Question
In the United States, what officers are most like the Iraqi police (working for evil people they're supposed to be protecting us from)?

Agents fighting crime on the border are dealing with increasing corruption in their ranks. Among those facing charges are immigration, customs and border patrol agents. All were caught working for smugglers in El Paso who are supposed to protect our border are increasingly taking bribes instead. They're the agents who guard our borders and decide who and what gets past nearby checkpoints leading to highways that double as lucrative smuggling routes. It was at a checkpoint in far West Texas that four agents who were supposed to protect the border switched sides. "We're disappointed when any agent violates the trust...

Angela Kocherga, "More corruption seen among border agents, San Antonio Express News, November  28, 2006 ---
Click Here
 

---

Question
Where were (are) the lawyers in the recent corporate governance and investment scandals?

Report of the Task Force on the Lawyer's Role in Corporate Governance, New York City Bar, November 2006 --- http://online.wsj.com/public/resources/documents/WSJ-CORP-GOV-FINAL_REPORT.pdf

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/fraud001.htm#Governance

---

The seamy underside of asbestos litigation
In the legal trade, this is known as "double dipping"--the process by which lawyers file claims at many different bankruptcy trusts on behalf of a single plaintiff. Each trust is told a different story about how the client got sick, and the plaintiff collects from all of them. Of course, the lawyers collect too. This practice may well have remained unexposed had not Brayton Purcell decided to cash in on Kananian one more time. It sued Lorillard Tobacco, this time claiming its client had become sick from smoking Kent cigarettes, whose filters contained asbestos for several years in the 1950s. That suit has now exploded on Brayton, exposing one of the asbestos bar's more lucrative cash cows.
Kimberley A. Strassel, "Trusts Busted:  The seamy underside of asbestos litigation," The Wall Street Journal, December 5, 2006 --- http://www.opinionjournal.com/columnists/kstrassel/?id=110009343

---

Study: Most Audit Committees Lack Accountant
Then why call them audit committees?
A new report says that in 2005 the number of accountants sitting on audit committees doubled compared to four years prior, but that six out of 10 companies still did not have at least one accountant on their committee. The research from Huron Consulting is based on a sample of more than 700 audit committee members at 178 public companies from the NASDAQ 100 and Fortune 100 listings. The report analyzed patterns of audit committee composition between 2002 and 2005 using information contained in the companies' annual proxy statements and 10-K disclosures filed with the U.S. Securities and Exchange Commission.
"Study: Most Audit Committees Lack Accountant ," SmartPros, November 30, 2006 --- http://accounting.smartpros.com/x55639.xml

---

Question
What may be the largest criminal tax fraud prosecution in U.S. history?

"Prosecutors in KPMG Tax Shelter Case Offer to Try 2 Groups of Defendants Separately," Lynnley Browning, The New York Times, October 5, 2006 --- Click Here

Last year, 16 former KPMG employees, as well as a lawyer and an outside investment adviser, were indicted by a federal grand jury in Manhattan on charges that they conspired to defraud the Internal Revenue Service by creating and selling certain questionable tax shelters.

The proposal to split the group comes after Judge Kaplan raised concerns about some prosecutorial tactics in the complex case. KPMG narrowly averted criminal indictment last year over certain questionable shelters and instead reached a $456 million deferred-prosecution agreement. Judge Kaplan has criticized prosecutors for pressuring KPMG to cut off the payment of legal fees to the defendants.

His concerns how appear to extend to the indictments of the defendants.

According to a transcript of the hearing on Tuesday, Judge Kaplan said: “The government indicted 18 people knowing that the effect of doing that would be to put economic pressure on people, along with whatever else puts pressure on people to cave and to plead, because they can’t afford to defend themselves and because perhaps there are other risks involved in a joint trial. That is the patent reality of this case.”

A representative for the United States attorney’s office in Manhattan did not have a comment on the letter yesterday.

The letter, which was not filed under seal but did not appear on the court’s docket, was confirmed by two persons close to the proceedings.

Under the proposal, the junior defendants would include Jeffrey Eischeid, the rising star who was in charge of KPMG’s personal financial planning division; John Larson, a former KPMG employee who set up an investment boutique that sold shelters; David Amir Makov, a onetime Deutsche Bank employee who later worked with Mr. Larson’s investment boutique, Presidio Advisory Services; and Gregg Ritchie, a former partner; among others.

The senior defendants would include Jeffrey Stein, a former vice chairman who was the No. 2. executive at the firm; John Lanning, a former vice chairman in charge of tax services; Richard Rosenthal, a former chief financial officer; Steven Gremminger, a former associate in-house lawyer; Robert Pfaff, a former KPMG partner who worked with Mr. Larson to set up Presidio Advisory Services; David Greenberg, a former senior tax partner; and Raymond J. Ruble, a former lawyer at Sidley Austin Brown & Wood; among others.

Lawyers for the defendants maintain that their clients did nothing illegal, while prosecutors contend that they created and sold tax shelters, some involving fake loans, that deprived the Treasury of $2.5 billion in tax revenue.

Bob Jensen's threads on this and other KPMG litigations are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG

---

Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls
Dresser Inc. said it will restate its financial statements for 2001 through 2003 based on a host of accounting errors. In May, the industrial engineering company had warned that it would restate its 2004 annual filing, its 2004 and 2005 quarterly financial statements, and would be evaluating the potential need to restate prior periods. The accounting errors relate to inventory valuation and derivative transactions under the Financial Accounting Standards Board's FAS 133. Other accounting errors relate to the company's businesses which were sold in November 2005.
Stephen Taub, "Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls, keep IPO on hold," CFO Magazine, November 26, 2006 ---
http://www.cfo.com/article.cfm/8346406/c_8347143?f=FinanceProfessor.com

Dresser Inc. changed its independent auditor to Pricewaterhouse Coopers (PwC) in 2002 and with plans to restate its 2001 financial statements after it changed auditors. The previous auditor was KPMG.

Bob Jensen's threads on KPMG are at --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

---

"PCAOB Finds Problems At PricewaterhouseCoopers (PwC)," by David Reilly, The Wall Street Journal, December 16, 2006; Page A4 --- http://online.wsj.com/article/SB116622194790551886.html?mod=todays_us_page_one

The Public Company Accounting Oversight Board, in an inspection report released Friday, cited PricewaterhouseCoopers LLP for deficiencies in some of its audits of public companies.

The PCAOB noted the firm had failed in some cases to catch or address errors in the way companies applied accounting rules or lacked sufficient evidence to back up some of its decisions. The PCAOB singled out for criticism nine audits done by PricewaterhouseCoopers, saying in a number of the cases the firm failed to adequately check the value of revenue, inventory and accounts receivable at companies whose books it was approving. The board's inspections entail reviews of a sampling of audits, not every audit done by a firm.

In keeping with the board's policies, the report doesn't identify the companies that had their audits cited. In addition, only a portion of the report is made public. A section that includes criticisms related to an accounting firm's quality-control systems is kept secret and never made public if a firm is able to show that it has corrected the problems cited within 12 months of the report's issuance.

In a comment letter included in the PCAOB report, PricewaterhouseCoopers said, "We have addressed each of the specific findings raised in the report and, where necessary, performed additional procedures or enhanced the related audit documentation." A spokesman for PricewaterhouseCoopers issued a statement saying that the firm believes it is "performing quality audits" and that it "will incorporate the board's findings" into the firm's practices.

The board's inspection reports are the only public assessment of audit firms' work available to investors and the corporate audit committees, which hire, fire and negotiate how much to pay the accounting firms.

The report is the second this year that the PCAOB has issued for a Big Four accounting firm covering inspections conducted last year of the firms' audits of companies' 2004 financial results. Earlier this month the agency issued its 2005 report for Deloitte & Touche LLP.

The PCAOB, which has been criticized for the length of time it is taking to issue annual reports, has yet to issue 2005 inspection reports for Ernst & Young LLP or KPMG LLP, the other two members of the Big Four. The board has until the end of the year to do so.

The PCAOB must issue an annual inspection report for any accounting firm that audits 100 or more public companies. Firms that audit fewer than 100 public companies are inspected every three years, although the PCAOB on Friday said it would look to amend this rule.

PricewaterhouseCoopers' response to its PCAOB report was in contrast to that of Deloitte, which included strong rebuttals of many of the board's findings.

Bob Jensen's threads on audit incompetence are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

Bob Jensen's threads on PwC troubles are at
http://www.trinity.edu/rjensen/Fraud001.htm#PwC

---

Monster says it made monster accounting errors
Monster Worldwide Inc. said on Wednesday it overstated profit from 1997 to 2005 by a total of $271.9 million, a result of its investigation into historical stock option grants and accounting. In a filing with the U.S. Securities and Exchange Commission, the parent of job search Web site Monster.com recorded a net charge of $9.2 million for 2005, $14.4 million for 2004, $27 million for 2003, $44.9 million for 2002, $65.6 million for 2001, and $110.8 million for the cumulative period of 1997 through 2000.
"Monster says overstated '97-'05 profit by $271.9 m," Rueters, December 13, 2006 --- Click Here

The Independent Auditor for Monster Worldwide is KPMG --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

---

It just gets deeper and deeper for KPMG

Fannie Mae Sues KPMG
The mortgage lending company Fannie Mae filed suit on Tuesday against its former auditor KPMG, accusing the firm of negligence and breach of contract for its part in the flawed accounting that led to a $6.3 billion restatement of earnings. Fannie Mae states in its complaint that KPMG applied more than 30 flawed principles and cost it more than $2 billion in damages. Fannie Mae fired the accounting firm in mid-December 2004, just a week after the Securities and Exchange Commission ordered the company to restate more than two years of flawed earnings. A KPMG spokesman, Tom Fitzgerald, said the company planned to “pursue our own claims against Fannie Mae.”
"Fannie Mae Sues KPMG," The New York Times, December 13, 2006 --- http://www.nytimes.com/2006/12/13/business/13kpmg.html?_r=1&oref=slogin

KPMG fired back at former audit client Fannie Mae this week, saying it would counter the mortgage giant’s $2 billion negligence and breach of contract lawsuit. KPMG “will pursue our own claims against Fannie Mae” in the U.S. District Court in Washington, D.C., spokesman Tom Fitzgerald told reporters Tuesday. Fannie Mae filed its lawsuit Tuesday in the Superior Court of the District of Columbia. Fitzgerald said the issues raised in Fannie Mae's lawsuit “are already pending" in shareholder lawsuits before the federal district court. He did not elaborate on what claims KPMG would make against Fannie Mae, Reuters reported.
"KPMG Plans Counter Suit of Fannie Mae," AccountingWeb, February 14, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102902 

Bob Jensen's threads on KPMG are at --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

---

Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls
Dresser Inc. said it will restate its financial statements for 2001 through 2003 based on a host of accounting errors. In May, the industrial engineering company had warned that it would restate its 2004 annual filing, its 2004 and 2005 quarterly financial statements, and would be evaluating the potential need to restate prior periods. The accounting errors relate to inventory valuation and derivative transactions under the Financial Accounting Standards Board's FAS 133. Other accounting errors relate to the company's businesses which were sold in November 2005.
Stephen Taub, "Accounting Snags Push Dresser to Restate Problems with derivative transactions, inventory controls, keep IPO on hold," CFO Magazine, November 26, 2006 ---
http://www.cfo.com/article.cfm/8346406/c_8347143?f=FinanceProfessor.com

Dresser Inc. changed its independent auditor to Pricewaterhouse Coopers (PwC) in 2002 and with plans to restate its 2001 financial statements after it changed auditors. The previous auditor was KPMG.

Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG

---

Federal Regulators Fine Grant Thornton $300,000 Over Audit of Failed Bank
Federal bank regulators have fined the accounting firm Grant Thornton LLP $300,000 for what they called "reckless conduct" in its audit of First National Bank of Keystone, a West Virginia institution whose collapse in 1999 was one of the costliest U.S. bank failures in the past decade.
Marcy Gordon, "Federal Regulators Fine Grant Thornton $300,000 Over Audit of Failed Bank, SmartPros, December 11, 2006 --- http://accounting.smartpros.com/x55776.xml

Grant Thornton LLP said it will challenge recent Treasury Department (DoT) findings and penalties stemming from the firm’s audit of a bank that collapsed in 1999. The Office of the Comptroller of the Currency, the Treasury agency that regulates nationally chartered banks, on Friday announced the telling $300,000 fine against the Chicago-based CPA firm that audited First National Bank of Keystone in 1998.
"Grant Thornton to Fight Claim of “Reckless” Audit," AccountingWeb, December 12, 2006 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=102894

Bob Jensen's threads on Grant Thornton (especially the Refco audit failure) are at http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton

---

Where were the auditors?
Firms cook the books to set executive pay
And these same executives are protesting Sarbanes-Oxley

 

 

"Firms cook the books to set executive pay," Editorial, The New York Times, December 19, 23006 --- http://www.sptimes.com/2006/12/19/Opinion/Firms_cook_the_books_.shtml

Among the corporate deceits that buttress America's obscene executive pay is the one about comparability. But a new federal rule may help expose the reality of so-called "peer groups." Far too often, the list of comparable CEOs is cooked.

As the New York Times reported in its latest installment on executive pay, former New York Stock Exchange chairman Richard Grasso was a poster child for the abuse. His $140-million compensation package was rationalized, in part, by comparing his job to those at companies with median revenues 25 times the size of the exchange, assets 125 times and employee bases 30 times the size.

Grasso was hardly alone. Executives have learned that the path to personal riches is paved by "peer groups" that include big and profitable companies. Eli Lilly compared itself to eight companies that had much higher profit margins. Campbell Soup used one set of companies for executive pay and a separate one as a benchmark for stock performance. Ford Motor Co. compared itself to other industries, its proxy statement said, because "the job market for executives goes beyond the auto industry."

The "job market" argument is particularly disingenuous. As the New York Times noted, ousted Hewlett-Packard chief executive Carly Fiorina was replaced by a data processing executive who was earning less than half her pay. His company, NCR, never appeared on the Hewlett-Packard "peer group."

The growth in executive pay has been so meteoric in the past quarter-century that it is demeaning the contributions of average workers and undermining public faith in corporate America. Last year, according to the Corporate Library, the average pay for an S&P 500 chief executive was $13.5-million. The average CEO now earns 411 times the average worker, up from 42 times in 1980.

The new Securities and Exchange Commission disclosure rules went into effect on Friday, and compensation consultants are scrambling to cover their tracks. But stockholders who have been kept mostly in the dark will now at least have a chance to see the playbook. That's the first step toward ending these games of executive greed.

Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm

 

Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

 

Bob Jensen's threads on fraudulent and incompetent auditing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

---

Saudi Arabia's Method for Terminating Corruption Investigations
Tony Blair, the British prime minister, has said he takes full responsibility for the decision to abandon an investigation into alleged corruption and bribery. The decision to abandon a two-year corruption inquiry into BAE Systems came after Saudi Arabia suggested it might cancel an order for 72 Eurofighter Typhoon jets from BAE Systems.
"Blair defends Saudi arms decision," Al Jazeera, December 16, 2006 ---
http://english.aljazeera.net/NR/exeres/1E0DDA3F-CA29-4CD9-9F9F-53C7A783F6B2.htm

---

A New Law to Encourage Whistle Blowing

"At Hospitals, Lessons in Detection of Fraud," by Robert Pear, The New York Times, December 24, 2006 --- http://www.nytimes.com/2006/12/24/us/24fraud.html?_r=1&oref=slogin

Most of the nation’s hospitals and nursing homes will have to teach their employees how to ferret out fraud and report it to the government under a federal law that takes effect next month.

The law encourages people in the health care industry to blow the whistle on their employers. Many health care providers said this week that they were unaware of the requirement, and when informed of it, they described it as a burdensome, potentially costly federal mandate.

But Senator Charles E. Grassley, Republican of Iowa, who drafted the law, said it would help ensure that “taxpayer dollars are used to provide care for the most vulnerable people and not to line the pockets of those who seek to defraud the government.”

Starting Jan. 1, companies that do at least $5 million a year in Medicaid business must educate all employees and officers on how to detect fraud, waste and abuse. Moreover, health care providers must tell employees that if they report fraud, they will be protected against retaliation and may be entitled to a share of money recovered by the government.

Under the federal False Claims Act, some whistle-blowers have received millions of dollars in rewards for disclosing large-scale fraud.

Health care providers must also establish policies to make sure that their contractors investigate and report fraud. A large hospital system, whether run by a Fortune 500 company or a group of Roman Catholic nuns, typically has hundreds of contracts with doctors, billing agents and other vendors.

The new requirement will also apply to many pharmacies, health maintenance organizations, home care agencies, suppliers of medical equipment, physician groups and drug manufacturers.

Continued in article

Bob Jensen's threads on whistle blowing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing

---

Prison for Chip Executive
An executive with Samsung Electronics will plead guilty, serve 10 months in prison and pay a $250,000 fine for conspiring to fix prices of computer memory chips, the Justice Department said on Thursday. Young-hwan Park participated in the conspiracy while he was a vice president for sales at Samsung, which is based in South Korea and is the world’s top maker of memory chips, the department said.
"Prison for Chip Executive," The New York Times, December 22, 2006 --- http://www.nytimes.com/2006/12/22/technology/22samsung.html

---

Congressman's Favors for Friend Include Help in Secret Budget
On a lavish, weeklong Caribbean cruise last year, software entrepreneur Warren Trepp wined and dined friends and business partners aboard the 560-foot Seven Seas Navigator. Among Mr. Trepp's guests on the cruise ship: Rep. Jim Gibbons of Nevada and his family. The two men have enjoyed a long friendship that has been good for both. Mr. Trepp has been a big contributor to Mr. Gibbons's campaigns, and the congressman has used his clout to intervene on behalf of Mr. Trepp's company, according to congressional records, court documents and interviews. The tiny Reno, Nev., company, eTreppid Technologies, has won millions of dollars in classified federal software contracts from the Air Force, U.S. Special Operations Command and the Central Intelligence Agency. At a time of rising concern over lawmakers who direct or "earmark" federal spending to their supporters and business partners, a growing part of the budget is shielded from scrutiny. This is the "black budget," mostly for defense and intelligence, which is disclosed only in the vaguest terms. The ties between Mr. Trepp and Mr. Gibbons raise questions about an influential politician in America's fastest-growing state, and also offer a rare glimpse of contracts in this secret budget being awarded to a politically connected businessman without competitive bidding.
John R. Wilke, "Congressman's Favors for Friend Include Help in Secret Budget With Rep. Gibbons's Backing, An Ex-Trader for Milken Wins Millions in Contracts A Lawsuit's Sensitive Subject, The Wall Street Journal, November 1, 2006; Page A1 ---
http://online.wsj.com/article/SB116234941031409783.html?mod=todays_us_page_one

---

The dubious Pacific Western distance education "university" is at it again
lan Contreras, an administrator with the Oregon Office of Degree Authorization, noted that Pacific Western grants many of its degrees to people in Asia, where the distinction between the “University of California” and “California University” will be lost in translation. “It’s a perfectly rational business decision,” he said of the move by PWU to change its name. “Because people who see this are going to think it is the UC.” Contreras added that California’s Bureau for Private Postsecondary and Vocational Education will have to approve the switch in title . . . Meanwhile, newspapers in Korea report that lawmakers and police have opened an inquiry into more than 150 high-ranking national figures who have received degrees at unauthorized foreign colleges. The Korea Times reported that 34 of those individuals received doctorates from Pacific Western. Those officials currently work at the education ministry and an agency affiliated with the Ministry of Science and Technology.
Paul D. Thacker, "What’s in a Name?" Inside Higher Ed, December 15, 2006 --- http://www.insidehighered.com/news/2006/12/15/calu

Guess who's buying fake diplomas?
Lawyers defending those accused in a federal court of running a diploma mill revealed on October 11 that 135 federal employees, including a White House official, purchased degrees from the operation, the Associated Press reported. The names of the federal officials were not revealed.
Inside Higher Ed, October 13, 2006
Jensen Comment
The largest market for fake diplomas is among K-12 teachers who benefit from automatic pay raises when receiving graduate degrees.

Bob Jensen's threads on diploma mills are at
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill

Bob Jensen's threads on non-traditional doctoral degree programs are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#NontraditionalDoctorates

Bob Jensen's threads on legitimate distance education and training alternatives are at http://www.trinity.edu/rjensen/crossborder.htm

---

"Lender Overcharged U.S. $1 Billion, Audit Finds," by Doug Lederman, Inside Higher Ed, October 2, 2006 --- http://www.insidehighered.com/news/2006/10/02/nelnet

For many months, student loan watchdogs have been charging that lenders have taken advantage of a loophole in federal law to reap billions of dollars in profits to which they were not entitled. Late Friday, the U.S. Education Department’s inspector general strongly backed their view, releasing an audit that accused the National Education Loan Network (Nelnet) of having received $278 million in federal subsidy payments for which it was not eligible and of inappropriately charging the government for as much as $882 million more.

The inspector general’s office urged Education Secretary Margaret Spellings to order Nelnet to return the improper payments it has already received and to instruct the company to revise its estimates for future payments to exclude funds for the contested loans. Meanwhile, officials at Nelnet, a Nebraska-based company, disputed the audit’s findings but said they would work with the department to resolve them.

At issue in the case is Nelnet’s use of an exemption in federal law that allowed lenders that financed the student loans they issued using tax-exempt bonds issued before 1993 to earn a government subsidized interest rate of 9.5 percent. Congress engaged in several aborted attempts to fully close the loophole throughout the 1990s and the early part of this decade, but some lenders continued to find ways to take advantage of it by recycling the pre-1993 loan funds, before Congress, as part of the Higher Education Reconciliation Act, finally closed it permanently this year.

In the audit, the inspector general describes a process by which Nelnet seemed quite purposefully to try to expand its pool of loans that would qualify for the 9.5 percent “special allowance” payments from the federal government. “Through Project 950,” as the company’s effort was called, “Nelnet used a series of transactions to increase the amount of loans ostensibly funded by tax-exempt obligations from approximately $551 million” in March 2003 to $3.66 billion in June 2004, according to the audit.
The company, the inspector general found, moved loans into and then — “as little as one day later” — out of a non-taxable trust estate with the goal of making those loans qualify for the 9.5 percent rate.

The audit recounts exchanges in 2003 and 2004 in which Nelnet sought and believed it had gained Education Department approval for its practices regarding the 9.5 percent loans. But the inspector general says that Nelnet’s inquiries did “not appear to reflect a comprehensive disclosure by Nelnet of the nature or effect” of its effort to increase its volume of loans eligible for the higher rate.

A 1993 letter outlining the practice, the audit says, “did not identify the eligible source of funds that would be used to purchase and qualify loans for the 9.5 percent floor, did not state directly that the process would be repeated many times, and did not state that the process would result in a substantial increase in the amount of loans billed under the 9.5 percent floor.”

The audit incorporates a response that Nelnet officials submitted to an earlier draft of the audit this summer, which the inspector general notes “strongly disagrees with our finding and recommendations and requested that our draft report be withdrawn.”

In a prepared statement, Nelnet said company officials believe the inspector general’s report is “incorrect” because it is “inconsistent with the Higher Education Act, applicable laws, policy, department regulations, and the guidance to student loan companies previously issued by the Department.”

Nelnet will “seek a resolution of this matter with the Department and will also examine all other available remedies that prove the merits of our position,” said Mike Dunlap, the company’s chairman and co-chief executive officer.

Critics of the lenders’ continued use of the 9.5 percent loophole heralded the inspector general’s audit. “The depth and breadth of Nelnet’s failure to comply with the law is breathtaking, and the cost to taxpayers is staggering,” said Rep. George Miller (D-Calif.), the senior Democrat on the House of Representatives Committee on Education and the Workforce. “In an era of high budget deficits, we must be vigilant about ensuring that available tax dollars are used to provide affordable college loans to families, not to provide excessive subsidies to banks.”

Miller and others, including Sen. Edward M. Kennedy (D-Mass.), who pushed the Education Department to look into the Nelnet matter, and watchdog groups like the Project on Student Debt, urged Spellings to back the inspector general. “The secretary of education should make sure that Nelnet pays back every penny they’ve wrongly claimed and should use the near $1.2 billion saved to help students and families pay for college,” said Michael Dannenberg of the New America Foundation, who has aggressively criticized the 9.5 percent rate practice.

Continued in article

---

Pension Fund Accounting Fraud in San Diego

"San Diego Charges," by Nicole Gelinas, The Wall Street Journal, November 27, 2006; Page A12 --- http://online.wsj.com/article/SB116459315111633209.html?mod=todays_us_opinion

The SEC has announced that it has resolved its pension-fund fraud case against San Diego, with the city agreeing not to commit illegal shenanigans in the future and to hire an "independent monitor" to help it avoid doing so. Although the SEC went easy on the residents and taxpayers of San Diego in its settlement, it still has an opportunity to make an example of the former officials who the SEC determined committed the fraud. The feds should seize that chance to show they're serious about policing a sector of the investment world that remains vulnerable to similar fraud.

San Diego ran into legal trouble with its pension fund because elected officials wanted to keep its municipal workers happy by awarding them more generous pension and health-care benefits, but also wanted to keep taxpayers happy by sticking to a lean budget. The two goals were mathematically irreconcilable. So San Diego officials, with the cooperation of the board members of the city employees' retirement system (the majority of whom were also city officials), intentionally underfunded the pension plan for years. They used the "savings" to award workers and retirees more benefits, some retroactive. Because taxpayers couldn't see how much retirement benefits for public employees eventually would cost them, they couldn't protest against those high future costs. The fund also violated sound investment principles by using "surplus" earnings in boom years to pay extra benefits to retirees, including a "13th check" in some years. Trustees should have put such "surpluses" aside for years in which the market was down.

But the alleged escalated in 2002 and 2003, when city officials brushed aside warnings from outside groups, as well as from an analyst it had itself commissioned, about the fund's parlous financial straits. Although figures clearly showed that the pension fund would face a seven-fold increase in its deficit, to more than $2 billion, over less than a decade, San Diego didn't disclose what, according to the SEC, it "knew or was reckless in not knowing" was an inevitability, instead maintaining its charade. City officials disclosed not a word of the fund's financial troubles to potential investors or bond analysts as it raised nearly $300 million in new municipal securities during those two years.

The SEC elected to go easy on the city. The feds won't levy a fine against it, reasoning that it would end up being the taxpayers who would pay. This argument has merit, since these taxpayers are already on the hook for the $1.5 billion deficit -- roughly equal to the city's operating budget -- the pension-fund fraud had concealed. Taxpayers could face fallout if wronged investors sue the city. But while SEC won't punish taxpayers, it can't afford to go so easy on the officials it's still investigating. (The SEC doesn't name the current and former officials under its scrutiny, but former Mayor Dick Murphy, former city manager Michael Uberuaga and former auditor Ed Ryan, as well as members of the City Council, all had degrees of responsibility for and knowledge of the pension fund's operations.) The SEC must demonstrate that it considers the fraud officials committed against the city's bondholders to be just as grave as similar frauds in the private sector.

People who invest in municipal bonds do so because they feel that such investments are safer than investing in the common stocks of corporations. That's why cities and states enjoy access to capital at affordable interest rates. And, for tax reasons, municipal-bond investors often invest in the bonds of the city in which they reside, so they face double jeopardy. In the first place, if city officials are committing fraud, their bonds will turn out not to be as sound (and thus not as valuable) as they thought they were. The second risk is that they will have to pay higher taxes, or suffer lower government services, to cover pension-funding shortfalls in their city's budget if that is the case.

Continued in article

Bob Jensen's threads on pension fund and post-retirement accounting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Pensions

---

Bristol-Myers Squibb illegal marketing proves costly
Bristol-Myers Squibb has reached a tentative agreement to pay $499 million to settle a federal investigation into illegal sales and marketing activities from the late 1990s through 2005, the company said yesterday. That settlement, and separate special charges the company also announced yesterday, would wipe out Bristol-Myers fourth-quarter profit. But its shares rose on the indication that the company was resolving a big legal issue and tidying up its books, making it a more viable takeover candidate. The United States attorney’s office in Boston, which first subpoenaed the records of Bristol-Myers in the matter in 2003, declined to confirm the announcement, saying it did not comment on such negotiations unless a final settlement has been signed.
Barnaby J. Feder, "Bristol Says U.S. Inquiry Is Settled," The New York Times, December 22, 2003 --- Click Here

 

---

Saddam's Kickback Enterprises

 

In 2,065 pages, Sir Terence Cole and his team unmask the vast corruption in AWB Ltd., Australia's former wheat board and supplier for a time of 16% of the world's wheat. That alone is a huge public service. AWB was the single largest payer of kickbacks to Saddam. From 1999 to 2003, the company paid $221.7 million to Iraq through "transportation" fees and "after-sales-service" fees designed to evade U.N. sanctions and Australian law. Given such compliant partners, it is little wonder Saddam thought the world would never act against him.
"Oil for Food Justice, The Wall Street Journal, November 30, 2006; Page A16 --- http://online.wsj.com/article/SB116483932656336151.html?mod=opinion&ojcontent=otep
 

---

Greater Accounting Transparency Sought by the Community College of Philadelphia
A faculty and staff union at the Community College of Philadelphia plans to pose one major question to the institution’s administration at a demonstration scheduled for today: Teachers and students open their books every day — why won’t administrators? The Faculty & Staff Federation of the Community College of Philadelphia, an affiliate of the American Federation of Teachers, plans to distribute leaflets and circulate a “mobile billboard” around the college’s main campus starting at 9 a.m. today to draw attention to their calls for greater financial transparency on the part of the institution, the latest development in ongoing contract negotiations.Classes will not be interrupted.
Elizabeth Redden, "Open the Books, Professors Plead," Inside Higher Ed, December 8. 2006 --- http://www.insidehighered.com/news/2006/12/08/ccp

---

Major breach of UCLA's computer files
In what appears to be one of the largest computer security breaches ever at an American university, one or more hackers have gained access to a UCLA database containing personal information on about 800,000 of the university's current and former students, faculty and staff members, among others. UCLA officials said the attack on a central campus database exposed records containing the names, Social Security numbers and birth dates — the key elements of identity theft — for at least some of those affected. The attempts to break into the database began in October 2005 and ended Nov. 21, when the suspicious activity was detected and blocked, the officials said.
Rebecca Trounson, "Major breach of UCLA's computer files: Personal information on 800,000 students, alumni and others is exposed; Attacks lasted a year, the school says," LA Times, December 12, 2006 ---
http://www.latimes.com/news/local/la-me-ucla12dec12,0,7111141.story?coll=la-home-headlines

---

Another Earnings Smoothing Fraud

"SEC CHARGES FORMER CEO AND TWO FORMER EXECUTIVES AFFILIATED WITH RENAISSANCERE HOLDINGS LTD. WITH SECURITIES FRAUD," AccountingEducation.com, October 26, 2006 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=143780

The Securities and Exchange Commission on September 27, 2006 announced securities fraud charges against James N. Stanard and Martin J. Merritt, the former CEO and former controller, respectively, of RenaissanceRe Holdings Ltd. (RenRe) and also against Michael W. Cash, a former senior executive of RenRe's wholly-owned subsidiary, Renaissance Reinsurance Ltd. The complaint, filed in the federal court in Manhattan, alleges that Stanard, Merritt, and Cash structured and executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe's earnings from 2001 to 2002 and 2003. The Commission also announced a partial settlement of its charges against Merritt, who has consented to the entry of an antifraud injunction and other relief.

Mark K. Schonfeld, Director of the Commission's Northeast Regional Office, said, "This is another case arising from our ongoing investigation of the misuse of finite reinsurance to commit securities fraud. The defendants enabled RenRe to take excess revenue from one good year and, in effect, 'park' it with a counterparty so it would be available to bring back in a future year when the company's financial picture was not as bright."

Andrew M. Calamari, Associate Director of the Commission's Northeast Regional Office, said, "The investing public relies upon senior executives of public companies not to engage in transactions that are designed to misstate their companies' financial statements. Today's enforcement action underscores that the Commission will pursue culpable senior officials who are instrumental in constructing fraudulent transactions."

The Defendants

• Stanard, age 57 and a resident of Maryland and Bermuda, was Ren Re's chairman and chief executive officer from 1993 until he resigned in November 2005.
   
• Merritt, age 43 and a Bermuda resident, held various positions, including that of controller, at both the holding company and the subsidiary.
   
• Cash, age 38 and a Bermuda resident, was a senior vice president of the subsidiary until he resigned in July 2005.

RenRe's Fraud

The Commission alleges that Stanard, Merritt and Cash committed fraud in connection with a sham transaction that they concocted to smooth RenRe's earnings. The complaint concerns two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round trip of cash. In the first contract, RenRe purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company, Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" or "cookie jar" that RenRe used in later periods to bolster income.

The second contract was a purported reinsurance agreement with Inter-Ocean that was, in fact, a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. This reinsurance agreement was a complete sham. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.

RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean when in fact, the complaint alleges, each of these individuals knew that this was not true. Merritt and Stanard also misrepresented or omitted certain key facts about the transaction to RenRe's auditors. As a result of RenRe's accounting treatment for this transaction, RenRe materially understated income in 2001 and materially overstated income in 2002, at which time it made a "claim" under the "reinsurance" agreement. It then received as apparent reinsurance proceeds the funds it had paid to Inter-Ocean and that Inter-Ocean held in a trust for RenRe's benefit.

On Feb. 22, 2005, RenRe issued a press release announcing that it would restate its financial statements for the years ended Dec. 31, 2001, 2002 and 2003. On March 31, 2005, RenRe filed its Form 10-K for the year ended Dec. 31, 2004, which contained restated financial statements for those years. Stanard signed and certified the 2004 Form 10-K. Both the press release and the Form 10-K attributed the restatement of the Inter-Ocean transaction to accounting "errors" due to "the timing of the recognition of Inter-Ocean reinsurance recoverables." These statements were misleading. In fact, the transaction contained no real reinsurance and the company's restated financial statements accounted for the transaction as if it had never occurred. In short, the entire transaction was a sham, and the company failed to disclose that fact and misrepresented the reasons for the restatement.

The Commission's Charges

The Commission's complaint charges Stanard, Merritt and Cash with securities fraud in violation of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5(a), (b) and (c) of the Exchange Act; with violating the reporting, books-and-records and internal control provisions of Exchange Act Section 13(b)(5) and Rule 13b2-1; and with aiding and abetting RenRe's violations of Exchange Act Sections 10(b), 13(a) and 13(b)(2) and Exchange Act Rules 10b-5(a), (b) and (c), 12b-20, 13a-1 and 13a-13. In addition, the complaint charges Stanard and Merritt with violating Exchange Act Rule 13b2-2 for making materially false statements to RenRe's auditors and charges Stanard with violating Exchange Act Rule 13a-14 for certifying financial statements filed with the Commission that he knew contained materially false and misleading information. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.

Partial Resolution

Merritt agreed to partially settle the Commission's claims against him. In addition to undertaking to cooperate fully with the Commission, and without admitting or denying the allegations in the complaint, Merritt consented to a partial final judgment that, upon entry by the court, will permanently enjoin him from violating or aiding or abetting future violations of the securities laws, bar him from serving as an officer or director of a public company, and defer the determination of civil penalties and disgorgement to a later date. Merritt also agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission's Rules of Practice. Merritt was a certified public accountant licensed to practice in Massachusetts.

The independent auditor caught up in this fraud is Ernst & Young. You can read more about Ernst & Young's troubles at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

---

A Fraudulent Paper Published in Nature, a Prestigious Science Journal
Another Case for Better Replication in Research Reporting

"'Grape harvest dates are poor indicators of summer warmth', as well as about scientific publication generally," by Douglas J. Keenan, Informath, November 3, 2006 ---  http://www.informath.org/apprise/a3200.htm 

That is, the authors had developed a method that gave a falsely-high estimate of temperature in 2003 and falsely-low estimates of temperatures in other very warm years. They then used those false estimates to proclaim that 2003 was tremendously warmer than other years.

The above is easy enough to understand. It does not even require any specialist scientific training. So how could the peer reviewers of the paper not have seen it? (Peer reviewers are the scientists who check a paper prior to its publication.) I asked Dr. Chuine what data was sent to Nature, when the paper was submitted to the journal. Dr. Chuine replied, “We never sent data to Nature”.

I have since published a short note that details the above problem (reference below). There are several other problems with the paper of Chuine et al. as well. I have written a brief survey of those (for people with an undergraduate-level background in science). As described in that survey, problems would be obvious to anyone with an appropriate scientific background, even without the data. In other words, the peer reviewers could not have had appropriate background.

What is important here is not the truth or falsity of the assertion of Chuine et al. about Burgundy temperatures. Rather, what is important is that a paper on what is arguably the world's most important scientific topic (global warming) was published in the world's most prestigious scientific journal with essentially no checking of the work prior to publication.

Moreover—and crucially—this lack of checking is not the result of some fluke failures in the publication process. Rather, it is common for researchers to submit papers without supporting data, and it is frequent that peer reviewers do not have the requisite mathematical or statistical skills needed to check the work (medical sciences largely excepted). In other words, the publication of the work of Chuine et al. was due to systemic problems in the scientific publication process.

The systemic nature of the problems indicates that there might be many other scientific papers that, like the paper of Chuine et al., were inappropriately published. Indeed, that is true and I could list numerous examples. The only thing really unusual about the paper of Chuine et al. is that the main problem with it is understandable for people without specialist scientific training. Actually, that is why I decided to publish about it. In many cases of incorrect research the authors will try to hide behind an obfuscating smokescreen of complexity and sophistry. That is not very feasible for Chuine et al. (though the authors did try).

Finally, it is worth noting that Chuine et al. had the data; so they must have known that their conclusions were unfounded. In other words, there is prima facie evidence of scientific fraud. What will happen to the researchers as a result of this? Probably nothing. That is another systemic problem with the scientific publication process.

Bob Jensen's threads on research replication, or lack thereof in accounting research, are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication

---

Cendant CEO Guilty at Cendant in 3rd Trial
It took eight years and three trials, but federal prosecutors finally won their case on Tuesday against Walter A. Forbes, the former chairman of the Cendant Corporation. Mr. Forbes was convicted here on charges that he masterminded an accounting fraud that was considered at the time it was discovered — 1998 — to be the largest on record. Investors lost $19 billion when Cendant’s stock fell after the disclosure. The Cendant fraud was later eclipsed by the scandals at Enron and WorldCom. A jury of eight men and four women in Federal District Court deliberated for two and a half days before finding Mr. Forbes, 63, of New Canaan, Conn., guilty of conspiracy and of two counts of submitting false reports to the Securities and Exchange Commission in overstating his company’s earnings by more than $250 million. He was acquitted on a fourth count, securities fraud.
Stacey Stowe, "Chief Guilty at Cendant in 3rd Trial," The New York Times, November 1, 2006 ---
http://www.nytimes.com/2006/11/01/business/01cendant.html?ref=business

The company's auditor, Ernst & Young, paid $335 million to settle.

"Before Enron, There Was Cendant," by Gretchen Morgenson, The New York Times, May 9, 2004 --- http://www.nytimes.com/2004/05/09/business/yourmoney/09watch.html 

Bob Jensen's threads on Ernst & Young are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst

---

Ex-Software Officer Settles With S.E.C
A former executive of McAfee, the antiviral software maker, agreed to pay about $757,000 to settle charges that he played a role in the company’s $622 million accounting fraud, the Securities and Exchange Commission said Tuesday. The S.E.C. charged in a civil lawsuit filed Monday in federal court in San Francisco that the company’s former treasurer, Eric Borrmann, aided in fraud from mid-1999 until he left McAfee in July 2000.
"Ex-Software Officer Settles With S.E.C.," The New York Times, November 1, 2006 ---
http://www.nytimes.com/2006/11/01/technology/01mcafee.html?ref=business

McAfee's outside auditor is Deloitte and Touche. You can read more about Deloitte's litigations at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

---

"Booming Audit Firms Seek Shield From Suits," by David Reilly, The Wall Street Journal, by November 1, 2006; Page C1 ---
http://online.wsj.com/article/SB116235111161209823.html?mod=todays_us_money_and_investing

Business is booming at the world's biggest accounting firms, so their top lobbying priority may seem ironic: They want government protection from a big financial hit.

Revenues at the Big Four -- PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and KPMG -- have grown at a double-digit pace in recent years as audit fees soared. Regulatory overhauls enacted in the wake of accounting scandals earlier this decade have led to new work for firms. One of the biggest problems facing the Big Four these days is a lack of staff to meet the huge demand for services.

Yet the Big Four want to limit court damages that investors and others can seek from them for flawed audits of public companies. Without such a shield, the firms say, it's only a matter of time before one of them is felled by a massive court award.

Their argument is being championed by an influential group recently formed to study the competitiveness of U.S. financial markets with the encouragement of Treasury Secretary Henry Paulson. The group is expected to recommend in coming weeks that the government enact new protections for auditors. A panel set up within the powerful U.S. Chamber of Commerce is sounding a similar theme. In Europe, the