Accounting Scandal Updates and Other Fraud Between July 1 and September 30, 2012
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 ---

Richard Campbell notes a nice white collar crime blog edited by some law professors --- 

Lexis Nexis Fraud Prevention Site ---

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

Investor Protection Trust ---
This site provides teaching materials.

The Investor Protection Trust provides independent, objective information to help consumers make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and uses grants to underwrite important initiatives carried out by other organizations.

Bob Jensen's threads on fraud prevention and fraud reporting ---

Bob Jensen's personal finance helpers ---


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

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---

Inforgraphic:  Where Malware Comes From ---

Bob Jensen's threads on malware ---

After KPMG was paid $456 million in 2006 fines for selling phony tax shelters, KPMG promised it would never happen again. Yeah Right!

"Court Rejects STARS Tax Shelter, Calls Conduct of Banks, KPMG & Sidley Austin 'Reprehensible ... Waste of Human Potential'," by Paul Caron, TaxProf Blog, September 23, 2013 ---

. . .

For reasons that will be explained, the Court also finds that BB&T is liable for tax penalties for its participation in the STARS transaction. The conduct of those persons from BB&T, Barclays, KPMG, and the Sidley Austin law firm who were involved in this and other transactions was nothing short of reprehensible. Perhaps the business environment at the time was “everyone else is doing it, why don’t we?” Perhaps some of those who participated simply were following direction from others. Nevertheless, the professionals involved should have known better than to follow the STARS path, rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance. One of Defendant’s experts, Dr. Michael Cragg, aptly stated that “enormous ingenuity was focused on reducing U.S. tax revenues.” Cragg, Tr. 4687. After wading through the intricacies of the STARS transaction, the Court shares Dr. Cragg’s view that “[t]he human effort, the amount of creativity and overall effort that was put into this transaction . . . is a waste of human potential.”

Continued in article


"Fraud Reports Climb Still Higher: Employee reports of fraud are steadily increasing, both as a percentage of all compliance-reporting activity and in raw numbers," by Caroline McDonald,, September 26, 2012 ---

Reports of fraud by corporate employees have continued their ceaseless rise so far this year, according to the Quarterly Corporate Fraud Index. The current drivers are increasing awareness of fraud, mandated whistle-blower protections, and changing company cultures.

The index measures reported frauds as a percentage of all compliance-related reports. Most recently, for the second quarter of 2012, that ratio climbed to 22.9%, up from 21.7% for the same quarter in 2011.

“This index essentially has been going up since the day we started tracking it [in 2005],” says Jimmy Lin, vice president of product strategy and corporate development at The Network, a provider of governance, risk, and compliance solutions that conducts the quarterly analysis in conjunction with BDO Consulting. The index looks at compliance-reporting activity at more than 1,400 clients of The Network worldwide, including nearly half of the Fortune 500.

Corporate employees are simply becoming more aware of organizational issues and more willing to report compliance errors, especially fraud, Lin says. Fraud is more often covered in the news media these days, he notes. Also, he claims, the client companies have become more sophisticated in educating employees on what fraud looks like (which is a service The Network provides). “We see the index going up and up as a positive. Companies are getting more interested in a holistic approach than a check-box approach to compliance.”

Employers are highly motivated to hear about alleged internal fraud before an employee instead makes an initial report to the Securities and Exchange Commission. “Even if it doesn’t turn into anything significant, they want to catch wind of it first,” notes Lin. Companies know that “even a hint of potential fraud issues in their organization, whether true or not,” puts their reputation at risk, not only with the public but also internally: “Employees may begin to wonder about the company’s ethics.”

The whistle-blower protections under the Dodd-Frank Act, such as prohibiting retaliation against whistle-blowers, also may be having an impact. Companies are “couching it as building a better culture,” says Lin.

Jonny Frank, a partner at forensic-accounting firm StoneTurn Group, points out that the SEC has offered incentives to encourage employees to use company-compliance hotlines. But another reason for the upward trend may be that the government expects companies to make the hotlines accessible to such third parties as customers and suppliers, as well as to employees.

And a growing number of companies annually require employees to certify as to their knowledge of wrongdoing. “It’s one thing to put the burden on employees to come forward; it’s another to ask them to confirm they don’t know of any wrongdoing,” Frank says. That trend “suggests a culture where employees see that the company is serious and not just giving lip service to fraud.”

Frank says compliance officers generally are doing a good job of pushing that message. Unfortunately, he adds, some companies’ finance teams are getting less involved as ethics and compliance controls mature. “It becomes easier for the CFO to just hand off that responsibility to compliance.”

Lin observes that organizations are vulnerable if compliance enforcement is not a pervasive theme throughout the company. If functional areas, departments, and divisions aren’t working together to make sure fraud is addressed, “then everybody is going to lose,” he says.

Continued in article

Bob Jensen's Fraud Updates ---

How to Mislead With Statistics:  Create a Denominator Effect

"W&L, Other Colleges Goose Rankings by Counting Incomplete Applications to Shrink Acceptance Rate," by Paul Caron, TaxProf Blog, September 23, 2013 ---

Jensen Comment
I know a Professor X who used to do something similar. Nearly 80% of his students had an A grade going into the final. On the last day of class he handed out teaching evaluations --- well in advance of the final examination scheduled late in final exam week. Then in the the final exam he clobbered them with an exam that made them happy to pass the course with any grade.

Of course, there's a difference between Professor X versus the colleges that report incomplete applications as full applications in computing admission acceptance rates. In the case of Professor X it did not take many semesters for it to become widely known across campus how he was shrinking the number of top grades in his courses. In the case of W&L and other colleges shrinking acceptance rates it might never have become known by the media how these colleges were fudging their acceptance rates.

"Law Deans in Jail," by Morgan Cloud and George B. Shepherd. SSRN, February 24, 2012 ---

A most unlikely collection of suspects - law schools, their deans, U.S. News & World Report and its employees - may have committed felonies by publishing false information as part of U.S. News' ranking of law schools. The possible federal felonies include mail and wire fraud, conspiracy, racketeering, and making false statements. Employees of law schools and U.S. News who committed these crimes can be punished as individuals, and under federal law the schools and U.S. News would likely be criminally liable for their agents' crimes.

Some law schools and their deans submitted false information about the schools' expenditures and their students' undergraduate grades and LSAT scores. Others submitted information that may have been literally true but was misleading. Examples include misleading statistics about recent graduates' employment rates and students' undergraduate grades and LSAT scores.

U.S. News itself may have committed mail and wire fraud. It has republished, and sold for profit, data submitted by law schools without verifying the data's accuracy, despite being aware that at least some schools were submitting false and misleading data. U.S. News refused to correct incorrect data and rankings errors and continued to sell that information even after individual schools confessed that they had submitted false information. In addition, U.S. News marketed its surveys and rankings as valid although they were riddled with fundamental methodological errors.


Bob Jensen's threads on cheating in higher education are at

Bob Jensen's threads on higher education college ranking controversies ---



Some of the Worst Internal Controls in History
"Fraud Case Spurs Show-Horse Sale," by Mark Peters, The Wall Street Journal, September 10, 2012 ---

The show-horse set will descend on this small city this month to bid on the crown jewel of what federal authorities allege to be a massive fraud: Hundreds of top-ranked quarter horses amassed by the former city comptroller accused of stealing tens of millions of dollars from public coffers.

Rita Crundwell, 59 years old, was arrested by federal authorities in April and accused of stealing more than $53 million from this city of 15,700 whose finances she ran since the 1980s.

Federal authorities said the alleged theft took place starting in 1990, and say that Ms. Crundwell, whose salary was around $80,000, also used the allegedly pilfered funds to buy sports cars, a boat, a home in Florida and a $2 million motor home.

Ms. Crundwell has pleaded not guilty to one charge of wire fraud. After her arrest, she was released from federal custody and is scheduled to appear in U.S. District Court in Rockford, Ill., in October. She declined to comment through her lawyers.

Authorities say that Ms. Crundwell used the allegedly stolen funds to furnish a horse ranch that housed nearly 400 quarter horses with names like Have Faith in Money, Jewels by Tiffany, and Secure with Cash.

Ms. Crundwell worked for the city nearly all her life, becoming comptroller in 1983. Over the years, she also became known as a renowned breeder of horses that she bought and sold and showed. The government also is auctioning other of her assets, including the motor home and horse equipment.

Authorities say Ms. Crundwell no longer can afford the $200,000 a month required to care for all the horses.

Ms. Crundwell agreed to the sale, authorities say, which was ordered through a court process. Federal authorities believe that horses were purchased and possibly maintained with funds from the alleged fraud. Money from the auction eventually could go to Dixon as partial restitution, but proceeds will be held in escrow until the case concludes.

Auctioneers said the size of the horse sale by a single owner is rare. A spokesman for the American Quarter Horse Association said the high caliber of the horses also makes it extraordinary.

"In all my years in the business, we've never done anything quite like this," said Mike Jennings, a four-decade veteran of the horse-auction business who the government hired to oversee the Crundwell sale, scheduled to take place on Sept. 23 and 24, and online starting last Friday, though no sales will take place until this week.

More than a thousand bidders, bargain hunters and onlookers are expected to attend the auction. Hotels in Dixon are sold out for the auction weekend, and city officials plan to run buses between downtown and the Crundwell ranch about four miles away.

Ms. Crundwell built her empire on a horse farm here known as the RC Ranch. Her initials are on the peak of the main barn and in mosaic on the tile floor of her trophy room, where hundreds of ribbons and horse statuettes are displayed.

On the walls are poster-size photographs of Ms. Crundwell, often in a white cowboy hat, showing her horses. She excelled in the beauty event known as halter, and holds more world championships than any other amateur owner. Eight years in a row, she was crowned top owner at the world championship show in Oklahoma City.

Ms. Crundwell also was popular with some on the circuit. She sponsored events, rented stalls at shows, and hired trainers and other staff. "For years, people felt they weren't able to compete against Rita and stopped trying," said Amy Gumz, owner of Gumz Farms in western Kentucky.

Ms. Crundwell's exit appears to be sparking new interest in the events she once dominated. That could help fuel demand at the upcoming auction where Mr. Jennings, the auctioneer, said the top horses could fetch hundreds of thousands of dollars.

The quarter horse is the U.S.'s most popular breed, used widely for trail riding, ranching and equestrian events. The breed is also trained to race short distances—its name comes from the quarter-mile that quarter horses typically run. The competitive show world ranges from cowboys riding them to rope cattle, to muscular horses being paraded in a ring and judged on their beauty.

In Dixon, Ms. Crundwell's hometown, many residents remain baffled by her arrest, which came after a colleague filling in while she was on vacation spotted alleged irregularities in the accounts. Dixon Mayor Jim Burke said because of the size and success of her horse operations Dixonites believed Ms. Crundwell's booming horse business financed her lifestyle.

"She carefully cultivated this image of having a successful horse operation," Mr. Burke said.

Dixon officials expect the auction to net several million dollars, which they hope will eventually end up with the city. Mr. Burke would like to use auction proceeds to pay off municipal debt and possibly to give residents rebates on water or other municipal bills.

Continued in article

How true can you get?
As (Commissioner) Bridgeman left office last year, he praised (Controller) Rita Crundwell for being an asset to the city and said she "
looks after every tax dollar as if it were her own," according to meeting minutes.

As quoted by Caleb Newquest on April 27, 2012 ---

She was mostly just horsing around
"Somehow the City of Dixon, Illinois Just Noticed (after six years) That $30 Million Was Missing," Going Concern, April 19, 2012 ---

Rita Crundwell has been the CFO/comptroller of Dixon, Illinois since the 1980s; a typical tenure for even an unelected Illinois official. In those 30-ish years, it appears that she performed her duties adequately enough, but she was just put on unpaid leave. You see, at some point in 2006, it is alleged that Ms. Crundwell started helping herself to money that belonged to the citizens of Ronald Reagan's boyhood home. Prosecutors allege that this went for the last six years and that Crundwell made off with $30,236,503 (and 51¢). 

Federal agents served warrants and seized contents of her bank accounts, seven trucks and trailers, a $2 million motor home  and a Ford Thunderbird—all of which prosecutors allege were paid for with money taken from city bank accounts by Crundwell. [...] Bank records obtained by the FBI allegedly show Crundwell illegally withdrew $30,236,503 from Dixon accounts since July 2006 , money she used, among other things, to buy a 2009 Liberty Coach Motor home for $2.1 million; a tractor truck for $147,000; a horse trailer for $260,000; and $2.5 million in credit card payments for items that included $340,000 in jewelry.

So a decent haul, but a Ford Thunderbird? Good Christ, spring a bit for the Lincoln Continental at least. Questionable taste in automobiles aside, one can't help but wonder how Dixon - a city with a population of just ~15,000 - could not notice millions of dollars missing. But they did! It's strange because in a city of that size, people gossip about one another's $35 overdraft fees, never mind millions of dollars being spent on multi-million dollar motorhomes. Anyway, Crundwell (who has a thing for horses apparently) had a good thing going, but then made the mistake of taking a little extra vacation: 

[L]ast year she took an additional 12 weeks of unpaid vacation. A city employee substituting for Crundwell examined bank statements and notified the mayor of activity in an account that, according to the complaint, he didn't know existed. Bank records list the primary account holder as the City of Dixon. An entity named RSCDA also is named on the account, with checks written on the account more expansively identifying that second account holder as "R.S.C.D.A., C/O Rita Crundwell."

So basically the city discovere the missing cash by the virtue of dumb luck, which sometimes is what it takes for these things to get uncovered. Better late than, oh whatever... seriously, a Thunderbird?

Bob Jensen's threads on the sad state of governmental accounting ---

Bob Jensen's Fraud Updates ---

More Clever than the Thumb of a Butcher
September 21, 2012 message from Dan Stone

One semester, I used the news story at the end of this post in an accounting systems class. I thought it was a clever, funny example of a failure of accounting controls. As was evident from my student evaluations, many students were not amused. I have since learned that, at least in Kentucky, anything related to sex or body functions -- even if relevant to the class -- must not be spoken about.

Dan Stone

Title: Co-op apologises after shopper is overcharged because store assistant's breasts were resting on the scales

A supermarket customer was over-charged by around £5 while buying fruit and vegetables because the cashier's breasts were resting on the weighing scales.

Bosses at a Jersey branch of Co-operative explained that the mistake occurred because the shop assistant's seat had been too low, causing her to lean on the counter.

Jim Hopley, chief executive of Channel Islands Co-operative, said the money has now been refunded and admitted that he has never seen anything like it in his 40 years of retail experience.

"Bank worker, 24, who stole £46,000 to fund boob job and party lifestyle told police she earned the money working as an escort," by Emma Clark, Daily Mail, September 21, 2012 --- Click Here

Rachael Martin, who has an eight-year-old son, told police she could afford her lifestyle by working as a 'common prostitute' but later admitted to thefts Underwent complete body overhaul in just weeks, including £4,000 on breast surgery, £1,700 on dental surgery, and liposuction She also spent £670 at exclusive jewellers Tiffany, and £506 on a pair of Jimmy Choo shoes The law graduate was jailed for 52 weeks

Bob Jensen's Fraud Updates ---

The Pentagon ordered 1,500 Turkeys for Thanksgiving
The expensive luxury and heavy Chevy Volt is a turkey and less environmentally friendly than hybrid cars of competitors (because of low gas mileage and miniscule electric power range). It appears that it's only customer is, get this, the Pentagon that just ordered 1,500 Volts.

Is the Chevy Volt losing $49,000 on each model built?
Not any longer thanks to the Pentagon.

"Pentagon to Buy 1,500 Chevy Volts," by Brian Koenig, The New American, September 12, 2012 ---

Chevy Volt ---

Production cost and sales price

In 2009, the Presidential Task Force on the Auto Industry said that "GM is at least one generation behind Toyota on advanced, “green” powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt." and that "while the Chevy Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable." A 2009 Carnegie Mellon University study found that a PHEV-40 will be less cost effective than a HEV or a PHEV-7 in all of the scenarios considered, due to the cost and weight of the battery Jon Lauckner, a Vice President at General Motors, responded that the study did not consider the inconvenience of a 7 miles (11 km) electric range and that the study's cost estimate of US$1,000 per kWh for the Volt's battery pack was "many hundreds of dollars per kilowatt hour higher" than what it costs to make today." President Barack Obama behind the wheel of a new Chevy Volt during his tour of the General Motors Auto Plant in Hamtramck, Michigan

In early 2010, it was reported that General Motors would lose money on the Volt for at least the first couple of generations, but it hoped the car would create a green image that could rival the Prius.

After the Volt's sales price was announced in July 2010, there was concern expressed of the launch price of the Volt and its affordability and resulting popularity, especially when the federal subsidies of US$2.4 billion were taken into account in the development of the car.

General Motors CEO Edward Whitacre Jr. rejected as "ridiculous" criticism that the Volt's price is too expensive. He said that "I think it's a very fair price. It's the only car that will go coast to coast on electricity without plugging it in, and nobody else can come close." Despite the federal government being the major GM shareholder due to the 2009 government-led bankruptcy of the automaker, during a press briefing at the White House a Treasury official clarified that the federal government did not have any input on the pricing of the 2011 Chevrolet Volt.

There have also been complaints regarding price markups due to the initial limited availability in 2010 of between US$5,000 to US$12,000 above the recommended price,[232] and at least in one case a US$20,000 mark up in California.[233] Even though the carmaker cannot dictate vehicle pricing to its dealers, GM said that it had requested its dealers to keep prices in line with the company’s suggested retail price.

In May 2011 the National Legal and Policy Center announced that some Chevrolet dealers were selling Volts to other dealers and claiming the US$7,500 federal tax credit for themselves. Then the dealers who bought the Volts sell them as used cars with low mileage to private buyers, who no longer qualify for the credit. General Motors acknowledged that 10 dealer-to-dealer Volt sales had taken place among Chevrolet dealers, but the carmaker said they do not encourage such practice.

In September 2012, Reuters published an opinion/editorial article where it claimed that General Motors, nearly two years after the introduction of the car, was losing $49,000 on each Volt it built. The article concludes that the Volt is "over-engineered and over-priced" and that its technological complexity has put off many prospective buyers, due to fears the car may be unreliable. GM executives replied that Reuters' estimates were grossly wrong as they allocated the production costs only on the number of Volts sold instead of spreading the production costs in the future, over the entire lifetime of the model. GM explained that the investments will pay off once the innovative technologies of the Volt will be applied across multiple current and future products

Continued in article

Bob Jensen's Fraud Updates ---

"Charles G. Koch: Corporate Cronyism Harms America:  When businesses feed at the federal trough, they threaten public support for business and free markets," by Charles G. Koch, The Wall Street Journal, September 9, 2012 ---

"We didn't build this business—somebody else did."

So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation's big financial institutions or auto makers, there would be no irony in the message at all.

It shouldn't surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they "believe government and big business work together against the rest of us."

Businesses have failed to make the case that government policy—not business greed—has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac "affordable housing" quotas, directives such as the Community Reinvestment Act, and the Federal Reserve's artificial, below-market interest-rate policy.

Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.

With partisan rhetoric on the rise this election season, it's important to remind ourselves of what the role of business in a free society really is—and even more important, what it is not.

The role of business is to provide products and services that make people's lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.

Only societies with a system of economic freedom create widespread prosperity. Studies show that the poorest people in the most-free societies are 10 times better off than the poorest in the least-free. Free societies also bring about greatly improved outcomes in life expectancy, literacy, health, the environment and other important dimensions.

So why isn't economic freedom the "default setting" for our economy? What upsets this productive state of affairs? Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.

We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.

We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn't ordinarily buy.

Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.

By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.

The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.

Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.

Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted "if the government provides funding for a project that private investors refuse to back." Some 71% think "private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies." Only 11% believe "government officials have a better eye for future value."

Continued in article

Bob Jensen's Rotten to the Core threads ---

"Detroit ex-mayor Kwame Kilpatrick turned City Hall into a den of bribes, prosecutor says," by Ed White, Mercury News, September 21, 2012 ---

Former Detroit Mayor Kwame Kilpatrick conspired with his father and best friend to turn City Hall into a den of bribes and kickbacks, a prosecutor said Friday as jurors heard opening statements in Kilpatrick's corruption trial.

Assistant U.S. Attorney Mark Chutkow gave jurors a 40-minute overview of what they'll see and hear in the months ahead. He said Kilpatrick was an enthusiastic rising star in Michigan politics who moved from the state Legislature, then enriched himself with hundreds of thousands of dollars by muscling contractors, fooling political supporters and rigging city business.

"This was not politics as usual," Chutkow said. "This was extortion, bribery, fraud. ... They broke their oath to serve this city. It was the citizens of the city of Detroit who were left holding the short end of the stick."

Kilpatrick -- who quit office in 2008 in an unrelated scandal and eventually served more than a year in prison for a probation violation -- is charged with racketeering conspiracy, extortion, bribery, fraud, false tax returns and tax evasion. His father, Bernard, also is on trial, along with the ex-mayor's best friend, Bobby Ferguson, and former Detroit water boss Victor Mercado.

Chutkow described how Kilpatrick deposited more than $200,000 in cash in his bank account and paid his credit card bills with another $280,000 in cash.

"He no longer lived like the citizens he governed," the prosecutor said, Advertisement noting luxurious travel and custom-made suits.

Continued in article

"Deputy RI House speaker to admit tax fraud guilt," by David Klepper,, September 14, 2012 ---

The outgoing deputy speaker of the Rhode Island House and a business partner have agreed to plead guilty to conspiracy and tax fraud for cheating the federal government out of more than $500,000 in tax payments, federal prosecutors said Friday.

Rep. John McCauley Jr., a Democrat who represents Providence, was charged Friday in federal court along with William L'Europa, his partner in their insurance adjuster business. Both indicated in court filings that they plan to plead guilty. The men were charged with conspiracy to defraud the United States and filing false tax returns.

McCauley is the sixth Rhode Island lawmaker to face criminal charges in the past year.

Prosecutors said McCauley and L'Europa underreported nearly $1.8 million dollars in receipts for tax years 2007 to 2010. They face up to eight years in prison.

McCauley, 54, was first elected in 1990 and is not seeking re-election. He didn’t immediately return a message left at his home. No one answered a phone listing for L'Europa.

Federal agents raided McCauley and L'Europa’s office in November and seized several boxes. They later said the search was part of an investigation into an arson fraud. Louisa Knight later pleaded guilty to federal fraud charges after admitting setting fire to her home and later filing an insurance claim. Authorities said at the time there was no indication that McCauley or L'Europa knew about the fraud.

A spokesman for Rhode Island U.S. Attorney Peter Neronha wouldn’t comment on whether the new charges are related to that investigation.

House Speaker Gordon Fox issued a statement Friday saying that the charges against McCauley had ‘‘nothing to do with his role at the Statehouse’’ and that McCauley has taken responsibility in ‘‘addressing his personal issues.’’

‘‘He has been a long-time friend who always represented his district well,’’ said Fox, D-Providence.

Five other lawmakers have faced criminal charges in the past year.

State Sen. Majority Leader Dominick Ruggerio, D-North Providence, was charged with driving under the influence in April, but the charge was dropped when Ruggerio admitted refusing an alcohol test and agreed to perform community service. His license was suspended for six months.

Rep. Robert Watson, R-East Greenwich, was charged with marijuana possession and DUI in April in Connecticut and was arrested in Rhode Island in January on a charge of marijuana possession. The former House minority leader pleaded not guilty to charges from the first incident and pleaded no-contest to the more recent charge. He is not seeking re-election.

Police arrested Rep. Dan Gordon, R-Portsmouth, in September after learning that he faced charges in Massachusetts that he failed to stop for police and drove with a suspended license stemming from a 2008 traffic stop. Gordon agreed to pay $1,000 to resolve the evasion charge and received probation for other traffic charges. He is not seeking re-election.

Rep. Leo Medina, D-Providence, was charged last month with practicing law without a license. Not guilty pleas were entered on his behalf. He is also accused of pocketing proceeds from a life insurance policy on a friend’s deceased daughter. Medina pleaded not guilty to those charges. He was defeated in this week’s Democratic primary.

In January, prosecutors dismissed a sexual assault case against Rep. John Carnevale, D-Providence, after the accuser died of medical causes. He had pleaded not guilty.

Fareed Zakaria ---

That Gray Zone of Plagiarism

"In Defense of Fareed Zakaria:  The famous pundit made a mistake, but the schadenfreude brigades are guilty of worse," by Bret Stephens, The Wall Street Journal, August 15, 2012 ---

. . .

Last week Mr. Zakaria apologized "unreservedly" to New Yorker writer Jill Lepore after a blogger noticed that a paragraph in his Time column was all-but identical to something Ms. Lepore had written. Mr. Zakaria has now been given a month's suspension by his employers pending further review of his work.

We'll see if there are other shoes to drop. Among the more mystifying aspects of this story is that plagiarism in the age of Google is an offense hiding in plain sight, especially when the kind of people who read Mr. Zakaria's columns are the same kind of people who read the New Yorker. Why couldn't he have added the words, "As the New Yorker's Jill Lepore wrote . . ."? What could he possibly have been thinking?

My guess is he wasn't thinking. That's never a good thing, but it's something that might happen to an overcommitted journalist so constantly in the public eye that he forgets he's there. The proper response is the full apology he has already made, and maybe a reconsideration of whether the current dimensions of Fareed Zakaria Inc. are sustainable. Otherwise, end of story.

But that's not how Mr. Zakaria is being treated. To some of his critics, nothing less than the Prague Defenestration will do.

Here, for instance, is Jim Sleeper in the Huffington Post—a publication that earns much of its keep piggybacking on the work of others. "Zakaria is a trustee of Yale," notes Mr. Sleeper. "If the Yale Corporation were to apply to itself the standards it expects its faculty and students to meet, Zakaria would have to take a leave or resign."

Mr. Sleeper, a one-time tabloid columnist, goes on to impugn Mr. Zakaria for various offenses, such as dissing people Mr. Sleeper obviously likes and commanding speaking fees Mr. Sleeper seems to think are too high. If Mr. Sleeper has ever been offered $75,000 to deliver deep thoughts to a corporate board and turned the money down, it would be interesting to see the evidence. Otherwise, his is the most vulgar voice of envy.

Also gloating are the people who detest Mr. Zakaria for his views. In a recent column in Reason magazine, Ira Stoll—who often insinuates that this editorial page gets all its good ideas from him—more or less gives Mr. Zakaria a plagiarism pass, then lights into him for holding incorrect views on tax rates and the Middle East. Who knew that disagreeing with Ira Stoll was one of the world's greatest journalistic offenses?

I'm an occasional guest on Mr. Zakaria's show, for which I get no pay and not much glory. Mr. Zakaria and I have an amicable relationship but have never socialized. And my political views are considerably to the right of his, to say the least.

But I will give Mr. Zakaria this: He anchors one of the few shows that treats foreign policy seriously, that aims for an honest balance of views, and that doesn't treat its panelists as props for an egomaniacal host. He's also one of the few prominent liberals I know who's capable of treating an opposing point of view as something other than a slur on human decency.

In my book, that makes him a good man who's made a mistake. No similar compliment can be paid to the schadenfreude brigades now calling for his head.

Celebrities Who Plagiarize/Cheat ---

Bob Jensen's threads on plagiarism ---

Book Review of The Shadow Scholar: How I Made a Living Helping College Kids Cheat by Dave Tomar (Bloomsbury, 251 pages, $25)
"A Man for All Semesters:  An exposé reveals how the Internet has turned collegiate cheating into big business," by Charles Dameron, The Wall Street Journal, September 20, 2012 ---

'If you knew how I work!" Balzac wrote to a friend in 1832 as he finished up another volume of what would become the "Comédie humaine." "I am a galley slave to pen and ink, a true dealer in ideas." Dave Tomar is no stranger to the feeling of tortured subjugation to the written word, though whether one could justly call him a "dealer in ideas" is another matter—"counterfeiter" is more like it.

In "The Shadow Scholar: How I Made a Living Helping College Kids Cheat," Mr. Tomar, a 32-year-old Rutgers graduate, describes how, for the better part of a decade, he labored as a writer-for-hire catering to incompetent and lazy students. It didn't matter if the task at hand was a reflection on Nietzsche, a piece on Piaget's theory of genetic epistemology, or a 150-page paper on public-sector investment in China and India. Mr. Tomar, with not a small amount of help from Wikipedia, was a man for all semesters.

The most amusing and disturbing tidbits of "The Shadow Scholar" are excerpted communiqués from Mr. Tomar's clients that show just how badly these arrested young minds required his assistance. "Let me know what will the paper going to be about," one college student instructs Mr. Tomar. "Also dont write about, abortion, euthanasia, clothing or death penalty, yhose were not allowed by my teacher."

Mr. Tomar worked for only a few cents a word, but he kept busy enough to earn $66,000 in 2010. (Not bad, especially considering that the average pay for a non-tenure-track lecturer at Harvard last year—an institution with its own student-plagiarism scandal at the moment—was just under $57,000.) He was a freelancer for several of the "hundreds and possibly thousands" of online paper mills in the United States, services with names like and that produce custom essays for their student clients. Lest you think that this sleazy racket is a fringe, underground phenomenon, Mr. Tomar is here to declare otherwise: "It's mainstream. It's popular culture. It's taxable income. It's googleable."

"The Shadow Scholar" is a follow-up to a 2010 essay of the same name that Mr. Tomar wrote, under the pseudonym Ed Dante, for the Chronicle of Higher Education. The original essay was concise, hard-hitting and topical, revealing the dirty details of a business that educators try studiously to ignore. By contrast, Mr. Tomar's book is frequently self-indulgent and meandering, as much a memoir of the author's post-college search for purpose as a whistleblowing manifesto. Clichés and mixed metaphors abound: "I'm tumbling into a well of bad memories the way that a motorcycle backfiring in the distance might take a guy back to 'Nam," he tells us in an eight-page account of a phone call to the Rutgers Parking and Transportation Department.

For those willing to wade through it, however, "The Shadow Scholar" is a fascinating exposé of the remarkably robust industry of academic ghostwriting. Assuming that Mr. Tomar's story is at least roughly faithful to the truth, his testimony amounts to a harrowing indictment of the modern American university's current shortcomings as a meritocratic, credentializing institution, much less a home for mental and moral growth.

Mr. Tomar didn't just aid and abet casual cheating. Rather, he claims, he was engaged in a process of systemic intellectual fraud that students took advantage of all the way up the academic ziggurat: fabricating "personal statements" for unqualified college applicants; crafting term papers for undergraduates and "cockpit parents" who diligently directed their children's plagiarism; sweating over doctoral dissertations with only one page of instructions to go on; even, in one extraordinary case, doing the writing for an entire Ph.D. program in cognitive and behavioral psychology on someone else's behalf.

Mr. Tomar's dispatches from the dark side certainly do nothing to dispel the impression that, even as tuition hikes at many colleges outpace inflation, American colleges and universities may be delivering a product of declining value. Former Emory University president William Chace, in a recent essay on the normalization of cheating in the academy, wrote of a "suspicion that students are studying less, reading less, and learning less all the time." The numbers back this up. Economists Philip Babcock and Mindy Marks reported in 2010 that the number of hours that full-time college students spent on their studies dropped by a third between 1961 and 2003, to 27 hours per week from 40.

Having largely abandoned the mission of molding student character, many American universities and colleges today find themselves challenged to uphold the most minimal standards of technical training and assessment. Sociologists Josipa Roksa and Richard Arum, in their 2011 book "Academically Adrift," found that, of a nationally representative sample of thousands of college students, over a third demonstrated "no significant progress on tests of critical thinking, complex reasoning and writing" after four years in college. Unable or unwilling to do the work, many students find it far easier to hand it off to a subcontractor.

Continued in article

Jensen Comment
Dave Tomar is now a student in the Yale Law school. He hopes that his extensive experience in cheating will make him a successful lawyer.

Bob Jensen's threads on plagiarism and cheating are at

Victor Lustig ---

"The Smoothest Con Man That Ever Lived," by Gilbert King, The Browser, August 22, 2012 ---

"Tax Court Rejects Geithner/Turbo Tax Defense,"
Bartlett v. Commissioner, T.C. Memo. 2012-254 (Sept. 4, 2012):

How nasty should the IRS get when trying to collect from its boss?
Warning:  It never pays to get nasty with the IRS, even for the boss (who I'm sure will willingly cough up)

Teaching Case from The Wall Street Journal Accounting Weekly Review on September 20, 2012

Trial Puts UBS in Spotlight
by: Dana Cimilluca
Sep 15, 2012
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Internal Controls, Management Controls

SUMMARY: The trial against former UBS trader Kweku Adoboli began on Monday. "The U.K. prosecutors opened their casting the 32-year-old as the lone perpetrator of an illegal scheme that shook the Swiss bank last year." The related video comments on the reputational impact of the $2.3 billion trading loss generated by one "desk" being indicative of insufficient internal controls. "Mr. Adoboli sat on a desk trading exchange traded funds...his fraudulent activity began in 2008 when he suffered a $400,000 loss on a legitimate trade and subsequently booked a false trade to hide it."

CLASSROOM APPLICATION: The article may be used to discuss internal control and material weaknesses, fraudulent accounting and reporting, and ethics.

1. (Introductory) For how long did Mr. Kweku Adoboli book false trades to cover losses he did not want exposed? What was his apparent reason for these actions?

2. (Introductory) How was Mr. Adoboli able to avoid detection of his false accounting? In your answer, define the term "umbrella" account.

3. (Advanced) Identify one internal control that should catch false entries such as those made by Mr. Adoboli.

4. (Advanced) What was the impact on the UBS AG stock price when the scandal about Mr. Adoboli broke in 2011? Does this reaction merely reflect the losses incurred by Mr. Adoboli or something more? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

UBS: Rogue Trader Hit Firm
by Deborah Ball, Paul Sonne and Carrick Mollenkamp
Sep 16, 2011
Page: A1

"Trial Puts UBS in Spotlight," by Dana Cimilluca, The Wall Street Journal, September 15, 2012 ---

U.K. prosecutors opened their case in the trial of Kweku Adoboli, the former UBS AG trader accused of a $2.3 billion fraud, by casting the 32-year-old as the lone perpetrator of an illegal scheme that shook the Swiss bank last year.

One year to the day after the scandal began to erupt, Mr. Adoboli sat in a packed London courtroom as Sasha Wass of the Crown Prosecution Service depicted him as a reckless and greedy fraudster bent on boosting "his bonus, his status, his job prospects and his ego."

The defense didn't provide any indication of its arguments in court, but Ms. Wass said Mr. Adoboli will claim that three of his colleagues on his trading desk were aware of his illegal activity before it surfaced.

Mr. Adoboli, who faces two counts each of false accounting and fraud, has pleaded not guilty. If convicted, he faces up to 10 years in jail on each fraud charge and seven years on each accounting charge. He is currently free on bail.

For UBS, the trial could shed an uncomfortable light on how a relatively junior trader could have caused the largest unauthorized trading loss in U.K. history, despite the giant bank's sophisticated risk controls.

The case comes on the heels of a series of scandals across the financial sector that have inflamed public opinion, particularly in Europe.

Beginning in 2006, Mr. Adoboli sat on a desk at UBS focused on trading exchange-traded funds, which are mutual-fund-like investments, often tied to well-known indexes like the Standard & Poor's 500-share index, but which trade on exchanges throughout the day. According to prosecutors, Mr. Adoboli's fraudulent activity began in 2008, when he suffered a $400,000 loss on a legitimate trade, and subsequently booked a false trade to hide it.

He was able to hide his unauthorized trades for years, using hundreds or thousands of fake accounting entries and so-called "umbrella" accounts where he stowed funds, until market turmoil last summer caused his losses to balloon and ultimately tripped internal compliance alarms, according to the picture painted by the prosecution.

The unauthorized trades eventually cost the bank $2.3 billion.

The contours of the positions that the prosecution and defense will likely stake out in the eight-week trial began to come into focus on the first day of the proceedings. The prosecution will begin calling witnesses on Monday, starting with an expert on bank trading.

Ms. Wass, the prosecutor, argued that Mr. Adoboli acted alone, apparently trying to pre-empt an argument that others knew of his illegal actions.

She repeatedly read from a lengthy email Mr. Adoboli allegedly sent to colleagues on Sept. 14, 2011, the day before UBS disclosed the unauthorized trading loss. In that email, he allegedly said: "It is with great stress that I write this mail. First of all the ETF trades that you see on the ledger are not trades that I have done with a counterparty as I previously described."

The prosecution played recordings of conversations between Mr. Adoboli and colleagues who quizzed him on his trades in August and September of last year, in which the former trader attempts to explain them.

Mr. Adoboli, dressed in a grey suit, white shirt and maroon patterned tie, sat impassively as Ms. Wass laid out the prosecution's case, at times playing with a pen and at others conferring with his lawyer.

The prosecution depicted an ambitious young banker who started out in UBS's so-called "back office" processing trades, and later moved to the more lucrative and prestigious trading floor, using knowledge he gained from his prior job to obfuscate his alleged illegal activity. He went from earning £40,500 ($65,788) in salary and bonus in 2005 to £360,000 in 2010, which included a £250,000 bonus that prosecutors said was boosted by his illegally inflated results.

"Like most gamblers, he believed he had the magic touch. Like most gamblers, when he lost, he caused chaos and disaster to himself and all of those around him," Ms. Wass said.

The trading loss proved devastating for UBS. The bank was already under pressure because of a massive credit loss it suffered at the height of the financial crisis that resulted in the need for government aid as well as from persistently weak business conditions in the securities industry since then.

The scandal initially knocked 10% off the bank's already beleaguered stock, ate into its bonus pool and forced the resignation of its chief executive, Oswald Grübel.

Continued in article


"Ex-UBS Trader Kweku Adoboli’s E-Mail to Accountant: Full Text," by Edward Robinson, Bloomberg, September 14, 2012 ---

Below is the text of an e-mail former UBS AG (UBSN) trader Kweku Adoboli sent to bank accountant William Steward on Sept. 14, 2011, describing how he accrued trading losses.

The e-mail was read out by prosecutor Sasha Wass at Adoboli’s fraud trial in London today.

The subject line for the e-mail, sent from Adoboli’s home e-mail account, was: “An explanation of my trades.”

Dear Will,

It is with great stress that I write this mail. First of all the ETF (Exchange Traded Funds) trades that you see on the ledger are not trades that I have done with a counterparty as I previously described.

I used the bookings as a way to suppress the PnL losses that I have accrued through off-book trades that I made. Those trades were previously profit making, became loss making as the market sold off aggressively though the aggressive sell-off days of July and early August.

Initially, I had been short futures through June and those lost money when the first Greek confidence vote went through in mid-June. In order to try and make the money back I flipped the trade long through the rally.

Although I had a couple of opportunities to unwind the long trade for a negligible loss, I did not move quickly enough for the market weakness on the back of the first back macro data and then an escalation Eurozone crisis cost me the losses you will see when the ETF bookings are cancelled. The aim had been to try and make the money back before the September expiry date came through but I clearly failed.

These are still live trades on the book that will need to be unwound. Namely a short position in DAX futures [which had been rolled to December expiry] and a short position in S and P 500 futures that are due to expire on Friday.

I have now left the office for the sake of discretion. I will need to come back in to discuss the positions and explain face to face, but for reasons that are obvious, I did not think it wise to stay on the desk this afternoon.

I will expect that questions will be asked as to why nobody else was aware of these trades. The reality is that I have always maintained that these were EFP trades to the member of my team, BUC, trade support and John Di Bacco (Adoboli’s manager).

I take full responsibility for my actions and the stilt storm that will now ensue. I am deeply sorry to have left this mess for everyone and to have put my bank and my colleagues at risk.


Jensen Comment
Derivatives trading is not a St. Petersburg Paradox Game ---

Bob Jensen's Timeline on Derivative Financial Instruments Scandals ---


Yet another example of a professional athlete who cannot handle money.
Would it have helped to have take a required financial literacy course in college?
"Bills QB Young owes loan company $1.7 million," by John Wawrow, Yahoo News, August 16, 2012 ---

Quarterback Vince Young has been ordered to pay a loan company nearly $1.7 million after missing a payment in late May, shortly after signing with the Buffalo Bills.

The ruling against Young was made in New York State Supreme Court in Manhattan on July 2, according to court documents.

Young took out a high-risk loan from Pro Player Funding for $1.877 million during the NFL lockout in May 2011, while he was still under contract with the Tennessee Titans. The loan - plus $619,000 in interest - was due to be paid back in January 2013 at an annual interest rate of 20 percent. That rate jumped another 10 percent if Young missed a payment.

A ruling in the lending company's favor was made because Young agreed he understood the terms by signing what's called an affidavit of confession of judgment upon taking out the loan. The affidavit is regarded as proof and could be used at any time by the lender in the event a client defaults on the loan. first reported the ruling against Young last week.

Young was unavailable for comment Thursday because he was traveling with the Bills to Minnesota for their preseason game on Friday. Messages left seeking comment from both the player's agent and publicist were not returned.

Continued in article

Ray Williams ---
"Nobody wnats you when you're down and out" ---

A Sad, Sad Case That Might Be Used When Teaching Personal Finance:  Another Joe Lewis Example
"Desperate times:  Ex-Celtic Williams, once a top scorer, is now looking for an assist," by Bob Hohler, Boston Globe, July 2, 2010 ---

Every night at bedtime, former Celtic Ray Williams locks the doors of his home: a broken-down 1992 Buick, rusting on a back street where he ran out of everything.

The 10-year NBA veteran formerly known as “Sugar Ray’’ leans back in the driver’s seat, drapes his legs over the center console, and rests his head on a pillow of tattered towels. He tunes his boom box to gospel music, closes his eyes, and wonders.

Williams, a generation removed from staying in first-class hotels with Larry Bird and Co. in their drive to the 1985 NBA Finals, mostly wonders how much more he can bear. He is not new to poverty, illness, homelessness. Or quiet desperation.

In recent weeks, he has lived on bread and water.

“They say God won’t give you more than you can handle,’’ Williams said in his roadside sedan. “But this is wearing me out.’’

A former top-10 NBA draft pick who once scored 52 points in a game, Williams is a face of big-time basketball’s underclass. As the NBA employs players whose average annual salaries top $5 million, Williams is among scores of retired players for whom the good life vanished not long after the final whistle.

Dozens of NBA retirees, including Williams and his brother, Gus, a two-time All-Star, have sought bankruptcy protection.

“Ray is like many players who invested so much of their lives in basketball,’’ said Mike Glenn, who played 10 years in the NBA, including three with Williams and the New York Knicks. “When the dividends stopped coming, the problems started escalating. It’s a cold reality.’’

Williams, 55 and diabetic, wants the titans of today’s NBA to help take care of him and other retirees who have plenty of time to watch games but no televisions to do so. He needs food, shelter, cash for car repairs, and a job, and he believes the multibillion-dollar league and its players should treat him as if he were a teammate in distress.

One thing Williams especially wants them to know: Unlike many troubled ex-players, he has never fallen prey to drugs, alcohol, or gambling.

“When I played the game, they always talked about loyalty to the team,’’ Williams said. “Well, where’s the loyalty and compassion for ex-players who are hurting? We opened the door for these guys whose salaries are through the roof.’’

Unfortunately for Williams, the NBA-related organizations best suited to help him have closed their checkbooks to him. The NBA Legends Foundation, which awarded him grants totaling more than $10,000 in 1996 and 2004, denied his recent request for help. So did the NBA Retired Players Association, which in the past year gave him two grants totaling $2,000.

Continued in article

Another sports hero who does not understand personal finance.
Rule Number 1 --- Don't mess with the IRS unless you're in hiding offshore.

Will the IRS settle for $179,435.07?
"IRS Stabs OJ Simpson in The Wallet: You Owe us!" by Jose Lambiet, Gossip Extra, August 24, 2012 ---

Jensen Comment
I'll just bet that the IRS will settle for $179,435.

Wharton Professor Olivia Mitchell on Worldwide Financial Literacy Participant02.pdf

Bob Jensen's personal finance helpers ---

Wealthy Italians Take Tax Lesson From Senator John Kerry (and 2004 Presidential Candidate)
Thanks to Paul Caron for the heads up!

"Italian Yacht Owners Weigh Anchor To Dodge Taxes," by Sylvia Poggioli, NPR, August 18, 2012 ---

Italy has a public debt of nearly 2 trillion euros, and it's cracking down on its notoriously wily tax evaders. Owners of luxury yachts are a prime target, with tax police launching dockside raids to see how individual tax files line up with owning and maintaining an expensive boat.

But yachts are mobile assets. In response, many boat owners are simply weighing anchor and setting course for more tax-friendly Mediterranean marinas.

On-the-spot tax inspections began last winter in Cortina d'Ampezzo, the trendy ski resort where many owners of Ferraris, Maseratis and Lamborghinis declared incomes of less than $30,000 a year.

It's summer now, and time to hunt down yacht owners. Tax police arrive dockside unannounced, board boats and check owners' details against their tax files. The raids have sent shock waves through the yachting community.

Cala Galera is a large private marina on the Tuscan coast with close to 1,000 berths.

"Clearly and definitely we at the moment are down with respect to other years," says marina director Pietro Capitani.

He points to the vast expanse of empty berths, and then makes a shooting gesture to his temple.

"We are at moment almost 40 percent less than last year. So, we are close to the [bang] for sure, for sure," he says.

A Huge Exodus

Since the tax crackdown was announced in March, around 30,000 boats have fled Italy, seeking safer havens. They include Slovenia, Croatia and Montenegro to the east, France and Spain to the west, and Tunisia and Malta to the south.

The Italian association of marinas says the yacht exodus has cost the Italian economy some $350 million this year in lost revenues from marina fees and services, and fuel sales.

Tax authorities are unrepentant, saying it's important to strike fear in the hears of tax dodgers. Italy has a long history of tax evasion and it is estimated to cost the government some $160 billion a year in lost revenue.

A few miles from Cala Galera, Porto Santo Stefano was once a favorite stop for luxury yachts cruising the clear turquoise waters of the Tuscan marine sanctuary.

Fashion designer Valentino's yacht was once a constant presence, as were the megaboats of Italian jet-setters. Today, it's as empty as the Cala Galera marina.

A Blow To Local Businesses

At a waterfront sail-repair shop, Paola Valenti has little to do.

"There are less than half the boats there were last year," he says. "Boats used to have to drop anchor and wait off shore for a berth to open up. This year, nothing, nothing, nothing."

One of the first boat tax raids took place in April in the southern port of Bari. There, tax inspectors found yachts owned by people who declared almost no income.

One of the most brazen cases was a yacht worth $1.5 million whose owner had never filed a tax return.

Despite her diminished income, Valenti has little sympathy for tax-dodging yacht owners. "If you own a boat," she says, "you have to have a certain declared income. You can't earn less than the sailor who works for you."

Continued in article

John Kerry ---

"Sen. John Kerry skips town on sails tax," by Gayle Fee and Laura Raposa, Boston Herald, July 23, 2010 ---

Sen. John Kerry, who has repeatedly voted to raise taxes while in Congress, dodged a whopping six-figure state tax bill on his new multimillion-dollar yacht by mooring her in Newport, R.I.

Isabel - Kerry’s luxe, 76-foot New Zealand-built Friendship sloop with an Edwardian-style, glossy varnished teak interior, two VIP main cabins and a pilothouse fitted with a wet bar and cold wine storage - was designed by Rhode Island boat designer Ted Fontaine.

But instead of berthing the vessel in Nantucket, where the senator summers with the missus, Teresa Heinz, Isabel’s hailing port is listed as “Newport” on her stern.

Could the reason be that the Ocean State repealed its Boat Sales and Use Tax back in 1993, making the tiny state to the south a haven - like the Cayman Islands, Bermuda and Nassau - for tax-skirting luxury yacht owners?

Cash-strapped Massachusetts still collects a 6.25 percent sales tax and an annual excise tax on yachts. Sources say Isabel sold for something in the neighborhood of $7 million, meaning Kerry saved approximately $437,500 in sales tax and an annual excise tax of about $70,000.

The senior senator’s chief of staff David Wade denied the old salt was berthing his boat out of state to avoid ponying up to the commonwealth.

“The boat was designed by and purchased from a company in Rhode Island, and it’s based in Newport at the Newport Shipyard for long-term maintenance, upkeep and charter purposes, not tax reasons,” Wade told the Track.

And state Department of Revenue spokesguy Bob Bliss confirmed the senator “is under no obligation to pay the commonwealth sales tax.”

But back in 2006, then-gubernatorial candidate Christy Mihos took some flack for avoiding some $23,000 in Bay State sales tax and $1,320 in local excise taxes by berthing his motor yacht in Rhode Island. But Mihos paid just $475,000 for his 36-foot vessel Ashley and readily admitted that he used the boat at his West Yarmouth summer home.

Continued in article

Bob Jensen's Fraud Updates ---

The course involved is "Government 1310: Introduction to Congress." So why is does cheating in this course come as a surprise?

"Cheating Scandal at Harvard," Inside Higher Ed, August 31, 2012 ---

Harvard University is investigating about 125 students -- nearly 2 percent of all undergraduates -- who are suspected of cheating on a take-home final during the spring semester, The Boston Globe reported Thursday. The students will appear before the college’s disciplinary board over the coming weeks, seem to have copied each other’s work, the dean of undergraduate education said. Those found guilty could face up to a one-year suspension. The dean would not comment on whether students who had already graduated would have their degrees revoked but he did tell the Globe, “this is something we take really, really seriously.” Harvard administrators said they are considering new ways to educate students about cheating and academic ethics. While the university has no honor code, the Globe noted, its official handbook says students should “assume that collaboration in the completion of assignments is prohibited unless explicitly permitted by the instructor.”

Jensen Comment
The main issue is whether students plagiarized work of other students.

Ironically the course involved is "Government 1310: Introduction to Congress." So why is does cheating in this course come as a surprise?

"Harvard Students in Cheating Scandal Say Collaboration Was Accepted," by Richard Perez-Pena, The New York Times, August 31, 2012 ---

. . .

 In years past, the course, Introduction to Congress, had a reputation as one of the easiest at Harvard College. Some of the 279 students who took it in the spring semester said that the teacher, Matthew B. Platt, an assistant professor of government, told them at the outset that he gave high grades and that neither attending his lectures nor the discussion sessions with graduate teaching fellows was mandatory.

¶ “He said, ‘I gave out 120 A’s last year, and I’ll give out 120 more,’ ” one accused student said.

¶ But evaluations posted online by students after finals — before the cheating charges were made — in Harvard’s Q Guide were filled with seething assessments, and made clear that the class was no longer easy. Many students, who posted anonymously, described Dr. Platt as a great lecturer, but the guide included far more comments like “I felt that many of the exam questions were designed to trick you rather than test your understanding of the material,” “the exams are absolutely absurd and don’t match the material covered in the lecture at all,” “went from being easy last year to just being plain old confusing,” and “this was perhaps the worst class I have ever taken.”

¶ Harvard University revealed on Wednesday that nearly half of the undergraduates in the spring class were under investigation for suspected cheating, for working together or for plagiarizing on a take-home final exam. Jay Harris, the dean of undergraduate education, called the episode “unprecedented in its scope and magnitude.”

¶ The university would not name the class, but it was identified by students facing cheating allegations. They were granted anonymity because they said they feared that open criticism could influence the outcome of their disciplinary cases.

¶ “They’re threatening people’s futures,” said a student who graduated in May. “Having my degree revoked now would mean I lose my job.”

¶ The students said they do not doubt that some people in the class did things that were obviously prohibited, like working together in writing test answers. But they said that some of the conduct now being condemned was taken for granted in the course, on previous tests and in previous years.

¶ Dr. Platt and his teaching assistants did not respond to messages requesting comment that were left on Friday. In response to calls to Mr. Harris and Michael D. Smith, the dean and chief academic officer of the Faculty of Arts and Sciences, the university released a statement saying that the university’s administrative board still must meet with each accused student and that it has not reached any conclusions.

¶ “We expect to learn more about the way the course was organized and how work was approached in class and on the take-home final,” the statement said. “That is the type of information that the process is designed to bring forward, and we will review all of the facts as they arise.”

¶ The class met three times a week, and each student in the class was assigned to one of 10 discussion sections, each of which held weekly sessions with graduate teaching fellows. The course grade was based entirely on four take-home tests, which students had several days to complete and which were graded by the teaching fellows.

¶ Students complained that teaching fellows varied widely in how tough they were in grading, how helpful they were, and which terms and references to sources they expected to see in answers. As a result, they said, students routinely shared notes from Dr. Pratt’s lectures, notes from discussion sessions, and reading materials, which they believed was allowed.

¶ “I was just someone who shared notes, and now I’m implicated in this,” said a senior who faces a cheating allegation. “Everyone in this class had shared notes. You’d expect similar answers.”

¶ Instructions on the final exam said, “students may not discuss the exam with others.” Students said that consulting with the fellows on exams was commonplace, that the fellows generally did not turn students away, and that the fellows did not always understand the questions, either.

¶ One student recalled going to a teaching fellow while working on the final exam and finding a crowd of others there, asking about a test question that hinged on an unfamiliar term. The student said the fellow defined the term for them.

¶ An accused sophomore said that in working on exams, “everybody went to the T.F.’s and begged for help. Some of the T.F.’s really laid it out for you, as explicit as you need, so of course the answers were the same.”

¶ He said that he also discussed test questions with other students, which he acknowledged was prohibited, but he maintained that the practice was widespread and accepted.

Huge Cheating Scandals at the University of Virginia, Ohio, Duke, Cambridge, and Other Universities ---

Bob Jensen's threads on plagiarism and other forms of cheating are at

Student Assignment on Fraud: Compare the Stockton Versus Orange County Bankruptcies

The Cause of Stockton's Bankruptcy:  Lousy Risk Disclosures on Bond Sales for Stockton's Pension Funds

"How Plan to Help City Pay Pensions Backfired," by Mary Williams Walsh,  The New York Times, September 3, 2012 ---

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.

After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.”

“Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.”

Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.

Since virtually all pension obligation bonds turn on the same basic strategy that Stockton followed, Mr. Michael’s research could be a road map for avoiding more such problems, or perhaps for seeking redress. His analysis was part of his August economic forecast for the region, which he prepares as director of the Business Forecasting Center at the University of the Pacific.

There are about $64 billion in pension obligation bonds outstanding, and even though issuance has slowed, more of the bonds are coming to market, even now.

Officials in Fort Lauderdale, Fla., are scheduled to vote on a $300 million pension obligation bond on Wednesday, for instance. Hamden, Conn., has amended its charter to allow for the bonds to rescue a city pension fund that is wasting away. Oakland, Calif., recently issued about $211 million of the bonds, following the lead of several other California cities and counties.

The basic premise of all pension obligation bonds is that a municipality can borrow at a lower rate of interest than the rate its pension fund assumes its assets will earn on average over the long term. Critics contend that municipalities that try this are in essence borrowing money and betting it on the stock market, through their pension funds. The interest on pension obligation bonds is not tax-exempt for this reason.

Alicia H. Munnell, director of the Center for Retirement Research at Boston College, looked at outcomes for nearly 3,000 pension obligation bonds issued from 1986 to 2009 and found that most were in the red. “Only those bonds issued a very long time ago and those issued during dramatic stock downturns have produced a positive return,” Ms. Munnell wrote with colleagues Thad Calabrese, Ashby Monk and Jean-Pierre Aubry. “All others are in the red.” Only one in five of the pension obligation bonds issued since 1992 has matured, so the results could change in the future.

Among the places where the strategy has failed miserably is New Orleans, which sold about $170 million of such debt in 2000 to produce cash to finance the pensions of 820 retired firefighters. Until then, New Orleans had never funded their benefits and simply paid them out of pocket, leaving the retirees fearful that in a budget squeeze, the city might renege.

City officials based the deal on the expectation that the bond proceeds would be invested in assets that would pay 10.7 percent a year — an unusually aggressive assumption, but one that made the numbers work. New Orleans’s credit was weak, and its borrowing rate was expected to be 8.2 percent. To get the rate on the bonds down as much as possible, New Orleans also issued variable-rate debt, combined with derivatives in an attempt to hedge against rate increases.

But instead of earning 10.7 percent a year, the bond proceeds the city set aside for the firefighters’ pensions lost value over the years, first in the dot-com crash and then in the financial crisis. And instead of hedging against interest rate increases, the derivatives failed, leaving New Orleans paying 11.2 percent interest. The city also has a $115 million balloon payment coming due on the debt in March.

Continued in article

Jensen Comment
An interesting assignment for students might be to compare the bad investment causes of bankruptcy of Stockton, CA versus Orange County , CA,

Listen to Part of a Sixty Minutes video that I made available to my my students learning how to account for derivative financial instruments ---

Boo to Merrill Lynch
Listen to Part of a Sixty Minutes video that I made available to my my students learning how to account for derivative financial instruments ---

Merrill Lynch was a major player in the infamous Orange County fraud when selling derivative financial instruments.  You can read more about this at 

It constantly amazes me how often the name Merrill Lynch crops up in news accounts of both outright frauds and concerns over ethics.  The latest account is typical.  A senior vic

They were an admixture of old-fashioned and uncouth, a duo almost as unlikely as Neil Simon's odd couple.  The seventy-year-old had been married to the same woman for forty years, in the same job for more than twenty, and in the same place--Orange County, California--forever.  The fifty-four-year-old had recently divorced and remarried, switched jobs often and moved even more frequently, most recently to a million-dollar home in swanky Moraga, east of Oakland, California.  Despite their obvious differences, they spoke on the phone virtually every day for many years.  They first met in 1975 and had traded billions of dollars of securities with each other.  The elder of the pair was the Orange County treasurer, Robert Citron; the younger was a Merrill Lynch bond salesman, Mike Stamenson.  Together they created what many officials described as the biggest financial fiasco in the United States: Orange County's $1.7 billion loss on derivative
Frank Partnoy, Page 157 of Chapter 8 entitled "The Odd Couple"
F.I.A.S.C.O. : The Inside Story of a Wall Street Trader by Frank Partnoy
- 283 pages (February 1999) Penguin USA (Paper); ISBN: 0140278796 
A longer passage from Chapter 8 appears at 

A second passage beginning on Page 166 reads as follows:

Also on December 5, Orange County filed the largest municipal bankruptcy petition in history.  Orange County's funds covered nearly two hundred schools, cities, and special districts.  The losses amounted to almost $1,000 for every  man, woman, and child in the county.  The county's investments, including structured notes, had dropped 27 percent in value, and the county said it no longer could meet its obligations.

The bankruptcy filing made the ratings agencies look like fools.  Just a few months before, in August 1994, Moody's Investors Service had given Orange County's debt a rating of Aa1, the highest rating of any California county.  A cover memo to the rating letter stated, "Well done, Orange County."  Now, on December 7, an embarrassed Moody's declared Orange County's bonds to be "junk"--and Moody's was regarded as the most sophisticated ratings agency.  The other major agencies, including S&P, also had failed to anticipate the bankruptcy.  Soon these agencies would face lawsuits related to their practice of rating derivatives.

On Tuesday, January 17, 1995, Robert Citron and Michael Stamenson delivered prepared statements in an all-day hearing before the California Senate Special Committee on Local Government Investments, which had subpoenaed them to testify.  It was a pitiful display.  Citron left his wild clothes at home, testifying in a dull gray suit and bifocals.  He apologized and pleaded ignorance.  He said, "In retrospect, I wish I had more education and training in complex government securities."  Stuttering and subdued, appearing to be the victim, Citron tried to excuse his whole life: He didn't serve in the military because he had asthma; he didn't graduate from USC because of financial troubles; he was an inexperienced investor who had never even owned a share of stock.  It was pathetic.

Stamenson also said he was sorry and cited the enormous personal pain the calamity had produced.  He pretended naivete.  He said Citron was a highly sophisticated investor and that he had "learned a lot" from him.  Stamenson's story was as absurd as Citron's was sad.  When Stamenson asserted that he had not acted as a financial adviser to the county, one Orange County Republican, Senator William A. Craven, couldn't take it anymore and called him a liar.  Stamenson finally admitted that he had spoken to Citron often--Citron had claimed every day--but he refused to concede that he had been an adviser.  At this point Craven exploded again, asking, "Well, what the hell were you talking about to this man every day?  The weather?"  Citron's lawyer, David W. Wiechert, was just as angry.  He said, "For Merrill Lynch to distance themselves from this crisis would be akin to Exxon distancing themselves from the Valdez."


Bob Jensen's timeline of derivative financial instruments frauds ---


The Foreign Corrupt Practices Act is Not Yet Dead
From The Wall Street Journal Accounting Weekly Review on August 24, 2012

Oracle Pays $2 Million in Settlement with SEC
by: Steven D. Jones and Ben Fox Rubin
Aug 17, 2012
Click here to view the full article on

TOPICS: Auditing, Foreign Corrupt Practices Act, Fraud, Internal Controls

SUMMARY: "Oracle Corp. paid $2 million to settle Securities and Exchange Commission accusations that an Indian subsidiary of the company violated U.S. laws designed to prevent bribery overseas [the Foreign Corrupt Practices Act (FCPA)]....The SEC said the failed to prevent [its subsidiary] from secretly setting aside money that eventually was used to make unauthorized payments to vendors in India....The complaint didn't allege Oracle bribed officials but said the funds created a risk the cash could be used for bribery."

CLASSROOM APPLICATION: The article may be used in an auditing or accounting systems course to cover the Foreign Corrupt Practices Act, appropriate internal controls in support of the FCPA, and audit procedures to detect weaknesses in internal controls and violations of the FCPA.

1. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)? When was it established?

2. (Introductory) If the SEC "...complaint didn't allege Oracle bribed officials," then why did Oracle pay a fine for the SEC complaint under the FCPA?

3. (Advanced) Define the phrases "misappropriation of assets" and "fraudulent financial reporting." Based on the description in the article, state which of these two events occurred at Oracle's Indian subsidiary. Support your answer.

4. (Advanced) What is a cycle approach to auditing? For the May 2006 example in the article, identify the audit cycle in which the inappropriate transactions occurred.

5. (Advanced) For the transaction cycle described above, identify an audit procedure that might have uncovered the inappropriate transactions. Describe the results of the test procedure that might indicate potential violations of internal controls and potential fraudulent transactions.

6. (Advanced) What is an approved vendor list? How does such a list help to implement controls over the type of transaction that occurred in May 2006?

Reviewed By: Judy Beckman, University of Rhode Island

"Oracle Pays $2 Million in Settlement with SEC,"  by Steven D. Jones and Ben Fox Rubin, The Wall Street Journal, August 17, 2012 ---

Oracle Corp. ORCL +0.77% paid $2 million to settle Securities and Exchange Commission accusations that an Indian subsidiary of the company violated U.S. laws designed to prevent bribery overseas.

The SEC said the business-software company failed to prevent Oracle India Private Ltd. from secretly setting aside money that eventually was used to make unauthorized payments to vendors in India. The unauthorized funds, which existed from 2005 to 2007, amounted to about $2.2 million, the SEC said Thursday.

The agency said the existence of the account, which was separate from the subsidiary's books, constituted a violation of the Foreign Corrupt Practices Act. The complaint didn't allege Oracle bribed officials but said the funds created a risk the cash could be used for bribery.

Oracle in its settlement didn't admit to or deny the allegations.

"We will continue to maintain a high standard of compliance and accountability for our business around the world," Oracle spokeswoman Deborah Hellinger said.

Oracle, which is based in Redwood Shores, Calif., discovered the funds in 2007, notified U.S. authorities and has cooperated with the SEC investigation, the company said.

A sales manager linked to the plan resigned, the jobs of four employees were terminated and the company has put in place controls and training to prevent similar situations from occurring again, Oracle said.

The settlement came amid a flurry of investigations under the Foreign Corrupt Practices Act, a 1977 law that bars payments to foreign officials to secure business. Pfizer Inc. PFE +1.10% this month agreed to pay $60.2 million to settle an overseas bribery investigation that began in 2004. Teva Pharmaceutical Industries Ltd. TEVA +0.00% disclosed that the SEC subpoenaed documents about the company's Latin American operations, and beauty company Avon Products Inc. AVP +0.58% said it entered talks to end a long-running bribery investigation involving some of the company's foreign operations.

Enforcing the act is an continuing effort, "not a new focus," said Jina Choi, assistant regional director of the SEC in San Francisco. The agency wants U.S. businesses to remain vigilant about regional corruption as companies seek to increase sales world-wide, she said.

The SEC in its seven-page complaint alleged that Oracle India employees inflated the amounts on bills connected with eight government contracts and then directed distributors to hold the excess cash in so-called side funds. The complaint alleged that the employees inflated bills approximately 14 times over two years and "made these margins large enough to ensure a side fund existed to pay third parties," the complaint said.

Payments from the side funds were made to third-party businesses that "did not exist" or were "merely storefronts," it said.

The SEC said the practice created the risk that the funds could be used for illegal purposes, such as bribery or embezzlement. The complaint didn't indicate whether any of the money was recovered.

Oracle didn't respond to questions about who received the cash.

In one example, Oracle India in May 2006 secured a $3.9 million deal with India's Ministry of Information Technology and Communications, according to the SEC complaint. As instructed by Oracle India's then-sales director, only $2.1 million was sent to Oracle as revenue on the transaction. Other Oracle India employees then instructed the distributor to park $1.7 million for "marketing development purposes," the SEC alleged. The distributor kept $151,000 for services rendered.

Continued in article

Jensen Comment
The question is whether a $2 million settlement, like most SEC settlements these days, is a mere chicken feed cost of doing business.

Teaching Case:  Bribery by Avon in China?

From The Wall Street Journal Accounting Weekly Review on February 17, 2012

Foreign Bribe Case at Avon Presented to Grand Jury
by: Joe Palazzolo and Emily Glazer
Feb 13, 2012
Click here to view the full article on

TOPICS: Foreign Corrupt Practices Act, Foreign Subsidiaries, Internal Auditing, Internal Controls

SUMMARY: "Federal prosecutors investigating whether U.S. executives at Avon Products, Inc., broke foreign-bribery laws have presented evidence in the probe to a grand jury...Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act [FCPA]...."

CLASSROOM APPLICATION: Questions ask students to consider what audit steps they would undertake to investigate the issues identified in the article. The article is useful in an auditing class to discuss internal audit functions.

1. (Introductory) Describe how Avon sells its products.

2. (Advanced) What is the Foreign Corrupt Practices Act (FCPA)? How do the law's requirement, and general ethics, make it imperative to prevent illegal payments or other corrupt acts?

3. (Advanced) How might Avon's business model make it difficult to establish internal controls over items such as possible illegal payments to foreign officials?

4. (Advanced) Define the internal audit function and compare it to the audits done by external auditors.

5. (Introductory) How was the Avon Products, Inc. internal audit function used in connection with the company's Chinese operations? What evidence did the internal auditors apparently find in 2005?

6. (Advanced) Suppose you are a member of the Avon internal audit team asked to investigate payments made out of Chinese operations. What steps would you plan to investigate the propriety of the payments?

Reviewed By: Judy Beckman, University of Rhode Island

"Foreign Bribe Case at Avon Presented to Grand Jury," by: Joe Palazzolo and Emily Glazer, The Wall Street Journal, February 13, 2012 ---

Federal prosecutors investigating whether U.S. executives at Avon Products Inc. broke foreign-bribery laws have presented evidence in the probe to a grand jury, people familiar with the matter said.

Authorities are focused on a 2005 internal audit report by the company that concluded Avon employees in China may have been bribing officials in violation of the Foreign Corrupt Practices Act, according to three people familiar with the matter. Avon had earlier said it first learned of bribery allegations in 2008.

The audit found several hundred thousand dollars in questionable payments to Chinese officials and third-party consultants in 2005, one of these people said. It came as Avon was pursuing a license to conduct door-to-door sales in China. Some of the payments were recorded on invoices as gifts for government officials, the person said. Avon secured China's first such license to a foreign company in 2006.

The Federal Bureau of Investigation and U.S. prosecutors in New York and Washington are trying to determine whether current or former executives ignored the audit's findings or actively took steps to conceal the problems, both potential offenses, two people familiar with the matter said.

Executives at Avon headquarters in New York who saw the audit report at the time didn't disclose its findings to the board's audit committee, finance committee or the full board, according to people familiar with the investigation. Board members didn't learn of the audit report until after Avon launched its own internal investigation of overseas bribery allegations in 2008, say the people familiar with the situation.

Legal experts say executives can be liable in overseas bribery cases even if they didn't authorize illegal payments or try to hide evidence of bribes. Under a legal concept known as willful blindness, a person can also be found guilty of taking steps to avoid learning of wrongdoing, they said, but prosecutors face a higher legal bar.

"We're not aware that a federal grand jury is investigating this," said an Avon spokeswoman. She declined to confirm whether there had been an audit in 2005 and declined to discuss how executives handled any such audit. She said Avon is fully cooperating with the investigation.

While grand juries gather information to determine whether there is enough evidence to bring criminal charges, they also can decline any action.

The investigation of Avon's headquarters comes as members of Congress pressure the Justice Department to hold more high-level executives accountable for corruption overseas. In December, the government unveiled charges against a group of former executives of German conglomerate Siemens AG. Siemens has said it is cooperating.

Avon opened an internal investigation into possible bribery in China in 2008, more than two years after the purported audit report. The company's internal review was later expanded to other regions of the world. The door-to-door cosmetics company has said the internal probe was triggered by an employee who sent a letter in 2008 to Chief Executive Andrea Jung alleging improper spending on travel for Chinese government officials.

The investigation put a cloud over the 12-year tenure of Ms. Jung, who won plaudits for securing the direct-sales license in China. She said in December she would step down once the company finds a replacement CEO; her announcement came amid pressure from investors concerned about Avon's financial performance. Avon has said questions about the company's activities in China kicked off probes by the Justice Department and Securities and Exchange Commission, as well as the audit committee of Avon's board.

Ms. Jung declined to comment. She has said little about the investigations in the past, except that the company is cooperating with the government.

Some high-ranking Avon executives have lost their jobs in the probe. The company said it fired Vice Chairman Charles Cramb on Jan. 29 in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn't be reached for comment.

Continued in article

February 17, 2012 reply from Bob Jensen to Jagdish Gangolly

Hi Jagdish,

I never suggested profiling when it comes to things like policies on investigating and prevention of plagiarism or cheating in general. The policies must apply to all national origins, and rule enforcement must apply to every student and faculty member. And this is not a racial thing since many of our Asian, Irish, Norwegian, and Latin students were born and educated in the U.S.

What is sad, however, in the United States is when being "street smart" is synonymous knowing how to get away with cheating relative to people who are more trusting and are not "street smart."

I do, however, believe that there is relativism of many things in different nations, including their heritages for bribery customs and norms for cheating/corruption ---

Corruption Perceptions Index 2009 | Transparency International

The interactive map is at

As a footnote when viewing the graphic at the above site, I notice how greatly some nations vary from their neighbors. For example, Argentina is perceived as being over twice as corrupt than Chile. Italy and France are more more corrupt than Germany even though all three nations have similar religious (Catholic) heritages. Religion is probably not the dominant factor in controlling corruption.

Law and tax rule enforcement, however, can be very powerful. The least-corrupt nations seem to rise above the other nations in terms of vigorous law enforcement and tax collections.

However, law enforcement is not synonymous with brutality. Russia, for example, has a brutal police and prison system that has not quelled widespread corruption. The same is true for Viet Nam.

Bob Jensen

Bob Jensen's Fraud Updates ---


"How London became the money-laundering capital of the world," by Rowan Bosworth-Davies,", July 15, 2012 ---
Note that this article first appeared on Roway's blog in March 26, well in advance of the revelations of LIBOR fixing scandals by U.K. banks

. . .

This article was written by Rowan Bosworth-Davies and first posted on his blog on March 26th 2012. It is reused with permission. Since then, it has emerged that HSBC faces a $1 billion penalty in the United States for weak anti money laundering controls by the US government. At a hearing in Washington this Tuesday, the US Senate Permanent Subcommittee on Investigations is poised to deliver a blistering attack on the London-headquartered bank’s anti-money laundering systems and controls, highlighting its role in transactions tied to Iran, terrorist financing and drug cartels. In a Reuters Special Report published July 13th 2012, Carrick Mollenkamp and Brett Wolf have detailed how the bank’s Delaware-based anti-money laundering hub pays lip-service to tackling the problem of money laundering.


"Understanding Libor," by FT reporters, Financial Times, July 20, 2012 ---

Jensen Comment
A recent article in The Economist predicts that it will be really difficult for plaintiffs in the thousands of LIBOR lawsuits to get serious settlements. I can't recall the citation (late in August 2012), but one of the main arguments is that use of LIBOR was volunary and not required. Also damages are very difficult to assess since playing "what if games are very difficult when it comes to "hypothetical impacts" of different interest rates.

Bob Jensen's fraud updates ---


Standard Chartered agreed to pay a $340m (£217m) fine on Tuesday in a humbling settlement with a United States regulator over Iranian money-laundering charges ---


Deloitte chief executive Joe Echevarria has fought back against allegations that his firm helped Standard Chartered hide transactions with Iran, saying charges by the top New York state banking regulator were "distortions of the facts" ---

Mr Echevarria, chief executive since June 2011, defended Deloitte in an interview with Reuters - his first since the firm was dragged into the spotlight over its independent reviews of Standard Chartered.

The New York State Department of Financial Services, in a case involving US anti-money laundering laws, last week said Deloitte consultants omitted critical details in a report to regulators about Standard Chartered.

The regulator cited an email from a Deloitte partner saying he drafted a "watered-down version" of the report after being asked by Standard Chartered to omit information.

"It's an unfortunate choice of words that was pulled out of context," Mr Echevarria said.

A source close to the matter, who asked to remain anonymous because of its sensitive nature, told Reuters that the Department of Financial Services had no plans to bring charges against Deloitte. A spokesman for the department refused to confirm or deny that statement.

Mr Echevarria said he was standing in line with his 16-year-old son at Universal Studios in Orlando, Florida a week ago when he first heard of the Standard Chartered matter by email. A Bronx native in his 35th year at Deloitte, Mr Echevarria said one of his first thoughts was, "There's got to be more to this."

The New York banking regulator head, Benjamin Lawsky, alleged Standard Chartered hid from regulators some 60,000 "secret transactions" tied to Iran. Standard Chartered has said the regulator's account did not present "a full and accurate picture of the facts."

Mr Lawsky said that at one point, Standard Chartered asked Deloitte to delete from its draft report any reference to payments that could reveal the bank's practices involving Iranian entities.

Mr Lawsky quoted an email from a Deloitte partner who said "we agreed" to the request.

Mr Echevarria declined to discuss specific allegations, but in a statement last week, Deloitte said "contrary to the allegation," it "absolutely did not delete any reference to certain types of payments" from a final report. Deloitte said the report did not include a recommendation that had been included in a prior draft.

"Presumably the facts will bear out that we certainly held up all the standards required and behaved in an ethical and responsible way," Mr Echevarria said.

Asked if Deloitte has taken action against anyone at the firm, Mr Echevarria said he could not comment on anything involving personnel or privacy issues.

In another damaging charge, the banking regulator said Deloitte gave Standard Chartered two reports with highly confidential client information - an allegation that, if true, would violate one of the cardinal rules in the consulting business.

"We have pretty robust processes in place for behaviour that violates law, rules or firm policies," Mr Echevarria said. "Appropriate actions are taken when individuals are found to have done that."

Mr Echevarria, who rose through the auditing ranks to become chief executive, has battled a series of reputational hits since taking over the US firm.

Late last year, the firm came under scrutiny from a member of Congress after audit industry regulators unsealed parts of a report criticizing quality controls at Deloitte's corporate auditing business. Deloitte said at the time that it had made investments to improve its audit practice.

Continued in article

As Andersen discovered, one felony conviction in the U.S. can end a firm's auditing practice in the entire U.S. I cannot imagine any large auditing firm gambling with  its nationwide authority to conduct audits. However, doubt that this risk applies to certain rogue author or consultant convictions such as when a single partner is convicted on insider trading that was much of a surprise to the firm as it was the SEC and the public. There's a huge gray zone, especially for a firm like Deloitte that did not sell or spin off most of its consulting practice before SOX went into effect. The auditing firms that are roaring back into consulting are putting their auditing divisions somewhat at risk.

Bob Jensen's threads on Deloitte ---

"Theory Of Spain's Political Class," by Cesar Molinas, The Browser, September 12, 2012 --- Click Here
Direct Link ---

In this article I propose a theory of Spain's political class to make a case for the urgent, imperious need to change our voting system and adopt a majority system. A good theory of Spain's political class should at least explain the following issues:

1. How is it possible that five years after the crisis began, no political party has a coherent diagnosis of what is going on in Spain?

2. How is it possible that no political party has a credible long-term plan or strategy to pull Spain out of the crisis? How is it possible that Spain's political class seems genetically incapable of planning?

3. How is it possible that Spain's political class is incapable of setting an example? How is it possible that nobody - except the king and for personal motives at that - has ever apologized for anything?

4. How is it possible the most obvious strategy for a better future - improving education, encouraging innovation, development and entrepreneurship, and supporting research - is not just being ignored, but downright massacred with spending cuts by the majority parties?

In the following lines I posit that over the last few decades, Spain's political class has developed its own particular interest above the general interest of the nation, which it sustains through a system of rent-seeking. In this sense it is an extractive elite, to use the term popularized by Acemoglu and Robinson. Spanish politicians are the main culprits of the real estate bubble, of the savings banks collapse, of the renewable energy bubble and of the unnecessary infrastructure bubble. These processes have put Spain in the position of requiring European bailouts, a move which our political class has resisted to the bitter end because it forces them to implement reforms that erode their own particular sphere of interest. A legal reform that enforced a majority voting system would make elected officials accountable to their voters instead of to their party leaders; it would mark a very positive turn for Spanish democracy and it would make the structural reforms easier. THE HISTORY

The politicians who participated in the transition process from Franco's regime to democracy came from very diverse backgrounds: some had worked for Franco, others had been in exile and yet others were part of the illegal opposition within national borders. They had neither a collective spirit nor a particular group interest. These individuals made two major decisions that shaped the political class that followed them. The first was to adopt a proportional representation voting system with closed, blocked lists. The goal was to consolidate the party system by strengthening the internal power of their leaders, which sounded reasonable in a fledgling democracy. The second decision was to strongly decentralize the state with many devolved powers for regional governments. The evident dangers of excessive decentralization were to be conjured by the cohesive role of the great national parties and their strong leaderships. It seemed like a sensible plan.

But four imponderables resulted in the young Spanish democracy acquiring a professional political class that quickly grew dysfunctional and monstrous. The first was the proportional system with its closed lists. For a long time now, members of party youth groups get themselves on the voting lists on the sole merit of loyalty to their leaders. This system has turned parties into closed rooms full of people where nobody dares open the windows despite the stifling atmosphere. The air does not flow, ideas do not flow, and almost nobody in the room has personal direct knowledge of civil society or the real economy. Politics has become a way of life that alternates official positions with arbitrarily awarded jobs at corporations, foundations and public agencies, as well as sinecures at private regulated companies that depend on the government to prosper.

Secondly, the decentralization of the state, which began in the early 1980s, went much further than was imaginable when the Constitution was approved. As Enric Juliana notes in his recent book Modesta España (or, Modest Spain), the controlled top-down decentralization was quicky overtaken by a bottom-up movement led by local elites to the cry of "We want no less!" As a result, there emerged 17 regional governments, 17 regional parliaments and literally thousands of new regional companies and agencies whose ultimate goal in many cases was simply to extend paychecks and bonuses. In the absence of established procedures for selecting staff, politicians simply appointed friends and relatives, which led to a politicized patronage system. The new political class had created a rent-seeking system - that is to say, a system that does not create new wealth but appropriates existing wealth - whose sewers were a channel for party financing.

Thirdly, political parties' internal power was decentralized even faster than the public administration. The notion that the Spain of the Regions could be managed by the two majority parties (the conservative Popular Party and the Socialists) fell apart when the regional "barons" accumulated power and, like the Earl of Warwick, became kingmakers within their own parties. This accelerated the decentralization and loss of control over the regional savings banks. Regional governments quickly passed laws to take over the cajas de ahorros, then filled the boards with politicians, unionists, friends and cronies. Under their leadership, the savings banks financed or created yet more businesses, agencies and affiliated foundations with no clear goal other than to provide yet more jobs for people with the right connections.

Additionally, Spain's political class has colonized areas that are not the preserve of politics, such as the Constitutional Court, the General Council of the Judiciary (the legal watchdog), the Bank of Spain and the CNMV (the market watchdog). Their politicized nature has strangled their independence and deeply delegitimized them, severely deteriorating our political system. But there's more. While it invaded new terrain, the Spanish political class abandoned its natural environment: parliament. Congress is not just the place where laws are made; it is also the institution that must demand accountability. This essential role completely disappeared in Spain many years ago. The downfall of Bankia, played out grotesquely in last July's parliamentary appearances, is just the latest in a long series of cases that Congress has decided to treat as though they were natural disasters, like an earthquake, which has victims but no culprits. THE BUBBLES

These processes created a political system in which institutions are excessively politicized and where nobody feels responsible for their actions because nobody is held accountable. Nobody within the system questions the rent-seeking that conforms the particular interest of Spain's political class. This is the background for the real estate bubble and the failure of most savings banks, as well as other "natural disasters" and "acts of God" that our politicians are so good at creating. And they do so not so much out of ignorance or incompetence but because all these acts generate rent.

The Spanish real estate bubble was, in relative terms, the largest of the three that are at the origin of today's global crisis, the US bubble and the Irish bubble being the other two. There is no doubt that, like the others, it fed on low interest rates and macroeconomic imbalances on a global scale. But unlike the US, in Spain decisions regarding what gets built where are taken at the political level. In Spain, the political class inflated the real estate bubble through direct action, not omission or oversight. City planning is born out of complex, opaque negotiations which, besides creating new buildings, also give rise to party financing and many personal fortunes, both among the owners of rezoned land and those doing the rezoning. As if this power were not enough, by transferring control of the savings banks to regional governments the politicians also had power of decision over who received money to build. This represented a quantum leap in the Spanish political class' capacity for rent-seeking. Five years on, the situation could not be more bleak. The Spanish economy will not grow for many years to come. The savings banks have disappeared, mostly due to bankruptcy.

The other two bubbles I will mention are a result of the peculiar symbiosis between our political class and Spanish capitalists who live off government favors. At a recent meeting, a well-known foreign investor called it "an incestuous relationship" while a Spanish investor talked about "a collusion against consumers and taxpayers." Be that as it may, let us first discuss the renewable energy bubble. Spain represents two percent of world GDP yet it is paying 15 percent of the global total of renewable energy subsidies. This absurd situation, which was sold to the public as a move that would put Spain on the forefront of the fight against climate change, creates lots of fraud and corruption, and naturally captured rent, too. In order to finance these subsidies, Spanish households and businesses pay the highest electricity rates in all of Europe, which seriously undermines the competitiveness of our economy. Despite these exaggerated prices, the Spanish power system debt is several million euros a year, with an accumulated debt of over 24 billion euros that nobody knows how to pay.

The last bubble I will discuss concerns the countless unnecessary infrastructure projects built in the last two decades at an astronomical cost, benefiting the builders and hurting the taxpayers. One of the most scandalous cases is the spoke highways into and out of Madrid. Meant to improve traffic flows into the capital, the radiales were built with no thought given to important principles of prudence and good management. First, rash forecasts were made regarding the potential traffic on these roads (currently it is 30 percent of expectations and not because of the crisis; there was no traffic in boom times, either.) The government allowed the builders and the concessionaires to be essentially the same people. This is madness, because when builders disguised themselves as license holders through companies with very little capital and huge debt, builders basically got money from the concessionaires to build the highways, and when there was no traffic, they threatened to let the latter go broke. The main creditors were - surprise! - the savings banks. So nobody knows how to pay the more than three billion euros in debt, which will ultimately fall on the taxpayers' shoulders. THE THEORY

The principle is very simple. Spain's political class has not only turned itself into a special interest group, like air traffic controllers for example; it has taken a step further and formed an extractive elite in the sense given to this term by Acemoglu and Robinson in their recent and already famous book Why Nations Fail. An extractive elite is defined by:

"Having a rent-seeking system which allows, without creating new wealth, for the extraction of rent from a majority of the population for one's own benefit."

"Having enough power to prevent an inclusive institutional system - in other words, a system that distributes political and economic power broadly, that respects the rule of law and free market rules."

Abominating the 'creative destruction' that characterizes the most dynamic forms of capitalism. In Schumpeter's words, "creative destruction is the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Innovation tends to create new centers of power, and that's why it is detested.

What does this simple theory have to say about the four questions set forth at the beginning of this article? Let us see:

1. Spain's political class, as an extractive elite, cannot effect a reasonable diagnosis of the crisis. It was their rent-seeking mechanisms that provoked it, but obviously they cannot say that. The Spanish political class needs to defend, as it is indeed doing to a man, that the crisis is an act of God, something that comes from the outside, unpredictable by nature, and in the face of which we can only show resignation.

2. Spain's political class, as an extractive elite, cannot have any exit strategy other than waiting for the storm to pass. Any credible long-term plan must include the dismantling of the rent-seeking mechanisms that the political class benefits from. And this is not an option.

3. Nobody apologizes for defending their particular interests. Air traffic controllers didn't, and neither will our politicians.

4. Just as the theory of extractive elites states, Spanish political parties share a great contempt for education, innovation and entrepreneurship, and a deep-seated hostility towards science and research. The loud arguments over the civics education course Educación para la Ciudadanía are in stark contrast with the thick silence regarding the truly relevant problems of our education system. Meanwhile, innovation and entrepreneurship languish in the midst of regulatory deterrents and punitive fiscal measures. And spending on scientific research is viewed as a luxury that politicians cut back savagely on, given half a chance.


Continued in article

Wars Without Guns and Bombs
"Exclusive: Iranian hackers target Bank of America, JPMorgan, Citi," by y Jim Finkle and Rick Rothacker, Reuters, September 21, 2012 ---

The attacks, which began in late 2011 and escalated this year, have primarily been "denial of service" campaigns that disrupted the banks' websites and corporate networks by overwhelming them with incoming web traffic, said the sources.

Whether the hackers have been able to inflict more serious damage on computer networks or steal critical data is not yet known. The sources said there was evidence suggesting the hackers targeted the banks in retaliation for their enforcement of Western economic sanctions against Iran.

Iran has beefed up its cyber capabilities after its nuclear program was damaged in 2010 by the Stuxnet virus, widely believed to have been developed by the United States. Tehran has publicly advertised its intentions to build a cyber army and encouraged private citizens to hack against Western countries.

The attacks on the three largest U.S. banks originated in Iran, but it is not clear if they were launched by the state, groups working on behalf of the government, or "patriotic" citizens, according to the sources, who requested anonymity as they were not authorized to discuss the matter.

They said the attacks shed new light on the potential for Iran to lash out at Western nations' information networks.

"Most people didn't take Iran seriously. Now most people are taking them very seriously," said one of the sources, referring to Iran's cyber capabilities.

Iranian officials were not available for comment. Bank of America, JPMorgan and Citigroup declined to comment, as did officials with the Pentagon, U.S. Department of Homeland Security, Federal Bureau of Investigation, National Security Agency and Secret Service.

A U.S. financial services industry group this week warned banks, brokerages and insurers to be on heightened alert for cyber attacks after the websites of Bank of America and JPMorgan Chase's experienced unexplained service disruptions.

NBC reported late on Thursday that the Iranian government was behind these attacks, citing U.S. national security sources. Reuters could not verify that independently.

Tensions between the United States and Iran, which date back to the revolution in 1979 that resulted in the current Islamic republic, have escalated in recent years as Washington led the effort to prevent Tehran from getting a nuclear bomb and imposed tough economic sanctions.


Denial-of-service campaigns are among the oldest types of cyber attacks and do not require highly skilled computer programmers or advanced expertise, compared with sophisticated and destructive weapons like Stuxnet.

But denial-of-service attacks can still be very disruptive: If a bank's website is repeatedly shut down, the attacks can hurt its reputation, affect customer retention and cause revenue losses as customers cannot open accounts or conduct other business.

Bank of America, Citigroup and JPMorgan Chase have consulted the FBI, Department of Homeland Security and National Security Agency on how to strengthen their networks in the face of the Iranian attacks, the sources said. It was not clear whether law enforcement agencies are formally investigating the attacks.

The Iranian attackers may have used denial-of-service to distract the victims from other, more destructive assaults that have yet to be uncovered, the sources said.

Frank Cilluffo, who served as homeland security adviser to U.S. President George W. Bush, told Reuters that he knows of "cyber reconnaissance" missions that have come from Iran but declined to give specifics.

"It is yet to be seen whether they have the wherewithal to cause significant damage," said Cilluffo, who is now director of the Homeland Security Policy Institute at George Washington University.

Continued in article

Jensen Comment
Cyberwars work both ways. President Obama bragged that U.S. succeeded in burning out millions of dollars worth of Iranian centrifuges.

"Obama Order Sped Up Wave of Cyberattacks Against Iran," by David E. Sanger, The New York Times, June

Gee:  Living High on the Buckeye at Ohio State University
"Gordon Gee, the Teflon President, Weathers Another Storm Over Expenses," by Jack Stripling, Chronicle of Higher Education, September 26, 2012 ---

It has been said that the only survivors of a nuclear holocaust will be cockroaches and Cher. At this point, it might seem reasonable to add E. Gordon Gee to that list.

At a time when college leaders are being tossed out at the very first whiff of a scandal, the Ohio State University president appears impervious to controversy.

Over the course of his decades-long career in higher education, Mr. Gee has weathered athletics scandal, spending probes, and even jokes about his ex-wife's smoking pot in the president's residence at Vanderbilt University.

Through it all, the unflappable Mr. Gee, 68, has never seemed to stop smiling.

Continued in article



Barclays ---

Why are US. towns & states, labor unions, and other investors suing U.K.'s Barclays and other U.K. banks for LIBOR manipulation?
Why do PwC auditors need more caffeine?

Many of their returns on investments in things like pension funds were diminished by U.K. bank conspiracies to manipulate LIBOR. And millions of interest rate swaps based upon LIBOR underlyings (notionals in the trillions) did not have fair and just settlements. What a huge mess going on while PwC and other Big Four auditing firms slept!!!

"Barclays Manipulates LIBOR While Auditor PwC Snoozes," by Francine McKenna, Forbes, July 2, 2012 ---

Bob Jensen's threads on banks and traders that are rotten to the core ---

Bob Jensen's threads on the woes of PwC are at

"The LIBOR Mess: How Did It Happen -- and What Lies Ahead?" Knowledge@Wharton, July 18, 2012 ---


Finance Professor Jim Mahar says Barclays really should be removing these advertisements as soon as possible.

Barclays ---

Rate-fixing scandal

In June 2012, as a result of an international investigation, Barclays Bank was fined a total of £290 million (US$450 million) for attempting to manipulate the daily settings of London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor). The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions".[94] The bank was found to have made 'inappropriate submissions' of rates which formed part of the Libor and Euribor setting processes, sometimes to make a profit, and other times to make the bank look more secure during the financial crisis.[95] This happened between 2005 and 2009, as often as daily.[96]

The BBC said revelations concerning the fraud were "greeted with almost universal astonishment in the banking industry."[97] The UK's Financial Services Authority (FSA), which levied a fine of £59.5 million ($92.7 million), gave Barclays the biggest fine it had ever imposed in its history.[96] The FSA's director of enforcement described Barclays' behaviour as "completely unacceptable", adding "Libor is an incredibly important benchmark reference rate, and it is relied on for many, many hundreds of thousands of contracts all over the world."[95] The bank's chief executive Bob Diamond decided to give up his bonus as a result of the fine.[98] Liberal Democrat politician Lord Oakeshott criticised Diamond, saying: "If he had any shame he would go. If the Barclays board has any backbone, they'll sack him."[95] The U.S. Department of Justice has also been involved, with "other financial institutions and individuals" under investigation.[95] On 2 July 2012, Marcus Agius resigned from the chairman position following the interest rate rigging scandal.[99] On 3 July 2012, Bob Diamond resigned with immediate effect, leaving Marcus Agius to fill his post until a replacement is found.[100]




"How Barclays Rigged the Machine," by Rana Foroohar, Time Magazine, July 23, 2012 ---,33009,2119318,00.html

Ever wonder why surveys about very personal topics (think sex and money) are done anonymously? Of course you don't, because it's obvious that people wouldn't tell the truth if they were identified on the record. That's a key point in understanding the latest scandal to hit the banking industry, which comes, as ever, with much hand-wringing, assorted apologies and a crazy-sounding acronym--this time, LIBOR. That's short for the London interbank offered rate, the interest rate that banks charge one another to borrow money. On June 27, Britain's Barclays bank admitted that it had deliberately understated that rate for years.

LIBOR is a measure of banks' trust in their solvency. And around the time of the financial crisis of 2008, Barclays' rate was rising. If a bank revealed publicly that it could borrow only at elevated rates, it would essentially be admitting that it--and perhaps the financial system as a whole--was vulnerable. So Barclays gamed the system to make the financial picture prettier than it was. The charade was possible because LIBOR is calculated not on the basis of documented lending transactions but on the banks' own estimates, which can be whatever bankers decree. This Kafkaesque system is overseen for bizarre historical reasons by an association of British bankers rather than any government body.

The LIBOR scandal has already claimed Barclays' brash American CEO, Bob Diamond, a man infamous for taking huge bonuses while his company's share price and profit were declining. Diamond resigned, but his head may not be the only one to roll. As many as 20 of the world's largest banks are being sued or investigated for manipulating over the course of many years the interest rate to which $350 trillion worth of derivatives contracts are pegged. Bank of England and former British-government officials accused of colluding with Barclays to stem a financial panic may also be caught up in the mess.

What's surprising is that individual consumers may actually have benefited, at least financially, from the collusion. Not only the central reference point for derivatives markets, LIBOR is also the rate to which all sorts of loans--variable mortgage rates, student loans, even car payments--may be pegged. To the extent that banks kept LIBOR artificially low, all those other loan rates were marked down too. Unlike the JPMorgan trading fiasco of a few weeks ago, which has resulted in a multibillion-dollar loss, the only apparent red ink so far in the LIBOR scandal is the $450 million in fines that Barclays will pay to the U.K. and U.S. governments for rigging rates (though pension funds and insurance companies on the short end of LIBOR-pegged financial transactions may have lost a lot of money).

Either way, the truth is that LIBOR is a much, much bigger deal than what happened at JPMorgan. Rather than one screwed-up trade that was--whether you like it or not (and I don't)--most likely legal, it represents a financial system that is still, four years after the crisis began, opaque, insular and dangerously underregulated. "This is a very, very significant event," says Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), which is one of the regulators investigating the scandal. "LIBOR is the mother of all financial indices, and it's at the heart of the consumer-lending markets. There have been winners and losers on both sides [of the LIBOR deals], but collectively we all lose if the market isn't perceived to be honest."

Continued in article

View from the Left
"Barclays and the Limits of Financial Reform," by Alexander Cockburn, The Nation, July 30, 2012 ---

"Execs to Cash In Despite Market Woes: Even companies whose investors received a negative return this year expect to fund at least 100% of formula-based annual bonus plans," David McCann,, December 9, 2011 ---

Are companies in denial when it comes to executives' annual bonuses for 2011? Judge for yourself.

Among 265 companies that participated in a newly released Towers Watson survey, 42% said their shareholders' total returns were lower this year than in 2010. No surprise there, given the stock markets' flat performance in 2011.

Yet among those that reported declining shareholder value, a majority (54%) said they expected their bonus plan to be at least 100% funded, based on the plan's funding formula. That wasn't much behind the 58% of all companies that expected full or greater funding (see chart).

"It boggles the mind. How do you articulate that to your investors?" asks Eric Larre, consulting director and senior executive pay consultant at Towers Watson. Noting that stocks performed excellently in 2010 while corporate earnings stagnated — the opposite of what has happened this year — he adds, "How are you going to say to them, 'We made more money than we did last year, but you didn't'?"

In particular, companies would have to convincingly explain that annual bonus plans are intended to motivate executives to achieve targets for short-term, internal financial metrics such as EBITDA, operating margin, or earnings per share, and that long-term incentive programs — which generally rest on stock-option or restricted-stock awards, giving executives, like investors, an ownership stake in the company — are more germane to investors.

But such arguments may hold little sway with the average investor, who "doesn't bifurcate compensation that discretely," says Larre. Rather, investors simply look at the pay packages as displayed in the proxy statement to see how much top executives were paid overall, and at how the stock performed.

Larre attributes much of the current, seeming generosity to executives to complacence within corporate boards. This year, the first in which public companies were required to give shareholders an advisory ("say on pay") vote on executive-compensation plans, 89% received a thumbs-up. But that came on the heels of 2010, when the S&P 500 gained some 13% and investors were relatively content with their returns. "They may not be as content now," Larre observes. "I think the number of 'no' say-on-pay votes will be larger during the 2012 proxy season."

Continued in article

"Sandy Weill Still Doesn't Have the Answer The banker-government consortium re-exposed in the Libor scandal won't be unwound from the top," by Holman W. Jenkins, Jr., The Wall Street Journal, July 27, 2012 ---

Sandy Weill was impressive as a scrambler, a dealmaker, a man who could catch a wave. He's come out of retirement now, a decade after creating the Citigroup oligopolist, to catch a new wave, declaring on CNBC that investment banking and commercial banking should be re-separated.

He explains that bank bailouts and too big to fail would no longer be necessary, without explaining how, since both bank bailouts and too big to fail predated the repeal of Glass-Steagall.

Mr. Weill finds himself suddenly welcome in the company of editorialists who, since the Libor scandal, have been renewing their clamor for bankers to be imprisoned, if not executed. He's become their new hero.

The inherent Stalinism of those who crave to put bankers in jail for things that aren't crimes is not unlike that of the original Stalinist—who understood that nothing of substance has to change if you've got enough scapegoats. Likewise, Mr. Weill's proposal to restore Glass-Steagall would also change nothing.

Even too big to fail is too small a phrase. Do not interpret the following conspiratorially: The total coalescence of the financial elite with the governing elite in our and other countries is a natural pattern. It may be corrupting. It may be counterproductive. But it's the natural outcome of the giant, almost inconceivable amounts of debt the U.S. and other governments ask the financial system to market and hold on their behalf.

If you owe the bank $1 million, the bank owns you. If you owe $1 billion, you own the bank. If you owe several trillion, you are the financial system. Libor is called a key underpinning of global finance. But that's far more true of IOUs issued by the U.S. government and its major counterparts. The global financial system is built on a mountain of government debt, and in turn banks and their governments are bedfellows of a highly incestuous order.

That's why, in every transcript and phone memorandum that has come to light, in talking about Libor, regulators and bankers talk to each other as if they were all just bankers talking amongst themselves.

That's why, when a high British official suggested that Barclays lowball its Libor submission during the financial crisis, Barclays didn't hesitate because, as one banker testified to the British Parliament, these were government instructions "at a time when governments were tangibly calling the shots."

It's ironic to think that some who championed the euro saw it as way to break free of rule by bankers. Europe's new monetary authority would be focused on a producing a stable currency; Europe's national governments would have no choice but to live within their means.

This experiment failed because the European Central Bank quickly adopted policies designed to induce banks not to distinguish between the debts of disciplined and undisciplined governments. That is, the euro was immediately corrupted by the need to help governments keep financing themselves.

Now the world is Europe. Under the current regime of financial repression, banks and states are even more annexes of each other. Notice Japan's central bank explicitly stating plans to erode the value of the government's debt in the hands of Japanese savers. Notice the European Central Bank again hinting at readiness to buy the debt of countries no longer able to find voluntary buyers in the market. In the U.S., how long before the Treasury issues a perpetual bond yielding zero percent for direct sale to the Fed?

The banker-government consortium re-exposed in the Libor scandal won't be unwound from the top, not when governments are more dependent than ever on a captive financial system to give their debt the illusion of viability. And yet there's still a possibility of unwinding it from the bottom, by giving large numbers of bankers an incentive to get out of the government-insured sector and go back to a world in which they live by their own profits and losses.

The solution begins with deposit-insurance reform. The FDIC would stop insuring deposits that are invested in anything other than U.S. Treasury paper. The FDIC would be charged solely with seizing these assets when a bank gets in trouble so the claims of insured depositors can be satisfied. There'd be no call to bail out other creditors or shareholders to minimize the cost to the deposit insurance fund.

Yes, the threat might be only semi-credible. But such a law could be got through Congress and risk-averse lenders would become less interested in holding uninsured credit against banks that are too big to manage and too opaque to be viable without a government backstop.

Continued in article

Bob Jensen's threads on banking frauds---


Bob Jensen's threads on corporate governance are at

Timeline of Financial Scandals, Auditing Failures, and the Evolution of International Accounting Standards ---- 

Teaching Case from The Wall Street Journal Accounting Weekly Review on September 20, 2012

Credit Suisse to Give More Files
by: Anita Greil
Sep 18, 2012
Click here to view the full article on

TOPICS: Ethics, International Business, Tax Evasion

SUMMARY: "Credit Suisse is handing over more internal documents to U.S. authorities in response to Washington's crackdown on tax evasion....Earlier this year, Switzerland's second-largest bank by assets and at least four smaller lenders transferred correspondence concerning details of their U.S. operations and containing thousands of names of employees who have dealt with American clients, causing controversy in Switzerland over personal privacy."

CLASSROOM APPLICATION: The article may be used to discuss on-the-job ethical decision making.

1. (Introductory) How have American taxpayers evaded taxes using Swiss bank accounts, particularly UBS? You may refer to the related article to help answer this question.

2. (Advanced) What is a tax amnesty program?

3. (Introductory) How can information from the bank Credit Suisse, which excludes client data, help U.S. authorities to uncover tax evasion by American taxpayers?

4. (Introductory) What is the concern at Credit Suisse about employee names being included in the correspondence that is to be delivered to the U.S. government?

5. (Advanced) Suppose you are a Swiss employee of a bank who is asked to handle a foreign citizen's account activities. Suppose you suspect that the account holder is evading home country taxation and you think that your employer condones this behavior. What actions would you consider taking? What personal risks are associated with the actions?

Reviewed By: Judy Beckman, University of Rhode Island

Whistleblower Gets $104 Million
by Laura Saunders and Robin Sidel
Sep 12, 2012
Page: C1

"Credit Suisse to Give More Files," by Anita Greil, The Wall Street Journal, September 18, 2012 ---

Credit Suisse . . .  is handing over more internal documents to U.S. authorities in response to Washington's crackdown on tax evasion, according to an internal memo reviewed by The Wall Street Journal.

Earlier this year, Switzerland's second-largest bank by assets and at least four smaller lenders transferred correspondence concerning details of their U.S. operations and containing thousands of names of employees who have dealt with American clients, causing controversy in Switzerland over personal privacy.

Credit Suisse has since held talks with Switzerland's data-privacy watchdog and agreed that it will give staff the option of obtaining information about transfers of data in advance.

A spokesman for Credit Suisse confirmed the memo's contents. All client-specific data have been removed from the business records that will be transferred, as they were from the first batch of records. The employees whose names are in the data aren't suspected of having helped Americans avoid taxes.

Switzerland has come under enormous pressure to stop allowing foreigners to use its bank-secrecy laws to evade taxes after UBS AG, UBS -1.02% the nation's biggest lender by assets, in 2009 admitted wrongdoing in helping Americans hide money from tax authorities. UBS agreed to turn over the names of more than 4,500 U.S. account holders and paid a $780 million fine. Thousands of Americans, not all of whom had accounts with UBS, have since voluntarily disclosed their accounts under two U.S. tax amnesties.

Information gathered from the UBS accounts and voluntary disclosures allowed U.S. authorities to identify 11 more banks, including Credit Suisse, that U.S. authorities say may have helped Americans evade taxes, leading to an expansion of the investigations starting last year.

Eager to end the pressure from Washington, the Swiss government has been negotiating a sweeping settlement that would govern transfers of data from all Swiss banks and ensure that all U.S. assets held in the country are taxed. Switzerland also hopes that the agreement would allow U.S. residents to keep private accounts held in the country, as long as taxes due on those assets are paid.

Little progress has been made in concluding the talks.

In July 2011, the U.S. Department of Justice notified Credit Suisse that it was a formal target of a criminal investigation into how Swiss financial institutions allegedly helped U.S. citizens avoid paying U.S. income tax. In April, the Swiss government gave banks permission to send the Justice Department the information it sought, within the limits of Swiss law.

"The documents concerned comprise e-mail correspondence, including attachments, with clients domiciled in the U.S., as well as internal e-mail correspondence, including attachments, about clients domiciled in the U.S. and the U.S. cross-border business in general during the period from June 2001 to March 2011," Hans-Ulrich Meister, who heads Credit Suisse's private-banking unit, told staff in the memo.

The latest records earmarked for transfer to the U.S. include names of employees of Credit Suisse's private-banking division who served clients in relation to business with the U.S. The memo invites staff members who aren't sure whether their names will be included in the coming transfer to contact a help desk for more information.

Continued in article

"True Lies Scam artists claim they work for the government. Not all of them do," by James Taranto, The Wall Street Journal, August 2, 2012 ---

"The latest scam designed to separate Missouri residents from their money involves phony letters from the State Attorney General's office, the IRS and other government agencies," St. Louis Public Radio reports.

Attorney General Chris Koster explains how the fraud works: "I have in my hand a letter from 'the FBI.' [It] claims that, 'you have won $3.5 million, but you owe $2,600 in a winner's fee, and you need to submit it' to this address, which so far we have traced to Florida."

We know how that is. Not long ago we received a similar letter. It purported to be from the Social Security Administration. The gist of it was that the government was promising to pay for our retirement, but only if we cough up more money now: "Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon."

The letter bore the signature "Michael J. Astrue, Commissioner." We laughed and put it aside, digging it out of our files when we read about the similar letters from Missouri. We've now traced it to an address near Washington, D.C. In an unlikely twist, Michael Astrue actually is the commissioner of the Social Security Administration. Even so, we're glad we didn't send any money.

The federal government has been making such too-good-to-be-true offers for decades--the "Social Security" game dates all the way back to 1935--but such scams seem to be multiplying of late. An example appears on the White House website under the heading "Did You Get a Check?"

Continued in article

Lifetime Social Security and Medicare Disability Benefits (at any age) ---

"85,000 Americans went on disability benefit in June (while only 80,000 jobs were added same period)," by Snejana Farberov, Daily Mail, July 7, 2012 ---

Disability Fraud ---

Senator Tom Harkin's Ethanol (Farm) Lobby and Teachers Union Lobby Frauds

The problem with the Farm Lobby is that it's become dominated by giant agribusiness and the impact of $20 billion a year of farm subsidies goes mostly to the largest corporate "farms."

The beneficiaries of the subsidies have changed as agriculture in the United States has changed. In the 1930s, about 25% of the country's population resided on the nation's 6,000,000 small farms. By 1997, 157,000 large farms accounted for 72% of farm sales, with only 2% of the U.S. population residing on farms. In 2006, the top 3 states receiving subsidies were Texas (10.4%), Iowa (9.0%), and Illinois (7.6%). The Total USDA Subsidies from farms in Iowa totaled $1,212,000,000 in 2006.[12] From 2003 to 2005 the top 1% of beneficiaries received 17% of subsidy payments.[12] In Texas, 72% of farms do not receive government subsidies. Of the close to $1.4 Billion in subsidy payments to farms in Texas, roughly 18% of the farms receive a portion of the payments.

Jensen Comment
The biggest example of Farm Lobby absurdity of requiring that 10% of every gallon of gasoline be U.S. produced corn ethanol. Corn ethanol takes more energy to produce (mostly in consumption of natural gas) than it yields, unlike Brazil's more energy-rish sugar cane ethanol. Furthermore corn ethanol does not ship well through pipelines and has to be trucked to refineries. And most importantly in drought times like these the demand for corn at ethanol producing plants drives up the price of corn even further, making it harder for farmers and ranchers and food manufacturing plants (like those that produce cereals and corn syrup) to feed livestock and people.

Senator Tom Harkin (D Iowa) recently wrote a blistering report aimed at for-profit university frauds. At the same time he's a prime mover of the corn ethanol fraud since he's in the pockets of agribusiness and agribusiness labor unions ---

As a matter of fact I'm suspicious that his blistering report about for-profit colleges was probably ghost written by teachers unions since Tom is also in the pockets of teachers unions.

Scathing Senate Report on For-Profit Universities

"Results Are In," by Paul Fain, Inside Higher Ed, July 30, 2012 ---

A U.S. Senate committee released an unflattering report on the for-profit college sector on Sunday, concluding a two-year investigation led by Sen. Tom Harkin, an Iowa Democrat. While the report is ambitious in scope, and scathingly critical on many points, it appears unlikely to lead to a substantial legislative crackdown on the industry -- at least not during this election year.

Issued by staff from the Democratic majority of the U.S. Senate Committee on Health, Education, Labor and Pensions, the report follows six congressional hearings, three previous reports and broad document requests. The
final result is voluminous, weighing in at 249 pages and accompanied by in-depth profiles of 30 for-profits. It questions whether federal investment through aid and loans is worthwhile in many of the examined colleges.

The investigation found that large numbers of students at for-profits fail to earn credentials, citing a 64 percent dropout rate in associate degree programs, for example. It also links those high dropout rates to the relatively small amount of money for-profits spend on instruction.

For-profits “devote tremendous amounts of resources to non-education related spending,” the report said, with the sector spending more revenue on both marketing and profit-sharing than on instruction. In 2009, the examined companies spent $4.1 billion or 22.4 percent of all revenue on marketing, advertising, recruiting and admissions staffing. Profit distributions accounted for $3.6 billion or 19.4 percent of revenue. In contrast, the companies spent $3.2 billion or 17.7 percent on instruction, according to the report.

The industry's trade group, the Association of Private Sector Colleges and Universities,
fired back with a rebuttal, saying the report  "twists the facts to fit a narrative, proving that this is nothing more than continued political attacks." For example, the association said the sector's overall graduation rate at two-year colleges is a much higher 62 percent.

Republican staff members also contributed a dissent to the report, saying it is “indisputable that significant problems exist” at some for-profits, but that the investigation was not conducted in a bipartisan manner. They also raised doubts about the report’s accuracy, noting, for example, that the committee relied in part on testimony from the Government Accountability Office, some of which was flawed and has been revised.

The final report does include a bit of praise for the industry, noting that it is here to stay, and will continue to play a significant role in serving growing numbers of nontraditional and disadvantaged groups of students, including adults.

Continued in article

"'' and the Problem With For-Profits," by Robert M. Shireman, Chronicle of Higher Education, January 31, 2012 ---

Please note that I'm not a huge advocate of for-profit universities, and I've written a great deal about those universities operating in the gray zone of fraud. However, few readers of Senator Tom Harkins report will realize that this is really a teachers union report. Such is the devious union mouthpiece named Tom Harkin.

Bob Jensen's threads on for-profit universities ---

European-Styled Avoidance of Fair Value Earnings Hits for Loan Loss Impairments

European banks circumvented earnings hits for anticipated billions in loan losses by a number of ploys, including arguments regarding transitory price movements, "dynamic provisioning" cookie jar accounting, and spinning debt into assets with fair value adjustments "accounting alchemy."

European banks resorted to a number of misleading ploys to avoid taking fair value adjustment hits to prevent earnings hits due to required fair value adjustments of investments that crashed such a investments in the bonds of Greece, Ireland, Spain, and Portugal.

The Market Transitory Movements Argument
Fair value adjustments can be avoided if they are viewed as temporary transitory market fluctuations expected to recover rather quickly. This argument was used inappropriately by European banks hold billions in the Greece, Ireland, Spain, and Portugal after the price declines could hardly be viewed as transitory. The head of the IASB at the time, David Tweedie, strongly objected to the failure to write down financial instruments to fair value. The banks, in turn, threatened to pressure the EU lawmakers to override the IFRS 9 requirement to adjust such value declines to market.

One of the major concerns of the  is that some nations at some points in time will simply not enforce the IASB standards that these nations adopted. The biggest problem that the IASB was having with European Banks is that the IASB felt many of many (actually most) EU banks were not conforming to standards for marking financial instruments to market (fair value). But the IASB was really helpless in appealing to IFRS enforcement in this regard.

When the realities of European bank political powers, the IASB quickly caved in as follows with a ploy that allowed European banks to lie about intent to hold to maturity. The banks would probably love to unload those loser bonds as quickly as possible before default, but they could instead claim that these investments were intended to be held to maturity --- a game of make pretend that the IASB went along with under the political circumstances.

"New accounting rule would ease Greek pain: IASB," By Silke Koltrowitz and Huw Jones,  Reuters, July 5, 2011 ---

European Union banks would have more breathing space from losses on Greek bonds if the bloc adopted a new international accounting rule, a top standard setter said on Tuesday.

The International Accounting Standards Board (IASB) agreed under intense pressure during the financial crisis to soften a rule that requires banks to price traded assets at fair value or the going market rate.

This led to huge writedowns, sparking fire sales to plug holes in regulatory capital.

The new IFRS 9 rule would allow banks to price assets at cost if they are being held over time.

The European Commission has yet to sign off on the new rule for it to be effective in the 27-nation bloc, saying it wants to see remaining parts of the rule finalized first.

Continued in article


Dynamic Provisioning:  The Cookie Jar Argument If Banks Had Cookies in the Jar
European Union officials knew this and let Spain proceed with its own brand of accounting anyway.
"The EU Smiled While Spain’s Banks Cooked the Books," by Jonathan Weil, Bloomberg, June 14, 2012 ---

Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.

But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.

By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.

This isn’t the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.

What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia (BKIA) group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.

Name Calling

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.

“Dynamic loan loss provisions can help deal with procyclicality in banking,” Bank of Spain’s director of financial stability, Jesus Saurina, wrote in a July 2009 paper published by the World Bank. “Their anticyclical nature enhances the resilience of both individual banks and the banking system as a whole. While there is no guarantee that they will be enough to cope with all the credit losses of a downturn, dynamic provisions have proved useful in Spain during the current financial crisis.”

The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

One of the more candid advocates of Spain’s approach was Charlie McCreevy, the EU’s commissioner for financial services from 2004 to 2010, who previously had been Ireland’s finance minister. During an April 2009 meeting of the monitoring board that oversees the International Accounting Standards Board’s trustees, McCreevy said he knew Spain’s banks were violating the board’s rules. This was fine with him, he said.

“They didn’t implement IFRS, and our regulations said from the 1st January 2005 all publicly listed companies had to implement IFRS,” McCreevy said, according to a transcript of the meeting on the monitoring board’s website. “The Spanish regulator did not do that, and he survived this. His banks have survived this crisis better than anybody else to date.”

Ignoring Rules

McCreevy, who at the time was the chief enforcer of EU laws affecting banking and markets, went on: “The rules did not allow the dynamic provisioning that the Spanish banks did, and the Spanish banking regulator insisted that they still have the dynamic provisioning. And they did so, but I strictly speaking should have taken action against them.”

Why didn’t he take action? McCreevy said he was a fan of dynamic provisioning. “Why am I like that? Well, I’m old enough to remember when I was a young student that in my country that I know best, banks weren’t allowed to publish their results in detail,” he said. “Why? Because we felt if everybody saw the reserves, etc., it would create maybe a run on the banks.”

So to sum up this way of thinking: The best system is one that lets banks hide their financial condition from the public. Barring that, it’s perfectly acceptable for banks to violate accounting standards, if that’s what it takes to navigate a crisis. The proof is that Spain’s banks survived the financial meltdown of 2008 better than most others.

Continued in article


Spinning Debt Into Earnings With the Wave of a Fair Value Accounting Wand
"Euro banks' £169bn in accounting alchemy," by: Lindsey White, Financial Times Advisor, January 19, 2009 --- Click Here

European banks conjured more than £169bn of debt into profit on their balance sheets in the third quarter of 2008, a leaked report shows.

Money Managementhas gained exclusive access to a report from JP Morgan, surveying 43 western European banks.

It shows an exact breakdown of which banks increased their asset values simply by reclassifying their holdings.

Germany is Europe's largest economy, and was the first European nation to announce that it was in recession in 2008. Based on an exchange rate of 1 Euro to £0.89, its two largest banks, Deutsche Bank and Commerzbank, reclassified £22.2bn and £39bn respectively.

At the same exchange rate, several major UK banks also made the switch. RBS reclassified £27.1bn of assets, HBOS reclassified £13.7bn, HSBC reclassified £7.6bn and Lloyds TSB changed £3.2bn. A number of Nordic and Italian banks also switched debts to become profits.

Banks are allowed to rearrange these staggering debts thanks to an October 2008 amendment to an International Accounting Standards law, IAS 39. Speaking to MM, IAS board member Philippe Danjou said that the amendment was passed in "record time".

The board received special permission to bypass traditional due process, ushering through the amendment in a matter of days, in order to allow banks to apply the changes to their third quarter reports.

However, it is unclear how much choice the board actually had in the matter.

IASB chairman Sir David Tweedie was outspoken in his opposition to the change, publicly admitting that he nearly resigned as a result of pressure from European politicians to change the rules.

Danjou also admitted that he had mixed views on the change, telling MM, "This is not the best way to proceed. We had to do it. It's a one off event. I'd prefer to go back to normal due process."

While he was reluctant to point fingers at specific politicians, Danjou admitted that Europe's "largest economies" were the most insistent on passing the change.

As at December 2008, no major French, Portuguese, Spanish, Swiss or Irish banks had used the amendment.

BNP Paribas, Credit Agricole, Danske Bank, Natixis and Societe Generale were expected to reclassify their assets in the fourth quarter of 2008.

The amendment was passed to shore up bank balance sheets and restore confidence in the midst of the current credit crunch. But it remains to be seen whether reclassifying major debts is an effective tactic.

"Because the market situation was unique, events from the outside world forced us to react quickly," said Danjou. "We do not wish to do it too often. It's risky, and things can get missed."

Jensen Comment
European banks thus circumvented earnings hits for anticipated billions in loan losses by a number of ploys, including arguments regarding transitory price movements, "dynamic provisioning" cookie jar accounting, and spinning debt into assets with fair value adjustments "accounting alchemy."

"Global curbs loom on offshore corporate tax avoidance," by Chris Vellacott, Reuters, August 30, 2012 ---

Cash-strapped governments keen to replenish their coffers and international bodies such as the OECD are stepping up efforts to claw back revenue lost when companies shift profit overseas to cut their tax bills.

A legal and routine practice known as transfer pricing, whereby subsidiaries of the same company in different countries trade with each other, is sometimes used by companies to move cash to jurisdictions with lower tax rates, such as tax havens.

But the process can be abused by inflating the price of goods and services traded with overseas units in order to shift more money offshore and evade corporate taxes, and authorities now want to toughen up their policies and close loopholes.

"Tax base erosion and profit shifting are real problems, they need to be dealt with," Joe Andrus, head of the transfer pricing unit at the Organisation for Economic Co-operation and Development, which sets the international guidelines on the practice, told Reuters.

Campaigners say economic damage caused by aggressive use of transfer pricing extends far beyond depriving governments of developed countries of revenue in fiscally straightened times.

The charity Christian Aid estimates the world's poorest countries are deprived of $160 billion in tax revenues every year by multinationals transferring profit beyond borders. The practice also distorts the economies of tax havens into which multinationals shift the profits.

Joao Pedro Martins, a Lisbon-based economist and author of a book about the Portuguese autonomous region of Madeira, says the "exports" of hundreds of multinational subsidiaries registered in the island have distorted its GDP at the locals' expense.

Though unemployment runs at more than 14 percent, the island's per capita GDP is 103 percent of the EU average, compared with 78 percent for the whole of Portugal, making it the second-richest part of the country after the capital Lisbon.

This means Madeira loses out on millions of euros of EU support it might otherwise get under a program of grants for regions with per capita GDP of less than 75 percent of the European average, Martins says.

The OECD champions a set of guidelines known as the "arm's-length" method which permits transfer pricing only when transactions between affiliates at are struck at market rates.

However, organizations can skirt this rule through trade in intangible assets or services where pricing can be arbitrary and much harder to benchmark against a global market rate.

"There is no such thing as an arms length price. The idea of the arms length price is fundamentally flawed from the outset," says John Christensen, director at pressure group Tax Justice Network which campaigns against aggressive tax avoidance.

Continued in article

"Finland prepares for break-up of eurozone:  Finland is preparing for the break-up of the eurozone, the country’s foreign minister warned today," by Ambrose Evans-Pritchard, The Telegraph, August 16, 2012 ---

The Nordic state is battening down the hatches for a full-blown currency crisis as tensions in the eurozone mount and has said it will not tolerate further bail-out creep or fiscal union by stealth.

“We have to face openly the possibility of a euro-break up,” said Erkki Tuomioja, the country’s veteran foreign minister and a member of the Social Democratic Party, one of six that make up the country’s coalition government.

“It is not something that anybody — even the True Finns [eurosceptic party] — are advocating in Finland, let alone the government. But we have to be prepared,” he told The Daily Telegraph.

“Our officials, like everybody else and like every general staff, have some sort of operational plan for any eventuality.”

Mr Tuomioja’s intervention is the bluntest warning to date by a senior eurozone minister. As he discussed the crisis, the minister had a copy of the Economist on his desk. It had a picture of Angela Merkel, the German Chancellor, reading a fictitious report entitled “How to break up the euro”, with a caption: “Tempted, Angela?”

“This is what people are thinking about everywhere,” said Mr Tuomioja. “But there is a consensus that a eurozone break-up would cost more in the short-run or medium-run than managing the crisis.

“But let me add that the break-up of the euro does not mean the end of the European Union. It could make the EU function better,” he said, describing the dash for monetary union in the 1990s as a vaulting political leap in defiance of economic gravity. Finland has emerged as the toughest member of the eurozone’s creditor bloc as it tries to hold together a motley coalition. It has insisted on collateral from both Greece and Spain in exchange for rescue loans.

The coalition government is on thin ice as voters peel away to eurosceptic parties. The True Finns shattered the political order in last year’s election with 19pc support. “Taxpayers here are extremely angry,” said Timo Soini, the True Finn leader.

“There are no rules on how to leave the euro but it is only a matter of time. Either the south or the north will break away because this currency straitjacket is causing misery for millions and destroying Europe’s future.

“It is a total catastrophe. We are going to run out of money the way we are going. But nobody in Europe wants to be first to get out of the euro and take all the blame,” he said.

Like other member states, Finland has a veto that could be used to block any new bail-out measures. However, unlike some states, its parliament would have to approve each future measure of the eurozone rescue, including a full bail-out of Spain.

The issue of euro break-up may come to a head in October as EU-IMF Troika inspectors report back on Greek bail-out compliance. Pleas from Athens for two extra years to stretch out its austerity regime have run into fierce resistance from creditor powers.

“It is up to Greeks whether they want to stay in the euro,” said Mr Tuomioja. “We cannot force Greece out. We can cut off lending and that would lead to a default. Then we could speculate whether that would entail getting out of the euro. Nobody knows if it could be contained,” he said. Mr Tuomioja said Finland would block attempts to strip the European Stability Mechanism (ESM) or bail-out fund of its senior status at the top of the credit ladder, a move that could greatly complicate efforts to lure investors back into Spanish and Italian bonds. “The ESM loans have priority. That is a red line for us. We are very concerned that the rules of the ESM seem to be changing.”

He voiced deep suspicion of plans by a “gang of four” EU insiders — including the European Central Bank’s Mario Draghi — to ensnare member states into some form of fiscal union. “I don’t trust these people,” he said.

Mr Draghi said two weeks ago that the issue of seniority would be “addressed” as part of his twin-pronged plan for the ECB and ESM to buy bonds in concert. A number of EU leaders and officials claimed there had been a deal on the ESM’s seniority status at an EU summit in late June. Finland, Holland, and Germany all deny this.

The warnings on the ESM were echoed by Miapetra Kumpula-Natri, chairman of the Finnish parliament’s Grand Committee on Europe, who said bail-out fatigue is nearing its limit.

“Our law passed this summer says the ESM has the same priority as the IMF. There was a clear understanding on this. Any change would require a new law passed by the whole parliament, and this would be very difficult because the risks would be much higher.”

The issue of EU senior status has become an extremely sensitive one for markets after the ECB and EU creditors refused to share losses from Greece’s debt restructuring, in which pension funds, insurers, and banks lost 75pc.

Continued in article

Jensen Comment
I think Finland is wondering why it did not follow the lead of Sweden, Norway, Denmark, and the United Kingdom in refusing to join the Eurozone in the first place ---

When government internal controls are a sick joke
"Wisconsin: 3 relatives suspected of cashing dead mother's Social Security checks for 30 years," by Dinesh Ramde,, September 25, 2012 ---

Three Portage County residents are accused of cashing Social Security checks of a relative who has been missing for 30 years and is presumed dead, and authorities are investigating to see whether her remains are buried on her wooded property.

If Marie Jost is still alive she'd be 100 years old. But authorities now suspect she died in about 1982, and they're accusing her son, daughter and son-in-law of continuing to cash her government checks in her absence.

Investigators believe Jost might be buried on her Amherst property. Sheriff's Capt. Dale O'Kray said Tuesday that cadaver dogs have hit upon the scent of human remains, and authorities are using heavy machinery to explore the property and dig for evidence.

"There's no indication she's been seen in the last 25 years and we have to have a starting point for where she might be," O'Kray said.

Charles T. Jost, 66; Delores M. Disher, 69; and Ronald Disher, 71, each face four felony charges including being party to the crimes of theft and mail fraud. The charges carry a maximum combined penalty of 68 years in prison and a $310,000 fine.

The Social Security Administration had sent three letters to Jost's home to verify she was still alive. After the third letter was sent, a man who identified himself as her son called to say Jost wasn't available.

The agency then contacted Portage County authorities last month asking that deputies check on her. Deputies went to her property where Charles Jost allegedly

told them Marie Jost and his 74-year-old brother Theodore "were riding in a vehicle someplace," according to the criminal complaint.

When a deputy asked for permission to search the property, Charles Jost allegedly grew agitated and asked them to leave. The deputy then asked whether Marie Jost was still alive, and Charles Jost said he would talk to his lawyer and ended the conversation, the complaint said.

Authorities obtained a search warrant and gathered evidence, but they haven't found anything to indicate whether Marie Jost is alive or dead, O'Kray said.

There's not a real house on the 3-acre property. Charles Jost lives in a tarp-covered shack there, and four to five sheds are filled with years' worth of garbage, O'Kray said.

"It's basically a 'Hoarders' episode gone bad," he said. "We have about 400 garbage bags of junk we had to remove to search the living areas."

During an initial court appearance Monday a judge ordered that Charles Jost undergo a competency evaluation. A message left for Jost's defense attorney Tuesday was not immediately returned.

Neighbors told authorities they had never seen an elderly woman at Charles Jost's home.

A Social Security agent said Marie Jost had not used her Medicare benefits since 1980 when she had a stroke. The agent said Jost had been sent Social Security payments of more than $175,000 since she had made a Medicaid claim.

Prosecutors say the Social Security checks were endorsed with an X, along with the printed names of Charles and Theodore Jost.

Continued in article

Jensen Comment
I wonder if she also voted over the past 30 years?

The Sad State of Governmental Accounting and Accountability ---

"PFGBest: Another Fraud, Another Example Of Weak Auditors and Weak Regulatory Oversight," by Francine McKenna, re:TheAuditors, July 17, 2012 ---

My latest column @Forbes is about the most recent futures industry fraud case, PFGBest. PFGBest is another reason why the industry’s poor business environment, wracked with a crisis of confidence after MF Global, just got much worse.

All Fall Down; PFGBest and MF Global Frauds Reveal Weak Watchdogs

I have also been extensively quoted in the Chicago Tribune Phil Rosenthal’s column this past weekend on the case.

Sterner penalties required to halt wrongdoing in financial industry

PFGBest has a long story behind it. CEO Russell Wasendorf, who admitted to a twenty year fraud on customers in his suicide attempt note, started the firm in 1980, according to MarketsWiki, an online open source knowledge base for current and historical information about the global exchange traded capital, derivatives, environmental and related OTC markets. The site is run by Chicagoan John Lothian who publishes a subscription-only industry newsletter.

PFGBest (formerly Peregrine Financial Group, Inc. – PFG), founded in 1980, is a privately held non-clearing registered Futures Commission Merchant. PFGBest has branch offices in Chicago; Bloomfield and New York City, NY; Camarillo and Mission Viejo, CA; Cedar Falls, IA; Scottsdale, AZ; Altamonte Springs, FL, and McKinny, TX. It serves Canada through an office in Toronto, and its Asian division offers brokerage and other services to clients who speak various Chinese dialects. The company also has a network of brokers spanning the globe.

Peregrine Financial Group hit the big time in the mid 1990s when a firm named First Commercial Financial Group was forced by regulators to move its customer business after regulators found financial irregularities. First Commercial’s business was moved to Peregrine and to RB&H, the firm headed by then CME Chairman Jack Sandner. RB&H became a part of MF Global. (Sandner is currently chairman of E-Trade Futures and on the board of the CME Group.)

Lothian writes in his blog on July 12:

Former CME Chairman Larry Rosenberg was CEO of First Commercial.

It is safe to say that Mr. Wasendorf did not get the pick of the litter when the customer business, which cleared at RB&H, was split up between RB&H and Peregrine. First Commercial was a party to 75 CFTC reparation cases and a respondent to 10 NFA arbitrations prior to their registration finally being revoked by the NFA in 1996.

Mr. Wasendorf and his firm Wasendorf & Son was also involved with another CME-related firm that had its own unhappy ending, GNP Commodities, headed by one-time CME Chairman Brian Monieson. GNP was the party to 117 CFTC reparation cases and five NFA arbitration awards. GNP also had two NFA, three CFTC and six exchange regulatory actions against it before its registration was revoked.

Of course Alaron also had its problems.  It was a party to 55 CFTC reparation cases, was a respondent to 12 NFA arbitration cases and two NFA, two CFTC and 15 exchange regulatory actions. By contrast, Peregrine was party to 38 CFTC reparation cases and 31 NFA arbitration awards, as well as four NFA and one CFTC regulatory actions.

Larry Rosenberg went on to head Lake Shore, which was also closed for fraud. First Commerical was also invested in by backers of the L & S firm, Glenn Laken and Bob Schialasi. Laken served time while indicted and jailed for securities fraud under NY RICO statutes in 2000. First Commercial owned 49% of  Jack Sandner’s RB & H. Unsubstantiated reports say RB & H was also backed by investors Sheikh Abdulla Backesh who is connected to the BCCI Bank $ 10 Billion fraud and had a minority stake and Talat Othman, of Arlington Heights’ Dearborn Financial.
PFGBest and MF Global were both customers of Sentinel, an investment advisor to the futures industry that’s also a fraud and a case of customer segregated assets gone missing.  The CEO and CFO were recently indicted.
That’s how the futures business works in Chicago. Firms run into trouble and stronger, better capitalized or sometimes just better connected firms picked over the carcasses for the best meat and take them over for a bargain price at the regulators’ request. Not much different from what the Treasury did to some financial institutions during the 2008 financial crisis.
What’s interesting for me in the PFGBest case is the use of a small, one-woman shop as the auditor. PFG Best has a subsidiary that was registered with the SEC. As such they were required to use an auditor that is registered with the PCAOB. Jeannie Veraja-Snelling registered her firm with the PCAOB and she had no marks on her record with the Illinois professional regulation authority before now.

Continued in article


Cedar Falls, Iowa Embezzler CEO Could Get 50 Years in Club Fed
"Peregrine CEO Signs Plea Deal," by Jacob Bunge, The Wall Street Journal, September 11, 2012 ---

The chief executive of Peregrine Financial Group Inc. faces a maximum 50 years in prison under a plea agreement he signed with federal prosecutors.

Under the agreement, Russell Wasendorf Sr. would plead guilty to charges of embezzlement and mail fraud alongside two counts of lying to government regulators, assistant U.S. attorneys said in a Cedar Rapids, Iowa, court Tuesday.

The development comes more than two months after Mr. Wasendorf, founder of Peregrine and a business leader in his adopted hometown of Cedar Falls, attempted suicide outside his firm's headquarters, leaving behind what authorities called a confession detailing a yearslong scheme to defraud his investors. Civil charges were brought by regulators against Mr. Wasendorf and Peregrine, and the firm filed for bankruptcy July 10.

A court-appointed trustee this week said the futures and currency brokerage has a $190 million shortfall in funds, and that its customers wouldn't get back all of the money they entrusted to Peregrine.

The disclosure of Mr. Wasendorf's potential plea deal came at a detention hearing Tuesday following Mr. Wasendorf's request to be released from jail.

Judge Jon Scoles said in a court document Tuesday that he would consider whether or not to grant bail that would release Mr. Wasendorf from the Linn County Correctional Center, where Mr. Wasendorf has been held since he was arrested July 13.

Prosecutors said Mr. Wasendorf agreed to admit guilt to a yearslong scheme in which he used customer money to cushion Peregrine's finances and pay other expenses, while covering his tracks by falsifying bank documents. Peter Deegan, an assistant U.S. attorney prosecuting the case, declined further comment.

Jane Kelly, the federal public defender representing Mr. Wasendorf, didn't respond to a request for comment.

Last month Mr. Wasendorf pleaded not guilty to 31 charges of misleading government regulators. He has cooperated with the investigation, however, spending hours with authorities probing Peregrine's finances and answering questions, according to a legal filing by the receiver responsible for liquidating Mr. Wasendorf's personal estate.

A statutory maximum sentence of 50 years was seen to amount to a life sentence for Mr. Wasendorf, who is 64 years old, and some affected by the Peregrine collapse said they looked forward to a resolution of the case.

Continued in article

"Curse of Arthur Andersen Lives On (in Huron Consulting)," by Jonathan Weil, Bloomberg, July 19, 2012 ---

Huron Consulting Group Inc., a Chicago-based consulting company founded by a group of former Arthur Andersen LLP partners after the accounting firm's 2002 demise, has agreed to pay $1 million to settle Securities and Exchange Commission allegations that it cooked its books.

he deal caps a remarkable act of corporate self-immolation. One of Huron's main businesses had been providing forensic-accounting advice to other companies, including those under SEC investigation for accounting fraud. Then in 2009 Huron restated more than three years of its financial reports to correct accounting violations, which reduced its earnings by $56 million. The company sold part of its disputes-and-investigations practice in 2010 and shuttered the rest.

The SEC, which disclosed the accord in a press release late Thursday, also reached settlement deals with Huron's former chief financial officer, Gary Burge, and its former chief accounting officer, Wayne Lipski. They agreed to pay almost $300,000 to resolve the SEC's claims against them.

Per the usual formalities, the defendants neither admitted nor denied anything. Unlike the conviction against Arthur Andersen for obstructing the government's investigation of Enron Corp., the SEC's order against Huron in this case won't be overturned.

Bob Jensen's threads on the Huron Consulting Group's book cooking scandals ---

A billion here, a billion there, pretty soon it adds up to real money.
Senator Everett Dirksen ---

"Labor Dept. Estimates $7.1 Billion in Overpayments to Unemployed," by Alice Gomstyn, ABC News, July 9, 2012 ---

While many Americans are feeling the pain of expired unemployment benefits, some have gotten a good chunk more than they were legally eligible for.

Preliminary estimates released by the U.S. Department of Labor find that, in 2009, states made more than $7.1 billion in overpayments in unemployment insurance, up from $4.2 billion the year before. The total amount of unemployment benefits paid in 2009 was $76.8 billion, compared to $41.6 billion in 2008.

Fraud accounted for $1.55 billion in estimated overpayments last year, while errors by state agencies were blamed for $2.27 billion, according to the Labor Department. The department's final report will be released next month.

Some of the overpayments likely can be traced back to the overwhelming workloads facing state employment agencies during the recession, said George Wentworth, a policy analyst for the National Employment Law Project.

"You've got a system that's been under siege like the unemployment insurance system has been for the last two years," Wentworth said. "You've got a lot of new staff coming into the system, there's been a lot of federal extensions [to unemployment insurance benefits] that have had to be programmed in and so on. There's just been a lot of change that states have had to handle. ... I just think the volume and the new staff have made the systems more susceptible to error."

Continued in article

Bob Jensen's Fraud Updates ---

The Humane Society's TV adds with the adorable and sad dogs and cats are probably among the most successful advertisements on television
But are they misleading in terms of not giving more than 1% of the donations to Humane Society shelters?
I'm always suspicious of these hard-sell fund raisers.
"Consumer group wants probe of Humane Society ads," WPXI Pittsburgh, July 13, 2012 ---

An organization wants attorneys general in Pennsylvania and 11 other states to investigate whether advertisements by the Humane Society of the United States violate laws by implying that money from donors supports animal shelters.

HumaneWatch, a nonprofit project of the Washington-based Center for Consumer Freedom, released a report on Thursday claiming that the Humane Society gives 1 percent or less of its income to local animal shelters, despite ads showing animals in shelters.

“Consistently, there is a disconnect between what they use to raise money and what they spend that money on,” said Justin Wilson, senior research analyst at the Center for Consumer Freedom.

Humane Society of the United States spokeswoman Stephanie Twinings said the Center for Consumer Freedom represents food industry interests in Washington and is more interested in stopping the Humane Society’s lobbying efforts than steering more money to shelters.

“This is all just their desperate attempts to pull fundraising away from us because we’re effective in getting regulations changed for the food industry,” she said.

Nils Fredricksen, spokesman for Pennsylvania Attorney General Linda Kelly, said his office neither confirms nor denies the existence of any investigations, but said Kelly reads and responds to any petition that crosses her desk.

“There is a belief in the public that the Humane Society of the United States is the mothership, so to speak, and that all the local humane societies ... must answer to them. That’s not true,” said Gretchen Fieser, spokeswoman for the Western Pennsylvania Humane Society in the North Side.

Local shelters and humane societies are concerned with animal welfare, rather than animal rights, food-industry issues or national campaigns, she said.

“(HSUS) can get better cages for chickens in factory farms,” Fieser said. “When we get chickens, they were someone’s pet or a science project that got too big.”

The Western Pennsylvania Humane Society on the North Side is in no way affiliated with the national group.

Jensen Comment
Obviously you can't adopt a pet like we "adopted" a young girl in Latin America by donating cash each month. The Human Society may send you a picture of your pet, but most likely it is either adopted for real by a loving family or euthanized since the Humane Society does not generally provide facilities for the long-term life of a dog or cat.

It's beginning to sound like Girl Scout Cookie money going toward bloated salaries of Girl Scout executives in luxurious Manhattan offices..

Bob Jensen's Fraud Updates are at

"Is Modern Portfolio Theory Dead? Come On," by Paul Pfleiderer, TechCrunch, August 11, 2012 ---

A few weeks ago, TechCrunch published a piece arguing software is better at investing than 99% of human investment advisors. That post, titled Thankfully, Software Is Eating The Personal Investing World, pointed out the advantages of engineering-driven software solutions versus emotionally driven human judgment. Perhaps not surprisingly, some commenters (including some financial advisors) seized the moment to call into question one of the foundations of software-based investing, Modern Portfolio Theory.

Given the doubts raised by a small but vocal chorus, it’s worth spending some time to ask if we need a new investing paradigm and if so, what it should be. Answering that question helps show why MPT still is the best investment methodology out there; it enables the automated, low-cost investment management offered by a new wave of Internet startups including Wealthfront (which I advise), Personal Capital, Future Advisor and SigFig.

The basic questions being raised about MPT run something like this:

Let’s begin by briefly laying out the key insights of MPT.

MPT is based in part on the assumption that most investors don’t like risk and need to be compensated for bearing it. That compensation comes in the form of higher average returns. Historical data strongly supports this assumption. For example, from 1926 to 2011 the average (geometric) return on U.S. Treasury Bills was 3.6%. Over the same period the average return on large company stocks was 9.8%; that on small company stocks was 11.2% ( See 2012 Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook, Morningstar, Inc., page 23. ).  Stocks, of course, are much riskier than Treasuries, so we expect them to have higher average returns — and they do.

One of MPT’s key insights is that while investors need to be compensated to bear risk, not all risks are rewarded. The market does not reward risks that can be “diversified away” by holding a bundle of investments, instead of a single investment. By recognizing that not all risks are rewarded, MPT helped establish the idea that a diversified portfolio can help investors earn a higher return for the same amount of risk.

To understand which risks can be diversified away, and why, consider Zynga. Zynga hit $14.69 in March and has since dropped to less than $2 per share. Based on what’s happened over the past few months, the major risks associated with Zynga’s stock are things such as delays in new game development, the fickle taste of consumers and changes on Facebook that affect users’ engagement with Zynga’s games.

For company insiders, who have much of their wealth tied up in the company, Zynga is clearly a risky investment. Although those insiders are exposed to huge risks, they aren’t the investors who determine the “risk premium” for Zynga. (A stock’s risk premium is the extra return the stock is expected to earn that compensates for the stock’s risk.)

Rather, institutional funds and other large investors establish the risk premium by deciding what price they’re willing to pay to hold Zynga in their diversified portfolios. If a Zynga game is delayed, and Zynga’s stock price drops, that decline has a miniscule effect on a diversified shareholder’s portfolio returns. Because of this, the market does not price in that particular risk. Even the overall turbulence in many Internet stocks won’t be problematic for investors who are well diversified in their portfolios.

Modern Portfolio Theory focuses on constructing portfolios that avoid exposing the investor to those kinds of unrewarded risks. The main lesson is that investors should choose portfolios that lie on the Efficient Frontier, the mathematically defined curve that describes the relationship between risk and reward. To be on the frontier, a portfolio must provide the highest expected return (largest reward) among all portfolios having the same level of risk. The Internet startups construct well-diversified portfolios designed to be efficient with the right combination of risk and return for their clients.

Now let’s ask if anything in the past five years casts doubt on these basic tenets of Modern Portfolio Theory. The answer is clearly, “No.” First and foremost, nothing has changed the fact that there are many unrewarded risks, and that investors should avoid these risks. The major risks of Zynga stock remain diversifiable risks, and unless you’re willing to trade illegally on inside information about, say, upcoming changes to Facebook’s gaming policies, you should avoid holding a concentrated position in Zynga.

The efficient frontier is still the desirable place to be, and it makes no sense to follow a policy that puts you in a position well below that frontier.

Most of the people who say that “diversification failed” in the financial crisis have in mind not the diversification gains associated with avoiding concentrated investments in companies like Zynga, but the diversification gains that come from investing across many different asset classes, such as domestic stocks, foreign stocks, real estate and bonds. Those critics aren’t challenging the idea of diversification in general – probably because such an effort would be nonsensical.

True, diversification across asset classes didn’t shelter investors from 2008’s turmoil. In that year, the S&P 500 index fell 37%, the MSCI EAFE index (the index of developed markets outside North America) fell by 43%, the MSCI Emerging Market index fell by 53%, the Dow Jones Commodities Index fell by 35%, and the Lehman High Yield Bond Index fell by 26%. The historical record shows that in times of economic distress, asset class returns tend to move in the same direction and be more highly correlated. These increased correlations are no doubt due to the increased importance of macro factors driving corporate cash flows. The increased correlations limit, but do not eliminate, diversification’s value. It would be foolish to conclude from this that you should be undiversified. If a seat belt doesn’t provide perfect protection, it still makes sense to wear one. Statistics show it’s better to wear a seatbelt than to not wear one.  Similarly, statistics show diversification reduces risk, and that you are better off diversifying than not.

Timing the market

The obvious question to ask anyone who insists diversification across asset classes is not effective is: What is the alternative? Some say “Time the market.” Make sure you hold an asset class when it is earning good returns, but sell as soon as things are about to go south. Even better, take short positions when the outlook is negative. With a trustworthy crystal ball, this is a winning strategy. The potential gains are huge. If you had perfect foresight and could time the S&P 500 on a daily basis, you could have turned $1,000 on Jan. 1, 2000, into $120,975,000 on Dec. 31, 2009, just by going in and out of the market. If you could also short the market when appropriate, the gains would have been even more spectacular!

Sometimes, it seems someone may have a fairly reliable crystal ball. Consider John Paulson, who in 2007 and 2008 seemed so prescient in profiting from the subprime market’s collapse. It appears, however, that Mr. Paulson’s crystal ball became less reliable after his stunning success in 2007. His Advantage Plus fund experienced more than a 50% loss in 2011. Separating luck from skill is often difficult.

Some people try to come up with a way to time the market based on historical data. In fact a large number of strategies will work well “in the back test.” The question is whether any system is reliable enough to use for future investing.

There are at least three reasons to be cautious about substituting a timing system for diversification.

Black Swans

What about those Black Swans? Doesn’t MPT ignore the possibility that we can be surprised by the unexpected? Isn’t it impossible to measure risk when there are unknown unknowns?

Most people recognize that financial markets are not like simple games of chance where risk can be quantified precisely. As we’ve seen (e.g., the “Black Monday” stock market crash of 1987 and the “flash crash” of 2010), the markets can produce extreme events that hardly anyone contemplated as a possibility. As opposed to poker, where we always draw from the same 52-card deck, in financial markets, asset returns are drawn from changing distributions as the world economy and financial relationships change.

Some Black Swan events turned out to have limited effects on investors over the long term. Although the market dropped precipitously in October 1987, it was close to fully recovered in June 1988. The flash crash was confined to a single day.
This is not to say that all “surprise” events are transitory. The Great Depression followed the stock market crash of 1929, and the effects of the financial crisis in 2007 and 2008 linger on five years later.

The question is, how should we respond to uncertainties and Black Swans? One sensible way is to be more diligent in quantifying the risks we can see. For example, since extreme events don’t happen often, we’re likely to be misled if we base our risk assessment on what has occurred over short time periods. We shouldn’t conclude that just because housing prices haven’t gone down over 20 years that a housing decline is not a meaningful risk. In the case of natural disasters like earthquakes, tsunamis, asteroid strikes and solar storms, the long run could be very long indeed. While we can’t capture all risks by looking far back in time, taking into account long-term data means we’re less likely to be surprised.

Some people suggest you should respond to the risk of unknown unknowns by investing very conservatively. This means allocating most of the portfolio to “safe assets” and significantly reducing exposure to risky assets, which are likely to be affected by Black Swan surprises. This response is consistent with MPT. If you worry about Black Swans, you are, for all intents and purposes, a very risk-averse investor. The MPT portfolio position for very risk-averse investors is a position on the efficient frontier that has little risk.

The cost of investing in a low-risk position is a lower expected return (recall that historically the average return on stocks was about three times that on U.S. Treasuries), but maybe you think that’s a price worth paying. Can everyone take extremely conservative positions to avoid Black Swan risk? This clearly won’t work, because some investors must hold risky assets. If all investors try to avoid Black Swan events, the prices of those risky assets will fall to a point where the forecasted returns become too large to ignore.

Continued in article

Jensen Comment
All quant theories and strategies in finance are based upon some foundational assumptions that in rare instances turn into the Achilles' heel of the entire superstructure. The classic example is the wonderful theory and arbitrage strategy of Long Term Capital Management (LTCM) formed by the best quants in finance (two with Nobel Prizes in economics). After remarkable successes one nickel at a time in a secret global arbitrage strategy based heavily on the Black-Scholes Model, LTCM placed a trillion dollar bet that failed dramatically and became the only hedge fund that nearly imploded all of Wall Street. At a heavy cost, Wall Street investment bankers pooled billions of dollars to quietly shut down LTCM ---

So what was the Achilles heal of the arbitrage strategy of LTCM? It was an assumption that a huge portion of the global financial market would not collapse all at once. Low and behold, the Asian financial markets collapsed all at once and left LTCM naked and dangling from a speculative cliff.

There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video called "Trillion Dollar Bet" explaining why LTCM collapsed.  Go to 
This video is in the media libraries on most college campuses.  I highly recommend showing this video to students.  It is extremely well done and exciting to watch.

One of the more interesting summaries is the Report of The President’s Working Group on Financial Markets, April 1999 --- 

The principal policy issue arising out of the events surrounding the near collapse of LTCM is how to constrain excessive leverage. By increasing the chance that problems at one financial institution could be transmitted to other institutions, excessive leverage can increase the likelihood of a general breakdown in the functioning of financial markets. This issue is not limited to hedge funds; other financial institutions are often larger and more highly leveraged than most hedge funds.

What went wrong at Long Term Capital Management? --- 

The video and above reports, however, do not delve into the tax shelter pushed by Myron Scholes and his other LTCM partners. A nice summary of the tax shelter case with links to other documents can be found at 

The above August 27, 2004 ruling by Judge Janet Bond Arterton rounds out the "Trillion Dollar Bet."

The classic and enormous scandal was Long Term Capital led by Nobel Prize winning Merton and Scholes (actually the blame is shared  with their devoted doctoral students).  There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video ("Trillion Dollar Bet") explaining why LTC collapsed.  Go to 

Another illustration of the Achilles' heel of a popular mathematical theory and strategy is the 2008 collapse mortgage-backed CDO financial risk bonds based upon David Li's Gaussian copula function of risk diversification in portfolios. The Achilles' heel was the assumption that the real estate bubble would not burst to a point where millions of subprime mortgages would all go into default at roughly the same time.

Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster:  The Formula That Killed Wall Street ---
Link forwarded by Jim Mahar --- 

Some highlights:

"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

"The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -  

The rhetorical question is whether the failure is ignorance in model building or risk taking using the model?

"In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---

ROBERT RUBIN was Bill Clinton’s treasury secretary. He has worked at the top of Goldman Sachs and Citigroup. But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.

A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives. The Black-Scholes options-pricing model was more than a piece of geeky mathematics. It was a manifesto, part of a revolution that put an end to the anti-intellectualism of American finance and transformed financial markets from bull rings into today’s quantitative powerhouses. Yet, in a roundabout way, Black’s approach also led to some of the late boom’s most disastrous lapses.

Derivatives markets are not new, nor are they an exclusively Western phenomenon. Mr Merton has described how Osaka’s Dojima rice market offered forward contracts in the 17th century and organised futures trading by the 18th century. However, the growth of derivatives in the 36 years since Black’s formula was published has taken them from the periphery of financial services to the core.

In “The Partnership”, a history of Goldman Sachs, Charles Ellis records how the derivatives markets took off. The International Monetary Market opened in 1972; Congress allowed trade in commodity options in 1976; S&P 500 futures launched in 1982, and options on those futures a year later. The Chicago Board Options Exchange traded 911 contracts on April 26th 1973, its first day (and only one month before Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts reached almost 1 trillion.

Trading has exploded partly because derivatives are useful. After America came off the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates, just as they sought protection against swings in interest rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed, tackled inflation in the 1980s. Equity options enabled investors to lay off general risk so that they could concentrate on the specific types of corporate risk they wanted to trade.

The other force behind the explosion in derivatives trading was the combination of mathematics and computing. Before Black-Scholes, option prices had been little more than educated guesses. The new model showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it, explains Emanuel Derman, a physicist who later took Black’s job at Goldman. Confidence in pricing gave buyers and sellers the courage to pile into derivatives. The better that real prices correlate with the unknown option price, the more confidently you can take on any level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr Derman has written, “someone had finally worked out how to synthesise H2O.”

Poetry in Brownian motion Black-Scholes is just a model, not a complete description of the world. Every model makes simplifications, but some of the simplifications in Black-Scholes looked as if they would matter. For instance, the maths it uses to describe how share prices move comes from the equations in physics that describe the diffusion of heat. The idea is that share prices follow some gentle random walk away from an equilibrium, rather like motes of dust jiggling around in Brownian motion. In fact, share-price movements are more violent than that.

Over the years the “quants” have found ways to cope with this—better ways to deal with, as it were, quirks in the prices of fruit and fruit salad. For a start, you can concentrate on the short-run volatility of prices, which in some ways tends to behave more like the Brownian motion that Black imagined. The quants can introduce sudden jumps or tweak their models to match actual share-price movements more closely. Mr Derman, who is now a professor at New York’s Columbia University and a partner at Prisma Capital Partners, a fund of hedge funds, did some of his best-known work modelling what is called the “volatility smile”—an anomaly in options markets that first appeared after the 1987 stockmarket crash when investors would pay extra for protection against another imminent fall in share prices.

The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants’ tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.

The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest. And in this crash foreign-exchange, interest-rate and equity derivatives models have so far behaved roughly as they should.

A muddle of mortgages Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralised-debt obligations (CDOs). The principle is simple enough. Imagine a waterfall of mortgage payments: the AAA investors at the top catch their share, the next in line take their share from what remains, and so on. At the bottom are the “equity investors” who get nothing if people default on their mortgage payments and the money runs out.

Despite the theory, CDOs were hopeless, at least with hindsight (doesn’t that phrase come easily?). The cash flowing from mortgage payments into a single CDO had to filter up through several layers. Assets were bundled into a pool, securitised, stuffed into a CDO, bits of that plugged into the next CDO and so on and on. Each source of a CDO had interminable pages of its own documentation and conditions, and a typical CDO might receive income from several hundred sources. It was a lawyer’s paradise.

This baffling complexity could hardly be more different from an equity or an interest rate. It made CDOs impossible to model in anything but the most rudimentary way—all the more so because each one contained a unique combination of underlying assets. Each CDO would be sold on the basis of its own scenario, using central assumptions about the future of interest rates and defaults to “demonstrate” the payouts over, say, the next 30 years. This central scenario would then be “stress-tested” to show that the CDO was robust—though oddly the tests did not include a 20% fall in house prices.

This was modelling at its most feeble. Derivatives model an unknown price from today’s known market prices. By contrast, modelling from history is dangerous. There was no guarantee that the future would be like the past, if only because the American housing market had never before been buoyed up by a frenzy of CDOs. In any case, there are not enough past housing data to form a rich statistical picture of the market—especially if you decide not to include the 1930s nationwide fall in house prices in your sample.

Neither could the models take account of falling mortgage-underwriting standards. Mr Rajan of the University of Chicago says academic research suggests mortgage originators, keen to automate their procedures, stopped giving potential borrowers lengthy interviews because they could not easily quantify the firmness of someone’s handshake or the fixity of their gaze. Such things turned out to be better predictors of default than credit scores or loan-to-value ratios, but the investors at the end of a long chain of securities could not monitor lending decisions.

The issuers of CDOs asked rating agencies to assess their quality. Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.

Issuers like to have an edge over the rating agencies. By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest. With help from companies like Codefarm, an outfit from Brighton in Britain that knew the agencies’ models for corporate CDOs, issuers could build securities with any risk profile they chose, including those made up from lower-quality ingredients that would nevertheless win AAA ratings. Codefarm has recently applied for administration.

There is a saying on Wall Street that the test of a product is whether clients will buy it. Would they have bought into CDOs had it not been for the dazzling performance of the quants in foreign-exchange, interest-rate and equity derivatives? There is every sign that the issuing banks believed their own sales patter. The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on. They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment. With CDOs in deep trouble, the lenders are now suffering.

Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark. According to Mr Derman, with Black-Scholes “you know what you are assuming when you use the model, and you know exactly what has been swept out of view, and hence you can think clearly about what you may have overlooked.” By contrast, with CDOs “you don’t quite know what you are ignoring, so you don’t know how to adjust for its inadequacies.”

Now that the world has moved far beyond any of the scenarios that the CDO issuers modelled, investors’ quantitative grasp of the payouts has fizzled into blank uncertainty. That makes it hard to put any value on them, driving away possible buyers. The trillion-dollar bet on mortgages has gone disastrously wrong. The hope is that the trillion-dollar bet on companies does not end up that way too.

Continued in article

Accountics Worshippers Please Take Note
"A Nobel Lesson: Economics is Getting Messier,
" by Justin Fox, Harvard Business Review Blog, October 11, 2010 --- Click Here

Closing Jensen Comment
So is portfolio diversification theory dead? I hardly think so. But if any lesson is to be learned is that we should question those critical underlying assumptions in Plato's Cave before worldwide strategies are implemented that overlook the Achilles' heel of those critical underlying assumptions.

"Ernst & Young 'covered up judge bribe case’," by Jonathan Russell, London Telegraph, June 30, 2012 ---

A senior partner closed an investigation into a £100,000 “bribe” despite colleagues suspecting the money had been paid to a judge overseeing a multi-million-pound tax case the company was fighting.

The allegations were disclosed by former E&Y partner and whistle-blower Cathal Lyons, who is suing the accountant for $6m for breach of contract.

He claims medical insurance he was relying on to treat injuries sustained in a car accident was withdrawn after he raised the issue of the alleged bribe with the accountant’s global head office in London.

Mr Lyons was a partner with E&Y’s Russian practice when the alleged wrongdoing came to light. It was originally investigated by James Mandel, E&Y’s general counsel in Moscow. In a witness statement supplied in support of Mr Lyons’s case, Mr Mandel said he suspected the payment may have been corrupt and wrote a report to that effect.

“I had the suspicion that this payment was not a proper payment for legal fees, but was an illegal payment possibly made to facilitate a positive outcome of a tax case,” he claimed in his witness statement.

He suspected that the €120,000 payment via a Russian law firm was made to influence a 390m rouble (£8.4m) court case brought by Russian tax authorities investigating a tax avoidance scheme E&Y was using to pay its Russian partners. E&Y was later cleared of liability in the case.

The accountant has admitted there was an investigation into allegations of bribery, but said the case was closed by Herve Labaude, a senior partner, in January 2010.

Mr Lyons claims that after he reported his concerns about the case to E&Y’s global head office, his medical insurance was withdrawn and he was dismissed.

In his writ he says the dismissal flowed from “personal animosity against him rising from a discussion in late 2010 between the claimant and Maz Krupski [E&Y’s director of global tax and statutory] regarding alleged corruption by the practice.”

Mr Lyons relied on his medical insurance to cover the cost of treatment flowing from a serious car accident he suffered in 2006. The accident left him with permanent disabilities and partial amputation. It is estimated medical cover in his current condition would cost $300,000 per year. He is suing for 20 years’ cover, or $6m.

Continued in article

Bob Jensen's threads on Ernst & Young woes are at

"I-Team Update: Accountant accused of stealing $1.1 million found dead," by Berkeley Brean, WHEC TV, June 27, 2012 ---

An accountant accused of stealing more than a million dollars from his company was found dead in his Irondequoit home on Saturday.

Gary Yakawiak was suppose to be in court earlier this month to be arraigned on a grand larceny charge, but when he didn’t show up, the judge issued a warrant for his arrest.

When police showed up to search his house Saturday, they found him dead inside. Police are not sure the cause of death at this time.

This afternoon we spoke to the prosecutor in the case.

Assistant District Attorney Mark Monaghan said. "I don't know the nature or the circumstances of how he passed, but I'm sure there are people who loved him and cared about him and it's unfortunate for them that they're going to have to go through this period of loss."

Monaghan said either the court, the DA's office or Yakawiak's attorney will make a motion to dismiss the indictment.

Yakawiak was accused of bilking $1.1 million dollars from Cascades Recovery, a recycling company. He was the company’s accounting manager. Police and the courts say that between August 2007 and February 2011, he took chunks of cash from the company and tried to cover it up by changing the bank statements.

Monaghan says there is now no recourse for Cascades in state court. He said because there will be no conviction, there can be no legal claim for restitution. If Cascades wants to get the money back that Yakawiak was accused of stealing, it will have to do that through civil court.

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