Accounting Scandal
Updates and Other Fraud on December 31, 2004
Bob Jensen at Trinity
University
Bob Jensen's Main Fraud Document --- http://www.trinity.edu/rjensen/fraud.htm
Other Documents
Scandal Updates --- http://www.trinity.edu/rjensen/fraud.htm#ScandalUpdates
What's Right and What's Wrong With SPEs, SPVs, and VIEs --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Electronic Business Controversies --- http://www.trinity.edu/rjensen/ecommerce/000start.htm
Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm
The Virginia Tech Overview: What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm
Fraud References --- http://www.trinity.edu/rjensen/fraud.htm#References
Fraudulent Dealer
Tricks: An Interactive DHTML Illustration ---
http://www.trinity.edu/rjensen/FraudDealerTricks.htm
This includes a summary of ten unethical tricks of the trade by automobile
dealers.
Selected Scandals in the Largest Remaining Public Accounting Firms --- http://www.trinity.edu/rjensen/fraud.htm#others
Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation
Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.htm
Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp
Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp
Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk
Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations
I love Infectious Greed by Frank Partnoy --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations
Bob Jensen's American History of Fraud --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing
Quotations
This is also what happens when Republican's win elections: Academic
Bias at Berkeley
Statisticians release an analysis debunking a previous
Berkeley study that said President Bush received more votes than he should have
in Florida counties that used touch-screen voting machines.
Kim Zetter. "Florida E-Vote Study Debunked," Wired News,
December 8, 2004 --- http://www.wired.com/news/evote/0,2645,65896,00.html?tw=wn_tophead_2
Two months ago, shortly before Japan ordered
Citigroup to close its private banking unit there for, among other things,
failing to guard against money laundering, Charles O. Prince, the chief
executive, commissioned an independent examination of his bank's lapses. When he
received the assessment in mid-October, he got an eyeful.
"It's Cleanup Time at Citi," by Timothy L. O'Brien and Landon Thomas,
Jr., The New York Times, November 7, 2004 --- http://www.nytimes.com/2004/11/07/business/yourmoney/07citi.html
Scroll down for details.
A judge refused to accept a guilty plea from a
former AOL software engineer accused of selling 92 million e-mail addresses to
spammers, saying he was not convinced the act was a crime under new federal
antispam legislation.
"Judge Rejects Guilty Plea In America Online Spam Case," The Wall
Street Journal, December 21, 2004 --- http://online.wsj.com/article/0,,SB110365400892306111,00.html?mod=technology_main_whats_news
You just can't teach an old dog insurance firm new tricks.
Marsh is collecting $275 million in commissions that
regulators have called improper, under an informal pact with Spitzer's office
Monica Langley, "Marsh Collects Disputed Fees Of $275 Million," The
Wall Street Journal, November 2, 2004 --- http://online.wsj.com/article/0,,SB109934550843461475,00.html?mod=home_whats_news_us
Corruption is like garbage, it must be removed every
day.
Ignacio
Pichardo Pagaza
As part of an ongoing effort to improve ethical
standards for tax professionals and to curb abusive tax avoidance transactions,
the Treasury Department and the Internal Revenue Service have issued final
regulations amending Treasury Department Circular 230. “The playing
field for tax advisors has changed with these standards for tax opinions, the
new penalties that Congress recently enacted and other steps the IRS has taken
to detect and deter abusive transactions,” said Namorato. "Most
professionals share our concern about the egregious behavior of some of their
colleagues and we appreciate the efforts of responsible practitioners to promote
ethical practice. We are taking steps to ensure that all practitioners live up
to their professional obligations.”
AccounitngWeb, December 22, 2004 --- http://www.accountingweb.com/item/100245
New Tax Guide Available from the IRS --- http://www.irs.gov/newsroom/article/0,,id=131175,00.html
Bob Jensen's tax helpers are at http://www.trinity.edu/rjensen/bookbob1.htm#010304Taxation
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
CEO Raines, CFO Howard Feel Push From Regulators;
KPMG Is Out as Auditor
Fannie Mae's CEO, Franklin Raines, and Timothy Howard, the chief financial
officer, stepped down amid growing pressure from regulators over accounting
violations. The mortgage company's board also dismissed
KPMG as outside auditor.
James R. Hagerty, John R. Wilke and Johathan Weil, "At Fannie Mae, Two
Chiefs Leave Under Pressure," The Wall Street Journal, December 22,
2004, Page A1 --- http://online.wsj.com/article/0,,SB110366339466106334,00.html?mod=home_whats_news_us
Fannie Mae, which has borrowings of more than $950 billion and is involved in financing more than a quarter of U.S. residential mortgage debt, described the exit of the 55-year-old Mr. Raines as a retirement and that of Mr. Howard, 56, as a resignation. But people familiar with the board's deliberations said directors had decided that both men had to leave to satisfy the company's regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo.
KPMG
knew that FAS 91 and FAS 133 were being violated, but KPMG did not insist on
correcting the books. How much of
Fannie’s current trouble can be blamed on KPMG?
Fannie's auditor, KPMG, disagreed with the way the company decided how much (derivatives
instruments debt and earnings fluctuations) to book in
1998. The matter was recorded as "an audit difference" -- a
disagreement between a company and its auditor that doesn't require a change in
the books.
John D. McKinnon and James R. Hagerty, "How Accounting Issue Crept Up On
Fannie's Pugnacious Chief," The Wall Street Journal, December 17,
2004 --- http://online.wsj.com/article/0,,SB110323877001802691,00.html?mod=todays_us_page_one
Bob Jensen's Fannie Mae threads are at http://www.trinity.edu/rjensen/caseans/000index.htm
Bob Jensen’s threads on KPMG’s troubles are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG
FAS 133 says Fannie can't get hedge accounting for non-homongenious
portfolios. Will the SEC let they (and auditor KPMG) get way with it
anyway?
Fannie Mae estimated it will have to post a $9 billion
loss if the SEC finds it has been accounting improperly for derivatives. Ofheo,
the mortgage firm's regulator, said Fannie incorrectly applied accounting rules
in a way that let it spread out losses over many years rather than taking an
immediate hit.
James R. Hagerty, "Fannie Warns of $9 Billion Loss If
Derivatives Ruling Is Adverse," The Wall Street Journal, November
16, 2004, Page A3 --- http://online.wsj.com/article/0,,SB110055804528874668,00.html?mod=home_whats_news_us
Bob Jensen's threads on the Freddie and Fannie derivatives
scandals are at http://www.trinity.edu/rjensen/caseans/000index.htm
The mounting pressure on Mr. Raines comes after a
career that lifted him from childhood poverty to Harvard Law School, a Rhodes
scholarship, and the pinnacle of power in government and finance. For years, the
company he leads got its way in Washington, wielding an army of lobbyists and
calling on its many friends in Congress and the homebuilding industry. Fighting
Fannie was considered futile. "You didn't question the king," says
Andrew Cuomo, housing secretary under President Clinton. Fannie, which has about
$957 billion of debt, is involved in financing more than a quarter of U.S.
residential mortgage debt outstanding
John D. McKinnon and James R. Hagerty, "How Accounting Issue
Crept Up On Fannie's Pugnacious Chief," The Wall Street Journal,
December 17, 2004 --- http://online.wsj.com/article/0,,SB110323877001802691,00.html?mod=todays_us_page_one
Bob Jensen's Fannie threads are at http://www.trinity.edu/rjensen/caseans/000index.htm
The SEC is probing "numerous" firms
including Tyco, Wyeth and El Paso, that participated in the Iraq oil-for-food
program.
Mark Maremont and Michael Schroeder, "SEC Seeks Data From Tyco, Wyeth Over
Iraq Program," The Wall Street Journal, December 15, 2004, Page A3
--- http://online.wsj.com/article/0,,SB110302684842899549,00.html?mod=home_whats_news_us
The mounting pressure on Mr. Raines comes after a
career that lifted him from childhood poverty to Harvard Law School, a Rhodes
scholarship, and the pinnacle of power in government and finance. For years, the
company he leads got its way in Washington, wielding an army of lobbyists and
calling on its many friends in Congress and the homebuilding industry. Fighting
Fannie was considered futile. "You didn't question the king," says
Andrew Cuomo, housing secretary under President Clinton. Fannie, which has about
$957 billion of debt, is involved in financing more than a quarter of U.S.
residential mortgage debt outstanding
John D. McKinnon and James R. Hagerty, "How Accounting Issue
Crept Up On Fannie's Pugnacious Chief," The Wall Street Journal,
December 17, 2004 --- http://online.wsj.com/article/0,,SB110323877001802691,00.html?mod=todays_us_page_one
Bob Jensen's Fannie threads are at http://www.trinity.edu/rjensen/caseans/000index.htm
Fannie's Unethical Tone at the Top: There's More Wrong Than Just
Accounting Fraud
Fannie Mae, eager to unload a batch of fraudulent loans it purchased from a
North Carolina lender, knowingly allowed the lender to resell the loans to a
government mortgage agency, according to federal law-enforcement officials. A
federal judge in Charlotte, N.C., has ordered Fannie Mae to forfeit $6.5 million
for not informing the agency about the fraud.
Dawn Kopecki, "Fannie Is Ordered to Forfeit $6.5 Million," The Wall
Street Journal, November 30, 2004 --- http://online.wsj.com/article/0,,SB110178387928686489,00.html?mod=home%5Fwhats%5Fnews%5Fus
Unlike recent financial scandals, issues raised by
Fannie Mae's regulators pertain to unwieldy accounting rules that are open to
widely divergent interpretations.
Timothy L. O'Brien and Jennifer S. Lee (See below)
Creditor claims against Adelphia Communications
Corp. total a staggering $3 trillion, or close to 40 percent of the national
debt, Dow Jones Newswires reported. But many of the claims pending against the
nation's fifth-largest cable company could turn out to be duplicates, and may be
more like $18.6 billion.
AccounitngWeb (See below)
Ernst & Young's Chairman and CEO Jim Turley
notes in a Wall Street Journal article that Section 404 of the US Sarbanes Oxley
Act is a critical step in enhancing investor confidence. He adds that the law
entails a major risk in its first year "that the opinions on internal
controls provided by management and independent auditors may be misinterpreted
by the market." But the bottom line is, "investors will derive
significant benefits from the implementation of Section 404. And the markets, in
turn, will benefit from the enhanced investor confidence."
E&Y Faculty Connection --- http://www.ey.com/global/content.nsf/International/Home
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Fraud detection can only improve with diligent
auditors combined with whistleblowers who are unafraid of retaliation because
their rights are protected. According to a survey of members of the Association
of Certified Fraud Examiners, less than 20 percent of fraud that is caught is
turned up by internal controls versus 40 percent for inside tipsters, the
Seattle Times reported.
"Fighting Fraud Calls for Assertive Auditors, Whistleblowers," AccountingWeb,
October 4, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=99860
Bob Jensen's updates on fraud detection are at http://www.trinity.edu/rjensen/FraudUpdates.htm
Washington's insurance commissioner is seeking
millions of dollars from accounting firm Ernst & Young for its alleged
neglect in overseeing finances at Metropolitan Mortgage &
Securities.
Washington State Sues E&Y Over Met Mortgage Woes," AccounitngWeb,
October 19m 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=99940
Bob Jensen's threads on E&Y scandals are at http://www.trinity.edu/rjensen/fraud.htm#Ernst
AT&T agreed to a $100 million settlement of a
suit by shareholders who claimed they were misled about the company's finances.
Shawn Young, "AT&T Settles Suit by Shareholders," The Wall
Street Journal, October 27, 2004 --- http://online.wsj.com/article/0,,SB109881211718455994,00.html?mod=home_whats_news_us
Still, the most damaging legacy of Fannie Mae's
years of unchecked growth may not be evident until the next significant economic
slump. Only then, argued Josh Rosner, an analyst at Medley Global Advisors in
New York, will the effects of Fannie Mae's relaxed mortgage underwriting
standards be felt. A result could be a more pronounced downturn in the real
estate market and more stress on the consumer.
Gretchen Morgenson, A Coming Nightmare of Homeownership?" The New York
Times, October 3, 2004 --- http://www.nytimes.com/2004/10/03/business/yourmoney/03watch.html
More bad news for the auditing firm of Deloitte & Touche
The spectre of a fresh scandal to follow the Parmalat affair hung over the
Italian financial world as magistrates continued a probe into accounting
irregularities at Italy's top construction company Impregilo. The company
said in a statement the investigation by public prosecutors in Monza, near
Milan, concerned up to 300 million euros (394.5 million dollars) in credit the
company gave to its subsidiary Imprepar, which went into liquidation early last
year.
Designers.com, November 24, 2004 --- http://economy.news.designerz.com/suspect-impregilo-accounts-raise-fears-of-new-italian-scandal.html
Bob Jensen's threads on Deloitte's scandals, including the recent $2 billion
lawsuit over its Forest Re audit, are at http://www.trinity.edu/rjensen/fraud001.htm#Deloitte
Looking for ways to cut their audit costs in light
of rising regulatory demands, some companies are dropping their Big Four
accounting firms and deciding the status of Corporate America's version of a
Good Housekeeping seal of approval isn't worth the price. All of the Big Four
accounting firms -- Deloitte, KPMG, PricewaterhouseCoopers (PWC) and Ernst &
Young -- lost more clients than they gained during the first eight months of the
year, says Audit Analytics. In two-thirds of the 396 departures, it was the Big
Four firm that got the boot.
USA Today, September 28, 2004, as reproduced by SmartPros --- http://www.smartpros.com/x45261.xml
Wiggle Room: Still Playing Games With Employee Stock Options to Prop Up
Earnings
At first glance, the change in assumption is puzzling,
because there has been no big rush by Cisco employees to exercise options. But
the change could help boost Cisco's bottom line if proposals to treat stock
options as an expense are finalized: By assuming a shorter life span for the
options, Cisco reduced by more than $300 million the estimated value of the 162
million stock options it granted to employees in August. After taxes, that's
about $190 million that Cisco may not have to expense over the next five
years. The incident highlights the flexibility of the assumptions that
companies use to value stock options. Accounting experts say companies can alter
assumptions -- sometimes in contradictory ways -- to influence the estimated
value of the options. The Financial Accounting Standards Board offers guidance
on setting those assumptions, but it leaves companies plenty of wiggle
room.
Scott Thurm, "Cisco May Profit On New Option Assumptions," The Wall
Street Journal, December 7, 2004 --- http://online.wsj.com/article/0,,SB110237572102492564,00.html?mod=technology%5Fmain%5Fwhats%5Fnews
Bob Jensen's threads on the options game are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
CEO Raines, CFO Howard
Feel Push From Regulators; KPMG Is Out as Auditor
Fannie Mae's CEO, Franklin Raines, and Timothy Howard, the chief financial
officer, stepped down amid growing pressure from regulators over accounting
violations. The mortgage company's board also dismissed
KPMG as outside auditor.
James R. Hagerty, John R. Wilke and Johathan Weil, "At Fannie Mae, Two
Chiefs Leave Under Pressure," The Wall Street Journal, December 22,
2004, Page A1 --- http://online.wsj.com/article/0,,SB110366339466106334,00.html?mod=home_whats_news_us
It just gets deeper and deeper for KPMG, the auditing firm that approved some the Fannie Mae's earnings smoothing with questionable allowance of hedge accounting for speculations under FAS 133 rules. Fannie's outside auditor, KPMG, certified its results knowing OFHEO's concerns.
OFHEO alleges that Fannie didn't qualify for this break (hedge accounting) because it didn't test whether the derivatives were eligible for such treatment. Now, OFHEO says Fannie may not use this method (hedge accounting) at all. Fannie could suffer a $12 billion hit from losses in derivatives, offset by $5 billion in gains, if OFHEO prevails. But the impact could be greatly diminished if the SEC rules that Fannie can continue to account for derivatives this way if it follows the rules more closely.
Paula Dwyer, "Fannie Mae: What's the Damage?" Business Week, October 11, 2004, Page 36 --- http://snipurl.com/Oct11FannieBob Jensen's threads on the Fannie Mae and Freddie Mac scandals are at http://www.trinity.edu/rjensen/caseans/000index.htm
Note that the 2004 scandal is the second time FAS 133 has tripped up Fannie Mae's auditors.
KPMG and the auditors
agreed to settle the action without admitting or denying the SEC's findings.
As part of the settlement, KPMG was censured and agreed to pay $10 million to
harmed Gemstar shareholders. This represents the largest payment ever made by
an accounting firm in an SEC action. The auditors, all of whom are certified
public accountants, agreed to suspensions from practicing before the SEC.
SEC as quoted at http://accountingeducation.com/news/news5560.html
Bob Jensen's threads on KPMG scandals are at http://www.trinity.edu/rjensen/fraud.htm#KPMG
Cynthia Cooper,
the former vice president of internal audit at WorldCom who exposed the largest
corporate fraud in U.S. history, will lead the list of three new inductees into
the 2004 American Institute of Certified Public Accountants' (AICPA) Business
& Industry Hall of Fame, an annual event sponsored by staffing services
company Ajilon Finance.
SmartPros, October 21, 2004 --- http://www.smartpros.com/x45564.xml
Bob Jensen's threads on Worldcom's scandals are at http://www.trinity.edu/rjensen/FraudEnron.htm#EnronLinks
Will it ever be possible to prevent Wall Street from becoming rotten to the core without freezing it?
This is a Very Depressing Commentary About Continued Rot
Investors appear to be losing the war with Wall
Street
"The Street's Dark Side: The markets can still be treacherous for
investors," by Charles Gasparino, Newsweek Magazine, December 20,
2004 --- http://www.msnbc.msn.com/id/6700786/site/newsweek/
The hammer came down quickly on Wall Street after the stock-market bubble burst. Regulators and lawmakers, under pressure to avenge the losses of millions of average Americans duped by unscrupulous brokers and corporate book-cookers, imposed swift reforms. Eliot Spitzer, the crusading New York state attorney general, demanded big brokerage firms overhaul their fraudulent stock research (they had been hyping companies that paid them huge investment banking fees). Congress passed the Sarbanes-Oxley Act to tighten up accounting and other standards for corporate behavior. With the reforms in place, Wall Street was again "an environment where honest business and honest risk-taking will be encouraged and rewarded," William Donaldson, chairman of the Securities and Exchange Commission, declared in a speech last year.
Despite the changes, however, Wall Street remains a treacherous place for the small investor. The big financial firms are still rife with conflicts that put their own interests, and those of big banking clients, ahead of everyone else's. (Just last week, for example, Citigroup was fined $275,000 for steering customers to invest in certain Citigroup funds that were "unsuitable'' for them.) Also, watchdog agencies like the SEC, even with bulked-up resources, continue to be ill-equipped to root out corporate crime. And when investors think they've been cheated, the system for ruling on their complaints remains stacked against them. "There are all sorts of practices and conflicts of interest on Wall Street that still have to be addressed, " says John Coffee, a Columbia University law professor.
. . .
Conflicts (Continued): During the 1990s, brokerage firms, regulators and lawmakers agreed to tear down the legal barriers that forced commercial bankers and investment bankers to operate independently. Wall Street quickly sought out merger partners, creating behemoths like Citigroup and JPMorgan Chase. They touted the convenience of one-stop shopping for consumers. But they also created incentives for staffers in different divisions to steer business to each other that would help the overall company. Spitzer's probe, for example, showed that many research analysts, supposedly peddling objective ratings, were working hand in glove with banking colleagues to win lucrative underwriting business from big corporate clients. The carrot for analysts: their compensation was tied in large part to the banking business they helped win. That's why analysts like Jack Grubman of Salomon Smith Barney told investors that he thought WorldCom was a "buy,'' even as it fell from more than $60 a share down to penny-stock territory.
Spitzer's settlement with Wall Street in 2002 was supposed to establish a higher wall separating banking and research; analysts could no longer work with bankers to pitch to corporate clients, and their pay had to be separated from such deals. But what's really changed? Analysts, under the guise of "due diligence,'' can still meet with executives around the time they're considering which investment bankers to hire. And many Wall Street firms acknowledge that investment-banking fees continue to flow into a pool of money used to pay analysts.
Are analysts' judgments more objective? Consider Google, which went public in August. Morgan Stanley's top Internet analyst, Mary Meeker, has been among Google's biggest boosters. Meeker was not supposed to play a direct role in helping Morgan land a slot to underwrite the IPO. But Morgan confirms that she did talk with Google founders Larry Page and Sergey Brin in meetings and lunches before the IPO. People familiar with the deal say those meetings helped play a big role in helping Morgan land the Google underwriting work. Meeker, along with the other four analysts whose firms underwrote the IPO, have been devoted cheerleaders of the stock, even as it has climbed from its $85 IPO price to above $171, a 101 percent increase in a matter of months. Clearly, it was a great call for those who bought at the outset. But many professional investors are now betting that at these levels, the stock is too pricey and due for a fall (recently the so-called short position on the stock jumped 34 percent in a month). Some Wall Street firms agree, particularly those who weren't part of the IPO underwriting. Morgan officials say that Meeker's call reflects her belief in the stock's potential.
Weak Watchdogs: If Wall Street firms could use a few more walls, the regulators charged with overseeing the firms could use fewer. The task of policing sprawling companies like Citigroup and JPMorgan Chase, which employ hundreds of thousands of people, is difficult enough. But the responsibilities for regulating them are also divided among different agencies—the Federal Reserve oversees banking, while the SEC regulates the securities side. NEWSWEEK has learned a nasty turf battle has erupted between the two agencies. The SEC wanted to examine possible leaks of confidential information from a firm's bank-debt departments to its trading desk. People at the SEC say it could open up a whole new area of insider-trading abuse. Counterparts at the Fed, however, "went nuts," according to a high-level SEC official, and tried to block the exam. SEC chairman William Donaldson conceded in a recent interview with NEWSWEEK that the Fed's mission has at times put it at odds with SEC. Neither agency would comment on the incident. "We're a cop,'' he said, noting that the Fed's main task is to protect the banking system. "We have two different roles," he added.
A more fundamental problem with much of Wall Street oversight is the notion of "self-regulation.'' Because of their limited resources, regulators ask Wall Street firms to police themselves in some areas. Their legal and "compliance" departments, for example, are supposed to provide "frontline'' regulation of their own brokerage departments. It doesn't always work out that way. Just ask Robert Pellegrini, who owns a winery on New York's Long Island. He says lax oversight allowed his financial adviser, Todd Eberhard, to steal about $1.2 million from his brokerage account. Eberhard later pleaded guilty to criminal securities fraud for making improper client trades, and he awaits sentencing that could land him in jail for 25 years. Pellegrini says in an arbitration claim that for several years, UBS PaineWebber processed Eberhard's illegal trades, despite numerous red flags. A simple background check by PaineWebber, his lawyer Jake Zamansky says, would have showed that three other firms refused to clear trades for Eberhard because of customer complaints. Eberhard Investment Advisors was not even registered with the NASD. A spokeswoman for PaineWebber said it "fully complied with its obligations as a clearing firm" and will "vigorously defend the allegations."
Justice Served? When customers like Pellegrini think they've been misled by a Wall Street broker, they have only one option for pressing their claim: to submit to arbitration. (Investors, when they sign up for a brokerage account, effectively sign away their right to use any system to settle a dispute.) But investors complain the deck is stacked against them, because the arbitrators are appointed by the industry, resulting in decisions that often favor the Wall Street firms. Investors won about half their cases last year, for example. Spitzer has said they should be winning more. Speaking before a private meeting of lawyers in Ft. Lauderdale, Fla., two weeks ago, Spitzer, according to a lawyer who was present, said he was frustrated that arbitration panels were blocking the use of evidence of conflicted research that he released as part of his investigation.
Investors appear to be losing the war with Wall Street in recovering money over conflicted research. Attorney Seth Lipner estimates that only 30 percent of all cases alleging that investors lost money because they relied on conflicted research has resulted in an award of money. Lipner blames the terms of the $1.4 billion settlement that Spitzer reached with Wall Street—the firms were allowed to pay the fine and agree to certain structural changes without having to admit guilt for misleading investors. "It has basically allowed arbitration panels to throw cases out," Lipner says. A spokesman for Spitzer says it's up to the courts to determine guilt, and that he simply laid out the evidence so investors could recoup their money. All of which proves that the best defense may be a twist on the old warning: caveat investor.
Regulators are concerned about Wall Street firms
tipping off selected investors to information about securities offerings.
"Securities Cops Probe Tipoffs Of Placements," by Ann Davis, The
Wall Street Journal, December 16, 2004; Page C1 --- http://online.wsj.com/article/0,,SB110315579554001426,00.html?mod=home_whats_news_us
Regulators are examining whether insiders at Wall Street firms that oversee big securities offerings for corporate clients have tipped off selected investors with valuable information about deals that can cause stock prices to fall.
Two recent cases demonstrate the regulators' concern: Federal prosecutors this week charged a former SG Cowen trader with trading on confidential knowledge that the firm's corporate clients were about to issue millions of dollars of new stock. Last month, the Ontario Securities Commission in Canada accused the Canadian brokerage house Pollitt & Co. and its president in a civil action of tipping off some clients to a pending deal involving bonds that could later be converted to stock. The Ontario authorities also accused one client of acting on the tip.
Regulators also are concerned about inadvertent tip-offs. The Securities and Exchange Commission, the New York Stock Exchange and other regulators are especially worried about information related to corporate stock and bond deals that are executed quickly, sometimes overnight. Such deals require brokerage houses to contact potential buyers to see if they are interested in buying the newly available securities, thereby giving them insider information that could be misused. (See a related article.)
Continued in article
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/fraudRotten.htm
Bob Jensen's fraud conclusions are at http://www.trinity.edu/rjensen/FraudConclusion.htm
A Politically Divided SEC: Why We Can't Trust Government Agencies to Protect US from Big Business
Of all the lawsuits, one filed against Mr. Winnick
last October in federal court in Manhattan holds special significance. J. P.
Morgan Chase and other leading banks are seeking $1.7 billion in damages from
Mr. Winnick and other Global Crossing executives, contending that the group
engaged in a "massive scam" to "artificially inflate" the
company's performance to secure desperately needed loans. Mr. Winnick, whose
lawyers dispute the accusations, declined to be interviewed for this article.
Among other things, the suit refocuses attention on exactly what Mr. Winnick
knew about his company's finances during times when it was borrowing heavily and
he was selling hundreds of millions of dollars in stock. It also outlines a
troubling series of meetings he held with Mr. Lay and other Enron executives
just months before their company crumpled.
Timothy O'Brian, "A New Legal Chapter for a 90's Flameout," The New
York Times, August 15, 2004 --- http://www.nytimes.com/2004/08/15/business/yourmoney/15win.html
"SEC Won't Charge, Fine Global Crossing Chairman: Agency's Donaldson Goes Against Staff, Noting Winnick's Nonexecutive Role," by Deborah Solomon, The Wall Street Journal, December 13, 2004; Page A1 --- http://online.wsj.com/article/0,,SB110290635013498159,00.html?mod=todays_us_page_one
The Securities and Exchange Commission won't file civil securities charges against former Global Crossing Ltd. Chairman Gary Winnick over disclosure violations or impose a $1 million fine, according to people familiar with the matter.
The action came despite objections from the SEC's two Democratic members and represents a rare reversal by the commission of its enforcement staff. It also caps a lengthy investigation of Global Crossing, the former Wall Street darling that helped set off a gold rush to capitalize on the Internet boom of the late-1990s.
. . .
The SEC had been expected to fine Mr. Winnick $1 million for failing to properly disclose a series of transactions undertaken by the telecom company, and he had tentatively agreed to pay that sum as part of a settlement agreement. But at a closed-door commission meeting last week, SEC Chairman William Donaldson and his two fellow Republican commissioners, Cynthia Glassman and Paul Atkins, opposed a staff recommendation to charge Mr. Winnick. Mr. Donaldson expressed concern that Mr. Winnick was a nonexecutive chairman and hadn't signed off on the inadequate disclosure, these people said.
This is what happens when Republicans win elections (and I'm a Republican)
The SEC is facing resistance from two Republican
commissioners
over the stiff fines it has been imposing on companies.
Deborah Solomon, "As Corporate Fines Grow, SEC Debates How Much Good They
Do," The Wall Street Journal, November 12, 2004 --- http://online.wsj.com/article/0,,SB110021198122471832,00.html?mod=home_whats_news_us
Bob Jensen's threads on why white collar crime pays (even when you get caught)
are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
It's about time.
The SEC staff is set to propose an overhaul of rules
governing how billions of shares trade each day in the U.S. The proposed plan
would expand a trading rule to mandate that investors are entitled to the best
price for most stock orders on both the NYSE and Nasdaq.
Kate Kelly and Deborah Solomon, "SEC Preps 'Best-Price' Overhaulm" The
Wall Street Journal, November 22, 2004 --- http://online.wsj.com/article/0,,SB110108697957180493,00.html?mod=home_whats_news_us
Forget it! The DC part of Washington DC means
Donate Cash
"SEC Loves NYSE," The Wall Street Journal, December 6,
2004; Page A14
Never underestimate the ability of a bureaucracy to wiggle backward. After many months of heavy breathing, the Securities and Exchange Commission is about to take stock trading back several decades. If you're thinking: Hmmm, this will help the New York Stock Exchange, you're right.
Back in February, the SEC proposed an overhaul of the national market system, called Reg NMS. The idea was to modernize an increasingly laborious and inefficient structure put in place in the 1970s. The main driver for reform, especially from institutional investors who often trade on behalf of smaller investors, was the trade-through rule.
This little bit of regulatory favoritism dictates that traders must do business with the exchange showing the "best" price for a security. It has also long given the New York Stock Exchange, with its auction system of stock specialists on the trading floor, a monopoly on a large amount of trading. Of course, having a monopoly, the NYSE had little incentive to upgrade its trading technology. And it didn't for years. Meanwhile, all sorts of swift, efficient electronic markets were created.
Institutional investors now find that they can trade faster, with anonymity and confidence, on these electronic markets. But the trade-through rule hinders them. The NYSE argues that this rule protects small investors who otherwise might not get the "best" price. In fact, the "best" price on the NYSE is often just a "maybe" price because it can disappear during the 15-30 seconds it takes to execute an order. On electronic venues, however, the price is firm and execution is achieved as soon as the computer key is hit.
The SEC's February proposal stopped short of abolishing the trade-through rule, but it did relax it. The proposal would have allowed traders to ignore the best price within a certain range and granted an explicit opt-out -- investors could give permission to ignore the best price on an order-by-order basis. Essentially, the proposal recognized the virtues of fast, automated markets by giving them trading priority over slow, manual markets.
The NYSE -- the queen of slow markets -- went wild. It aggressively lobbied against the SEC proposal and, in an effort to qualify as a fast market, introduced the first real reform in decades. In a plan unveiled in August, the NYSE has proposed to make itself into a "hybrid" market by expanding its tiny automated system, called Direct Plus.
The new Direct Plus lifts restrictions on size and timing of orders, allows orders that are not immediately executed to be canceled, and permits investors to gobble up or dump a lot of shares in one sweep at multiple prices. Specialists will, however, retain their role. The plan allows for the automatic market to switch into an auction mode if additional "liquidity" becomes necessary -- which sounds as if the NYSE is up to its old tricks. At least the threat of losing its monopoly has, finally, spurred the Big Board into some long-needed changes toward automated trading.
But then came word that the SEC has backpedaled. In a draft scheduled to be voted on this month, the new Reg NMS has dropped the opt-out provision and extended the trade-through rule to Nasdaq. Rumors were that all markets will also be required to display their full depth-of-book -- the entire list of bids and offers -- not just their best price. Simply put, the trade-through rule would not only be retained but would reign supreme. The uproar over this news has been so loud that the SEC has now agreed to put the new rule out for comment before any final vote.
Extending trade-through to Nasdaq is an unnecessary extension of regulatory reach. The SEC itself has admitted that, even without a trade-through rule, Nasdaq offers competitive quoting in actively traded stocks. Moreover, recent academic studies show that there is less volatility on Nasdaq and other electronic trading markets.
The impetus for reforming the national market system was an acknowledgement that both the technology and motives for trading have changed radically in the past 30 years. The practical point was to break the monopoly strictures so that competition among markets would direct order flow to the venues that best suited investors. There is an argument that the NYSE, with its specialists, provides value for trading medium- and low-cap stocks, and no doubt the Big Board will retain its market share if that's the case. But that hardly suggests that trading in the most liquid stocks should be forced into the NYSE.
And so after all this, the SEC has failed to grapple with the central question: Why shouldn't the markets for trading stocks be free to compete on service and innovation? Instead, it looks like the SEC is going to give investors the same-old, very old, story.
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Securities regulators are probing whether fund
companies directed trades toward firms that lavished them with
"excessive" gifts. SEC, NASD Investigate Whether Securities
Firms Gave Excessive Presents
Deborah Solomon, "Probe Focuses on Gifts to Advisers," The Wall
Street Journal, November 25, 2004, Page c19 --- http://online.wsj.com/article/0,,SB110123997986182154,00.html?mod=home_whats_news_us
Bob Jensen's thread on securities trading frauds are at http://www.trinity.edu/rjensen/fraudRotten.htm
So where was Levitt before Spitzer did his
job? While heading up the SEC, Levitt always seemed willing to take on the
CPA firms, but he treaded lightly (really did very little) while the financial
industry on Wall Street ripped off investors bigtime. It never ceases to
amaze me how Levitt capitalizes on his failures.
Forget Enron, WorldCom or mutual funds. The crisis
enveloping the insurance industry is "the scandal of the decade, without a
question" and "dwarfs anything we've seen thus far."
Arthur Levitt as quoted by SmartPros, October 25, 2004 --- http://www.smartpros.com/x45590.xml
Bob Jensen's threads on insurance frauds are at http://www.trinity.edu/rjensen/fraudRotten.htm#MutualFunds
Reining in the CPA Hucksters
All the Big Four and other CPA firms were huckstering abusive tax shelters, with KPMG being the worst of the lot --- http://www.trinity.edu/rjensen/fraud001.htm#KPMG
"Auditing-Rule Maker Seeks New Limits On Tax Services," by Jonathan Weil, The Wall Street Journal, December 15, 2004, Page C3 --- http://online.wsj.com/article/0,,SB110306143764900061,00.html?mod=home%5Fwhats%5Fnews%5Fus
The auditing profession's chief regulator unveiled a broad proposal aimed at preventing accounting firms from auditing the books of public companies to which they have sold tax shelters that the Internal Revenue Service deems abusive tax-avoidance schemes.
The proposal by the two-year-old Public Company Accounting Oversight Board also would prohibit accounting firms from selling any tax services at all to senior officers of publicly held audit clients. Until recently, regulators had seen little need to pass significant restrictions on firms' ability to sell tax services to audit clients, believing they created few conflicts of interest. In the past two years, however, several highly publicized controversies have called that premise into question.
Last year, Sprint Corp.'s board forced the resignations of the long-distance company's top two executives after learning that the IRS was challenging tax shelters they had purchased from the company's independent auditor at the time, Ernst & Young LLP. And Senate hearings last year into KPMG LLP's tax-shelter practices revealed numerous examples in which the firm had mass-marketed allegedly abusive strategies to audit clients.
The tax proposal comes on top of Securities and Exchange Commission restrictions, passed in 2000 and 2003, limiting consulting and other nonaudit services by auditors. "This is a time when the most important task of the profession is to restore the investing public's confidence in the quality, integrity and worth of its work on the public's behalf," said William J. McDonough, chairman of the accounting board, which voted 5-0 to submit the proposal for public comment. "The appearance that some in the profession assist corporate and other privileged clients to evade the rules, whether they are tax rules or accounting rules, threatens the restoration of public confidence."
Some auditors began signaling displeasure with the board's auditor-independence initiative on tax services months ago. In a Sept. 22 letter to Rep. Richard Baker, chairman of the House subcommittee that oversees the accounting board, Deloitte & Touche LLP Chief Executive Officer James Quigley said his firm believes the issue should be "addressed by tax regulation, legislation and the courts, rather than through independence regulation with a sole focus on auditors."
Deloitte, Ernst and PricewaterhouseCoopers LLP officials declined to comment on the proposal's specifics yesterday. In a statement, KPMG said that "the proposed rules appear to be balanced and provide a level of clarity concerning what is or is not a permissible tax service."
After a 60-day comment period, the accounting board's proposal is set to take effect in October 2005. Here's a look at the highlights:
Corporate tax shelters: In the future, an accounting firm would be disqualified as a company's independent auditor if it sells the company a tax shelter already included on the IRS's published list of abusive tax-avoidance strategies -- or a shelter substantially similar to an IRS-listed strategy. Generally speaking, the rules wouldn't disqualify auditors in connection with tax services completed before Oct. 20, 2005.
The auditor also would be disqualified if it requires the client to sign a confidentiality agreement barring disclosure of the strategy. Additionally, firms selling tax strategies to audit clients would be disqualified if later found to have lacked a reasonable basis for believing that a given strategy "more likely than not" would pass muster with tax authorities.
Accounting firms also might be disqualified, depending on the circumstances, in other situations where they would be in the position of having to audit their own tax-shelter work. Such situations can arise when a firm sells an audit client a tax strategy that the IRS later adds to its list of abusive transactions and where the strategy's accounting effects have a material impact on the client's financial statements. The accounting board said it would seek further public comments on this point before deciding how to proceed.
Tax services for executives: Yesterday's proposal would impose an outright ban on selling tax services to an audit client's senior officers. Some big accounting firms, including Ernst, have said their clients' audit committees already have cut back substantially on letting them perform such work, in the wake of the Sprint episode.
Firms still would be allowed to sell tax services to an audit client's corporate directors -- even the audit-committee members to whom they report, a point likely to draw criticism from some investors. Additionally, the board decided not to propose a ban on preparing tax returns for audit-client employees working in foreign countries.
Contingent fees: Despite an existing SEC ban on such fee arrangements with audit clients, they remained standard practice until recently at some accounting firms. These firms based their tax-shelter fees on a percentage cut of clients' tax savings. Now, the accounting board says it wants to formally include the contingent-fee ban in its own auditing standards.
Bob Jensen's "Saga of Auditor Professionalism and Independence" is at http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Guess who ultimately ends up paying the $510 million for accounting fraud?
"Time Warner to pay 510-million-dollar fraud settlement," TurkishPress.com, December 15, 2004 --- http://www.turkishpress.com/news.asp?ID=34926
Time Warner, the world's largest media-entertainment company, said Wednesday it had agreed to pay a total of 510 million dollars to resolve federal probes into accounting irregularities at its America Online (AOL) units.
The company said 210 million dollars would be paid in agreement with the Department of Justice (DoJ), while a further 300-million-dollar penalty would be levied under a proposed settlement with the Securities and Exchange Commission (SEC).
Deputy US Attorney General James Comey said the Justice Department would file a criminal complaint against AOL that charges several employees with securities fraud.
However, the prosecution will be deferred for two years and then dismissed, so long as the company adheres to all stipulations of its deal with the government.
"If AOL fails to comply with the agreement, the deal is off. And they are in a world of trouble," Comey said.
As well as the 210-million-dollar payout, the agreement requires AOL to undertake a wide range of corporate reforms.
The charges levelled against AOL arose out of a scheme to falsify the financial results of a company called Purchase Pro -- a dot-come startup which is now bankrupt.
"As so often happens, during the dot-com bubble days, the revenues that AOL and Purchase Pro were counting on did not materialize, Comey said.
"And instead of confronting that harsh reality, AOL and Purchase Pro cooked up a scheme to inflate Purchase Pro's revenues," he added.
Four former Purchase Pro executives have agreed to plead guilty to felony charges based on their roles in the scheme.
The multi-million dollar settlement incorporates a 60-million-dollar fine and the establishment of a 150-million-dollar fund to settle any related shareholder or securities legislation.
The proposed 300-million-dollar settlement with the SEC would resolve an investigation by the securities watchdog into whether AOL improperly accounted for a 400-million-dollar payment made by German media company Bertelsmann, which used to own 50 percent of AOL Europe.
Question
How can you "PUT" away your cares about clear-cut rules of accounting?
Answer
See how AOL did it in conspiracy with Goldman Sachs
With the AOL-Time Warner deal due to close in just three months, Bertelsmann needed to reduce its AOL Europe holding -- pronto. But the obvious buyer, AOL, didn't want to own more than 50% or more of the venture, either. Going above half might trigger a U.S. accounting rule that would force AOL to consolidate all the struggling unit's losses on its books when AOL was already grappling with deteriorating ad revenues and a declining stock price. Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.
"Goldman's 1% Solution," by Paula Dwyer, Business Week, June 28, 2004 --- http://www.businessweek.com/@@ajkOUmUQQWvg7RMA/premium/content/04_26/b3889045_mz011.htm?se=1
Goldman's 1% Solution
In 2000, it cut a questionable deal that smoothed the AOL-Time Warner merger. Will the SEC take action?
In more ways than one, the news from the European Union was bad. It was October, 2000, and the EU's executive arm, the European Commission, had just jolted America Online Inc. with a ruling that its pending acquisition of Time Warner Inc. (TWX ) could harm competition in Europe's media markets, especially the emerging online music business. The EC was concerned that AOL was a 50-50 partner with German media giant Bertelsmann in one of Europe's biggest Internet service providers, AOL Europe. Now the EC was ordering Bertelsmann to give up control over AOL Europe.With the AOL-Time Warner deal due to close in just three months, Bertelsmann needed to reduce its AOL Europe holding -- pronto. But the obvious buyer, AOL, didn't want to own more than 50% or more of the venture, either. Going above half might trigger a U.S. accounting rule that would force AOL to consolidate all the struggling unit's losses on its books when AOL was already grappling with deteriorating ad revenues and a declining stock price.
Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.
LEGAL HEADACHES
Or so it seemed at the time. But the deal also may have violated U.S. securities laws. The Securities A: Exchange Commission and the Justice Dept. have construed some deals involving promises to buy back assets at a specific time and price as share-parking arrangements designed to mislead investors. The former chief executive of AOL Europe says the Goldman deal may have kept up to $200 million in 2000 losses off of the combined AOL-Time Warner financials -- enough, he says, that Time Warner might have tried to change the terms of the $120 billion merger, since AOL wouldn't have looked as healthy. But as the deal moved toward consummation, the Goldman arrangement was never disclosed in public documents to AOL or Time Warner shareholders.
The AOL Europe transaction threatens to create problems for Goldman Sachs. But it could also prolong the legal headaches of Time Warner Inc., as the AOL-Time Warner combine is now called. For the past two years, Time Warner has been in heated negotiations with the SEC over AOL's accounting for advertising revenues (BW -- June 7). Just as the SEC is wrapping up that case -- it could warn Time Warner as early as this summer that it intends to bring civil fraud charges -- the Goldman transaction raises troubling new questions about AOL's financial dealings prior to the merger.
The SEC has not brought charges over the 1% solution, and an SEC spokesman would not comment on whether the agency is probing the deal. Time Warner spokeswoman Tricia Primrose Wallace says the company will not comment on any part of the Goldman arrangement. A lawyer for Stephen M. Case, AOL's chairman and CEO at the time of the deal, referred questions to Time Warner. Thomas Middelhoff, who was Bertelsmann's chairman at the time of the deal and negotiated the AOL Europe joint venture with Case in 1995, says through a spokesman that the sale of a 0.5% stake was "purely a financial technique" handled by others. And Lucas van Praag, a Goldman Sachs spokesman, says: "We handled this entirely appropriately. We don't believe there is anything untoward here."
Continued in the article
AOL's independent auditor was Ernst & Young. You can read more about Ernst & Young's woes at http://www.trinity.edu/rjensen/fraud001.htm#Ernst
PCAOB Board Member Doug Charmichael discussed issues of mergers (between such giants as AOL and Time Warner) and independence before the SEC on July 26, 2001 --- http://www.sec.gov/rules/proposed/s71300/testimony/carmich1.htm
Will some clients be relegated to risk pools that reluctant auditing firms must serve? High risk drivers are now assigned to a risk pool that insurance companies must serve (due to state laws requiring insurance) at higher rates even though they would rather not serve at any rate. The same may happen with high risk clients of accounting firms.
"Big Four Accounting Firms Steering Clear of Risky Business," AccountingWeb, December 14, 2004 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=100202
Statistics from research firm Audit Analytics indicate that the Big Four firms are dropping clients at record rates, and the trend is increasing. Since the auditing nightmares at Enron were exposed three years ago, audit firm resignations among the Big Four have increased from 18% of all departures from auditing assignments in 2001 to 34% in 2004. Just in the first three quarters of this year, the Big Four firms have resigned from a total of 157 U.S. audits.The firms are attributing the resignations to a variety of factors, with limited resources as a result of Sarbanes-Oxley legislation being the most prominent reason. The Sarbanes-Oxley Act of 2002 placed additional burdens on auditors and is leaving accounting firms in a position of having to be more selective in choosing the clients whose audits can be performed most efficiently.
In addition, firms are weeding out clients with risk factors that can affect the reliability of financial statement information. Earlier this fall, PricewaterhouseCoopers resigned from the audit of Pegasus Communications Corp., citing "material weaknesses in the application of accounting principle and policies that led to the restatement of the Company's financial statements," as the reason for the resignation.
A side effect of the Big Four's paring down of its clients is the boon to second tier national firms such as Grant Thornton, BDO Seidman, and McGladrey & Pullen. USA Today reports that many of the companies being booted by the Big Four are turning to these smaller firms and finding a benefit in lower costs and better access to top accounting professionals.
In order to meet the added demands of Sarbanes-Oxley, the Big Four and the smaller accounting firms are scrambling to find and hire talent, which is good news for accountants seeking jobs. It's reported that both the types of jobs available for accountants and the starting salaries are improving. "More of [the accounting graduates] are getting jobs with the better firms than in the past few years," said Edward Ketz, an accounting professor at Penn State's Smeal College of Business. And Robert Half International anticipates starting salaries for auditors to increase from 5 percent to 13.4 percent in 2005.
December 14, 2004 reply from Robert Bowers [M.Robert.Bowers@WHARTON.UPENN.EDU]
I feel I must reply here.
For some time I have felt that a CPA's worst nightmare is a crooked client. For audit, tax, whatever.
If I determine that a client is lying to me, I jettison them. They aren't worth the trouble.
But how about analogy to other criminal conduct?
By publishing audited statements, registration with SEC, etc, we are giving corporations access to probably the largest source of capital in the world.
Why not a 3 strikes you're out rule (like DWI for drivers)
Perhaps auditors should maintain a shared database (such as the CLUE report w/ insurance co's)
Whatever is done, I strongly feel the profession should take the lead.
Proper policing and control is OUR responsibility unless we want .... Sarbanes II (shudder)
Come on guys! Either we form a task force and clean things up, or Congress will be only too happy to "reform" things for us!
Bob
Jensen's threads on professionalism and fees are at http://www.trinity.edu/rjensen/fees.htm
Cost cutting practice that create moral hazards are discussed at http://www.trinity.edu/rjensen/FraudConclusion.htm#CostCutting
The Pension Fund Consulting Racket
Nowhere are the conflicts of interest for financial services conglomerates more potentially lucrative - and more obscure - than in the management of pension assets.
"How Consultants Can Retire on Your Pension," by Gretchen Morgenson and Mary Williams Walsh, The New York Times, December 12, 2004 --- http://www.nytimes.com/2004/12/12/business/yourmoney/12pension.html
Nine years ago, William Keith Phillips, a top stockbroker at Paine Webber, met with the trustees of the Chattanooga Pension Fund in Tennessee to pitch his services as a consultant. He gave them an intriguing, if unusual, choice. They could pay for his investment advice directly, as pension funds often do, or they could save money by agreeing to allocate a portion of its trading commissions to cover his fees. Under a commission arrangement, Mr. Phillips told the trustees, the fund would be less likely to incur out-of-pocket expenses, leaving more money to invest for its 1,600 beneficiaries.
Seven and a half years later, Chattanooga's pension trustees discovered just how expensive that money-saving plan had been. According to an arbitration proceeding they filed against Mr. Phillips, the agreement cost the fund $20 million in losses, undisclosed commissions and fees. And since 2001, Chattanooga has had to raise nearly $3.7 million from taxpayers to keep the $180 million fund fiscally sound.
The Chattanooga trustees fired Mr. Phillips in 2003 and, last October, filed arbitration proceedings against him, UBS Wealth Management USA, formerly the Paine Webber Group, and his new firm, Morgan Stanley. The case, which is pending, accuses the consultant of, among other things, fraud and breach of fiduciary duty. The commission arrangement was central to the problem because it put Mr. Phillips's interests ahead of his client's, the fund said in its complaint.
"The very important and in many ways unique relationship that a pension fund board has with its consultant is based on trust," said David R. Eichenthal, finance officer and chairman of the general pension plan for the city of Chattanooga. "To the extent that Phillips breached that trust, we thought it was important for the pension fund to do everything possible to hold him accountable for the results."
Pension experts say the Chattanooga case is hardly rare among retirement funds. The Securities and Exchange Commission is concerned enough about conflicts of interest among consultants who advise pension funds on asset allocation, selection of money managers and other investment matters that it is conducting an industrywide inquiry. The results of the S.E.C.'s investigation are expected soon, and enforcement actions may follow.
Aubrey Harwell, a lawyer for Mr. Phillips, declined to make him available for this article. Mr. Harwell said: "No. 1, these are allegations and not proven facts. And No. 2, the performance during the days that Keith Phillips was consulting were well beyond the benchmarks." Details of the commission arrangement, he added, were fully disclosed to the pension fund. But this is not the first time a pension client has sued Mr. Phillips. In 2000, the Metro Nashville Pension Plan filed an arbitration based on similar accusations. That arbitration was settled two years later, with UBS paying $10.3 million to the pension fund.
As financial services conglomerates have added a wide array of operations in recent years, the possibility of conflicts of interest has also grown. And nowhere are the conflicts more potentially lucrative - and more obscure - than in the management of pension assets.
"Recommendations to pension funds regarding asset allocation, money manager selection and securities brokerage policies are frequently driven by undisclosed financial arrangements," said Edward A. H. Siedle, president of Benchmark Financial Services Inc., in Ocean Ridge, Fla., and a former lawyer for the S.E.C. "Pensions often accept that poor investment performance is attributable to unfortunate investment assumptions when, in fact, more sinister forces were at work. Investment performance often is compromised as the result of conflicts of interest, undisclosed financial arrangements, excessive fees and fraud."
An estimated $5 trillion sits in thousands of pension funds across the nation, run for the benefit of private company, state or municipal workers who rely on the funds for retirement income. Some funds are huge, with billions of dollars under management, and are overseen by a board of finance professionals. Many, however, are tiny, with just a few million dollars invested. These funds are often run by volunteers less versed in the ways of Wall Street.
Pension fund boards typically hire a consultant to advise them on investment strategies and the hiring of money managers. Problems can crop up when these pension consulting firms, which have a fiduciary duty to the fund, put their own interests first.
JUST as pension funds come in many sizes, so, too, do the consulting firms that serve them. Some are one-person operations while others work within a large financial-services firm. Among the biggest companies in pension consulting are Mercer Inc., a unit of Marsh & McLennan, and Callan Associates, a privately held company based in San Francisco.
In recent years, however, Wall Street firms have played an increasingly large role in the world of pension consulting. Merrill Lynch, Smith Barney and Morgan Stanley are all big in this field.
The potential for conflicts is greatest at firms with brokerage or trading operations, pension authorities say, and it almost always involves how the consultants are compensated.
The trouble is, much of a consultant's pay can be hidden from view. The Chattanooga complaint said Mr. Phillips and his colleagues controlled and manipulated the information given to the pension board, keeping it in the dark about excessive fees and conflicts inherent in the recommendations they made to the fund. Mr. Phillips's reports on the pension fund's performance were misleading, the complaint said, because they did not take into consideration all of the fees and commissions it paid.
Continued in article
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/fraudRotten.htm
Court Defies SEC, Upholds Limitations on Expiring Fraud Claims
Before Sarbanes-Oxley, the law stated that investors
who were made aware of fraudulent activities had to file lawsuits against the
misbehaving companies within one year of discovering the fraud and within three
years of the actual fraudulent activity.
AccountingWeb, December 9, 2004 --- http://www.accountingweb.com/item/100203
Before Sarbanes-Oxley, the law stated that investors who were made aware of fraudulent activities had to file lawsuits against the misbehaving companies within one year of discovering the fraud and within three years of the actual fraudulent activity. The Sarbanes-Oxley Act of 2002 (SOX) extended the time period for filing claims to two years from the discovery and five years from the fraudulent activity.
Now some investors who have lost money as a result of the many corporate fraud cases that have been discovered in recent years, would like the extended time that SOX allows for filing investor lawsuits to be retroactive. For example, state pension funds in Washington, Georgia, and Ohio that are victims of alleged securities fraud at Enron Corp. in the late 1990s (pre-SOX) cannot file suit against Enron because the statute of limitations has expired. Were the SOX time periods made retroactive, lawsuits could still be filed.Continued in the article
AICPA Launches Web Site to Promote Audit Quality --- http://cpcaf.aicpa.org/