency wishes to maintain "buddy-buddy relationships with universities and with researchers."

    Continued in article

    Bob Jensen's threads about accountability and conflicts of interest in higher education are at


    "Merrill Lynch Settlement With SEC Worth Up to $7B," SmartPros, August 25, 2008 ---

    Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement.

    The largest U.S. brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors. Under that deal, announced Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2.

    Merrill also agreed to pay a $125 million fine in a separate accord with state regulators.

    The $330 billion market for auction-rate securities collapsed in mid-February.

    The SEC's estimate of a $7 billion recovery is based on its projection of the eventual amount of the bonds that will be cashed in by the affected investors, who bought them before Feb. 13. The $10 billion to $12 billion is the total amount that Merrill is committing to buy back. The firm has to offer redemptions to all investors, though not all may cash in the securities.

    The SEC said the new agreement will enable retail investors, small businesses and charities who purchased the securities from Merrill "to restore their losses and liquidity."

    New York-based Merrill neither admitted nor denied wrongdoing in agreeing to the federal settlement, which is subject to approval by SEC commissioners.

    The firm wasn't fined under the accord, but the SEC said Merrill "faces the prospect" of a penalty after completing its obligations under the agreement. The amount of the penalty, if any, would take into account the extent of Merrill's misconduct in marketing and selling auction-rate securities, and an assessment of whether it fulfilled its obligations, the SEC said.

    "Merrill Lynch's conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement," Linda Thomsen, the agency's enforcement director, said in a statement. "We will continue to aggressively investigate wrongdoing in the marketing and sale of auction-rate securities."

    Merrill, Goldman Sachs Group Inc. and Deutsche Bank on Thursday brought to eight the number of global banks that have settled a five-month investigation into claims they misled customers into believing the securities were safe.

    The auction-rate securities market involved investors buying and selling instruments that resembled regular corporate debt, except the interest rates were reset at regular auctions - some as frequently as once a week. A number of companies and retail clients invested in the securities because, thanks to the regular auctions, they could treat their holdings as liquid, almost like cash.

    Major issuers included companies that financed student loans and municipal agencies like the Port Authority of New York and New Jersey. When big banks ceased backstopping the auctions with supporting bids because of concerns about credit exposure, the bustling market collapsed. That left some issuers paying double-digit interest rates because of the terms under which they issued the securities.

    Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

    Jensen Comment
    It's unbelievable how many huge frauds there are in which Merrill Lynch has been an active participant. For example, go to the following site and do a word search for "Merrill" ---
    For example, Merrill Lynch was a key player in the derivatives instrument fraud that cost Orange County over a billion dollars. This is just one of the many examples.


    How to Prevent Corporate and Other Organizational Cheating

    "How to Prevent Cheating," by Margaret Steen, Stanford Magazine, August 2008 --- 

    WHEN A CORPORATE SCANDAL throws a company into crisis or even destroys it, many onlookers’ reaction is that the people involved must have been immoral. Certainly they, the onlookers, would never become involved in cooking the company books, approving mortgages without proper documentation, or lying to customers about a product’s capabilities.

    Yet it’s easier than most people realize for ordinary, well-meaning people to get caught up in activities they should have known were wrong. These activities do “real harm to real people,” says GSB accounting Professor Maureen McNichols, who teaches an elective course called Understanding Cheating. Among other things, the course helps students see how good leadership and the right organizational structure can cut down on the opportunities for corruption.

    Creating a structure that reduces the chances of cheating requires a balancing act: between too few controls and too many, and between understanding why people cheat and intolerance for such behavior.

    Many people, including students at business schools, resist discussing how the influence of a group or a situation can lead good people to do bad things. It seems to excuse the behavior, and they want individuals to be held accountable for their actions. But research indicates that leaders who don’t acknowledge that group pressure exists—so they can use that understanding to promote an ethical organizational culture and appropriate controls—may be setting their organizations up for corruption.

    “I would say that there are some people who are just flat-out corrupt: They would steal the offering from the church plate,” says Douglas Brown, MBA ’61, who was named treasurer of the state of New Mexico in 2005 after a corruption scandal led to the indictment of the two previous treasurers. But there’s a much larger group who are deeply conflicted about what to do and finally “just kind of tunnel under and put up with it.”

    Brown didn’t fire everyone who had had a hand in his department’s corrupt practices. For example, an employee who was asked by her boss to send out invitations to a golf tournament “which was basically lining the pockets of the state treasurer” was kept on.

    Just as posting speed limit signs and exhortations that “Speed Kills!” will do little to reduce speeding if the police aren’t issuing tickets, so businesses need controls and independent auditors to rein in potential cheating. But “too many controls can breed enormous inefficiencies,” Brown says, causing business to grind to a halt. “This is a common managerial problem: You have to trust your people and empower them” while still monitoring what they’re doing.

    The idea that ordinary, good people can end up involved in corruption is counterintuitive to some. “We underestimate the power of a situation to control people’s actions,” says GSB organizational behavior Professor Deborah Gruenfeld. “Most of us believe we’re much more auto-nomous than we are.”

    Social science research suggests leaders need to take into account group power, organizational structure, rationalization, and fear and confusion.

    • GROUP POWER. If the supervisor of the storeroom notices supplies are disappearing fast, he or she is likely to remind coworkers that too many people are stealing. That’s exactly the wrong approach to take, psychologist Robert Cialdini of Arizona State University told researchers at a recent Business School conference. In an experiment in Petrified Forest National Park in Arizona, Cialdini placed signs at entrances asking people not to take home petrified wood. The sign at one entrance showed three thieves with an X over them, while at another entrance, the sign depicted just one thief. The latter was far more effective at reducing theft.

    “You want to alert people to the extent of a problem as a way of mobilizing them against it,” Cialdini says. But when you emphasize how common cheating is, “there’s a subtext message, which is that all of your neighbors and coworkers are doing this. And if there’s a single, most primitive lever for behavior in our species, it’s the power of the crowd.”

    • ORGANIZATIONAL STRUCTURE. “My lifetime’s work in business ethics suggests that business corruption has everything to do with culture and with incentives,” says Kirk Hanson, MBA ’71, executive director of the Markkula Center for Applied Ethics at Santa Clara University and an emeritus GSB faculty member.

    For example, Don Moore, associate professor of organizational behavior and theory at the Tepper School of Business at Carnegie Mellon University, has written about how the relationship between accounting firms and their clients “makes it impossible for auditors to be objective, given what we know about human psychology.” Auditors want smooth working relationships with their clients, and they don’t want to be fired, so they have an incentive not to ask awkward questions.

    Executives may also “look the other way when a salesperson overpromises,” Cialdini says. They may ignore exaggeration in the company’s marketing materials or use proprietary information gained from one vendor in negotiation with another.

    Actions speak louder than words. “You can’t dupe people by saying, ‘This is what we stand for,’ when promotions are based on something else,” Gruenfeld says.

    • RATIONALIZATION. Because people generally want to view themselves as ethical, they will reframe a situation to justify their actions, says Elizabeth Mullen, assistant professor of organizational behavior at the GSB, whose courses on negotiation and organizational behavior include ethics topics. “The division of labor required for much corporate work, with many people contributing a small amount to a project, makes this easier. For example, an employee can tell himself, ‘I’m not the person who falsified the safety data for the product; I just reported the data that I had,’” Mullen says.

    People also accept uncritically information that confirms what they want to believe, Moore said, while poking holes in statements they wish weren’t true.

    • FEAR AND CONFUSION. GSB political economy Professor Jonathan Bendor, who teaches a course on negotiation that includes discussions of cheating, thinks for most people fear is a more common cause of corrupt behavior than greed. People want to avoid conflict, and being a whistleblower can ruin a person’s career, even if the person is vindicated. So many people keep quiet.

    “It takes a huge amount of courage to say ‘stop.’ Some of this stuff is a judgment call, and you may be wrong, and then you really look stupid. But you have to take the risk,” says Bowen “Buzz” McCoy, a former member of the Business School’s Advisory Council who spent 30 years at Morgan Stanley. He has written and consulted on business ethics and, with his wife, endowed a GSB chair in leadership values and helped fund the Stanford Program in Ethics in Society.

    Although many cases of corruption involve behavior that anyone should know is wrong, it’s not always so clear cut. For example, says Professor Blake Ashforth of Arizona State’s W.P. Carey School of Business, “Small gifts are ways of cementing friendships. Big gifts are bribes. How big is big?”

    McCoy points out that a good salesperson may use hyperbole but doesn’t lie, and that in some cases the sophistication of the customer plays a role in how far a salesperson should go in making claims. Adds Gruenfeld: “When people say someone is entrepreneurial or resourceful, part of what they mean is that person knows how to work around constraints in the system.”

    GSB Professor Emeritus James March adds that “without a certain amount of cheating—violating rules—and corruption—inducing others to violate rules—no organization can survive. It is often called ‘taking initiative’ or ‘using your head.’ That is not a justification of egregious behavior, but a reminder that the boundary between art and obscenity is often hazy.”

    Tepper’s Moore describes “an endless process of co-evolution” in which businesses explore new models. Some are deemed by society to be unethical or undesirable and eventually outlawed. Others become the norm.

    Moore explains how auditors can go from behavior that is technically correct but ethically borderline to outright corrupt in just a few years. First, the auditor sees the client doing something that’s just on the edge of permissibility and doesn’t say anything. The next year, the client pushes just a bit further, this time over the line. Now the auditor doesn’t confront the client about it, since the practice is so similar to the one that went unremarked the previous year. By the third year, the client’s practice is clearly wrong, but the auditor realizes that to challenge it would be to admit mistakes in previous audits. And by the fourth year, the auditor is actively engaged in a coverup with the client to prevent the corrupt practice from being discovered.

    Continued in article

    Bob Jensen's threads on fraud are at

    Bob Jensen's threads on corporate governance are at

    "How to Prevent Investment Adviser Fraud," by Brian Carroll, Journal of Accountancy, January 2006 ---

    SECTION 206 OF THE INVESTMENT ADVISERS ACT OF 1940 provides guidelines for investment advisers on what constitutes fraud.

    THE SUPREME COURT HAS HELD THAT THE ACT imposes a fiduciary duty on investment advisers to act in the best interest of their clients by fully disclosing all potential conflicts of interest.

    INVESTMENT ADVISERS SHOULD REVIEW CAREFULLY SEC and other disclosure requirements to ensure they clearly understand potential conflicts.

    INVESTMENT ADVISERS SHOULD REVIEW ALL SEC FILINGS, client marketing materials and other significant documents to ensure that they have appropriately disclosed all potential conflicts.

    Brian Carroll, CPA, is special counsel with the SEC in Philadelphia and an adjunct professor at Rutgers University School of Law, Camden, N.J.



    "Keep Private Equity Away From Our Banks," by Andy Stern, The Wall Street Journal, July 7, 2008; Page A13 ---

    Private-equity firms have made a lavish living on making big bets when no one is looking. Unlike banks and thrifts – which are regulated, transparent and generally publicly owned enterprises – private-equity firms operate in secret, virtually free from regulation. They use tax loopholes around carried interest – and deduct interest payments on the debt they use for buyouts – to extract huge profits from the companies they buy. Private-equity profits are built on big risks, and taking advantage of lax regulation – the very problems that led to the subprime and credit crises.

    Shareholders are also paying the price for private-equity investments in banks. Texas Pacific Group's (TPG) recent investment in Washington Mutual (WaMu) massively diluted shareholder stakes by handing 50.2% of the company to TPG and its partners. While the deal – crafted in secret without shareholder input or approval – has already put $50 million in transaction fees in the pocket of TPG, WaMu shareholders have seen their stock value fall to $5.38 a share, the lowest level in 16 years (a nearly 90% drop in the last year alone).

    Continued in article

    Bob Jensen's threads on "Rotten to the Core" are at

    The Timeline of Derivative Financial Instruments Fraud ---

    The Timeline of the Recent History of Fannie Mae Scandals 2002-2008 ---
    "Fannie Mayhem: A History," The Wall Street Journal, July 14, 2008

    The Mouse That Roared
    Hundreds of super-rich American tax cheats have, in effect, turned themselves in to the IRS after a bank computer technician in the tiny European country of Liechtenstein came forward with the names of US citizens who had set up secret accounts there, according to Washington lawyers investigating the scheme. The bank clerk, Heinrich Kieber, has been branded a thief by the government of Liechtenstein for violating the country's bank secrecy laws.
    Brian Ross and Rhoda Schwartz, "Day of Reckoning? Super Rich Tax Cheats Outed by Bank Clerk," ABC News, July 15, 2008 ---

    "Nancy Heinen, Former Apple General Counsel, Settles Backdating Charges,"  by Arik Hesseldahl, Business Week, August 14, 2008 --- Click Here

    Posted by: Arik Hesseldahl on August 14 Nancy Heinen, Apple’s former general counsel has settled civil charges brought by the Securities and Exchange Commission in 2007, the commission announced today.

    The settlement calls for Heinen, who had served as Apple’s general counsel from 1997 until her departure in mid-2006, to pay $2.2 million in disgorgement, interest and penalties, and to be barred from serving as an office of a public company for five years. Under terms of the settlement, she has neither admitted nor denied any wrongdoing.

    Heinen had been accused by the SEC of being responsible for the backdating of two big blocks of stock options grants to Apple executives, a matter that had cast a pall over the company it first disclosed the matter in June of 2006, about a month after Heinen’s departure. The SEC said that company records pertaining to a grant of 4.8 million options to Apple’s senior executive team in February of 2001, and a grant of 7.5 million shares made to CEO Steve Jobs in December of 2001 had been altered to conceal what it called a fraud. The result was that Apple underreported its stock-related expenses by nearly $40 million.

    In the case of the first grant, the SEC said, six executives including Heinen, received options that were in-the-money, meaning their strike price was lower than the actual share price on the date of grant.

    Apple was required to report the $18.9 million difference as a stock-based compensation charge in regulatory filings, but didn’t. The commission had accused Heinen of backdating the options to Jan. 17 when the price of Apple’s stock was lower, and, was also accused of having directed underlings to prepare documents showing that the grant had been properly approved by Apple’s board of directors when it had not.

    Heinen’s lawyer, Cris Areguedas had argued that Heinen hadn’t backdated the options to the Jan. 17 date as the SEC alleged, but had been laboring under the impression that the grant had been properly approved by Apple’s board in late 2000, and was only pushing back the grant date, which was legal under rules in force at the time. Her intent, Arguedas said, had been not to defraud Apple investors but to help the company avoid the appearance of having “spring-loaded” the options in advance of a an important Steve Jobs keynote address at the 2001 MacWorld Expo in San Francisco.

    In the second case, Heinen had been accused of signing fictitious board meeting minutes concerning a “special board meeting” that had never taken place, that reflected the approval of directors of a grant to Jobs. Again the difference, $20.3 million in this instance, wasn’t properly reported in regulatory filings.

    In this instance, while the SEC complaint implied that Heinen believed the proper grant date was Aug. 29, but when Jobs complained about the vesting schedule, and had wanted some of the options in the grant to be “pre-vested” meaning he would have been able to exercise them right away. As a November 2001 deadline for properly reporting the expense neared, Heinen became concerned about the delay, the SEC complaint said, and looked for a data where Apple’s share price was close to the $17.83 price of Aug. 29. She chose Oct. 19, when the stock was at $18.30, but less than $21.01, its price on the actual grant date of Dec. 18, thus creating for Jobs, an instant paper profit.

    The settlement would appear to bring final closure to the matter of Apple’s relatively minor backdating issue. During parts of 2006 and 2007, the matter had caused Apple investors some anxiety that Jobs might be targeted by the SEC either for civil charges or by the U.S. Department of Justice for criminal charges. The amount of money involved – less than $40 million – was in fact minimal to Apple, who during the its fiscal years 2006 and 2007 had reported sales of $20 billion and $24 billion respectively, and whose cash horde had exceeded $15 billion by the close of its 2007 fiscal year.

    The matter had been expected to come to trial in the federal court for the Northern District of California this year, and would have likely generated substantial media attention because Jobs, having been subpoenaed in 20007 was expected to appear as a witness.

    The settlement also means that Heinen’s version of events will likely not be aired in public. When Apple’s former CFO Fred Anderson settled charges related to the matter in 2007, he issued a public broadside at Apple and Jobs in particular. At the time Anderson, through his lawyer, said that he had warned Jobs that the company would need to record a charge for the options granted Apple executives in early 2001.

    Anderson’s version of events would seem to contradict Apple’s version of events, which it announced in October of 2006, after an investigation by a special committee of its outside directors concluded that Jobs didn’t fully appreciate the accounting implications of the matter.

    TrackBack URL for this entry: 

    Bob Jensen's threads on backdating are at

    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 ---

    Simple Ways to Commit Fraud With Excel

    July 23, 2008 message from Glen L Gray [glen.gray@CSUN.EDU]

    Who knew fraud was so easy...

    SEC: Ex-CFO Used Spreadsheets for Fraud  ----

    Glen L. Gray, PhD, CPA
    Accounting & Information Systems, COBAE California State University,
    Northridge 18111 Nordhoff ST Northridge, CA 91330-8372
    818.677.3948 818.677.2461


    July 23, 2008 reply from David Albrecht [albrecht@PROFALBRECHT.COM]

    Yes, I recall reading that article. Didn't the CFO rely on hidden rows and columns, as well as using a font colored white? It seems so basic to check for hidden items, but so easy to overlook.

    Other important items to check for would be cell links and file ancestery.

    David Albrecht

    July 24, 2008 reply from Roger Debreceny [roger@DEBRECENY.COM]

    My colleague Ray Panko is recognized as one of the leaders in research on spreadsheet errors .. check out his excellent website at  .. his (recently updated) paper " What We Know About Spreadsheet Errors" gives interesting (and frightening) data on errors in s'sheets found in a variety of studies.

    Interestingly, research in Europe on s'sheets is much more advanced than in North America. The Eusprig group ( ) has an annual meeting with interesting papers that can be downloaded from the Eusprig website.

    Question: How many spreadsheets touch in some way on the financial statements in the typical Fortune 1000 company?


    Second Circuit Affirms Dismissal of Indictment Against Former KPMG Partners and Employees
    Because of 6th Amendment Violation In a major victory for the white collar defense bar, the Second Circuit affirmed the district court's dismissal of the indictment against former KPMG partners and employees because the government deprived the defendants of their Sixth Amendment right to counsel by causing KPMG to place conditions on the advancement of legal fees and to cap the fees and ultimately end them. U.S. v. Stein (2d Cir. August 28, 2008).
    Securities Law Professor Blog, August 28, 2008 ---

    KPMG Going to Court in New Jersey for Alleged  professional malpractice and negligence

    "KPMG Ordered to Stand Trial in Fraud Law," SmartPros, July 28, 2008 ---

    Big Four auditing firm KPMG LLP has been ordered by a New Jersey Superior Court judge to stand trial in an accounting fraud lawsuit involving Cast Art Industries, according to a statement issued Friday by law firm Eagan O'Malley & Avenatti, which represents Cast Art.

    Cast Art sued KPMG in 2003 for professional malpractice and negligence for allegedly failing to detect a pervasive financial fraud at Papel Giftware, Inc. prior to Cast Art acquiring Papel in December 2000 for nearly $50 million.

    In a written opinion, Judge Heidi Willis Currier found sufficient evidence for a jury trial to proceed against KPMG, Papel's auditor.

    In one email uncovered during the lawsuit, a member of Papel's management described how the company had "raped and pillaged to an extreme" in order to meet its forecasts. A KPMG partner later acknowledged, in a memorandum he sent to others at KPMG, that Papel's management could not be trusted.

    The lawsuit alleges that KPMG knew Papel's management could not be trusted yet repeatedly represented to Cast Art and others that Papel's financial statements were accurate and no fraud had occurred.

    "Wall Street, Main Street, investors, and the public at large depend on auditing firms to be truthful and accurate when reporting on the financial condition of company," stated Michael Avenatti, a lawyer for Cast Art. "In this case, like in too many others, KPMG cut every possible corner and fell woefully short."

    Cast Art claims that for three years prior to its acquisition of Papel, KPMG repeatedly affirmed that Papel's financial statements were accurate when in reality the company's management had engaged in a number of fraudulent schemes designed to inflate the value of the company to potential buyers. Cast Art alleges that Papel's management booked tens of thousands of fraudulent transactions on the company's books and records by, among other things, purposely shipping product to phony customers and double and triple shipping the same product to the same customer.

    Cast Art plans to seek close to $50 million at trial. Opening statements are expected to begin in the trial on Sept. 15, 2008.


    KPMG Hit Once Again for Negligence (this time in the United Kingdom)

    "The UK's economic elites cannot effectively regulate themselves: The disciplining of major accounting firms is still little more than a cynical public relations exercise," by Prim Sikka, The Guardian, July 4, 2008 ---

    Governments talk of heavy fines and incarceration for antisocial behaviour for normal people, but it is entirely different for economic elites, as exemplified by major accountancy firms. Despite recurring audit failures, they get their own courts, puny fines and little or no public accountability. Appeals professionalism and private disciplinary arrangements disarm journalists and critics and mask the usual predatory moneymaking business.

    Last week, seven years after the collapse of Independent Insurance Group, the UK accountancy profession frightened KPMG with a fine of £495,000 over its audit failures. The partner in charge of the audits was fined £5,000 and the firm had to pay disciplinary hearings costs of £1.15m. The audit failures played a part in helping the company to report a loss of £105m into a profit of £22m. In October 2007, two Independent directors were jailed for seven years.

    The puny fines will hardly worry KPMG or its partners. The firm boasts worldwide income of nearly $20bn (£10bn) and about £1.6bn of this is from its UK operations. Its partners are charged out at an hourly rate of £600. Last year, its 559 UK partners enjoyed profits of £806,000 each and also shared a Christmas bonus of £100m.

    The seven-year delay is not unusual. The professional structures took eight years to levy a fine on Coopers & Lybrand (now part of PricewaterhouseCoopers) for audit shortcomings that might have prevented the late Robert Maxwell from looting his companies and employee's pension funds. The frauds came to light after his suicide in 1991. A UK government investigation did not report until 2001. In 1999, a professional disciplinary hearing placed most of the blame for audit failures on an audit partner who died in the intervening years. The firm was fined £1.2m for its audit failures and ordered to pay costs of £2.2m. Taken together this amounted to £6,000 per partner. Coopers had collected over £25m in fees from Maxwell. In 1999, PricewaterhouseCoopers had UK income of £1.8bn.

    The fraud-ridden Bank of Credit and Commerce International (BCCI) was closed down in July 1991. Nearly 1.4 million depositors lost some part of their $8bn savings, though some UK savers were bailed out by the taxpayer funded depositor protection scheme. The UK government failed to appoint an independent inquiry to investigate the role of auditors, but a US Senate report published in 1992, raised numerous questions about the conduct of auditors. Eventually, in 2006, without commenting on any of the findings of the US Senate, a disciplinary panel of the UK accountancy profession found some faults with the audits conducted by the UK arm of Price Waterhouse (now part of PricewaterhouseCoopers). The firm was fined £150,000 and ordered to pay hearing costs of £825,000. At that time the firm had UK income of around £2bn.

    The above is a small sample of what passes for self-regulation in the UK accountancy profession. The sinking ship of self-regulation has now been refloated, albeit with a few deckchairs rearranged. The government has delegated the investigation of major audit failures to the Financial Reporting council (FRC), a statutory regulator dominated by corporate and accounting elites. In August 2005, it announced an investigation into the audits of MG Rover conducted by Deloitte & Touche. So far no report has materialised.

    The usual excuse is that the accountancy regulators can't do anything until all litigation is resolved. Such an excuse did not stop the US government from investigating auditors of Enron or WorldCom. There is hardly any evidence to show that the UK fines are effective or have resulted in any improvement in audit quality. Despite recurring failures, no partner from any major UK auditing firm has ever been banned from practising and no major firm has ever been suspended from selling audits. Most stakeholder lawsuits against auditors are barred after six years, and the much-delayed disciplinary findings are of little use to them. In any case, generally auditors only owe a "duty of care" to the company as a legal person and not to any individual shareholder, creditor or other stakeholder who may have suffered loss as a result of auditor negligence.

    The above cases do not suggest that auditors directly participated in any of the irregular activities. Nevertheless, the disciplining of major accounting firms remains a cynical public impression management exercise. The victims of poor audits can submit evidence to disciplinary panels, but cannot appeal against its findings, or feather-duster fines. In contrast, the firms and their partners can. There is no way of knowing how any evidence gathered by the disciplinary panels is weighted or filtered. None of it is available for public scrutiny. The fines levied swell the coffers of the regulators and their sponsors and are not used to compensate the victims of audit failures. Neither the professional bodies nor any disciplinary structure owes a "duty of care" to any individual affected by their policies. It is time the economic elites were subjected to the legal processes that apply to normal people.

    Bob Jensen's threads on KPMG are at

    A former vice president of imaging and printing services at the Hewlett Packard Company (HP) pleaded guilty today to stealing trade secrets, announced Acting Assistant Attorney General Matthew Friedrich of the Criminal Division and U.S. Attorney Joseph P. Russoniello for the Northern District of California. Atul Malhotra, 42, of Santa Barbara, Calif., was charged on June 27, 2007, in a one count information with theft of trade secrets. According to court documents, from Nov. 17, 1997, to April 28, 2006, Malhotra was employed by International Business Machines Corporation (IBM) as director of sales and business development in output...
    FBI, July 11, 2008 ---

    "SEC Obtains Asset Freeze Against Alleged International Fraud," Blog of the Corporate Law Center, University of Cincinnati College of Law, August 16, 2008 ---

    The SEC obtained an emergency court order freezing the profits from an alleged $13 million international fraud involving a Seattle-area microcap company and a Barcelona stock promoter. The Commission charged GHL Technologies, Inc., and its CEO Gene Hew-Len with issuing a series of false press releases touting the company's business dealings. The Commission also charged Francisco Abellan (also known as "Frank Abel") of Barcelona, Spain with coordinating the scheme, sending glossy promotional mailers to over 2 million U.S. recipients and unloading over $13 million in GHL stock on unsuspecting investors. At the SEC's request, the federal district court in Tacoma, Wash. Thursday issued an order freezing Abellan's assets and prohibiting him from further dissipating the proceeds of the scheme (most of which, according to the SEC, he transferred to multiple bank accounts in the principality of Andorra).

    GHL (later renamed NXGen Holdings, Inc.) is an installer of GPS-based navigation equipment. According to the Commission's complaint, in early 2006, President and CEO Hew-Len and stock promoter Abellan arranged for GHL to issue millions of shares of GHL stock to offshore entities designated by Abellan. In April 2006, the SEC alleges, Abellan caused the dissemination of "The Street Stock Report," a full-color glossy mailer sent to millions of U.S. addresses urging investors to purchase GHL stock quickly to see huge trading profits. Around the same time, Hew-Len issued nine press releases over a nine-week period hyping the company. Among other things, according to the SEC, the press releases made false claims about contracts with large customers, fraudulently touting millions of dollars in potential revenues. Following this concerted promotion campaign, GHL's stock price doubled and trading volume spiked nearly 1500%. Abellan and his entities sold their GHL stock holdings for profits in excess of $13 million. The stock, which reached a high of nearly $9 per share at the height of the scheme, now trades at under a penny.

    The SEC's complaint charges GHL, Hew-Len and Abellan with numerous securities violations and seeks preliminary and permanent injunctions, disgorgement, penalties, and other permanent and emergency relief. Pursuant to the court's order, a hearing will be held on August 27, 2008 to determine whether the asset freeze will remain in place during the remainder of the litigation.

    Bob Jensen's fraud updates are at

    "Wachovia Agrees to Buy Back over $8.5 Billion in ARSs," Blog of the Corporate Law Center, University of Cincinnati College of Law, August 16, 2008 ---

    The SEC and the New York Attorney General announced on August 15 that investors, small businesses, and charities who purchased auction rate securities (ARS) through and Wachovia Capital Markets, LLC (collectively Wachovia) could receive over $8.5 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached with Wachovia.

    Continued in article

    JP Morgan Chase and Morgan Stanley Also Agree to Buy Back ARSs in Settlement with New York AG.

    Bob Jensen's fraud updates are at

    Bob Jensen's Rotten to the Core threads on banks are at

    "Whistle-Blowers Say California State U. Fired Them for Questioning No-Bid Contracts," by  Kathryn Masterson, Chronicle of Higher Education August 17, 2008 --- Click Here

    Three senior employees at California State University say they lost their jobs after questioning whether the system’s chancellor, Charles B. Reed, misused public funds when he hired a labor-consulting firm without soliciting competitive bids, the San Francisco Chronicle reported.

    Two lawyers who worked in California State’s labor-relations office — Paul Verellen and Joel Block — said their firings were directly related to their questions over the hiring of C. Richard Barnes and Associates, a Georgia-based firm, to represent the university in negotiations with labor unions and in arbitration with faculty members.

    Mr. Verellen has filed a whistle-blower complaint with California’s Bureau of State Audits and said he plans to file a lawsuit against Mr. Reed and the university. A third dismissed employee has signed a legal settlement that prevents him from discussing the case, but others told the newspaper he too had lost his job after asking questions about the Barnes contracts.

    The Barnes firm, which is led by C. Richard Barnes, a former director of the Federal Mediation and Conciliation Service, has received more than $2-million so far, the newspaper reported. The university says the no-bid contracts were necessary and legitimate.

    Mr. Reed said that the former employees were let go in a staff reorganization, and that the Barnes contracts had been some of the office’s “best-spent resources.” The San Francisco Chronicle quoted him as saying: “I frankly got tired of all the labor-relations problems that we were having. I asked somebody who the very best labor person was in the country, and it turned out to be a guy in Atlanta who had worked in the Clinton administration. … And I asked him if he would help us with our labor problems.”

    Bob Jensen's threads on whistle blowing are at

    Cheating in Business School Rankings in India

    From the Mostly Economics Blog by Amol Agrawal on July 7, 2008 ---

    Premchand Palety has been writing some fantastic columns every Monday in Mint. He has been discussing each activity of B-schools in his column and it makes you wonder what are we getting into.

    In his recent column he talks about the B-School ranking season with a number of magazines coming out with their views on which school is the best. He says:

    I have spoken to different directors and main promoters of B-schools about the issue of corruption in rankings. Some of them have confirmed that corrupt practices are followed by some agencies and publications. I was always surprised by the Top 10 ranking of an otherwise average B-school that used to participate in only one survey, by a business magazine.An insider from that school told to me the real reason. There was a major financial deal, amounting to several lakhs of rupees, struck between the CEO of the B-school and the agency head.

    And then there is a lot more on corruption in these rankings.

    Frankly it does not matter as the list hardly changes and I do not care why so much newsprint is wasted. I have always maintained that Business Schools in India, especially the elite ones, are anything like their abroad counterparts.

    In abroad the main thing is the quality of research. Here, the main (perhaps only) criteria is placements. There is hardly any research by anyone in India. I haven’t come across one paper from these elite schools being referred in any research paper, be it any topic even India-specific.  But you do get to hear a lot on their placement achievements. And if the government imposes a service tax on the basis of their placement services, there is a big hue and cry.

    I would maintain the trend is set by these elite schools and otehrs have simply copied their ways. There are so many advertisements these days even of elite schools and all you get to read is this “100% placements”. It is getting crazy and no one is interested in teaching. There are so many who pass out paying crazy sums not knowing anything at all. Throughout Day one and  Day final all the students talk about is internships and placements. So like it was said “All roads lead to Rome” , B-Schools say ” all roads lead to Placement”.

    Continued in article

    Bob Jensen's threads on collegiate ranking controversies are at

    "As Textbooks Go 'Custom,' Students Pay Colleges Receive Royalties For School-Specific Editions; Barrier to Secondhand Sales,"
    by Diana Hacker, The Wall Street Journal, July 10, 2008, Page B10 ---

    The University of Alabama, for instance, requires freshman composition students at its main campus to buy a $59.35 writing textbook titled "A Writer's Reference," 

    The spiral-bound book is nearly identical to the same "A Writer's Reference" that goes for $30 in the used-book market and costs about $54 new. The only difference in the Alabama version: a 32-page section describing the school's writing program -- which is available for free on the university's Web site. This version also has the University of Alabama's name printed across the top of the front cover, and a notice on the back that reads: "This book may not be bought or sold used."

    Custom textbooks like this one are proliferating on U.S. college campuses, guaranteeing hefty sales for publishers -- and payments to colleges that are generally undisclosed to students. The publisher of the Alabama book -- Bedford/St. Martin's, based in Boston -- pays the Tuscaloosa school's English department a $3 royalty on each of the 4,000 copies sold each year. And though the prohibition on selling the book used can't be legally enforced, the college bookstore won't buy the books back, making it more difficult for students to find used copies.

    Textbook companies and college officials involved in such deals say custom textbooks provide needed resources for academic departments and more-useful materials for students.

    But Ann Marie Wagoner, a 19-year-old University of Alabama freshman who pays $1,200 a year for textbooks, calls the cost of new custom books "ridiculous" and complains that students aren't told about the royalties. "They're hiding it so there isn't a huge uproar," she says.

    The custom-textbook business has become the fastest-growing segment of the $3.5 billion market for U.S. new college texts, comprising 12% of sales for 2006, the latest year for which data is available. Royalty deals generate tens of thousands of dollars for some big academic departments. The arrangements have drawn little attention, despite increasing legislative and regulatory scrutiny of the spiraling price of textbooks, which have been rising at twice the rate of inflation over the past two decades.

    In 2005, a report by the U.S. Government Accountability Office criticized several textbook industry practices -- including frequent new editions and the "bundling" of books with extras like CDs and workbooks -- that discourage the purchase of used books and inflate prices for students.

    The agency found that college students spend an average of about $900 a year on textbooks. That's the equivalent of 8% of tuition and fees at the average private four-year college, 26% at a state university and 72% at a community college.

    Controlling Textbook Costs

    In recent years, 34 states have proposed or passed legislation to control textbook costs, including measures to prohibit inducements to professors for adopting textbooks, according to a May 2007 congressional study. A bill pending in Congress would require more disclosure of textbook pricing, in part by requiring publishers to sell textbooks separately from the bundles of extras with which they are now often packaged.

    The book-royalty arrangements resemble a practice exposed during last year's student-loan scandal, when some universities steered students to particular lending firms and received a secret cut of the loans. New York Attorney General Andrew Cuomo called those payments "kickbacks" and forced universities, many of which said they used the money to fund scholarships, to halt the practice. Mr. Cuomo recently launched a broad conflict-of-interest investigation of the relationship between colleges and vendors, including book publishers.

    For publishers, the custom market is a way to thwart used-book sales, which cut deeply into their profits. Though used books have been around for decades, they have become a much bigger industry threat in the Internet age. Web sites for used books, such as Amazon.com1 and eBay, have transformed fragmented, campus-by-campus dealings in old texts into a national market, where discounts of 50% off the new-book price are common. Because of their limited audience, custom books are difficult to resell -- and they sometimes aren't eligible for authorized campus book-buyback programs.

    James V. Koch, former president of Old Dominion University and the University of Montana, says that colleges, rather than requiring students to buy custom texts, should post exclusive material free on university Web sites. Prof. Koch, an economist who studied textbook costs for a Congressional advisory committee last year, says royalty arrangements involving specially made books may violate colleges' conflict-of-interest rules because they appear to benefit universities more than students.

    'Unethical Behavior'

    "It treads right on the edge of what I would call unethical behavior," he says. "I'm not sure it passes the smell test." Many colleges forbid professors from personally accepting royalties when they assign their own books for classes; others have no rules.

    At the University of Alabama, Carolyn Handa, who until recently directed the school's writing program, acknowledges that students can save money if they buy used standard editions or sell their books at the end of the term. But Prof. Handa says the university edition is designed as a long-term reference. "You don't sell back your dictionary after your first year of college," she says. "It should be a resource they have on their shelf."

    The writing program so far has collected about $20,000 in royalties in the two years since it started requiring custom textbooks, Prof. Handa says. She adds that she regularly declines pitches from other publishers offering even higher royalties. "I feel bad enough getting $3," she says.

    Prof. Handa says the royalty money helps pay for trips to conferences for graduate students and will underwrite teaching awards. This year, three graduate students received about $500 apiece to attend the April convention of the Conference on College Composition and Communication in New Orleans.

    Bedford/St. Martin's is a unit of Macmillan, which is owned by German publishing giant Verlagsgruppe Georg von Holtzbrinck GmbH. Brian Napack, president of Macmillan, says university departments deserve royalties because of the time they spend putting together custom texts. "We didn't come to the market to give departments royalties," he says. "We think there's a decent argument to be made for it. It's a nice bonus for colleges to have a couple of extra bucks to use for education."

    Attracted to 15% annual sales growth, big players such as Pearson PLC, McGraw-Hill Cos. and Macmillan are all making major pushes into the custom-book field. In part, that's because technology has made it cost-effective for customers to create specialized books for relatively few students. Proponents say students often complain that professors use only a few chapters of standard texts, whereas custom books can follow a course precisely.

    Searching Facebook

    Nicole Allen, textbooks advocate for U.S. Public Interest Research Groups -- a consumer organization -- says students, faced with buying a custom textbook, should ask the professor whether they can instead make do with a used standard version. If a custom text is required, students can try to find it used through local book exchanges or by searching social-networking sites such as Facebook for students who have recently taken the course and may want to sell a copy, Ms. Allen says.

    Some custom books involve more than just little tweaks of established texts. At Virginia Tech, about 3,000 first-year students annually buy a required composition guide created by its faculty. The school distributes a new edition each year featuring student work. At the university bookstore, the text, published by Pearson, sells for about $50. Carolyn Rude, who chairs the English department, says the book helps provide consistency across more than 100 sections of freshman composition by ensuring a standard curriculum. She wouldn't disclose the precise amount of the royalty but said it was "several dollars" per book and generated about $20,000 annually. The university uses the money to bring in expert speakers and pay for $600 research and travel stipends for instructors, Prof. Rude says.

    A $10 Royalty per Book

    Pennsylvania State University recently ended a contract with Pearson for the roughly 10,000 students taking introductory economics courses. The economics department received a $10 royalty for each custom textbook students purchased, generating about $50,000 a year for the program, says Susan Welch, dean of the college of liberal arts. But, Prof. Welch says, the school was uncomfortable "making money on students like that," and the arrangement discouraged students from buying cheaper, used books. Under a new contract with Pearson, Penn State now uses standard texts with no royalties, as well as custom course packs.

    Don Kilburn, chief executive of Pearson's custom-publishing division, says royalties are justified when professors and others "put in a fair amount of time and effort." Pearson says it pays royalties on 300 of roughly 9,000 custom projects. Mr. Kilburn acknowledged that custom books have lower resale value for students. But with custom books, he says, students "get something better suited for their needs."

    Bob Jensen's threads on publisher frauds are at

    How the Media Networks and Hollywood in general commit frauds

    "Law and Disorder Producer Dick Wolf and NBC Are Battling Over the Profits Of One of the Richest TV Shows Ever. These Are Their Stories," by Rebecca Dana, The Wall Street Journal,  July 12, 2008; Page A1 ---

    NBC Universal and Hollywood producer Dick Wolf have built "Law and Order" into one of the most lucrative properties in the history of television, generating billions of dollars from the franchise's three procedural crime dramas. The 19-year-old marriage was never an idyllic one, but as long as both sides were getting rich, it remained intact.

    Now, it's on the rocks.

    This spring, Mr. Wolf faced off against his corporate bosses in two major legal battles over the series's revenue, prestige and legacy -- a high-stakes saga that played out largely behind closed doors. If it were a TV show, it would be called "Law and Order: Law and Order."

    According to Mr. Wolf's friends and employees, the producer believes he has been systematically cheated by NBC. He thinks the company has sold the show at a cheap in-house price to its own cable outlets rather than getting the best deal possible by letting other networks bid on it. NBC denies this, and in a private hearing this spring, an arbitrator sided with the network.

    Continued in article

    More on How White Collar Crime Pays Even When You Get Caught

    "The Milberg Double Cross," The Wall Street Journal, July 14, 2008; Page A16 ---

    The Justice Department recently took a bow in its legal victory over the law firm of Milberg Weiss. But now it seems Justice may itself have been conned by the notorious firm and its felonious former lead partner, Melvyn Weiss.

    It was only last month that Milberg agreed to pay $75 million as part of a nonprosecution agreement over Justice's charges that it had run a 30-year kickback scheme. Not 30 days, or months. Thirty years. The firm got off easy, not least because it finally cut ties with the partners (including Weiss) it blamed for the scheme. Yet according to papers filed in New York State court, even as Milberg was pinning the blame on these criminals and telling Justice it had thrown them overboard, the law firm's remaining partners were agreeing to pay millions to Weiss going forward. Apparently crime does pay.

    Continued in article

    Jensen Comment

    If I'm not mistaken, before we knew Melvyn Weiss was going to become a convicted felon, he was a very sanctimonious featured plenary session speaker a few years ago at an American Accounting Association annual meeting. I no longer have the video (I gave it and my other videos to the accounting history archives at the University of Mississippi.) My recollection is that Mr. Weiss lambasted CPA firms for wanting limited liability.

    Bob Jensen's threads on how white collar crime pays even if you get caught are at

    Other Links
    Main Document on the accounting, finance, and business scandals --- 

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    Bob Jensen's threads on pro forma frauds are at 

    Bob Jensen's threads on ethics and accounting education are at

    The Saga of Auditor Professionalism and Independence ---

    Incompetent and Corrupt Audits are Routine ---

    Bob Jensen's threads on accounting theory are at 

    Future of Auditing --- 




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