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)
If an auditor issues going concern exceptions in audit reports, the
exceptions themselves will probably contribute to the downfall of the clients
The same can be said by financial analysts who elect to trash a company's
Hence we have the age-old conflict between holding back on what you really
secretly predict versus pulling the fire alarm on a troubled company
There are no easy answers here except to conclude that it auditors and credit
rating agencies appeared to not reveal many of their inner secret predictions in
Auditing firms and credit rating agencies lost a lot of credibility in this
economic crisis, but they've survived many such stains on their reputations in
By now we're used to the fact that the public is generally aware of the fire
before the auditors and credit rating agencies pull the alarm lever
On the other hand, financial wizards who pull the alarm lever on nearly every
company all the time lose their credibility in a hurry
A father walks into a restaurant with his young son. He gives the young boy 3
pennies to play with to keep him occupied.
Suddenly, the boy starts choking, going blue in the face. The father realizes
the boy has swallowed the pennies and starts slapping him on the back..
The boy coughs up 2 of the pennies, but keeps choking. Looking at his son,
the father is panicking, shouting for help.
A well dressed, attractive, and serious looking woman, in a blue business
suit is sitting at a coffee bar reading a newspaper and sipping a cup of coffee.
At the sound of the commotion, she looks up, puts her coffee cup down, neatly
folds the newspaper and places it on the counter, gets up from her seat and
makes her way, unhurried, across the restaurant.
Reaching the boy, the woman carefully drops his pants; takes hold of the
boy's testicles and starts to squeeze and twist, gently at first and then ever
so firmly. After a few seconds the boy convulses violently and coughs up the
last penny, which the woman deftly catches in her free hand.
Releasing the boy's testicles, the woman hands the penny to the father and
walks back to her seat at the coffee bar without saying a word.
As soon as he is sure that his son has suffered no ill effects, the father
rushes over to the woman and starts thanking her saying, "I've never seen
anybody do anything like that before, it was fantastic. Are you a doctor?"
"Statement by SEC Chairman: Statement on the Inspector
General's Report Regarding the Bernard Madoff Fraud," by SEC Chairman Mary
Shapiro, SEC Speech, September 4, 2009 ---
Deloitte to Pay $1M in Beazer Suit
Deloitte & Touche has agreed to pay investors of Beazer
Homes USA nearly $1 million to settle claims the firm should have noticed the
homebuilder was issuing inaccurate financial statements as the housing market
began to decline earlier this decade. The audit firm, Beazer, and former Beazer
executives have settled the class-action lawsuit for a total of $30.5 million,
pending approval by the U.S. District Court for the Northern District of
Georgia. Deloitte is scheduled to pay $950,000.
Sarah Johnson, "Deloitte to Pay $1M in Beazer Suit," CFO.com, May 7, 2009
Bob Jensen's threads on Deloitte & Touche are at
"Beazer to Pay Up to $53 Million in Fraud Case," by Brett Kendall and
Sarah H. Lynch, The Wall Street Journal, July 3, 2009 ---
Beazer Homes USA Inc. will pay up to $53 million to
settle mortgage fraud charges related to federally insured mortgage loans
the company made to buyers of its homes.
The U.S. Department of Justice said Wednesday that
Beazer will pay $5 million to the federal government and up to $48 million
to victimized homeowners.
The settlement is tied to an agreement with federal
prosecutors in North Carolina that will allow the Atlanta-based company to
avoid criminal prosecution on the mortgage-fraud charges, and on other
accounting-fraud charges related to the manipulation of company earnings.
In a separate action, the Securities and Exchange
Commission filed civil charges Wednesday against Beazer's former chief
accounting officer, accusing him of conducting a fraudulent earnings scheme
and hiding his wrongdoing from outside auditors and other company
In the mortgage fraud case, prosecutors said Beazer
ignored income requirements in making loans to unqualified buyers, and
sought to hide from the Federal Housing Administration that some company
branches had excessive default rates on their loans.
Prosecutors also said Beazer charged home buyers
interest "discount points" at closing but kept the money and didn't reduce
interest rates on the loans. They added that the home builder provided
buyers with cash gifts so they could come up with minimum down payments,
only to add the gift price onto the purchase price of the house.
Beazer said in a statement that it has fully
cooperated with governmental authorities since irregularities in its
mortgage origination business and its financial reporting came to light.
"We deeply regret these matters and have used what
we have learned to strengthen our control and compliance culture," said
Beazer Chief Executive Ian J. McCarthy.
In the SEC's accounting fraud case, the agency said
Beazer's former chief accountant, Michael T. Rand, wrongfully understated
the company's income between 2000 and 2005 by setting aside a reserve or
rainy-day fund for land development and house construction costs.
Mr. Rand's lawyer didn't return a call for comment.
When home sales slowed in 2006, Beazer tapped into
a reserve for land development and house construction and improperly boosted
its slumping earnings, the agency said.
In the end, the SEC said, Beazer understated the
company's income in SEC filings by $63 million between fiscal years 2000
through 2005. In addition, the company overstated its income and understated
losses by a total of $47 million in fiscal year 2006 and the first two
quarters of fiscal year 2007.
Corrections & Amplifications The Securities and
Exchange Commission accused the former chief accounting officer of Beazer
Homes USA Inc. of engaging in an accounting scheme that caused the company
to understate its income between 2000 and 2005. A previous version of this
article incorrectly said the company had overstated its income during those
History of Litigation of Beazer Homes ---
SEC Sues Ex-CAO of Beazer Homes in Earnings Scheme ---
Beazer Accountant Fired in Document Destruction Try ---
Outside auditors informed Beazer the appreciation
interest in the homes violated accounting principles, and would not allow the
company to record the revenue and profit from the home sales to the outside
investors. In order to deceive its auditor, the SEC
states, Beazer circumvented the accounting rules by entering into new agreements
in 2006 that omitted the appreciation interest, but then entered oral side
agreements with the investors for the company to receive a portion of that
appreciation. Beazer is one of the country's 10 largest single-family home
builders with operations in Arizona, California, Delaware, Florida, Georgia,
Indiana, Maryland, Nevada, New Jersey, New Mexico, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Texas, and Virginia.
"Beazer Homes settles SEC investigation," Entrepreneur, September 24, 2008 ---
|Deloitte & Touche has agreed to pay investors of Beazer Homes USA
nearly $1 million to settle claims the firm should have noticed the
homebuilder was issuing inaccurate financial statements as the housing
market began to decline earlier this decade. The audit firm, Beazer, and
former Beazer executives have settled the class-action lawsuit for a
total of $30.5 million, pending approval by the U.S. District Court for
the Northern District of Georgia. Deloitte is scheduled to pay $950,000.
Sarah Johnson, "Deloitte to Pay $1M in Beazer Suit," CFO.com, May
7, 2009 ---
Bob Jensen's threads on Deloitte & Touche are at
SEC says: "GE bent the accounting rules beyond the breaking point"
"GE Settles Civil-Fraud Charges: Fine of $50 Million Resolves SEC
Probe Into Firm's Accounting Practices," by Paul Glader and Kara Scannell,
The Wall Street Journal, August 5, 2009 ---
General Electric Co. agreed to pay a $50 million
fine to the Securities and Exchange Commission to settle civil fraud and
other charges that GE's financial statements in 2002 and 2003 misled
The fine settles a probe that started in 2005 into
GE's accounting procedures, including financial hedges and revenue
recognition. In a complaint filed with U.S. District Court in Connecticut,
the SEC said the Fairfield, Conn., conglomerate used improper accounting
methods to boost earnings or avoid disappointing investors.
"GE bent the accounting rules beyond the breaking
point," said Robert Khuzami, director of the SEC's Division of Enforcement,
in a prepared statement. "Overly aggressive accounting can distort a
company's true financial condition and mislead investors."
GE agreed to pay the fine without admitting or
denying the SEC's allegations. The SEC noted efforts by GE's audit committee
to correct and improve the company's accounting during the probe. GE twice
restated its financial results and disclosed other errors. The probe led to
several employees being disciplined or fired.
"We are committed to the highest standards of
accounting," said GE spokeswoman Anne Eisele. "While this has been a
difficult and costly process, our controllership processes have been
strengthened as a result, and GE is a stronger company today." GE said it
doesn't need to further correct or revise its financial statements related
to the investigation.
The SEC complaint focused on GE's accounting for
four items over various periods: derivatives, commercial-paper funding,
sales of spare parts and revenue recognition. The commission said GE in 2002
and 2003 reported locomotive sales that hadn't yet occurred in order to
boost revenue by $370 million. A 2002 change in accounting for spare parts
in its aircraft-engine unit increased that year's net income by $585
million, the commission said.
In early 2003, the SEC alleges, GE changed how it
accounted for hedges on its issuances of short-term borrowings known as
commercial paper. The commission said the change boosted GE's pretax
earnings for 2002 by $200 million. Had it not changed the methodology, the
commission said, GE would have missed analysts' earnings estimates for the
first time in eight years, by 1.5 cents.
"Every accounting decision at a company should be
driven by a desire to get it right, not to achieve a particular business
objective," said David P. Bergers, director of the commission's Boston
office, which led the investigation. "GE misapplied the accounting rules to
cast its financial results in a better light."
The settlement resolves the GE accounting inquiry,
but Mr. Bergers said similar SEC investigations of other companies continue.
GE's shares were up 10 cents to $13.82 in 4 p.m.
composite trading on the New York Stock Exchange. Investors and analysts
said the settlement represented closure.
"I feel as though the company has corrected its
practices," said David Weaver, a portfolio manager at Adams Express in
Baltimore, which owns about 1.5 million GE shares. "Going forward, I feel a
little more comfortable with the cleanliness of [GE's earnings] numbers."
Matt Collins, an industrial analyst at Edward Jones
in St. Louis, said the accounting issues had been "frustrating for
investors, but they were never material." He said investors are now focused
on the recession and losses at GE's finance unit.
The SEC under enforcement chief Mr. Khuzami is
trying to close cases older than three years unless they are critical to the
agency's program. The goal is to clear out the pipeline so attorneys can
work on current cases, although one person familiar with the matter said
that wasn't a consideration in this case.
GM's auditor, KPMG, is not named in the court paper such that the role auditors
played in allowing GE to push these alleged accounting abuses is not disclosed.
When will auditors learn about complexities of financial risk?
"Did Wells Fargo's Auditors Miss Repurchase Risk?" by
Francine McKenna|, ClusterStock, September 20,
the Business Insider worried that Wells Fargo may be making the same fatal
mistake AIG did – underestimating, or worse,
naively ignoring Collateral Call Risk.
The concern was focused on
potential exposure from the credit default swaps portfolio they inherited
from Wachovia. In WFC's annual report the Buiness Insider saw limited
discussion of this risk and no details of the reserves for it.
There are two possible ways
to account for the lack of discussion of Collateral Call Risk. Either
Wachovia wrote its derivative contracts in ways that don’t permit buyers to
demand more collateral or Wells Fargo is not disclosing this risk. (A third
possibility—that they don't even seem aware that they have this risk — seems
remote after AIG.)
When I read that,
I saw eerie parallels with New Century, all the more so because of the
auditor connection – both Wells Fargo and Wachovia and New Century (now in
Chapter 11) are audited by KPMG. New Century was not too transparent either
and, as a result, many people, including
some very sophisticated investors
were caught with their pants down. KPMG is accused in a $1 billion dollar
lawsuit of not just being incompetent, but of aiding, abetting, and covering
up New Century’s fraudulent loan loss reserve calculations just so they
could keep their lucrative client happy and viable.
KPMG’s audit and review failures concerning New Century’s reserves
highlights KPMG’s gross negligence, and its calamitous effect — including
the bankruptcy of New Century. New Century engaged in admittedly high risk
lending. Its public filings contained pages of risk factors…New Century’s
calculations for required reserves were wrong and violated GAAP. For
example, if New Century sold a mortgage loan that did not meet certain
conditions, New Century was required to repurchase that loan. New Century’s
loan repurchase reserve calculation assumed that all such repurchases occur
within 90 days of when New Century sold the loan, when in fact that
assumption was false.
In 2005 New Century informed KPMG that the total outstanding loan repurchase
requests were $188 million. If KPMG only considered the loans sold within
the prior 90 days, the potential liability shrank to $70 million. Despite
the fact that KPMG knew the 90 day look-back period excluded over $100
million in repurchase requests, KPMG nonetheless still accepted the flawed
$70 million measure used by New Century to calculate the repurchase
reserve. The obvious result was that New Century significantly under
reserved for its risks.
How does the New
Century situation and KPMG’s role in it remind me of Wells Fargo now? Well,
in both cases, there’s no disclosure of the quantity and quality of the
repurchase risk to the organization. Back in
March of 2007, I wrote about the lack of
disclosure of this repurchase risk in New Century’s 2005 annual report:
There are 17 pages of discussion of general and REIT specific risk
associated with this company, but no mention of the specific risk of the
potential for their banks to accelerate the repurchase of mortgage loans
financed under their significant number of lending arrangements….it does not
seem that reserves or capital/liquidity requirements were sufficient to
cover the possibility that one of or more lenders could for some reason
decide to call the loans. Did the lenders have the right to call the loans
unilaterally? It does say that if one called the loans it is likely that all
would. Didn’t someone think that this would be a very big number (US 8.4
billion) if that happened.
Some have been writing since 2005 about the elephant in the room that is
mortgage loan repurchase risk:
Even if a lender sells most of the loans it originates, and, theoretically,
passes the risk of default on to the buyer of the loan, there remains an
elephant lurking in the room: the risk posed to mortgage bankers from the
representations and warranties made by them when they sell loans in the
secondary market… in bad times, the holders of the loans have been known to
require a second "scrubbing" of the loan files, looking for breaches of
representations and warranties that will justify requiring the originator to
repurchase the loan. …A "pure" mortgage banker, who holds and services few
loans, may think he's passed on the risk (absent outright fraud).
Sophisticated originators know better…When the cycle turns (as it always
does) and defaults rise, those originating lenders who sacrificed sound
underwriting in return for fee income will find the grim reaper knocking at
their door once again, whether or not they own the loan.
quoted Wells Fargo from page 127 of their
2008 Annual Report (emphasis added):
In certain loan sales or
securitizations, we provide recourse to the buyer whereby we are
required to repurchase loans at par value plus accrued interest on the
occurrence of certain credit-related events within a certain period of time.
The maximum risk of loss…In 2008 and in 2007, we did not repurchase a
significant amount of loans associated with these agreements.
But earlier, on page 114,
there is a footnote to a chart representing loans in their balance sheet
that have been securitized--including residential mortgages and
securitzations sold to FNMA and FHLMC--where servicing is their only form of
However, the delinquencies
and charge off figures do not include sold loans. Wells Fargo tells us these
numbers do not represent their potential obligations for repurchase if FNMA
and FHLMC decide their underwriting standards were not up to par.
Delinquent loans and net charge-offs exclude loans sold to FNMA and FHLMC.
We continue to service the loans and would only experience a loss if
required to repurchasea delinquent loan due to a breach in original
representations and warranties associated with our underwriting standards.
So where are those numbers?
Where is the number that correlates to the $8.4 billion dollar exposure that
brought down New Century? Wells Fargo saw an almost 300% increase from 2007
to 2008 in delinquencies and 200% increase in charge offs from commercial
loans and a 300% increase in delinquencies and 350% increase in charge offs
on residential loans they still hold. Can anyone say with certainty that we
won’t see FNMA and FHLMC come back and force some repurchases on Wells Fargo
for lax underwriting standards?
This is all we get from Wells
Fargo in the 2008 Annual Report:
During 2008, noninterest income was
affected by changes in interest rates, widening credit spreads, and other
credit and housing market conditions, including…
The lack of
disclosure of this issue here mirrors the lack of disclosure in New Century
and perhaps in other KPMG clients such at Citigroup, Countrywide ( now
inside Bank of America) and others. How do I know there could be a pattern?
the inspections of KPMG by the PCAOB, their
regulator, tell us they have been called on auditing deficiencies just like
this. Do we have to wait for a post-failure lawsuit to bring some sense,
and some sunshine, to the system?
Francine McKenna is Editor of Re: The Auditors.
Will auditors survive the huge lawsuits concenring their negligence in
estimating loan losses in the subprime mortgage and CDO crisis ---
Bob Jensen's threads on auditing firm lawsuits ---
Bob Jensen's fraud updates are at
Bob Jensen's threads on earnings management and creative accounting are at
Charges Terex Corporation With Accounting Fraud," SEC News, August 12, 2009
The Securities and Exchange Commission today charged Terex Corporation, a
Westport, Conn.-based heavy equipment manufacturer, with accounting fraud for
making material misstatements in its own financial reports to investors, as well
as aiding and abetting a fraudulent accounting scheme at United Rentals, Inc.
(URI), another Connecticut-based public company.
Terex has agreed to settle the SEC's charges and pay a penalty of $8
million. The SEC
previously charged URI
with fraud as well as officers of URI and Terex.
"Terex is being charged with helping United Rentals pull off a
sophisticated accounting scheme," said Fredric D. Firestone, Associate
Director in the SEC's Division of Enforcement. "These two public
companies inflated year-end results in order to mislead investors during
a period of industry recession."
The SEC's complaint, filed in U.S. District Court for the District of
Connecticut, alleges that Terex aided and abetted the fraudulent
accounting by URI for two year-end transactions that were undertaken to
allow URI to meet its earnings forecasts. These fraudulent transactions
also allowed Terex to prematurely recognize revenue from its sales to
URI. The fraud occurred through URI's sales of used equipment to a
financing company and its lease-back of that equipment for a short
period. As part of the scheme, Terex agreed to sell the equipment at the
end of the lease period and guarantee the financing company against any
losses. URI separately guaranteed Terex against losses it might incur
under the guarantee it had extended to the financing company.
The SEC's complaint also alleges that from 2000 through June 2004,
Terex's accounting staff failed to resolve imbalances arising from
certain intercompany transactions. Instead of investigating and
correcting the imbalances, Terex offset the imbalances with unsupported
and improper entries. As a result, costs were not recorded as expenses,
and, on a consolidated basis, Terex appeared to be more profitable than
Without admitting or denying the SEC's charges, Terex agreed to settle
the Commission's action by consenting to be permanently enjoined from
violating the antifraud, reporting, books and records and internal
control provisions of the federal securities laws and by paying the $8
million penalty. The settlement is subject to court approval.
The Commission acknowledges the assistance of the U.S. Attorney's Office
for the District of Connecticut and the New Haven Field Office of the
Federal Bureau of Investigation in this matter.
What does Bernie Madoff have in common with Terex?
At one time, Madoff and Terex used unregistered auditors.
restated its financial statements in 2005 ---
Terex Resources Inc. (TSX VENTURE:TRR) ("Terex" or the "Company") announces that
it is filing on SEDAR today new financial statements in respect of its year
ended December 31, 2003 that have been audited by Parker Simone LLP. The new
financial statements have been prepared and are being filed on SEDAR today as a
result of the former financial statements in respect of its year ended December
31, 2003 having been audited by an auditor that was not registered with the
Canadian Public Accountability Board.
"Audit Overseer Faults BDO, Grant Thornton: The PCAOB says BDO
had trouble testing revenue-recognition controls, while Grant Thornton did not
adequately identify GAAP errors. Both firms complain that the board criticized
judgment calls," by Marie Leone, CFO.com, July 13, 2009 ---
Annual inspection reports for BDO Seidman and Grant
Thornton, released last Thursday by the Public Company Accounting Oversight
Board, criticized some of the audit testing procedures and practices at the
two large accounting firms.
The review of BDO focused mainly on issues related
to testing controls around revenue recognition, while Grant Thornton was
chastised for not identifying or sufficiently addressing errors in clients'
application of generally accepted accounting principles with respect to
pension plans, acquisitions, and auction-rate securities.
With regard to BDO, the inspection staff reviewed
seven of the company's audits performed from August 2008 through January
2009 as a representation of the firm's work.
The report highlighted several deficiencies tied to
what it said were failures by BDO to perform audit procedures, or perform
them sufficiently. According to the reports, the shortcomings were usually
based on a lack of documentation and persuasive evidence to back up audit
opinions. For example, the board said, BDO did not test the operating
effectiveness of technology systems that a client used to aggregate revenue
totals for its financial statements. The systems were used by the client
company for billing and transaction-processing purposes.
The inspection team also reported that BDO's audit
of a new client failed to "appropriately test" the company's recognition of
revenue practices. Specifically, the audit firm noted that sales increased
in the last month of the year but it failed to get an adequate explanation
from management. Also, the report concluded that BDO reduced its
"substantive" revenue testing of two other clients, although more thorough
testing was needed.
And while BDO identified so-called "channel
stuffing" as a risk of material misstatement due to fraud, at another
client, its testing related to whether the client engaged in the act was not
adequate, said the inspectors. (Channel stuffing is the practice of
accelerating revenue recognition by coaxing distributors to hold excess
Other alleged problem spots for BDO included a
failure to design and perform sufficient audit procedures to test: journal
entries and other adjustments for evidence of possible material misstatement
due to fraud; valuation of accrued liabilities related to contra-revenue
accounts; a liability for estimated sales returns in connection with an
acquisition; and assumptions related to a client's goodwill impairment of a
significant business unit.
In response to the inspection report, BDO performed
additional procedures or supplemented its work papers as necessary. It also
noted in a letter that was attached to the report that none of the clients
cited had to restate their financial results.
In the letter, BDO acknowledged the importance of
the inspection exercise, commenting that "an inherent part of our audit
practice involves continuous improvement." However, the firm also said the
report does not "lend itself to a portrayal of the overall high quality of
our audit practice," since it reviews only a tiny sampling of audits. What's
more, BDO pointed out that many of the issues reviewed "typically involved
many decisions that may be subject to different reasonable interpretations."
Deficiencies highlighted in the inspection report
on Grant Thornton, meanwhile, included failures to "identify or
appropriately address errors" in clients' application of GAAP. In addition,
inadequacies were said to have been found with respect to performing
necessary audit procedures, or lacking adequate evidence to support audit
opinions. The Grant Thornton inspections were performed at on eight audits
conducted between July 2008 and December 2008.
In five audits, the PCAOB said inspectors found
deficiencies in testing benefit plan measurements and disclosures. In four
of those audits, Grant Thornton was said to have failed to test the
existence and valuation of assets held in the issuer's defined-benefit
pension plan. In one audit, the board said, the accounting firm failed to
test the valuation of real estate and hedge fund investments and a
guaranteed investment contract held by the client's defined-benefit pension
One client amended three of its post-retirement
benefit plans to eliminate certain benefits, and Grant Thornton "failed to
evaluate whether the issuer's accounting" was appropriate, said the report.
In another audit, the accounting firm allegedly did not perform sufficient
procedures to evaluate whether the assumptions related to the discount rate
and long-term rate of return on plan assets — provided by the client's
actuary — were reasonable.
In a separate audit, a client acquired a public
company that was described as having six reporting units. The client
recorded the fair values of the net assets of each reporting unit according
to the valuations provided by a specialist. But according to the inspection
report, Grant Thornton did not audit the acquisition transaction
In particular, the firm neglected to evaluate which
of the fair-value estimates represented the "best estimate" with regard to
two units that were hit with an economic penalty for having a lower total
fair value than their net assets, the inspectors said. They also concluded
that Grant Thornton did not do a sufficient auditing job when it failed to
note whether it was appropriate for the specialist to use liquidation values
for two other units.
Continued in article
Bob Jensen's threads on BDO and Grant Thornton are at
Bob Jensen's threads on professionalism and independence in auditing are
Ghost writers for the halls of academe
Sen. Charles E. Grassley, an Iowa Republican who has
been investigating financial conflicts of interest
is now urging the National Institutes of Health to
combat the practice of university researchers' signing their names to scientific
papers that were actually
prepared by ghostwriters working for
drug companies. At least three Columbia University
researchers signed their names to articles financed by the pharmaceutical maker
The New York Times reported.
Chronicle of Higher Education,
August 19, 2009 ---
Update about a professor of psychology
"Professor at Canada's McGill U. Admits Signing Research Generated by Drug
Maker," by Paul Basken, Chronicle of Higher Education, August 24, 2009 ---
Bob Jensen's threads on Professors Who Cheat are at |
Bob Jensen's threads on ghost students on campus are at
The Russians are Scamming; The Russians are Scamming
"Bank-fraud scam alleged in Denver and Aurora: Investigators say 700
people were involved in a Denver-based scheme run by Russian immigrants, with
losses topping $80 million," by Felisa Cardona, The Denver Post, August
15, 2009 ---
A alleged massive organized bank-fraud scheme
involving 16 Russian immigrants was busted by federal agents Friday, with 15
raids at several locations, including an Aurora auto dealership and a Denver
Federal agents said the Denver-based scheme led to
losses of more than $80 million and involved 700 people — mostly students in
the U.S. on visas who were recruited by the criminal enterprise.
Described by authorities as a "bust out" scam, the
allegations involved using the identity and credit line of a business to
obtain loans and goods with no intention of repaying the money or paying for
the merchandise, according to the case affidavit unsealed Friday.
Additionally, some of the 700 obtained credit cards to buy luxury items with
no intention of paying for them, while others took out cash loans without
repaying, it is alleged.
As part of the investigation, federal agents
searched CannaMed, a medical-marijuana dispensary on Leetsdale Drive in
Denver. But medical marijuana was not the focus of the search or the
investigation, said Jeff Dorschner, spokesman for the Colorado U.S.
"The focus of the investigation is fraud and has
nothing to do with medical marijuana, and there is no link to the initial
investigation and medical marijuana," he said.
Medical marijuana is legal in Colorado. But under
federal law, once a federal agent comes in contact with marijuana, the
plants must be seized because the drug is illegal.
A person involved with the medical-marijuana
dispensary is potentially involved in unrelated criminal conduct, according
to a source close to the investigation.
Federal Bureau of Investigation agents also came in
contact with a marijuana-growing operation at another home that was searched
Maaliki Motors on South Havana Street in Aurora was
raided as well, but the business was searched solely because some of the
suspect credit cards were used there to purchase vehicles, according to the
Valeria Igorevna Glukhova, 22, used a Washington
Mutual credit card on Sept. 22, 2008, at the dealership and spent $10,000 on
a 2005 Lexus RX 330, court records say. Glukhova has not been arrested.
Four women were arrested during the bust, but only
two were in U.S. District Court in Denver on Friday for an initial
Natallia Vishnevskaya, 26, and Nadezda Nikitina,
23, remained in custody and through a Russian interpreter were told by U.S.
Magistrate Judge Michael Hegarty that they have a detention hearing
Wednesday to determine whether they should be released on bail.
Vishnevskaya and Nikitina are each charged with
bank fraud and submitting a false and fraudulent application for credit. The
charges carry maximum terms of 30 years in prison.
The court documents say that Nikitina formed a
business, A&N Enterprises, and filed articles of organization with the
Colorado Secretary of State.
However, the Colorado Department of Labor reported
that she did not have any employment income at the time she filled out
applications for credit on which she said she earned $180,000 a year.
In May 2008, Nikitina tried to buy Jet Skis at
Vickery Motorsports, and the store denied her loan application when it saw
the number of loans on her credit reports.
Susan Ghardashyan, 69, and Seda Sahakyan, 77, were
taken to a medical facility after their arrests. They may make an initial
appearance in court next week, but the charges against them were unavailable
Court documents say Ghardashyan spent $20,300 at
Maaliki Motors from February to April using a Target National Bank Card and
another $10,000 on a Nordstrom card at the dealership. In late February, two
attempts were made at charging another $21,000 to the Nordstrom card at
Maaliki, but the charges were declined, the records show.
Dorschner declined to comment on whether anyone
involved in the businesses knew that the cards were being used fraudulently.
Bob Jensen's fraud updates are at
Bank of America pays $33M SEC fine over Merrill bonuses
Bank of America Corp. has agreed to pay a $33 million
penalty to settle government charges that it misled investors about Merrill
Lynch's plans to pay bonuses to its executives, regulators said Monday. In
seeking approval to buy Merrill, Bank of America told investors that Merrill
would not pay year-end bonuses without Bank of America's consent. But the
Securities and Exchange Commission said Bank of America had authorized New
York-based Merrill to pay up to $5.8 billion in bonuses. That rendered a
statement Bank of America mailed to 283,000 shareholders of both companies about
the Merrill deal "materially false and misleading," the SEC said in a statement.
Yahoo News, August 3, 2009 ---
Bank of America Not Punished Enough
"Judge Rejects Bank of America's $33M Fine," SmartPros, August 11, 2009
A federal judge in New York refused to accept a $33
million fine imposed on Bank of America for deceiving investors in its
purchase of Merrill Lynch.
Bank of American did not admit to any wrongdoing in
the pre-trial settlement with the Securities and Exchange Commission. But
judge Jed Rakoff not only said the fine was too small, but told the SEC to
name the executives responsible for the deception, The New York Times
Rakoff said the two financial firms "effectively
lied to their shareholders," by paying Merrill Lynch employees $3.6 billion
in bonuses after the deal closed in January.
Rakoff said the fine was "strangely askew" given
the multi-billion-dollar deal and the $45 billion in government bailout
funds Bank of America has accepted, much of it to help the bank absorb
Merrill Lynch's losses.
"Do Wall Street people expect to be paid large
bonuses in years when their company lost $27 billion?" Rakoff asked.
SEC and Bank of America attorneys defended their
position, but Rakoff refused to budge, ordering a new hearing on the issue
in two weeks, the newspaper said.
Bob Jensen's threads on the banking crisis are at
"13 Indicted In $100 Million Mortgage Fraud Case," by Lisa Chow, NPR
(audio), July 9, 2009 ---
Prosecutors in New York
have charged 13 people with running a massive mortgage fraud scheme. They say
everyone was in on the alleged scheme: lawyers, appraisers and mortgage brokers.
According to the
indictment, mortgage company AFG Financial Group, based on Long Island, targeted
properties whose owners were starting to default on their mortgages.
The company recruited
"straw buyers" — people with good credit scores — to apply for a loan to buy the
target property, while promising the distressed owners that they'd get to stay
in the home.
The indictment says they
paid appraisers to inflate the value of the property. Then they allegedly paid
off lawyers to represent all parties: the seller, the buyer and the bank at the
Attorney Robert Morgenthau says the group fraudulently obtained $100 million in
"One of the morals of
this case is there is no free lunch," Morgenthau says. "People with distressed
properties thought they were being bailed out. They didn't look carefully at all
at what the transaction was."
Morgenthau says 25 people
were involved in the scheme, and 12 already have pleaded guilty.
Bob Jensen's fraud updates are at
Bob Jensen's threads on mortgage lending Greed, Sleaze, Bribery, and Lies
New York's Pretty Young Things Are Turning to Crime
Robin Katz is a "sexy 25-year-old financial planner
working at Chase's Midtown headquarters," according to the New York Post, who
allegedly ripped off a client to the tune of $110,000 so she could spend it
"shopping" and "going out." Katz is a graduate of Smith College, and to judge by
her Facebook friends—who hail from Yale, Harvard, Wellesley, Princeton, the
Phillips Exeter Academy, etc.—she is pretty firmly ensconced in the ranks of
America's elite youth. She certainly seemed pedigreed and trustworthy enough for
her clients to entrust her with hundreds of thousands of dollars. Mistake!
John Cook, Gawker.com, July 21, 2009 ---
Bob Jensen's fraud updates 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
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
"Gauging the Worth of a Frequent-Flier Credit Card," by Ron Lieber, The
New York Times, August 16, 2008 ---
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
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
joesentme.com, 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
"A Timeline of the Madoff Fraud," The New York Times, June 29,
New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"
(The SEC's) Swanson later married Madoff's niece,
and their relationship is now under review by the SEC inspector general, who is
examining the agency's handling of the Madoff case, the Post reported. Swanson,
no longer with the agency, declined to comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 ---
The Washington Post account is at ---
A U.S. Securities and Exchange Commission lawyer
warned about irregularities at Bernard Madoff's financial management firm as
far back as 2004, The Washington Post reported on Thursday, citing agency
documents and sources familiar with the investigation.
Genevievette Walker-Lightfoot, a lawyer in the
SEC's Office of Compliance Inspections and Examinations, sent emails to a
supervisor saying information provided by Madoff during her review didn't
add up and suggesting a set of questions to ask his firm, the report said.
Several of the questions directly challenged Madoff
activities that turned out to be elements of his massive fraud, the
Madoff, 71, was sentenced to a prison term of 150
years on Monday after he pleaded guilty in March to a decades-long fraud
that U.S. prosecutors said drew in as much as $65 billion.
The Washington Post reported that when
Walker-Lightfoot reviewed the paper documents and electronic data supplied
to the SEC by Madoff, she found it full of inconsistencies, according to
documents, a former SEC official and another person knowledgeable about the
The newspaper said the SEC staffer raised concerns
about Madoff but, at the time, the SEC was under pressure to look for
wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus
on a separate probe into mutual funds, the report said.
One of Walker-Lightfoot's supervisors on the case
was Eric Swanson, an assistant director of her department, the Post
reported, citing two people familiar with the investigation.
Swanson later married Madoff's niece, and their
relationship is now under review by the SEC inspector general, who is
examining the agency's handling of the Madoff case, the Post reported.
Swanson, no longer with the agency, declined to
comment, the Post said.
SEC spokesman John Nester also declined to comment,
citing the ongoing investigation by the agency's inspector general, the
Our Main Financial Regulating Agency: The SEC Screw
One of the biggest regulation failures in history is the way the SEC failed to
seriously investigate Bernie Madoff's fund even after being warned by Wall
Street experts across six years before Bernie himself disclosed that he was
running a $65 billion Ponzi fund.
CBS Sixty Minutes on June 14, 2009 ran a rerun that is
devastatingly critical of the SEC. If you’ve not seen it, it may still be
available for free (for a short time only) at
The title of the video is “The Man Who Would Be King.”
Between 2002 and 2008 Harry Markopolos repeatedly told
(with indisputable proof) the Securities and Exchange Commission that Bernie
Madoff's investment fund was a fraud. Markopolos was ignored and, as a result,
investors lost more and more billions of dollars. Steve Kroft reports.
Markoplos makes the SEC look truly incompetent or
outright conspiratorial in fraud.
I'm really surprised that the SEC survived after Chris
Cox messed it up so many things so badly.
As Far as Regulations Go
An annual report issued by
the Competitive Enterprise Institute (CEI) shows that the U.S. government
imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the
$1.2 trillion generated by individual income taxes, and amounts to $3,849 for
every American citizen. According the 2009 edition of Ten Thousand Commandments:
An Annual Snapshot of the Federal Regulatory State, the government issued 3,830
new rules last year, and The Federal Register, where such rules are listed,
ballooned to a record 79,435 pages. “The costs of federal regulations too often
exceed the benefits, yet these regulations receive little official scrutiny from
Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report.
“The U.S. economy lost value in 2008 for the first time since 1990,” Crews said.
“Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on
Americans beyond the $3 trillion officially budgeted” through the regulations.
"Government Implemented Thousands of New Regulations Costing $1.17 Trillion in
2008," CNS News, June 12, 2009 ---
I’m a long-time believer that industries being regulated end up controlling the
regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur
Levitt to Chris Cox do absolutely nothing to change my belief ---
How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry
for regulators who play ball while they are still employed by the government. It
happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so
many people work for the FBI and IRS, it's a little harder for industry to
manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of
the worst offenders whereas other agencies often deal with top management of the
largest companies in America.
Bob Jensen's fraud updates are at
"Executive Overconfidence and the Slippery Slope to Fraud," by
Catherine M. Schrand University of Pennsylvania - Accounting Department
and Sarah L. C. Zechman University of Chicago Booth School of Business, SSRN,
May 1, 2009 ---
We propose that executive overconfidence, defined as having unrealistic
(positive) beliefs about future performance, increases a firm’s propensity
to commit financial reporting fraud. Moderately overconfident executives are
more likely to “borrow” from the future to manage earnings thinking it will
be sufficient to cover reversals. On average, however, they are wrong, and
the managers are compelled to engage in greater earnings management or come
clean. Using industry, firm, and executive level proxies for overconfidence,
we provide evidence consistent with this hypothesis. Additional analysis
suggests a distinction between moderately and extremely overconfident
executives. The extremely overconfident executives are simply opportunistic.
We find no evidence that non-fraud firms have stronger governance to
Keywords: executive overconfidence, fraud, earnings
Bob Jensen's threads on earnings management are at
"Public Pensions Cook the Books: Some plans want to hide the truth
from taxpayers," by Andrew Biggs, The Wall Street Journal, July 6,
Here's a dilemma: You manage a public employee
pension plan and your actuary tells you it is significantly underfunded. You
don't want to raise contributions. Cutting benefits is out of the question.
To be honest, you'd really rather not even admit there's a problem, lest
taxpayers get upset.
What to do? For the administrators of two Montana
pension plans, the answer is obvious: Get a new actuary. Or at least that's
the essence of the managers' recent solicitations for actuarial services,
which warn that actuaries who favor reporting the full market value of
pension liabilities probably shouldn't bother applying.
Public employee pension plans are plagued by
overgenerous benefits, chronic underfunding, and now trillion dollar
stock-market losses. Based on their preferred accounting methods -- which
discount future liabilities based on high but uncertain returns projected
for investments -- these plans are underfunded nationally by around $310
The numbers are worse using market valuation
methods (the methods private-sector plans must use), which discount benefit
liabilities at lower interest rates to reflect the chance that the expected
returns won't be realized. Using that method, University of Chicago
economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to
the market collapse, public pensions were actually short by nearly $2
trillion. That's nearly $87,000 per plan participant. With employee benefits
guaranteed by law and sometimes even by state constitutions, it's likely
these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.
Some public pension administrators have a strategy,
though: Keep taxpayers unsuspecting. The Montana Public Employees'
Retirement Board and the Montana Teachers' Retirement System declare in a
recent solicitation for actuarial services that "If the Primary Actuary or
the Actuarial Firm supports [market valuation] for public pension plans,
their proposal may be disqualified from further consideration."
Scott Miller, legal counsel of the Montana Public
Employees Board, was more straightforward: "The point is we aren't
interested in bringing in an actuary to pressure the board to adopt market
value of liabilities theory."
While corporate pension funds are required by law
to use low, risk-adjusted discount rates to calculate the market value of
their liabilities, public employee pensions are not. However, financial
economists are united in believing that market-based techniques for valuing
private sector investments should also be applied to public pensions.
Because the power of compound interest is so
strong, discounting future benefit costs using a pension plan's high
expected return rather than a low riskless return can significantly reduce
the plan's measured funding shortfall. But it does so only by ignoring risk.
The expected return implies only the "expectation" -- meaning, at least a
50% chance, not a guarantee -- that the plan's assets will be sufficient to
meet its liabilities. But when future benefits are considered to be riskless
by plan participants and have been ruled to be so by state courts, a 51%
chance that the returns will actually be there when they are needed hardly
constitutes full funding.
Public pension administrators argue that government
plans fundamentally differ from private sector pensions, since the
government cannot go out of business. Even so, the only true advantage
public pensions have over private plans is the ability to raise taxes. But
as the Congressional Budget Office has pointed out in 2004, "The government
does not have a capacity to bear risk on its own" -- rather, government
merely redistributes risk between taxpayers and beneficiaries, present and
Market valuation makes the costs of these potential
tax increases explicit, while the public pension administrators' approach,
which obscures the possibility that the investment returns won't achieve
their goals, leaves taxpayers in the dark.
For these reasons, the Public Interest Committee of
the American Academy of Actuaries recently stated, "it is in the public
interest for retirement plans to disclose consistent measures of the
economic value of plan assets and liabilities in order to provide the
benefits promised by plan sponsors."
Nevertheless, the National Association of State
Retirement Administrators, an umbrella group representing government
employee pension funds, effectively wants other public plans to take the
same low road that the two Montana plans want to take. It argues against
reporting the market valuation of pension shortfalls. But the association's
objections seem less against market valuation itself than against the fact
that higher reported underfunding "could encourage public sector plan
sponsors to abandon their traditional pension plans in lieu of defined
The Government Accounting Standards Board, which
sets guidelines for public pension reporting, does not currently call for
reporting the market value of public pension liabilities. The board
announced last year a review of its position regarding market valuation but
says the review may not be completed until 2013.
This is too long for state taxpayers to wait to
find out how many trillions they owe.
Bob Jensen's threads on Off-Balance-Sheet Financing (OBSF) are at
Bob Jensen's threads about fraud in government are at
By analogy, this is why corporations selling securities to the public are
required to have independent audits
"NY AG: Facelift firm placed bogus online reviews," MIT's Technology Review,
July 14, 2009 ---
The online journal gave a chatty account of a
problem-free face lift. "You will never regret it," the patient wrote.
But the seemingly satisfied customer actually was an employee of the firm
behind the Lifestyle Lift, writing as part of a company campaign to plant
plugs for the procedure online, state Attorney General Andrew Cuomo said in
announcing a $300,000 settlement with the company Tuesday.
His office said the settlement appeared to be one of the first to address
so-called astroturf marketing, or creating a bogus grassroots buzz about a
Troy, Mich.-based Lifestyle Lift Inc. said its informational material now
accurately reflects actual patients' comments and is clearly labeled as
coming from the company.
"We want to be acknowledged as a model of integrity and accuracy," company
President Gordon Quick said in a statement.
Widely advertised through television infomercials as a relatively quick and
inexpensive form of face lift, the Lifestyle Lift has been performed on more
than 100,000 people since 2001, according to the company. It's affiliated
with a network of doctors in New York and 21 other states.
The company has aggressively guarded its online reputation. In 2007, it sued
an Arizona man who maintained a consumer-oriented Web site that included
criticisms of Lifestyle Lift, saying the site's use of the procedure's name
infringed on the company's trademark and amounted to false advertising. A
federal judge in Michigan dismissed the case last year, saying the site was
commentary protected by the First Amendment.
But Lifestyle Lift also came up with another new way to fight back: Having
staffers post glowing reviews, comments and testimonials that appeared to
come from clients.
"I need you to devote the day to doing more postings on the Web as a
satisfied client," employees were told in one internal e-mail, according to
the attorney general's office. Another internal message directed a worker to
"put your wig and skirt on and tell them about the great experience you
The disguised workers did that and more, sometimes pushing to get message
boards to remove critical posts and even setting up pro-Lifestyle Lift Web
sites that masqueraded as independent views, Cuomo's office said. The
postings dated back to early 2007, the attorney general's office said.
One such site featured a detailed "journal," stretching from a first
consultation to two months after the procedure, and included photos and an
exhortation to "GO FOR IT." Another supposed first-person account came
complete with the names of the writer's children.
"This company's attempt to generate business by duping consumers was
cynical, manipulative and illegal," Cuomo said in a release. He said the
tactics violated consumer protection laws.
Lifestyle Lift said Tuesday the disputed endorsements were "representative
of" real patients' comments but acknowledged they weren't rendered verbatim
or labeled as coming from the company.
The company, which said it has since changed management, will pay the state
$300,000 in penalties and costs. The settlement came as the attorney
general's office investigated the company's practices, without any
litigation in court.
The Federal Trade Commission is working on revising its nearly 30-year-old
guidelines on the use of testimonials and endorsements to reflect the growth
of online marketing. The review comes amid heightened attention to the role
blogs and Internet comments can now play in a product's fortunes.
In the meantime, the American Advertising Federation, an industry group, has
its own guidelines specifying that testimonials "shall be limited to those
of competent witnesses who are reflecting a real and honest opinion or
"We think the consumer has the right to know that an advertisement is an
advertisement," spokesman Clark Rector said.
Bob Jensen's threads on professionalism in auditing are at
CPA auditors will undoubtedly be drawn into the Calpers lawsuit because of
the way auditors went along with absurd underestimations of bad debt and loan
loss reserves. For claims that auditors knew these reserves were badly
underestimated see the citations at
"Calpers Sues Over Ratings of Securities," by Leslie Wayne, The New
York Times, July 14, 2009 ---
The nation’s largest
public pension fund has filed suit in California state court in connection
with $1 billion in losses that it says were caused by “wildly inaccurate”
credit ratings from the three leading ratings agencies.
The suit from the
California Public Employees Retirement System, or
Calpers, a public fund known for its shareholder
activism, is the latest sign of renewed scrutiny
over the role that credit ratings agencies played in
providing positive reports about risky securities
issued during the subprime boom that have lost
nearly all of their value.
lawsuit, filed late last week in California Superior
Court in San Francisco, is focused on a form of debt
called structured investment vehicles, highly
complex packages of securities made up of a variety
of assets, including subprime mortgages. Calpers
bought $1.3 billion of them in 2006; they collapsed
in 2007 and 2008.
Calpers maintains that in
giving these packages of securities the agencies’
highest credit rating, the three top ratings
Moody’s Investors Service,
Standard & Poor’s and
Fitch — “made negligent
misrepresentation” to the pension fund, which
provides retirement benefits to 1.6 million public
employees in California.
AAA ratings given by the agencies “proved to be
wildly inaccurate and unreasonably high,” according
to the suit, which also said that the methods used
by the rating agencies to assess these packages of
securities “were seriously flawed in conception and
Calpers is seeking damages,
but did not specify an amount. Steven Weiss, a
spokesman for McGraw Hill, the parent company of
Standard and Poor’s, said the company could not
comment until it had been served and seen the
Moody’s and Fitch did not
respond to a request for comment.
As the Obama administration
considers an overhaul of the
financial regulatory system,
credit rating agencies have
come in for their share of the blame in the recent
market collapse. Critics contend that, rather than
being watchdogs, the agencies stamped high ratings
on many securities linked to subprime mortgages and
other forms of risky debt.
approval helped fuel a boom on Wall Street, which
issued billions of dollars in these securities to
investors who were unaware of their inherent risk.
Lawmakers have conducted hearings and debated
whether to impose stricter regulations on the
the lawsuit is not the first against the credit
rating agencies, some of which face litigation not
only from investors in the securities they rated but
from their own shareholders, too, it does lay out
how an investor as sophisticated as Calpers, which
has $173 billion in assets, could be led astray.
security packages were so opaque that only the hedge
funds that put them together — Sigma S.I.V. and
Cheyne Capital Management in London, and Stanfield
Capital Partners in New York — and the ratings
agencies knew what the packages contained.
Information about the securities in these packages
was considered proprietary and not provided to the
investors who bought them.
Calpers also criticized what contends are conflicts
of interest by the rating agencies, which are paid
by the companies issuing the securities — an
arrangement that has come under fire as a
disincentive for the agencies to be vigilant on
behalf of investors.
the case of these structured investment vehicles,
the agencies went one step further: All three
received lucrative fees for helping to structure the
deals and then issued ratings on the deals they
Calpers said that the three agencies were “actively
involved” in the creation of the Cheyne, Stanfield
and Sigma securitized packages that they then gave
their top credit ratings. Fees received by the
ratings agencies for helping to construct these
packages would typically range from $300,000 to
$500,000 and up to $1 million for each deal.
fees were on top of the revenue generated by the
agencies for their more traditional work of issuing
credit ratings, which in the case of complex
securities like structured investment vehicles
generated higher fees than for rating simpler
ratings agencies no longer played a passive role but
would help the arrangers structure their deals so
that they could rate them as highly as possible,”
according to the Calpers suit.
suit also contends that the ratings agencies
continued to publicly promote structured investment
vehicles even while beginning to downgrade them. Ten
days after Moody’s had downgraded some securitized
packages in 2007, it issued a report titled
“Structured Investment Vehicles: An Oasis of Calm in
the Subprime Maelstrom.”
Bob Jensen's threads on the bad behavior of credit ratings agencies see
September 2, 2009 message from Paul Bjorklund
SEC CHARGES LAS VEGAS-BASED CPA
AND HIS ACCOUNTING FIRM WITH FRAUD
Today, the Securities and Exchange Commission
charged a Las Vegas-based CPA and his public accounting firm with securities
fraud for issuing false audit reports that failed to comply with Public
Company Accounting Oversight Board ("PCAOB") Standards and
were often the product of high school graduates
hired with little or no education or experience in accounting or auditing.
The Commission's lawsuit, filed in federal district court in Las Vegas,
Nevada, names Michael J. Moore ("Moore"), CPA, age 55, of Las Vegas, Nevada,
and Moore & Associates Chartered ("M&A"), a Nevada corporation headquartered
in Las Vegas, Nevada. Moore and M&A have agreed to settle the charges
without admitting or denying the allegations.
According to the SEC's complaint,
Moore and M&A issued audit reports for more
than 300 clients who consist of primarily shell or developmental stage
companies with public stock quoted on the OTCBB or the Pink Sheets.
The SEC alleges that Moore and M&A violated
numerous auditing standards, including a failure to hire employees with
adequate technical training and proficiency. The SEC further alleges that
Moore and M&A did not adequately plan and supervise the audits, failed to
exercise due professional care, and did not obtain sufficient competent
evidence. Despite the audit failures, M&A issued and Moore signed audit
reports falsely stating that the audits were conducted in accordance with
PCAOB Standards. By issuing and signing these false audit reports, Moore and
M&A violated the antifraud provisions of Section 10(b) of the Securities
Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and
Regulation S-X Rule 2-02(b)(1).
The SEC's complaint also
alleges that Moore and M&A violated Sections 10A(a)(1) and10A(b)(1) of the
Exchange Act by failing to include audit procedures designed to detect and
report likely illegal acts. The complaint further alleges that Moore and M&A
improperly modified audit documentation in violation of Regulation S-X Rule
To settle the Commission's charges, Moore and M&A
consented to the entry of a final judgment permanently enjoining them from
future violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Regulation S-X
Rules 2-02(b)(1) and 2-06 and ordering them to disgorge $179,750 plus
prejudgment interest of $10,151.59.
Moore separately agreed to pay a
Moore and M&A also consented to the entry of an administrative order that
makes findings and suspends them from appearing or practicing before the
Commission as an accountant pursuant to Rule 102(e)(3) of the Commission's
Rules of Practice.
"Study Tallies Corporations Not Paying Income Tax," by Lynley
Browning, The New York Times, August 12, 2008 ---