Accounting Scandal Updates and Other Fraud Between October 1 and December 31, 2009
Bob Jensen at
Trinity University

Bob Jensen's Main Fraud Document --- http://www.trinity.edu/rjensen/fraud.htm 

Bob Jensen's Enron Quiz (and answers) --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

Bob Jensen's Enron Updates are at --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

Other Documents

Richard Campbell notes a nice white collar crime blog edited by some law professors --- http://lawprofessors.typepad.com/whitecollarcrime_blog/ 


A Personal Experience
Why many physicians will turn away their Medicare patients just like my wife was turned away by her surgeon in the South Texas Spinal Clinic in San Antonio because she was on Medicare
--- http://www.trinity.edu/rjensen/Health.htm#SpinalClinic 


Lexis Nexis Fraud Prevention Site ---  http://risk.lexisnexis.com/prevent-fraud

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 

PwC's Global Economic Crime Survey ---
http://www.pwc.com/en_GX/gx/economic-crime-survey/pdf/global-economic-crime-survey-2009.pdf

Bob Jensen's threads on Fraud Detection and Reporting ---
http://www.trinity.edu/rjensen/FraudReporting.htm

 

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 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 --- http://www.aicpa.org/pubs/jofa/jul2006/wells.htm

What Accountants Need to Know --- http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow

Global Corruption (in legal systems) Report 2007 --- http://www.transparency.org/content/download/19093/263155

Tax Fraud Alerts from the IRS --- http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html

White Collar Fraud Site --- http://www.whitecollarfraud.com/
Note the column of links on the left.

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm




The motto of Judicial Watch is "Because no one is above the law". To this end, Judicial Watch uses the open records or freedom of information laws and other tools to investigate and uncover misconduct by government officials and litigation to hold to account politicians and public officials who engage in corrupt activities.
Judicial Watch --- http://www.judicialwatch.org/

Judicial Watch Announces List of Washington's "Ten Most Wanted Corrupt Politicians" for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009

Judicial Watch, the public interest group that investigates and prosecutes government corruption, today released its 2009 list of Washington's "Ten Most Wanted Corrupt Politicians." The list, in alphabetical order, includes:

  1. Senator Christopher Dodd (D-CT): This marks two years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt" list for his corrupt relationship with Fannie Mae and Freddie Mac and for accepting preferential treatment and loan terms from Countrywide Financial, a scandal which still dogs him. In 2009, the scandals kept coming for the Connecticut Democrat. In 2009, Judicial Watch filed a Senate ethics complaint against Dodd for undervaluing a property he owns in Ireland on his Senate Financial Disclosure forms. Judicial Watch's complaint forced Dodd to amend the forms. However, press reports suggest the property to this day remains undervalued. Judicial Watch also alleges in the complaint that Dodd obtained a sweetheart deal for the property in exchange for his assistance in obtaining a presidential pardon (during the Clinton administration) and other favors for a long-time friend and business associate. The false financial disclosure forms were part of the cover-up. Dodd remains the head the Senate Banking Committee.

     

  2. Senator John Ensign (R-NV): A number of scandals popped up in 2009 involving public officials who conducted illicit affairs, and then attempted to cover them up with hush payments and favors, an obvious abuse of power. The year's worst offender might just be Nevada Republican Senator John Ensign. Ensign admitted in June to an extramarital affair with the wife of one of his staff members, who then allegedly obtained special favors from the Nevada Republican in exchange for his silence. According to The New York Times: "The Justice Department and the Senate Ethics Committee are expected to conduct preliminary inquiries into whether Senator John Ensign violated federal law or ethics rules as part of an effort to conceal an affair with the wife of an aide…" The former staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately upon leaving his congressional job, despite the fact that he was subject to a one-year lobbying ban. Ensign seems to have ignored the law and allowed Hampton lobbying access to his office as a payment for his silence about the affair. (These are potentially criminal offenses.) It looks as if Ensign misused his public office (and taxpayer resources) to cover up his sexual shenanigans.

     

  3. Rep. Barney Frank (D-MA): Judicial Watch is investigating a $12 million TARP cash injection provided to the Boston-based OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As reported in the January 22, 2009, edition of the Wall Street Journal, the Treasury Department indicated it would only provide funds to healthy banks to jump-start lending. Not only was OneUnited Bank in massive financial turmoil, but it was also "under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use." Rep. Frank admitted he spoke to a "federal regulator," and Treasury granted the funds. (The bank continues to flounder despite Frank's intervention for federal dollars.) Moreover, Judicial Watch uncovered documents in 2009 that showed that members of Congress for years were aware that Fannie Mae and Freddie Mac were playing fast and loose with accounting issues, risk assessment issues and executive compensation issues, even as liberals led by Rep. Frank continued to block attempts to rein in the two Government Sponsored Enterprises (GSEs). For example, during a hearing on September 10, 2003, before the House Committee on Financial Services considering a Bush administration proposal to further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two Government Sponsored Enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury." Frank received $42,350 in campaign contributions from Fannie Mae and Freddie Mac between 1989 and 2008. Frank also engaged in a relationship with a Fannie Mae Executive while serving on the House Banking Committee, which has jurisdiction over Fannie Mae and Freddie Mac.

     

  4. Secretary of Treasury Timothy Geithner: In 2009, Obama Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes from 2001-2004 on his lucrative salary at the International Monetary Fund (IMF), an organization with 185 member countries that oversees the global financial system. (Did we mention Geithner now runs the IRS?) It wasn't until President Obama tapped Geithner to head the Treasury Department that he paid back most of the money, although the IRS kindly waived the hefty penalties. In March 2009, Geithner also came under fire for his handling of the AIG bonus scandal, where the company used $165 million of its bailout funds to pay out executive bonuses, resulting in a massive public backlash. Of course as head of the New York Federal Reserve, Geithner helped craft the AIG deal in September 2008. However, when the AIG scandal broke, Geithner claimed he knew nothing of the bonuses until March 10, 2009. The timing is important. According to CNN: "Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG's impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is ten days before Treasury staffers say they first learned 'full details' of the bonus plan, and three days before the [Obama] Administration launched a new $30 billion infusion of cash for AIG." Throw in another embarrassing disclosure in 2009 that Geithner employed "household help" ineligible to work in the United States, and it becomes clear why the Treasury Secretary has earned a spot on the "Ten Most Corrupt Politicians in Washington" list.

     

  5. Attorney General Eric Holder: Tim Geithner can be sure he won't be hounded about his tax-dodging by his colleague Eric Holder, US Attorney General. Judicial Watch strongly opposed Holder because of his terrible ethics record, which includes: obstructing an FBI investigation of the theft of nuclear secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests for an independent counsel to investigate alleged fundraising abuses by then-Vice President Al Gore in the Clinton White House; undermining the criminal investigation of President Clinton by Kenneth Starr in the midst of the Lewinsky investigation; and planning the violent raid to seize then-six-year-old Elian Gonzalez at gunpoint in order to return him to Castro's Cuba. Moreover, there is his soft record on terrorism. Holder bypassed Justice Department procedures to push through Bill Clinton's scandalous presidential pardons and commutations, including for 16 members of FALN, a violent Puerto Rican terrorist group that orchestrated approximately 120 bombings in the United States, killing at least six people and permanently maiming dozens of others, including law enforcement officers. His record in the current administration is no better. As he did during the Clinton administration, Holder continues to ignore serious incidents of corruption that could impact his political bosses at the White House. For example, Holder has refused to investigate charges that the Obama political machine traded VIP access to the White House in exchange for campaign contributions – a scheme eerily similar to one hatched by Holder's former boss, Bill Clinton in the 1990s. The Holder Justice Department also came under fire for dropping a voter intimidation case against the New Black Panther Party. On Election Day 2008, Black Panthers dressed in paramilitary garb threatened voters as they approached polling stations. Holder has also failed to initiate a comprehensive Justice investigation of the notorious organization ACORN (Association of Community Organizations for Reform Now), which is closely tied to President Obama. There were allegedly more than 400,000 fraudulent ACORN voter registrations in the 2008 campaign. And then there were the journalist videos catching ACORN Housing workers advising undercover reporters on how to evade tax, immigration, and child prostitution laws. Holder's controversial decisions on new rights for terrorists and his attacks on previous efforts to combat terrorism remind many of the fact that his former law firm has provided and continues to provide pro bono representation to terrorists at Guantanamo Bay. Holder's politicization of the Justice Department makes one long for the days of Alberto Gonzales.

     

  6. Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris (D-IL): One of the most serious scandals of 2009 involved a scheme by former Illinois Governor Rod Blagojevich to sell President Obama's then-vacant Senate seat to the highest bidder. Two men caught smack dab in the middle of the scandal: Senator Roland Burris, who ultimately got the job, and Rep. Jesse Jackson, Jr. According to the Chicago Sun-Times, emissaries for Jesse Jackson Jr., named "Senate Candidate A" in the Blagojevich indictment, reportedly offered $1.5 million to Blagojevich during a fundraiser if he named Jackson Jr. to Obama's seat. Three days later federal authorities arrested Blagojevich. Burris, for his part, apparently lied about his contacts with Blagojevich, who was arrested in December 2008 for trying to sell Obama's Senate seat. According to Reuters: "Roland Burris came under fresh scrutiny…after disclosing he tried to raise money for the disgraced former Illinois governor who named him to the U.S. Senate seat once held by President Barack Obama…In the latest of those admissions, Burris said he looked into mounting a fundraiser for Rod Blagojevich -- later charged with trying to sell Obama's Senate seat -- at the same time he was expressing interest to the then-governor's aides about his desire to be appointed." Burris changed his story five times regarding his contacts with Blagojevich prior to the Illinois governor appointing him to the U.S. Senate. Three of those changing explanations came under oath.

     

  7. President Barack Obama: During his presidential campaign, President Obama promised to run an ethical and transparent administration. However, in his first year in office, the President has delivered corruption and secrecy, bringing Chicago-style political corruption to the White House. Consider just a few Obama administration "lowlights" from year one: Even before President Obama was sworn into office, he was interviewed by the FBI for a criminal investigation of former Illinois Governor Rod Blagojevich's scheme to sell the President's former Senate seat to the highest bidder. (Obama's Chief of Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are also tangled up in the Blagojevich scandal.) Moreover, the Obama administration made the startling claim that the Privacy Act does not apply to the White House. The Obama White House believes it can violate the privacy rights of American citizens without any legal consequences or accountability. President Obama boldly proclaimed that "transparency and the rule of law will be the touchstones of this presidency," but his administration is addicted to secrecy, stonewalling far too many of Judicial Watch's Freedom of Information Act requests and is refusing to make public White House visitor logs as federal law requires. The Obama administration turned the National Endowment of the Arts (as well as the agency that runs the AmeriCorps program) into propaganda machines, using tax dollars to persuade "artists" to promote the Obama agenda. According to documents uncovered by Judicial Watch, the idea emerged as a direct result of the Obama campaign and enjoyed White House approval and participation. President Obama has installed a record number of "czars" in positions of power. Too many of these individuals are leftist radicals who answer to no one but the president. And too many of the czars are not subject to Senate confirmation (which raises serious constitutional questions). Under the President's bailout schemes, the federal government continues to appropriate or control -- through fiat and threats -- large sectors of the private economy, prompting conservative columnist George Will to write: "The administration's central activity -- the political allocation of wealth and opportunity -- is not merely susceptible to corruption, it is corruption." Government-run healthcare and car companies, White House coercion, uninvestigated ACORN corruption, debasing his office to help Chicago cronies, attacks on conservative media and the private sector, unprecedented and dangerous new rights for terrorists, perks for campaign donors – this is Obama's "ethics" record -- and we haven't even gotten through the first year of his presidency.

     

  8. Rep. Nancy Pelosi (D-CA): At the heart of the corruption problem in Washington is a sense of entitlement. Politicians believe laws and rules (even the U.S. Constitution) apply to the rest of us but not to them. Case in point: House Speaker Nancy Pelosi and her excessive and boorish demands for military travel. Judicial Watch obtained documents from the Pentagon in 2008 that suggest Pelosi has been treating the Air Force like her own personal airline. These documents, obtained through the Freedom of Information Act, include internal Pentagon email correspondence detailing attempts by Pentagon staff to accommodate Pelosi's numerous requests for military escorts and military aircraft as well as the speaker's 11th hour cancellations and changes. House Speaker Nancy Pelosi also came under fire in April 2009, when she claimed she was never briefed about the CIA's use of the waterboarding technique during terrorism investigations. The CIA produced a report documenting a briefing with Pelosi on September 4, 2002, that suggests otherwise. Judicial Watch also obtained documents, including a CIA Inspector General report, which further confirmed that Congress was fully briefed on the enhanced interrogation techniques. Aside from her own personal transgressions, Nancy Pelosi has ignored serious incidents of corruption within her own party, including many of the individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)

     

  9. Rep. John Murtha (D-PA) and the rest of the PMA Seven: Rep. John Murtha made headlines in 2009 for all the wrong reasons. The Pennsylvania congressman is under federal investigation for his corrupt relationship with the now-defunct defense lobbyist PMA Group. PMA, founded by a former Murtha associate, has been the congressman's largest campaign contributor. Since 2002, Murtha has raised $1.7 million from PMA and its clients. And what did PMA and its clients receive from Murtha in return for their generosity? Earmarks -- tens of millions of dollars in earmarks. In fact, even with all of the attention surrounding his alleged influence peddling, Murtha kept at it. Following an FBI raid of PMA's offices earlier in 2009, Murtha continued to seek congressional earmarks for PMA clients, while also hitting them up for campaign contributions. According to The Hill, in April, "Murtha reported receiving contributions from three former PMA clients for whom he requested earmarks in the pending appropriations bills." When it comes to the PMA scandal, Murtha is not alone. As many as six other Members of Congress are currently under scrutiny according to The Washington Post. They include: Peter J. Visclosky (D-IN.), James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W. Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than investigate this serious scandal, according to Roll Call House Democrats circled the wagons, "cobbling together a defense to offer political cover to their rank and file." The Washington Post also reported in 2009 that Murtha's nephew received $4 million in Defense Department no-bid contracts: "Newly obtained documents…show Robert Murtha mentioning his influential family connection as leverage in his business dealings and holding unusual power with the military."

     

  10. Rep. Charles Rangel (D-NY): Rangel, the man in charge of writing tax policy for the entire country, has yet to adequately explain how he could possibly "forget" to pay taxes on $75,000 in rental income he earned from his off-shore rental property. He also faces allegations that he improperly used his influence to maintain ownership of highly coveted rent-controlled apartments in Harlem, and misused his congressional office to fundraise for his private Rangel Center by preserving a tax loophole for an oil drilling company in exchange for funding. On top of all that, Rangel recently amended his financial disclosure reports, which doubled his reported wealth. (He somehow "forgot" about $1 million in assets.) And what did he do when the House Ethics Committee started looking into all of this? He apparently resorted to making "campaign contributions" to dig his way out of trouble. According to WCBS TV, a New York CBS affiliate: "The reigning member of Congress' top tax committee is apparently 'wrangling' other politicos to get him out of his own financial and tax troubles...Since ethics probes began last year the 79-year-old congressman has given campaign donations to 119 members of Congress, including three of the five Democrats on the House Ethics Committee who are charged with investigating him." Charlie Rangel should not be allowed to remain in Congress, let alone serve as Chairman of the powerful House Ways and Means Committee, and he knows it. That's why he felt the need to disburse campaign contributions to Ethics Committee members and other congressional colleagues.

"A Low, Dishonest Decade: The press and politicians were asleep at the switch.," The Wall Street Journal, December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage

Stock-market indices are not much good as yardsticks of social progress, but as another low, dishonest decade expires let us note that, on 2000s first day of trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq Composite Index stood at 4131, both substantially higher than where they are today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the first great Wall Street disaster of this unhappy decade. The Dow got north of 14000 before the real-estate bubble imploded.

And it was supposed to have been such an awesome time, too! Back in the late '90s, in the crescendo of the Internet boom, pundit and publicist alike assured us that the future was to be a democratized, prosperous place. Hierarchies would collapse, they told us; the individual was to be empowered; freed-up markets were to be the common man's best buddy.

Such clever hopes they were. As a reasonable anticipation of what was to come they meant nothing. But they served to unify the decade's disasters, many of which came to us festooned with the flags of this bogus idealism.

Before "Enron" became synonymous with shattered 401(k)s and man-made electrical shortages, the public knew it as a champion of electricity deregulation—a freedom fighter! It was supposed to be that most exalted of corporate creatures, a "market maker"; its "capacity for revolution" was hymned by management theorists; and its TV commercials depicted its operations as an extension of humanity's quest for emancipation.

Similarly, both Bank of America and Citibank, before being recognized as "too big to fail," had populist histories of which their admirers made much. Citibank's long struggle against the Glass-Steagall Act was even supposed to be evidence of its hostility to banking's aristocratic culture, an amusing image to recollect when reading about the $100 million pay reportedly pocketed by one Citi trader in 2008.

The Jack Abramoff lobbying scandal showed us the same dynamics at work in Washington. Here was an apparent believer in markets, working to keep garment factories in Saipan humming without federal interference and saluted for it in an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."

But the preposterous populism is only one part of the equation; just as important was our failure to see through the ruse, to understand how our country was being disfigured.

Ensuring that the public failed to get it was the common theme of at least three of the decade's signature foul-ups: the hyping of various Internet stock issues by Wall Street analysts, the accounting scandals of 2002, and the triple-A ratings given to mortgage-backed securities.

The grand, overarching theme of the Bush administration—the big idea that informed so many of its sordid episodes—was the same anti-supervisory impulse applied to the public sector: regulators sabotaged and their agencies turned over to the regulated.

The public was left to read the headlines and ponder the unthinkable: Could our leaders really have pushed us into an unnecessary war? Is the republic really dividing itself into an immensely wealthy class of Wall Street bonus-winners and everybody else? And surely nobody outside of the movies really has the political clout to write themselves a $700 billion bailout.

What made the oughts so awful, above all, was the failure of our critical faculties. The problem was not so much that newspapers were dying, to mention one of the lesser catastrophes of these awful times, but that newspapers failed to do their job in the first place, to scrutinize the myths of the day in a way that might have prevented catastrophes like the financial crisis or the Iraq war.

The folly went beyond the media, though. Recently I came across a 2005 pamphlet written by historian Rick Perlstein berating the big thinkers of the Democratic Party for their poll-driven failure to stick to their party's historic theme of economic populism. I was struck by the evidence Mr. Perlstein adduced in the course of his argument. As he tells the story, leading Democratic pollsters found plenty of evidence that the American public distrusts corporate power; and yet they regularly advised Democrats to steer in the opposite direction, to distance themselves from what one pollster called "outdated appeals to class grievances and attacks upon corporate perfidy."

This was not a party that was well-prepared for the job of iconoclasm that has befallen it. And as the new bunch muddle onward—bailing out the large banks but (still) not subjecting them to new regulatory oversight, passing a health-care reform that seems (among other, better things) to guarantee private insurers eternal profits—one fears they are merely presenting their own ample backsides to an embittered electorate for kicking.

Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/

Climategate on Finnish TV --- http://climateaudit.org/2009/12/29/climategate-on-finnish-tv/

The motto of Judicial Watch is "Because no one is above the law". To this end, Judicial Watch uses the open records or freedom of information laws and other tools to investigate and uncover misconduct by government officials and litigation to hold to account politicians and public officials who engage in corrupt activities.
Judicial Watch --- http://www.judicialwatch.org/

Judicial Watch Announces List of Washington's "Ten Most Wanted Corrupt Politicians" for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009

Judicial Watch, the public interest group that investigates and prosecutes government corruption, today released its 2009 list of Washington's "Ten Most Wanted Corrupt Politicians." The list, in alphabetical order, includes:

  1. Senator Christopher Dodd (D-CT): This marks two years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt" list for his corrupt relationship with Fannie Mae and Freddie Mac and for accepting preferential treatment and loan terms from Countrywide Financial, a scandal which still dogs him. In 2009, the scandals kept coming for the Connecticut Democrat. In 2009, Judicial Watch filed a Senate ethics complaint against Dodd for undervaluing a property he owns in Ireland on his Senate Financial Disclosure forms. Judicial Watch's complaint forced Dodd to amend the forms. However, press reports suggest the property to this day remains undervalued. Judicial Watch also alleges in the complaint that Dodd obtained a sweetheart deal for the property in exchange for his assistance in obtaining a presidential pardon (during the Clinton administration) and other favors for a long-time friend and business associate. The false financial disclosure forms were part of the cover-up. Dodd remains the head the Senate Banking Committee.

     

  2. Senator John Ensign (R-NV): A number of scandals popped up in 2009 involving public officials who conducted illicit affairs, and then attempted to cover them up with hush payments and favors, an obvious abuse of power. The year's worst offender might just be Nevada Republican Senator John Ensign. Ensign admitted in June to an extramarital affair with the wife of one of his staff members, who then allegedly obtained special favors from the Nevada Republican in exchange for his silence. According to The New York Times: "The Justice Department and the Senate Ethics Committee are expected to conduct preliminary inquiries into whether Senator John Ensign violated federal law or ethics rules as part of an effort to conceal an affair with the wife of an aide…" The former staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately upon leaving his congressional job, despite the fact that he was subject to a one-year lobbying ban. Ensign seems to have ignored the law and allowed Hampton lobbying access to his office as a payment for his silence about the affair. (These are potentially criminal offenses.) It looks as if Ensign misused his public office (and taxpayer resources) to cover up his sexual shenanigans.

     

  3. Rep. Barney Frank (D-MA): Judicial Watch is investigating a $12 million TARP cash injection provided to the Boston-based OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As reported in the January 22, 2009, edition of the Wall Street Journal, the Treasury Department indicated it would only provide funds to healthy banks to jump-start lending. Not only was OneUnited Bank in massive financial turmoil, but it was also "under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use." Rep. Frank admitted he spoke to a "federal regulator," and Treasury granted the funds. (The bank continues to flounder despite Frank's intervention for federal dollars.) Moreover, Judicial Watch uncovered documents in 2009 that showed that members of Congress for years were aware that Fannie Mae and Freddie Mac were playing fast and loose with accounting issues, risk assessment issues and executive compensation issues, even as liberals led by Rep. Frank continued to block attempts to rein in the two Government Sponsored Enterprises (GSEs). For example, during a hearing on September 10, 2003, before the House Committee on Financial Services considering a Bush administration proposal to further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two Government Sponsored Enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury." Frank received $42,350 in campaign contributions from Fannie Mae and Freddie Mac between 1989 and 2008. Frank also engaged in a relationship with a Fannie Mae Executive while serving on the House Banking Committee, which has jurisdiction over Fannie Mae and Freddie Mac.

     

  4. Secretary of Treasury Timothy Geithner: In 2009, Obama Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes from 2001-2004 on his lucrative salary at the International Monetary Fund (IMF), an organization with 185 member countries that oversees the global financial system. (Did we mention Geithner now runs the IRS?) It wasn't until President Obama tapped Geithner to head the Treasury Department that he paid back most of the money, although the IRS kindly waived the hefty penalties. In March 2009, Geithner also came under fire for his handling of the AIG bonus scandal, where the company used $165 million of its bailout funds to pay out executive bonuses, resulting in a massive public backlash. Of course as head of the New York Federal Reserve, Geithner helped craft the AIG deal in September 2008. However, when the AIG scandal broke, Geithner claimed he knew nothing of the bonuses until March 10, 2009. The timing is important. According to CNN: "Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG's impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is ten days before Treasury staffers say they first learned 'full details' of the bonus plan, and three days before the [Obama] Administration launched a new $30 billion infusion of cash for AIG." Throw in another embarrassing disclosure in 2009 that Geithner employed "household help" ineligible to work in the United States, and it becomes clear why the Treasury Secretary has earned a spot on the "Ten Most Corrupt Politicians in Washington" list.

     

  5. Attorney General Eric Holder: Tim Geithner can be sure he won't be hounded about his tax-dodging by his colleague Eric Holder, US Attorney General. Judicial Watch strongly opposed Holder because of his terrible ethics record, which includes: obstructing an FBI investigation of the theft of nuclear secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests for an independent counsel to investigate alleged fundraising abuses by then-Vice President Al Gore in the Clinton White House; undermining the criminal investigation of President Clinton by Kenneth Starr in the midst of the Lewinsky investigation; and planning the violent raid to seize then-six-year-old Elian Gonzalez at gunpoint in order to return him to Castro's Cuba. Moreover, there is his soft record on terrorism. Holder bypassed Justice Department procedures to push through Bill Clinton's scandalous presidential pardons and commutations, including for 16 members of FALN, a violent Puerto Rican terrorist group that orchestrated approximately 120 bombings in the United States, killing at least six people and permanently maiming dozens of others, including law enforcement officers. His record in the current administration is no better. As he did during the Clinton administration, Holder continues to ignore serious incidents of corruption that could impact his political bosses at the White House. For example, Holder has refused to investigate charges that the Obama political machine traded VIP access to the White House in exchange for campaign contributions – a scheme eerily similar to one hatched by Holder's former boss, Bill Clinton in the 1990s. The Holder Justice Department also came under fire for dropping a voter intimidation case against the New Black Panther Party. On Election Day 2008, Black Panthers dressed in paramilitary garb threatened voters as they approached polling stations. Holder has also failed to initiate a comprehensive Justice investigation of the notorious organization ACORN (Association of Community Organizations for Reform Now), which is closely tied to President Obama. There were allegedly more than 400,000 fraudulent ACORN voter registrations in the 2008 campaign. And then there were the journalist videos catching ACORN Housing workers advising undercover reporters on how to evade tax, immigration, and child prostitution laws. Holder's controversial decisions on new rights for terrorists and his attacks on previous efforts to combat terrorism remind many of the fact that his former law firm has provided and continues to provide pro bono representation to terrorists at Guantanamo Bay. Holder's politicization of the Justice Department makes one long for the days of Alberto Gonzales.

     

  6. Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris (D-IL): One of the most serious scandals of 2009 involved a scheme by former Illinois Governor Rod Blagojevich to sell President Obama's then-vacant Senate seat to the highest bidder. Two men caught smack dab in the middle of the scandal: Senator Roland Burris, who ultimately got the job, and Rep. Jesse Jackson, Jr. According to the Chicago Sun-Times, emissaries for Jesse Jackson Jr., named "Senate Candidate A" in the Blagojevich indictment, reportedly offered $1.5 million to Blagojevich during a fundraiser if he named Jackson Jr. to Obama's seat. Three days later federal authorities arrested Blagojevich. Burris, for his part, apparently lied about his contacts with Blagojevich, who was arrested in December 2008 for trying to sell Obama's Senate seat. According to Reuters: "Roland Burris came under fresh scrutiny…after disclosing he tried to raise money for the disgraced former Illinois governor who named him to the U.S. Senate seat once held by President Barack Obama…In the latest of those admissions, Burris said he looked into mounting a fundraiser for Rod Blagojevich -- later charged with trying to sell Obama's Senate seat -- at the same time he was expressing interest to the then-governor's aides about his desire to be appointed." Burris changed his story five times regarding his contacts with Blagojevich prior to the Illinois governor appointing him to the U.S. Senate. Three of those changing explanations came under oath.

     

  7. President Barack Obama: During his presidential campaign, President Obama promised to run an ethical and transparent administration. However, in his first year in office, the President has delivered corruption and secrecy, bringing Chicago-style political corruption to the White House. Consider just a few Obama administration "lowlights" from year one: Even before President Obama was sworn into office, he was interviewed by the FBI for a criminal investigation of former Illinois Governor Rod Blagojevich's scheme to sell the President's former Senate seat to the highest bidder. (Obama's Chief of Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are also tangled up in the Blagojevich scandal.) Moreover, the Obama administration made the startling claim that the Privacy Act does not apply to the White House. The Obama White House believes it can violate the privacy rights of American citizens without any legal consequences or accountability. President Obama boldly proclaimed that "transparency and the rule of law will be the touchstones of this presidency," but his administration is addicted to secrecy, stonewalling far too many of Judicial Watch's Freedom of Information Act requests and is refusing to make public White House visitor logs as federal law requires. The Obama administration turned the National Endowment of the Arts (as well as the agency that runs the AmeriCorps program) into propaganda machines, using tax dollars to persuade "artists" to promote the Obama agenda. According to documents uncovered by Judicial Watch, the idea emerged as a direct result of the Obama campaign and enjoyed White House approval and participation. President Obama has installed a record number of "czars" in positions of power. Too many of these individuals are leftist radicals who answer to no one but the president. And too many of the czars are not subject to Senate confirmation (which raises serious constitutional questions). Under the President's bailout schemes, the federal government continues to appropriate or control -- through fiat and threats -- large sectors of the private economy, prompting conservative columnist George Will to write: "The administration's central activity -- the political allocation of wealth and opportunity -- is not merely susceptible to corruption, it is corruption." Government-run healthcare and car companies, White House coercion, uninvestigated ACORN corruption, debasing his office to help Chicago cronies, attacks on conservative media and the private sector, unprecedented and dangerous new rights for terrorists, perks for campaign donors – this is Obama's "ethics" record -- and we haven't even gotten through the first year of his presidency.

     

  8. Rep. Nancy Pelosi (D-CA): At the heart of the corruption problem in Washington is a sense of entitlement. Politicians believe laws and rules (even the U.S. Constitution) apply to the rest of us but not to them. Case in point: House Speaker Nancy Pelosi and her excessive and boorish demands for military travel. Judicial Watch obtained documents from the Pentagon in 2008 that suggest Pelosi has been treating the Air Force like her own personal airline. These documents, obtained through the Freedom of Information Act, include internal Pentagon email correspondence detailing attempts by Pentagon staff to accommodate Pelosi's numerous requests for military escorts and military aircraft as well as the speaker's 11th hour cancellations and changes. House Speaker Nancy Pelosi also came under fire in April 2009, when she claimed she was never briefed about the CIA's use of the waterboarding technique during terrorism investigations. The CIA produced a report documenting a briefing with Pelosi on September 4, 2002, that suggests otherwise. Judicial Watch also obtained documents, including a CIA Inspector General report, which further confirmed that Congress was fully briefed on the enhanced interrogation techniques. Aside from her own personal transgressions, Nancy Pelosi has ignored serious incidents of corruption within her own party, including many of the individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)

     

  9. Rep. John Murtha (D-PA) and the rest of the PMA Seven: Rep. John Murtha made headlines in 2009 for all the wrong reasons. The Pennsylvania congressman is under federal investigation for his corrupt relationship with the now-defunct defense lobbyist PMA Group. PMA, founded by a former Murtha associate, has been the congressman's largest campaign contributor. Since 2002, Murtha has raised $1.7 million from PMA and its clients. And what did PMA and its clients receive from Murtha in return for their generosity? Earmarks -- tens of millions of dollars in earmarks. In fact, even with all of the attention surrounding his alleged influence peddling, Murtha kept at it. Following an FBI raid of PMA's offices earlier in 2009, Murtha continued to seek congressional earmarks for PMA clients, while also hitting them up for campaign contributions. According to The Hill, in April, "Murtha reported receiving contributions from three former PMA clients for whom he requested earmarks in the pending appropriations bills." When it comes to the PMA scandal, Murtha is not alone. As many as six other Members of Congress are currently under scrutiny according to The Washington Post. They include: Peter J. Visclosky (D-IN.), James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W. Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than investigate this serious scandal, according to Roll Call House Democrats circled the wagons, "cobbling together a defense to offer political cover to their rank and file." The Washington Post also reported in 2009 that Murtha's nephew received $4 million in Defense Department no-bid contracts: "Newly obtained documents…show Robert Murtha mentioning his influential family connection as leverage in his business dealings and holding unusual power with the military."

     

  10. Rep. Charles Rangel (D-NY): Rangel, the man in charge of writing tax policy for the entire country, has yet to adequately explain how he could possibly "forget" to pay taxes on $75,000 in rental income he earned from his off-shore rental property. He also faces allegations that he improperly used his influence to maintain ownership of highly coveted rent-controlled apartments in Harlem, and misused his congressional office to fundraise for his private Rangel Center by preserving a tax loophole for an oil drilling company in exchange for funding. On top of all that, Rangel recently amended his financial disclosure reports, which doubled his reported wealth. (He somehow "forgot" about $1 million in assets.) And what did he do when the House Ethics Committee started looking into all of this? He apparently resorted to making "campaign contributions" to dig his way out of trouble. According to WCBS TV, a New York CBS affiliate: "The reigning member of Congress' top tax committee is apparently 'wrangling' other politicos to get him out of his own financial and tax troubles...Since ethics probes began last year the 79-year-old congressman has given campaign donations to 119 members of Congress, including three of the five Democrats on the House Ethics Committee who are charged with investigating him." Charlie Rangel should not be allowed to remain in Congress, let alone serve as Chairman of the powerful House Ways and Means Committee, and he knows it. That's why he felt the need to disburse campaign contributions to Ethics Committee members and other congressional colleagues.

"A Low, Dishonest Decade: The press and politicians were asleep at the switch.," The Wall Street Journal, December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage

Stock-market indices are not much good as yardsticks of social progress, but as another low, dishonest decade expires let us note that, on 2000s first day of trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq Composite Index stood at 4131, both substantially higher than where they are today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the first great Wall Street disaster of this unhappy decade. The Dow got north of 14000 before the real-estate bubble imploded.

And it was supposed to have been such an awesome time, too! Back in the late '90s, in the crescendo of the Internet boom, pundit and publicist alike assured us that the future was to be a democratized, prosperous place. Hierarchies would collapse, they told us; the individual was to be empowered; freed-up markets were to be the common man's best buddy.

Such clever hopes they were. As a reasonable anticipation of what was to come they meant nothing. But they served to unify the decade's disasters, many of which came to us festooned with the flags of this bogus idealism.

Before "Enron" became synonymous with shattered 401(k)s and man-made electrical shortages, the public knew it as a champion of electricity deregulation—a freedom fighter! It was supposed to be that most exalted of corporate creatures, a "market maker"; its "capacity for revolution" was hymned by management theorists; and its TV commercials depicted its operations as an extension of humanity's quest for emancipation.

Similarly, both Bank of America and Citibank, before being recognized as "too big to fail," had populist histories of which their admirers made much. Citibank's long struggle against the Glass-Steagall Act was even supposed to be evidence of its hostility to banking's aristocratic culture, an amusing image to recollect when reading about the $100 million pay reportedly pocketed by one Citi trader in 2008.

The Jack Abramoff lobbying scandal showed us the same dynamics at work in Washington. Here was an apparent believer in markets, working to keep garment factories in Saipan humming without federal interference and saluted for it in an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."

But the preposterous populism is only one part of the equation; just as important was our failure to see through the ruse, to understand how our country was being disfigured.

Ensuring that the public failed to get it was the common theme of at least three of the decade's signature foul-ups: the hyping of various Internet stock issues by Wall Street analysts, the accounting scandals of 2002, and the triple-A ratings given to mortgage-backed securities.

The grand, overarching theme of the Bush administration—the big idea that informed so many of its sordid episodes—was the same anti-supervisory impulse applied to the public sector: regulators sabotaged and their agencies turned over to the regulated.

The public was left to read the headlines and ponder the unthinkable: Could our leaders really have pushed us into an unnecessary war? Is the republic really dividing itself into an immensely wealthy class of Wall Street bonus-winners and everybody else? And surely nobody outside of the movies really has the political clout to write themselves a $700 billion bailout.

What made the oughts so awful, above all, was the failure of our critical faculties. The problem was not so much that newspapers were dying, to mention one of the lesser catastrophes of these awful times, but that newspapers failed to do their job in the first place, to scrutinize the myths of the day in a way that might have prevented catastrophes like the financial crisis or the Iraq war.

The folly went beyond the media, though. Recently I came across a 2005 pamphlet written by historian Rick Perlstein berating the big thinkers of the Democratic Party for their poll-driven failure to stick to their party's historic theme of economic populism. I was struck by the evidence Mr. Perlstein adduced in the course of his argument. As he tells the story, leading Democratic pollsters found plenty of evidence that the American public distrusts corporate power; and yet they regularly advised Democrats to steer in the opposite direction, to distance themselves from what one pollster called "outdated appeals to class grievances and attacks upon corporate perfidy."

This was not a party that was well-prepared for the job of iconoclasm that has befallen it. And as the new bunch muddle onward—bailing out the large banks but (still) not subjecting them to new regulatory oversight, passing a health-care reform that seems (among other, better things) to guarantee private insurers eternal profits—one fears they are merely presenting their own ample backsides to an embittered electorate for kicking.

Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/

Bob Jensen's threads on corrupt politicians can be found at http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers


Never ending fraud in Medicare billings: 
Unaudited overpayments, unqualified items, and criminal vendors

One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

"A Hole in Health-Care Reform: Overbilling by medical-equipment suppliers, device makers, and drug companies has cost taxpayers billions. New legislation will do little to stem the tide," by Chad Terhune, Business Week, December 10, 2009 ---
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3 

President Barack Obama and his Democratic allies on Capitol Hill say that a vast expansion of health coverage can be funded by squeezing out waste and fraud rather than cutting benefits. Whether that turns out to be true may help determine the success of the sweeping reform package being debated by Congress. Slashing costs is no easy task, and stopping fraud is even tougher. No less than $47 billion in Medicare spending went to dubious claims in the year ended Sept. 30, according to the U.S. Health & Human Services Dept. That's 10.7% of the $440 billion program that subsidizes care for the elderly. Medicaid, the government program for the poor, lets billions trickle away at roughly the same rate. The $10 million annual increase that Congress is allocating to fight fraud may not be enough to do the trick.

One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

One way to get a sense of the scale of the seepage—and the challenge facing the Administration—is to look at whistleblower lawsuits filed under the federal False Claims Act. That law allows company employees to sue on behalf of the government to recover improperly claimed federal funds.

A suit filed by William A. Thomas, a former senior sales manager at Siemens Medical Solutions USA, one of the nation's largest medical suppliers and a unit of German engineering giant Siemens (SI), offers a case study in the difficulty of containing costs. Thomas, a 15-year Siemens Medical veteran, alleges in federal court in Philadelphia that for years the company overbilled the Veterans Affairs Dept. and other government agencies by hundreds of millions of dollars for MRI and CT scan machines and other expensive equipment. These high-tech systems—used to examine everything from damaged knees to suspected cancers—cost $500,000 to $3 million apiece, sometimes more. Thomas, who retired from Siemens in 2008, claims that with no justification other than larger profits, his former employer charged its government customers far more than private-sector buyers for the same equipment.

"Billions and billions could be saved with the right government regulation and oversight applied to health care," Thomas, 56, says in an interview. "But I think corporations will continue running circles around the federal government."

In court filings, Siemens has denied any wrongdoing and has sought to have the Thomas suit dismissed. A company spokesman, Lance Longwell, declined to elaborate for this article, citing the litigation.

The Thomas suit illustrates some of the vagaries of False Claims Act cases, hundreds of which are filed every year against government contractors in a range of industries. As the plaintiff, Thomas stands to pocket up to 30% of any court recovery, with the rest going to the Treasury. The Justice Dept., which can intervene in such suits to help steer them, announced last year that it will stay out of the case against Siemens for now. Yet Thomas' allegations have helped drive a parallel criminal investigation of Siemens' equipment marketing practices by the Defense Dept. and the U.S. Attorney's Office in Philadelphia.

In April federal investigators searched for records at the headquarters of Siemens Medical in Malvern, Pa., a suburb of Philadelphia. Ed Bradley, special agent-in-charge of the Defense Criminal Investigative Service, confirmed that the investigation is continuing but declined to comment further.

Longwell, the Siemens Medical spokesman, says the company is cooperating with criminal investigators. In March, just weeks before the search of its offices, Siemens won a new $267 million contract to provide radiology equipment to the U.S.

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Jensen Comment
The GAO has declared that many huge sink holes for fraud and waste are unauditable --- the Pentagon, the IRS, Medicare, and the list goes on and on. But the Congress that funds these programs is manipulated by special interest groups who do not want these audits. The new sink hole on the block is almost anything green.

What is happening to America?

Bob Jensen's threads on health care are at
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3


Video:  FRONTLINE: The Credit Card Game [Flash Player] --- http://www.pbs.org/wgbh/pages/frontline/creditcards/

Bob Jensen's threads on Dirty Secrets of Credit Card Companies --- http://www.trinity.edu/rjensen/FraudReporting.htm#FICO


The Greatest Swindle in the History of the World
Paulson and Geithner Lied Big Time

"The Ugly AIG Post-Mortem:  The TARP Inspector General's report has a lot more to say about the rating agencies than it does about Goldman Sachs," by Holman Jenkins, The Wall Street Journal, November 24m 2009 --- Click Here

A year later, the myrmidons of the media have gotten around to the question of why, after the government took over AIG, it paid 100 cents on the dollar to honor the collateral demands of AIG's subprime insurance counterparties.

By all means, read TARP Inspector General Neil Barofsky's report on the AIG bailout—but read it honestly.

It does not say AIG's bailout was a "backdoor bailout" of Goldman Sachs. It does not say the Fed was remiss in failing to require Goldman and other counterparties to settle AIG claims for pennies on the dollar.

It does not for a moment doubt the veracity of officials who say their concern was to stem a systemic panic that might have done lasting damage to the U.S. standard of living.

To be sure, Mr. Barofsky has some criticisms to offer, but the biggest floats inchoate between the lines of a widely overlooked section headed "lessons learned," which focuses on the credit rating agencies. The section notes not only the role of the rating agencies, with their "inherently conflicted business model," in authoring the subprime mess in the first place—but also the role of their credit downgrades in tipping AIG into a liquidity crisis, in undermining the Fed's first attempt at an AIG rescue, and in the decision of government officials "not to pursue a more aggressive negotiating policy to seek concessions from" AIG's counterparties.

Though not quite spelling it out, Mr. Barofsky here brushes close to the last great unanswered question about the AIG bailout. Namely: With the government now standing behind AIG, why not just tell Goldman et al. to waive their collateral demands since they now had the world's best IOU—Uncle Sam's?

Congress might not technically have put its full faith and credit behind AIG, but if banks agreed to accept this argument, and Treasury and Fed insisted on it, and the SEC upheld it, the rating agencies would likely have gone along. No cash would have had to change hands at all.

This didn't happen, let's guess, because the officials—Hank Paulson, Tim Geithner and Ben Bernanke—were reluctant to invent legal and policy authority out of whole cloth to overrule the ratings agencies—lo, the same considerations that also figured in their reluctance to dictate unilateral haircuts to holders of AIG subprime insurance.

Of course, the thinking now is that these officials, in bailing out AIG, woulda, shoulda, coulda used their political clout to force such haircuts, but quailed when the banks, evil Goldman most of all, insisted on 100 cents on the dollar.

This story, in its gross simplification, is certainly wrong. Goldman and others weren't in the business of voluntarily relinquishing valuable claims. But the reality is, in the heat of the crisis, they would have acceded to any terms the government dictated. Washington's game at the time, however, wasn't to nickel-and-dime the visible cash transfers to AIG. It was playing for bigger stakes—stopping a panic by asserting the government's bottomless resources to uphold the IOUs of financial institutions.

What's more, if successful, these efforts were certain to cause the AIG-guaranteed securities to rebound in value—as they have. Money has already flowed back to AIG and the Fed (which bought some of the subprime securities to dissolve the AIG insurance agreements) and is likely to continue to do so for the simple reason that the underlying payment streams are intact.

Never mind: The preoccupation with the Goldman payments amounts to a misguided kind of cash literalism. For the taxpayer has assumed much huger liabilities to keep homeowners in their homes, to keep mortgage payments flowing to investors, to fatten the earnings of financial firms, etc., etc. These liabilities dwarf the AIG collateral calls, inevitably benefit Goldman and other firms, and represent the real cost of our failure to create a financial system in which investors (a category that includes a lot more than just Goldman) live and die by the risks they voluntarily take without taxpayers standing behind them.

No, Moody's and S&P are not the cause of this policy failure—yet Mr. Barofsky's half-articulated choice to focus on them is profound. For the role the agencies have come to play in our financial system amounts to a direct, if feckless and weak, attempt to contain the incentives that flow from the government's guaranteeing of so many kinds of private liabilities, from the pension system and bank deposits to housing loans and student loans.

The rating agencies' role as gatekeepers to these guarantees is, and was, corrupting, but the solution surely is to pare back the guarantees themselves. Overreliance on rating agencies, with their "inherently conflicted business model," was ultimately a product of too much government interference in the allocation of credit in the first place.

The Mother of Future Lawsuits Directly Against Credit Rating Agencies and I, ndirectly Against Auditing Firms

It has been shown how Moody's and some other credit rating agencies sold AAA ratings for securities and tranches that did not deserve such ratings --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

My friend Larry sent me the following link indicating that a lawsuit in Ohio may shake up the credit rating fraudsters.
Will 49 other states and thousands of pension funds follow suit?
Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.
http://www.nytimes.com/2009/11/21/business/21ratings.html?em

Jensen Comment
The credit raters will rely heavily on the claim that they relied on the external auditors who, in turn, are being sued for playing along with fraudulent banks that grossly underestimated loan loss reserves on poisoned subprime loan portfolios and poisoned tranches sold to investors --- http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bad things happen in court where three or more parties start blaming each other for billions of dollars of losses that in many cases led to total bank failures and the wiping out of all the shareholders in those banks, including the pension funds that invested in those banks. A real test is the massive lawsuit against Deloitte's auditors in the huge Washington Mutual (WaMu) shareholder lawsuit.

"Ohio Sues Rating Firms for Losses in Funds," by David Segal, The New York Times, November 20m 2009 --- Click Here

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

“We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

He accused the companies of selling their integrity to the highest bidder.

Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

“A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

“If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

“Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

"Rating agencies lose free-speech claim," by Jonathon Stempel, Reuters, September 3, 2009 ---
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE5824KN20090903

There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by down grading your bonds. And believe me, it’s not clear sometimes who’s more powerful.  The most that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out.
Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert of Financial Matters:  Two Thumbs Down for Credit Reporting Agencies," Washington University Law Quarterly, Volume 77, No. 3, 1999 --- http://www.trinity.edu/rjensen/FraudCongressPartnoyWULawReview.htm 

Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html

"How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 --- http://www.mcclatchydc.com/homepage/story/77244.html

Paulson and Geithner Lied Big Time:  The Greatest Swindle in the History of the World
What was their real motive in the greatest fraud conspiracy in the history of the world?

Bombshell:  In 2008 and early 2009, Treasury Secretary leaders Paulson and Geithner told the media and Congress that AIG needed a global bailout due to not having cash reserves to meet credit default swap (systematic risk) obligations and insurance policy payoffs. On November 19, 2009 in Congressional testimony Geithner now admits that all this was a pack of lies. However, he refuses to resign as requested by some Senators.

"AIG and Systemic Risk Geithner says credit-default swaps weren't the problem, after all," Editors of The Wall Street Journal, November 20, 2009 --- Click Here

TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.

Hello?

For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

Both Treasury and the Fed say they think it would have been inappropriate for the government to muscle counterparties to accept haircuts, though the New York Fed tried to persuade them to accept less than par. Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?

Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might not have been able to pay claims to its insurance policy holders: "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world."

Yet, if there is one thing that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulated subsidiaries—where there was no CDS trading—then the Beltway narrative implodes.

Interestingly, in Treasury's official response to the Barofsky report, Assistant Secretary Herbert Allison explains why the department acted to prevent an AIG bankruptcy. He mentions the "global scope of AIG, its importance to the American retirement system, and its presence in the commercial paper and other financial markets." He does not mention CDS.

All of this would seem to be relevant to the financial reform that Treasury wants to plow through Congress. For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for restructuring the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure.

More broadly, lawmakers now have an opportunity to dig deeper into the nature of moral hazard and the restoration of a healthy financial system. Barney Frank and Chris Dodd are pushing to give regulators "resolution authority" for struggling firms. Under both of their bills, this would mean unlimited ability to spend unlimited taxpayer sums to prevent an unlimited universe of firms from failing.

Americans know that's not the answer, but what is the best solution to the too-big-to-fail problem? And how exactly does one measure systemic risk? To answer these questions, it's essential that we first learn the lessons of 2008. This is where reports like Mr. Barofsky's are valuable, telling us things that the government doesn't want us to know.

In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's report, Mr. Geithner said, "It's a great strength of our country, that you're going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight." He added, "Now, you're going to see a lot of conviction in this, a lot of strong views—a lot of it untainted by experience."

Mr. Geithner has a point about Monday-morning quarterbacking. He and others had to make difficult choices in the autumn of 2008 with incomplete information and often with little time to think, much less to reflect. But that was last year. The task now is to learn the lessons of that crisis and minimize the moral hazard so we can reduce the chances that the panic and bailout happen again.

This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

Jensen Comment
One of the first teller of lies was the highly respected Gretchen Morgenson of The New York Times who was repeating the lies told to her and Congress by the Treasury and the Fed. This was when I first believed that the problem at AIG was failing to have capital reserves to meet CDS obligations. I really believed Morgenson's lies in 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
 

Here's what I wrote in 2008 --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Credit Default Swap (CDS)
This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

"Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 --- http://www.nytimes.com/2008/09/21/business/21gret.html
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 --- http://www.nytimes.com/2009/03/08/business/08gret.html

What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

You tube had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" --- http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
In particular note this video by Paddy Hirsch --- http://www.youtube.com/watch?v=kaui9e_4vXU
Paddy has some other YouTube videos about the financial crisis.

Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

 

Bob Jensen's threads on why the infamous "Bailout" won't work --- http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity

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


Third Disgraced Pennsylvania Revenue Secretary to Resign in the Rendell Administration.
"Whip DeWeese, revenue chief Stetler charged in corruption probe," by Brad Bumsted, Pittsburgh Tribune Review, December 15, 2009 ---
http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_657829.html

Former state House Speaker H. William DeWeese, former Revenue Secretary Steve Stetler and DeWeese aide Sharon Rodavich were charged today in an ongoing legislative corruption investigation led by Attorney General Tom Corbett.

DeWeese, D-Greene County, Stetler and Rodavich were charged with theft, conspiracy and conflict of interest. The charges against DeWeese and Rodavich stem from their allegedly raising money for DeWeese's campaigns with state-paid workers, resources and time.

"The grand jury showed that DeWeese's legislative dstaff and campaign staff were virtually one and the same," Corbett said. DeWeese aides testified to the grand jury that "campaign work for DeWeese was expected" from legislative staff.

They are the latest ensnared in a nearly 3-year-old probe, which has resulted in charges against 22 other current and former Democrat and Republican staffers and lawmakers. DeWeese is the second former speaker charged in the investigation. Republican John Perzel of Philadelphia was charged Nov. 12 with spending millions of taxpayer dollars on campaigns.

DeWeese saw his former chief of staff, Mike Manzo, and former right-hand man Mike Veon charged in the first round of indictments, handed down in July 2008. DeWeese, a 33-year veteran of the House, has been a force in state politics for nearly two decades, including a stint in 1993 as Speaker.

Stetler, a former House member from York who oversaw Democratic campaigns, resigned this morning as a member of Gov. Ed Rendell's Cabinet, a senior administration official said.

Corbett's announcement comes as the General Assembly is in the midst of approving table games at casinos. The charges could create chaos in a legislature stung by a series of disclosures since the investigation began in February 2007. Recent polls show public opinion of the body at its lowest level ever, after earlier charges and a 101-day budget impasse.

The Tribune-Review reported last week that DeWeese met three times with the attorney general's investigative team and his attorney Walter Cohen said he was cooperating fully. DeWeese was not seeking immunity, Cohen said.

Cohen said today he received no information about Corbett's charges.

Last week, the attorney general's office lost the first corruption case to go to trial. Former Rep. Sean Ramaley of Baden was acquitted on six felony counts of holding a sham job in Veon's Beaver Falls office.

Prosecutors alleged Ramaley used the job to campaign. A Dauphin County jury cleared him after his lawyer Philp Ignelzi of Pittsburgh told jurors there was reasonable doubt about each charge.

Five Democrats in that case have agreed to plead guilty. Veon, facing multiple charges of theft, conflict of interest and conspiracy, is slated for trial Jan. 19 along with aides. That case revolves around the use of millions of dollars in taxpayer-financed bonuses to reward staffers who worked campaigns. Veon, Annamarie Peretta-Rosepink and Brett Cott, strongly maintain their innocence.

Last month, former House Speaker John Perzel, R-Philadelphia, was accused with 9 other Republicans of directing a scheme to divert $10 million in tax money to pay for sophisticated computer equipment and programs that Perzel allegedly wanted to give Republicans an edge in elections. Perzel through his attorney says he is innocent of all charges.


Through the Banking Glass Darkly
 "FASB to Propose More Flexible Accounting Rules for Banks," by Floyd Norris, The New York Times, December 7, 2009 ---
http://www.nytimes.com/2009/12/08/business/08account.html?_r=2&ref=business

Facing political pressure to abandon “fair value” accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the “decoupling” of bank capital rules from normal accounting standards.

His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value — often the market value — of bank loans and other assets.

In the prepared text of a speech planned for a conference in Washington, Robert H. Herz, the chairman of the Financial Accounting Standards Board, called on bank regulators to use their own judgment in allowing banks to move away from Generally Accepted Accounting Principles, or GAAP, which his board sets.

“Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.

“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”

Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.

Banks have argued that accounting rules should be changed, saying that current rules are “pro-cyclical” — making banks seem richer when times are good, and poorer when times are bad and bank loans may be most needed in the economy.

Mr. Herz conceded the accounting rules can be pro-cyclical, but questioned how far critics would go. Consumer spending, he said, depends in part on how wealthy people feel. Should mutual fund statements be phased in, he asked, so investors would not feel poor — and cut back on spending — after markets fell?

The House Financial Services Committee has approved a proposal that would direct bank regulators to comment to the S.E.C. on accounting rules, something they already can do. But it stopped short of adopting a proposal to allow the banking regulators to overrule the S.E.C., which supervises the accounting board, on accounting rules.

“I support the goal of financial stability and do not believe that accounting standards and financial reporting should be purposefully designed to create instability or pro-cyclical effects,” Mr. Herz said.

He paraphrased Barney Frank, the chairman of the House committee, as saying that “accounting principles should not be viewed to be so immutable that their impact on policy should not be considered. I agree with that, and I think the chairman would also agree that accounting standards should not be so malleable that they fail to meet their objective of helping to properly inform investors and markets or that they should be purposefully designed to try to dampen business, market, and economic cycles. That’s not their role.”

Banks have argued that accounting rules made the financial crisis worse by forcing them to acknowledge losses based on market values that may never be realized, if market values recover.

Mr. Herz said the accounting board had sought middle ground by requiring some unrealized losses to be recognized on bank balance sheets but not to be reflected on income statements.

Banking regulators already have capital rules that differ from accounting rules, but have not been eager to expand those differences. One area where a difference may soon be made is in the treatment of off-balance sheet items that the accounting board is forcing banks to bring back onto their balance sheets. The banks have asked regulators to phase in that change over several years, to slow the impact on their capital needs.

Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue

Please don't blame the accountants for the banking meltdown ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue

Bob Jensen's threads on banking frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

 


This is the way most fraud arises on Wall Street and it does not take even a high school education to understand how it works
"Former RNC Finance Chair pleads guilty to $1 million bribery," by Mark Hemingway, Washington Examiner, December 4, 2009 ---
http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Former-RNC-Finance-Chair-pleads-guilty-to-1-million-bribery-78554297.html

Elliott Broidy, the former Finance Chairman of the Republican National Committee, plead guilty yesterday to offering $1 million bribes to officials with New York state's pension funds. In return, Broidy got a $250 million investement in the Wall Street firm he worked for:

Broidy, who also resigned as chairman of Markstone Capital Partners, the private equity firm, admitted that he had paid for luxury trips to hotels in Israel and Italy for pension staffers and their relatives -- including first-class flights and a helicopter tour. Broidy funneled the money through charities and submitted false receipts to the state comptroller's office to cover his tracks.

The California financier, who was the GOP finance chairman in 2008, also paid thousands of dollars toward rent and other expenses for former "Mod Squad" star Peggy Lipton, who was dating a high-ranking New York pension official at the time.

Broidy now faces up to four years in jail and has to return some $18 million. Since the scandal with New York's pension fund broke, it has so far led to five guilty pleas and $100 million in public funds have been returned. However, Pro-Publica -- which has been doggedly covering the story -- notes that nothing has been done to prevent future corruption:

The system that allowed corruption to flourish in New York, where $110 billion in retirement savings are controlled by a sole trustee with no board oversight, is still in place.

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

Are there any truly honest local, state, and Federal officials ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers


"Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine McKenna, re: The Auditors, September 18, 2009 --- http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

When each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by “healthier” institutions, they were all carrying in their wallets non-qualified, clean opinions on their financial statements from their auditors. In none of the cases had the auditors warned shareholders and the markets that there was “ a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.”

Continued in a very good article by Francine (she talks with some major players)
http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/

A New One from Francine
"Continuing The Conversation: If Auditors Weren’t There, Why Not?" by Francine McKenna, re: The Auditors, Decmeber 14, 2009 ---
http://retheauditors.com/2009/12/14/continuing-the-conversation-if-auditors-werent-there-why-not/

Jim Peterson and I talk often.  It was my lucky day when I found him writing for the International Herald Tribune about auditors and litigation and the future of the profession.  There’s quite an archive there to draw from.  Jim not only has the experience but the chops to write about the subjects that I feel strongly about.  Albeit I’m a little more fun, but…I told a mutual admirer recently not to judge me more beautiful than Jim.  He hasn’t seen Jim in stilettos nor me in a bow tie…

Jim opened a dialogue with me and the others who write frequently on this topic, like Dennis Howlett and Richard Murphy, via his post today at Re: Balance.  The subject is, “If not, why not…” We’re talking about the auditors’ failure to be a force either before, during, or after the financial crisis.

“Here – in response to the always tart-tongued Francine — is why the auditors weren’t there:

The simple if depressing reason is that their core product has long since been judged irrelevant. The standard auditor’s report is an anachronism — having lost any value it may once have had, except for legally-required compliance (here).

If that single page disappeared from corporate annual reports, no honest user of financial information would admit to missing it. Nor, offered the choice, would any rational CFO pay the fees to obtain it.”

If no one but me asks, since no one cares, then what are we doing here?  Only legally required compliance keeps us walking like dizzy children through this hall of mirrors, never reaching sunshine.

“…the fundamental issue of trustworthiness – on which the entire value of the auditors’ franchise perilously rests – is put under scrutiny when they are effectively sidelined for want of influence and capacity to persuade.”

Continued in article

Where Were the Auditors as Poison Was Being Added to Mortgage Loans on Main Street ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


Will the Big Auditing Firms Survive the Shareholder/Pension Fund Lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

 

Francine maintains an outstanding auditing blog at
http://retheauditors.com/

Bob Jensen's threads on "Where Were the Auditors?" ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

Some auditing firms are now being hauled into court in bank shareholder and pension fund lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

 


Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/


Community Organizers of Fraud
An internal review by ACORN's board of directors found that $5 million was embezzled from the community organization, far more than a previously reported sum of $1 million, according to documents from the Louisiana attorney general's office.

Michael Kunzelman, "La. prosecutor probes ACORN after embezzlement," Yahoo News, October 6, 2009 ---
http://news.yahoo.com/s/ap/20091006/ap_on_re_us/us_acorn_missing_money


"Going to School on Revenue Recognition," by Tom Selling, The Accounting Onion, December 5, 2009 --- Click Here

Jensen Comment
Another question is consistency and whether inconsistencies suggest earnings management.

"Strategic Revenue Recognition to Achieve Earnings Benchmarks," Marcus L. Caylor, Marcus L. Caylor, SSRN, January 14, 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=885368
This paper is a free download.

Abstract:
 I examine whether managers use discretion in the two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid three common earnings benchmarks. I find that managers use discretion in both accounts to avoid negative earnings surprises. I find that neither of these accounts is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-à-vis accounts receivable. I provide a reason for why managers might prefer to manage a deferral rather than an accrual: lower costs to manage (i.e., no future cash consequences). My results suggest that if given the choice, managers prefer to use accounts that incur the lowest costs to the firm.

Fraudulent Revenue Accounting
"Detecting Circular Cash Flow:  Healthy doses of skepticism and due care can help uncover schemes to inflate sales," by John F. Monhemius and Kevin P. Durkin, Journal of Accountancy, December 2009 --- 
http://www.journalofaccountancy.com/Issues/2009/Dec/20091793.htm

Following an initial customer confirmation request with no response, a first-year auditor mails a second and third request, all under the supervision of the auditor-in-charge assigned to the account. Field work begins on the audit, but there is still no response from the customer. Another auditor scanning the cash journal from the beginning of the year through the current date notes that all outstanding invoices have subsequently been paid from this customer during this period. Customer check copies are provided, and remittances indicate that payment has been received in settlement of all outstanding invoices at fiscal year-end for this customer. But has the existence of accounts receivable from this customer at fiscal year-end really been established?

Fraudsters have been creating increasingly complex and sophisticated schemes designed to rely on potential weaknesses in the execution of audit procedures surrounding key assertions such as existence. A financial statement auditor can use his or her professional judgment while carrying out audit procedures to detect such a scheme.

Given the difficult economic times of the past year, special care should be given to consider fraud while performing audit engagements. One fraud scheme that has been encountered with increasing frequency involves the inflation of accounts receivable and sales through the creation of a circular flow of cash through a company to give the appearance of increasing revenue and existence of accounts receivable. This article addresses this fraud technique when used to materially overstate assets and inflate borrowing capacity under an asset-based revolving line of credit. This article also points out red flags that may help uncover such a scheme.

BACKGROUND

A typical asset-based revolving line of credit allows a company to borrow funds for working capital. The borrowing limit is based on a formula that takes into account various working capital assets and related advance rates. A typical availability formula allows for loan advances equal to a set percentage of asset balances.

This article focuses on an accounts receivable- backed line of credit, an asset that is prone to manipulation in this specific fraud scheme. Typical advances against accounts receivable range from 75% to 85% of eligible accounts receivable. Items excluded from eligible collateral would include invoices aged over 90 days, affiliate receivables or any other invoice that would create a nonprime receivable from the lender’s perspective. The loan agreement in an asset-based loan facility requires management to submit an availability calculation periodically. This allows the lender to monitor collateral levels and exposure. A generic accounts receivable availability calculation is illustrated in Exhibit 1.

Continued in article

 Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's threads on revenue recognition frauds are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books
The Controversy Over Earnings Smoothing and Other Manipulations ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation

 


TIAA-CREF Goes Political:  Is it spending on political causes without informing its own members?
Message from my friend Larry

I ran across this entry in the Center for Public Integrity's investigation of the climate lobby. I fail to see why TIAA-CREF should be using participant's retirement funds to lobby Congress on climate change? Course, TIAA-CREF's CEO Roger Ferguson is on Obama's economic advisory committee. Maybe it's a payback?

Larry

Jensen Comment
Cap and Trade will create high costs and profit losses to many companies. Is this good for the CREF portfolio value in your lifetime?

TIAA-CREF offers "socially responsible" portfolio investing as an option, but this is entirely a different matter than spending member money on lobbying for political causes.

Nowhere in the TIAA-CREF Website could I find where your funds were being spent for the climate lobby.


"Another Bogus ACORN Lawsuit," by Michelle Malkin, Townhall, November 13, 2009 ---
http://townhall.com/columnists/MichelleMalkin/2009/11/13/another_bogus_acorn_lawsuit 

ACORN is doing what it does best: playing the victim, blaming everyone else for its self-inflicted wounds, perpetuating false narratives and defending the entitlement industry to the death.

On Thursday, the disgraced welfare rights organization filed suit over a congressional funding ban passed in September after nationwide undercover sting videos exposed ACORN's criminal element.

The group and its web of nonprofit, tax-exempt affiliates have collected an estimated $53 million in government funds since 1994. This pipeline is apparently a constitutionally protected right. According to ACORN's lawyers at the far-left Center for Constitutional Rights, the congressional funding ban constitutes a "bill of attainder" -- an act of the legislature declaring a person(s) guilty of a crime without trial.

Now cue the world's smallest violin and pass the Kleenex: ACORN's lawyers say the group has suffered cutbacks and layoffs as a result of the punitive funding ban. The congressional persecution means ACORN can no longer teach first-time-homebuyer indoctrination classes and -- gasp -- the loss of an $800,000 contract to conduct "outreach" on "asthma."

Message: The demons in the House who defunded ACORN (345 of them, including 172 Democrats) are cutting off oxygen to poor people!

"It's not the job of Congress to be the judge, jury and executioner," CCR lawyer Jules Lobel moaned as he equated the House's act of fiscal responsibility with the death penalty.

"It is outrageous to see Congress violating the Constitution for purposes of political grandstanding," CCR Legal Director Bill Quigley seethed without a shred of irony.

"Congress bowed to FOX News and joined in the scapegoating of an organization that helps average Americans going through hard times to get homes, pay their taxes and vote. Shame on them," ACORN head Bertha Lewis piled on in an affidavit lamenting the loss of state, local and private foundation grants, which she blamed on the resolution. It "gave the green light for others to terminate our funds, as well."

What ACORN's sob-story tellers leave out is the inconvenient fact that nonprofits were bailing on ACORN long before undercover journalists Hannah Giles and James O'Keefe and BigGovernment.com publisher Andrew Breitbart entered the scene. Internal ACORN records from a Washington, D.C., meeting held last August noted that more than $2 million in foundation money was being withheld as a result of the group's embezzlement scandal involving founder Wade Rathke's brother, Dale -- reportedly involving upward of $5 million.

Rathke admitted he suppressed disclosure of his brother's massive theft -- first discovered in 2000 -- because "word of the embezzlement would have put a 'weapon' into the hands of enemies of ACORN." In other words: The protection of ACORN's political viability came before the protection of members' dues (and taxpayers' funds).

A small group of ACORN executives helped cover up Dale Rathke's crime by carrying the amount he embezzled as a "loan" on the books of Citizens Consulting Inc. CCI, the accounting and financial management arm of ACORN and its affiliates, is housed in the same building as the national ACORN headquarters in New Orleans. It's also home to ACORN International, now operating under a different name, which Wade Rathke continues to head.

ACORN brass cooked up a "restitution" plan to allow the Rathkes to pay back a measly $30,000 a year in exchange for secrecy about the deal. ACORN's lawyers issued a decree to its employees to keep their "yaps" shut. Dale Rathke kept his job and his $38,000 annual salary until the story leaked to donors and board members outside the Rathke circle.

In June 2008, the left-wing Catholic Campaign for Human Development cut off grant money to ACORN "because of questions that arose about financial management, fiscal transparency and organizational accountability of the national ACORN structures." In November 2008 -- ahem, more than a year before the congressional ACORN funding ban was passed -- CCHD voted unanimously to extend and make permanent its ban on funding of ACORN organizations. "This decision was made because of serious concerns regarding ACORN's lack of financial transparency, organizational performance and questions surrounding political partisanship," according to Bishop Roger Morin.

Did ACORN's lawyers call that withdrawal of funding "political grandstanding" and "scapegoating," too?

The lawsuit over the congressional funding ban is just the latest desperate legal measure to distract from ACORN's long-festering ethics and financial scandals. ACORN's attorneys have sued Giles, O'Keefe, Breitbart and former ACORN/Project Vote whistleblower Anita MonCrief. And they'll sue anyone else who gets in the way of rehabilitating the scandal-plagued enterprise's image.

It took decades to build up its massive coffers and intricate web of affiliates across the country. It will take months and years to untangle the entire operation. And it will take time, money and relentless sunshine to dismantle the government-subsidized partisan racket.

ACORN can never be "reformed." It is constitutionally corrupt. Sue me.

Bob Jensen's threads on ACORN are at http://www.trinity.edu/rjensen/2008Bailout.htm
Search for "ACORN"

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


Note especially the last paragraph in the article below concerning alleged frauds of accountants he employed!

"Joe Francis free: Was he a victim of accountants gone wild?" AccountingWeb, November 11, 2009 ---
http://www.accountingweb.com/topic/watchdog/joe-francis-free-was-he-victim-accountants-gone-wild

In spite of a future that looked pretty dismal, “Girls Gone Wild” producer Joe Francis will not serve another day of jail time for tax evasion. The charges against him included underreporting his income by about $20 million, and later, bribing jail workers in Nevada while he was being held on the tax charges. For awhile it looked like he might end up with ten years in prison. Now, he's free, having been sentenced by U.S. District Judge James Otero to 301 days in jail -- which happens to be the amount of time he has already served -- plus a year of probation, and a quarter million dollar fine. In an unusual twist, just as Francis has worked out his IRS problems, the official spotlight has turned on the guy who blew the whistle on him.

Francis's trouble started in 2005 when the Internal Revenue Service began looking into his tax returns for 2002 and 2003. His accountant, Michael Barrett, turned Francis into the IRS under the Whistleblower program, hoping to collect a multi-million dollar reward. Oddly enough, the information Barrett gave the IRS related to tax returns which he himself prepared, signed, and filed, without showing them to Francis. Barrett said the tax returns showed $20 million in bogus business expenses, including $3.78 million used to build a home in Mexico, $10.4 million in false consulting expenses, and a half million dollar phony insurance claim. In addition, Francis is accused of transferring $15 million from an offshore bank account to a California brokerage account in the name of a Cayman Islands Company under his control.

At first the video producer denied the charges and claimed the IRS was targeting him because they were jealous of his youth and enormous success. His defense attorney, Robert Bernhoff, told the Los Angeles Times, "This ain't 'Girls Gone Wild.' This is the IRS gone wild. The American taxpayers should be outraged that an IRS program is being abused like this."

Then, after years of fighting the charges, Francis appeared in a Los Angeles court on September 23, 2009 to plead guilty to two misdemeanors, agreeing to pay $249,705. Judge Otero accepted the plea bargain on the misdemeanor charges after it was learned that a key witness withheld information from prosecutors.

As part of the plea, Francis agreed to admit that he underreported income by about $563,000 and also that he gave more than $5,000 worth of items to two jail workers in exchange for food during his incarceration at Washoe County, Nevada.

Brad Brian, Francis's lead trial attorney, said in a statement, "It took us seven months, but in the end we demonstrated that the felony tax charges never should have been brought in the first place."

After the hearing, Francis kissed his mother and told reporters simply, "I think we won that one."

His tax woes may be over. But in recent weeks, the IRS is turning up the heat on his accountant, Michael Barrett. For a long time, Francis maintained that his tax failures were caused not by his own wrongdoing, but by Barrett. Barrett, in fact, was scheduled to be a key witness for the prosecution against Francis. But as the IRS delved more deeply into the case against Francis, some of the scrutiny turned on Barrett himself and two other employees of Francis's production company, Mantra Films. The accountant is accused - among other things - of setting up shadow corporations and then using them to bilk Mantra out of hundreds of thousands of dollars. No arrests have yet been made.


Question
Can a clever cost accountant save Intel from Attorney General of New York State?

"N.Y. files antitrust lawsuit against Intel:  Chipmaker used bribes, coercion to get PC makers to shun its rivals, Cuomo says," by Tomoeh Murakami Tse and Cecilia Kang, The Washington Post, November 5, 2009 --- Click Here

New York Attorney General Andrew M. Cuomo filed an antitrust suit against Intel on Wednesday, accusing the world's largest chipmaker of illegally threatening computer makers and paying them billions of dollars in kickbacks to stop using chips made by rivals.

The lawsuit comes amid increased scrutiny of the company's business practices and adds to a growing chorus of complaints by overseas regulators who have accused the chipmaker of anti-competitive behavior.

Intel has repeatedly denied wrongdoing, and a company spokesman did so again Wednesday. "We disagree with the New York attorney general," Chuck Mulloy said. "Neither consumers who have consistently benefited from lower prices and increased innovation nor justice are being served by the decision to file a case now. Intel will defend itself."

Cuomo's suit, filed in the U.S. District Court of Delaware, claims that Intel violated state and federal antitrust laws by "engaging in a worldwide, systematic campaign of illegal conduct" that involved threatening and bribing executives at firms with such household names as Hewlett-Packard, Dell and IBM.

According to the lawsuit, Intel persuaded computer makers to use its chips in exchange for billions of dollars of payments masked as "rebates." The company also threatened to retaliate against manufacturers that worked with Intel's competitors, in a particular Advanced Micro Devices.

For example, Cuomo said, Intel paid nearly $2 billion in 2006 to Dell, which agreed to refrain from marketing AMD products. Intel also paid IBM $130 million not to launch a product using AMD chips and threatened to derail a joint development project with Hewlett-Packard if the computer maker promoted AMD products, Cuomo said.

A history of scrutiny

"Rather than compete fairly, Intel used bribery and coercion to maintain a stranglehold on the market," Cuomo said in a statement. "Intel's actions not only unfairly restricted potential competitors, but also hurt average consumers who were robbed of better products and lower prices."

As part of the lawsuit, Cuomo presented internal e-mails between Intel executives as well as between Intel executives and those at computer makers.

According to Cuomo, for example, Intel chief executive Paul S. Otellini wrote a 2005 e-mail to Dell chief executive Michael S. Dell, who had complained that his company's business performance was suffering. Otellini reminded him that Intel had paid more than $1 billion to Dell. " This was judged by your team to be more than sufficient to compensate for the competitive issues," Otellini allegedly wrote.

Hewlett Packard, Dell and IBM either declined to comment or did not return phone calls and e-mail.

While numerous foreign regulators have filed lawsuits against Intel, which is based in Santa Clara, Calif., Cuomo's is the first formal antitrust action against Intel by U.S. regulators in more than a decade. In 1998, the Federal Trade Commission filed an administrative complaint, which was later settled.

Continued in article

Jensen Comment
One gray zone in such lawsuits is where the "bribes" in reality are volume discount pricings. Accountants often teach cost-volume-profit decision making with one of the decision variables being how to set prices on the basis of expected sales volumes at each of the various pricing alternatives (that affect contribution margins over variable costs). We seldom, however, bring into the CVP equation the possibility that certain types of discount pricing restrains competition. Also giving a $2 billion "bribe" is not quite the same as setting a lower price per unit that can be justified on the basis of economies of scale in production. A fixed $2 billion bribe falls more into the realm of a "fixed cost." Fixed costs are included in CVP analysis, but they're usually assumed, in our courses, to be legitimate fixed costs and not illegal bribes. It will be interesting to see how Intel (an Dell) presents a defense to this lawsuit. Ken Lay (at Enron) personally paid over a million dollars for an accounting professor from USC to be his expert witness. It did not do any good in Ken's trial where Lay was found guilty.

In the testimony below, defense witnesses for Skilling and Lay (Walter Rush and Jerry Arnold) "attribute Enron's descent into bankruptcy proceedings to a combination of bad publicity and lost market confidence" rather than accounting fraud. This places the Professor Arnold's opinion in conflict with that of Professors Hartgraves and Benston earlier analyses based upon the lengthy Powers Report commissioned by the former Chairman of the Board of Enron ---
http://www.trinity.edu/rjensen/FraudEnron.htm


Accounting Teachers About Cooking the Books Get Caught ... er ... Cooking the Books
The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.

What I find ironic below is that the Huron Consulting Group is itself a consulting group on technical accounting matters, internal controls, financial statement restatements, accounting fraud, rules compliance, and accounting education. If any outfit should've known better it was Huron Consulting Group ---
http://www.huronconsultinggroup.com/about.aspx

Huron Consulting Group was formed in May of 2003 in Chicago with a core set of 213 following the implosion of huge Arthur Andersen headquartered in Chicago. The timing is much more than mere coincidence since a lot of Andersen professionals were floating about looking for a new home in Chicago. In the past I've used the Huron Consulting Group published studies and statistics about financial statement revisions of other companies. I never anticipated that Huron Consulting itself would become one of those statistics. I guess Huron will now have more war stories to tell clients.

The media and blogs are conveniently pinning the Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled into Huron.
Big Four Blog, August 5, 2009 ---
http://www.blogcatalog.com/blog/life-after-big-four-big-four-alumni-blog/eae8a159803847f6a73af93c063058f9

"Can hobbled Huron Consulting survive this scandal?" by Steven R. Strahler, Chicago Business, August 4, 2009 ---
http://www.chicagobusiness.com/cgi-bin/news.pl?id=35019&seenIt=1

An accounting mess at Huron Consulting Group Inc. that led to the decapitation of top management and the collapse in its share price puts the survival of the Chicago-based firm in jeopardy.

Huron’s damaged reputation imperils its ability to provide credible expert witnesses during courtroom proceedings growing out of its bread-and-butter restructuring and disputes and investigations practices. Rivals are poised to capture marketshare.

“These types of firms have to be squeaky clean with no exceptions, and this was too big of an exception,” says Allan Koltin, a Chicago-based accounting industry consultant. “I respect the changes they made and the speed (with which) they made them. I’m not sure they can recover from this.”

Huron executives declined to comment.

Late Friday, Huron said it would restate results for the three years ended in 2008 and for the first quarter of 2009, resulting in a halving of its profits, to $63 million from $120 million, for the 39-month period. Revenue projections for 2009 were cut by more than 10%, to a range of $650 million to $680 million from $730 million to $770 million.

The company said its hand was forced by its recent discovery that holders of shares in acquired firms had an agreement among themselves to reallocate a portion of their earn-out payments to other Huron employees. The company said it had been unaware of the arrangement.

“The employee payments were not ‘kickbacks’ to Huron management,” the company said.

Whatever the description, the fallout promises to shake Huron to its core. The company’s stock plunged 70% Monday to about $14 per share, and law firms were preparing to mount class-action shareholder litigation.

“If the public doesn’t buy that the house is clean, my guess is some of the senior talent will start to move very quickly,” says William Brandt, president and CEO of Chicago-based restructuring firm Development Specialists Inc. “Client retention is all that matters here.”

Publicly traded competitors like Navigant Consulting Inc. are unlikely to make bids for Huron because of the potential for damage to their own stock. Private enterprises like Mesirow Financial stand as logical employers as Huron workers jump ship.

“There certainly is potential out there for clients and employees who may be looking at different options, but at this point in the process it’s a little early to tell what impact this will have,” says a Navigant spokesman.

Huron’s woes led to the resignation last week of Chairman and CEO Gary Holdren and Chief Financial Officer Gary Burge, both of whom will stay on with the firm for a time, and the immediate departure of Chief Accounting Officer Wayne Lipski.

Mr. Holdren, 59, has a certain amount of familiarity with turmoil.

He was among co-founders of Huron in 2002, when their previous employer, Andersen, folded along with its auditing client Enron Corp. He told the Chicago Tribune in 2007, “Initially, when we’d call on potential clients, they’d say, ‘Huron? Who are you? That sounds like Enron,’ or ‘Aren’t you guys supposed to be in jail? Why are you calling us?’ ”

This year, it’s been money issues dogging Huron. In the spring, shareholders twice rejected proposals to sweeten an employee stock compensation plan.

Mr. Holdren’s total compensation in 2008 was $6.5 million, according to Securities and Exchange Commission filings. Mr. Burge received $1.2 million.

A Huron unit in June sued five former consultants and their new employer, Sonnenschein Nath & Rosenthal LLP, alleging that the defendants were using trade secrets to lure Huron clients to the law firm. The defendants denied the charges. The case is pending in Cook County Circuit Court.

"3 executives at Huron Consulting Group resign over accounting missteps Consulting firm announces it will restate financial results for the past 3 fiscal years,"by Wailin Wong, Chicago Tribune, August 1, 2009 ---
http://archives.chicagotribune.com/2009/aug/01/business/chi-sat-huron-0801-aug01  

Chief Executive Gary Holdren and two other top executives are resigning from Chicago-based management consultancy Huron Consulting Group as the company announced Friday it is restating financial statements for three fiscal years.

Holdren’s resignation as CEO and chairman was effective Monday and he will leave Huron at the end of August, the company said in a statement. Chief Financial Officer Gary Burge is being replaced in that post but will serve as treasurer and stay through the end of the year. Chief Accounting Officer Wayne Lipski is also leaving the company. None of the departing executives will be paid severance, Huron said.

Huron will restate its financial results for 2006, 2007, 2008 and the first quarter of 2009. The accounting missteps relate to four businesses that Huron acquired between 2005 and 2007.

According to Huron’s statement and a filing with the Securities and Exchange Commission, the selling shareholders of the acquired businesses distributed some of their payments to Huron employees. They also redistributed portions of their earnings “in amounts that were not consistent with their ownership percentages” at the time of the acquisition, Huron said.

A Huron spokeswoman declined to give the number of shareholders and employees involved, saying the company was not commenting beyond its statement.

“I am greatly disappointed and saddened by the need to restate Huron’s earnings,” Holdren said in the statement. He acknowledged “incorrect” accounting.

Huron said the restatement’s total estimated impact on net income and earnings before interest, taxes, depreciation and amortization for the periods in question is $57 million.

“Because the issue arose on my watch, I believe that it is my responsibility and my obligation to step aside,” said Holdren.

Huron said the board’s audit committee had recently learned of an agreement between the selling shareholders to distribute some of their payments to a company employee. The committee then launched an inquiry into all of Huron’s prior acquisitions and discovered the involvement of more Huron employees.

Huron said it is reviewing its financial reporting procedures and expects to find “one or more material weaknesses” in the company’s internal controls. The amended financial statements will be filed “as soon as practicable,” Huron said.

James Roth, one of Huron’s founders, is replacing Holdren as CEO. Roth was previously vice president of Huron’s health and education consulting business, the company’s largest segment. George Massaro, Huron’s former chief operating officer who is the board of directors’ vice chairman, will succeed Holdren as chairman.

James Rojas, another Huron founder, is now the company’s CFO. Rojas was serving in a corporate development role. Huron did not announce a replacement for Lipski, the chief accounting officer.

The company’s shares sank more than 57 percent in after-hours trading. The stock had closed Friday at $44.35. Huron said it expects second-quarter revenues between $164 million and $166 million, up about 15 percent from the year-earlier quarter.

The company, founded by former partners at the Andersen accounting firm including Holdren, also said that it is conducting a separate inquiry into chargeable hours in response to an inquiry from the SEC.

Bob Jensen's threads on accounting firm frauds are at
http://www.trinity.edu/rjensen/fraud001.htm

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


"Cybercrime Capitalizes on Swine-Flu Fears," by Marisa Taylor, The Wall Street Journal, November 18, 2009 ---
http://blogs.wsj.com/digits/2009/11/18/cybercrime-capitalizes-on-swine-flu-fears/?mod=

Cybercriminals are capitalizing on swine-flu fears by pitching sales of fake Tamiflu, security firm Sophos said.

Networks of fraudsters use spam and malware to direct Web traffic to phony pharmaceutical sites, wrote Graham Cluley, a technology consultant for Sophos.

“Although unwitting buyers do often receive some kind of drug as result of the transactional exchange, at best the drug doesn’t work and at worse it can pose serious health risks,” he added. Cybercriminals are “putting their customers’ health, personal information and credit card details at risk” with these counterfeit versions of Tamiflu.

Many of these fraudulent pharmaceutical sites originate in Russia, Sophos’s Dmitry Samosseiko noted in a paper on the topic. One network called GlavMed, for example, has more than 120,000 online pharmacy sites selling generic drugs under the name of Canadian Pharmacy. Each GlavMed spammer uses e-commerce software to create new domains or direct traffic to colleagues’ domains, and charge a 40% commission on each sale.

A log file of purchases made on Canadian Pharmacy showed about 200 drug purchases per day per site, meaning a domain owner can earn up to an estimated $16,000 in a day, Mr. Samosseiko wrote. The top five countries that have been purchasing Tamiflu and other drugs from so-called Canadian Pharmacy sites are the United States, Germany, the United Kingdom, Canada and France.

The Federal Trade Commission said earlier this week that it issued warnings to 10 Web sites making questionable claims that their products could be used to treat swine flu. The FTC said that these remedies, which included homeopathic remedies and air-filtration systems, were violating federal law unless they can back up their claims with scientific proof.

The agency conducted a sweep in late September targeting Web operators who take advantage of natural disasters or financial crises. “As consumers grow increasingly anxious about obtaining the H1N1 vaccine for their children and other vulnerable family members, scam artists take advantage by selling them bogus remedies online,” said David Vladeck, director of the FTC’s bureau of consumer protection, in a statement.


I'm sorry David Friehling, when you say you were duped I don't believe a single word of your plea for leniency!
Madoff's CPA only pleads guilty to one (wink, wink) professional failure apart from the crimes to which he confessed.
He should get 150 years in the same cell as Bernie.

From The Wall Street Journal Accounting Weekly Review on November 5, 2009

Madoff Auditor Says He Was Duped, Too
by Chad Bray
Nov 04, 2009
Click here to view the full article on WSJ.com

TOPICS: Audit Quality, Auditing, Auditing Services, Auditor Independence, Fraudulent Financial Reporting

SUMMARY: David Friehling, former accountant for the Bernard L. Madoff Investment Securities, LLC, pleaded guilty to fraud and other charges in connection with his auditing work for the firm of convicted swindler Bernard Madoff.

CLASSROOM APPLICATION: The article can be used in an auditing class to cover topics of collecting sufficient competent evidential matter, auditor responsibilities for detecting fraud, business risk associated with taking on personal tax work associated with corporate clients, and overall ethical conduct of an accounting practice.

QUESTIONS: 
1. (Introductory) According to the article, what work did Mr. Friehling do for Bernard L. Madoff Investment Securities LLC and for people related to those businesses? List all work that you see identified in the article.

2. (Introductory) Of what professional failure did Mr. Friehling plead guilty at a hearing before U.S. District Judge in Manhattan?

3. (Advanced) Mr. Friehling states that he "took the information given to him by Mr. Madoff or Mr. Madoff's employees at 'face value.'" How does that statement imply a failure to conduct adequate audit procedures?

4. (Advanced) Is it evident from the results of the Madoff fraud case that the firm's auditors must have been guilty of some audit failure? In your answer, comment on an auditor's responsibility to detect fraud and on the likelihood of detecting fraud in cases of collusion.

5. (Introductory) How is the tax work done by Mr. Friehling for persons related to the Madoff firm resulting in even greater violations of the law and ethical conduct of his practice?

6. (Advanced) Refer to the second related article. Is it a "GAAP rule" that prevents an auditor or accountant from "just accepting what a client tells you about his financial statements, without doing more..."?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Bernie Madoff's Small-Town CPA
by Thomas Coyle
Nov 04, 2009
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Is Friehling's Guilty Plea A Warning Shot to Madoff's Family?
by Ashby Jones
Nov 04, 2009
Online Exclusive

"Madoff Auditor Says He Was Duped, Too:   Friehling Pleads Guilty, but Denies Knowing About the Scheme; 'Biggest Mistake of My Life'," by Chad Bray, The Wall Street Journal, November 4, 2009 ---
http://online.wsj.com/article/SB125725853747925287.html?mod=djem_jiewr_AC

David Friehling, the former accountant to convicted Ponzi-scheme operator Bernard Madoff, pleaded guilty to fraud and other charges Tuesday in connection with his auditing work for Madoff's firm, but denied knowing about the underlying Ponzi scheme.

Mr. Friehling pleaded guilty to securities fraud, aiding or abetting investment advisor fraud, three counts of obstructing or impeding the administration of Internal Revenue laws, and four counts of making false filings with the Securities and Exchange Commission at a hearing before U.S. District Judge Alvin K. Hellerstein in Manhattan.

Mr. Friehling, 49 years old, admitted that he failed to conduct independent audits of Bernard L. Madoff Investment Securities LLC's financial statements, saying he took the information given to him by Mr. Madoff or Madoff's employees at "face value."

However, he denied any knowledge of Mr. Madoff's Ponzi scheme and said he entrusted his own retirement and his family's investments to Mr. Madoff, saying he had about $500,000 with the firm.

In what was "the biggest mistake of my life, I placed my trust in Bernard Madoff," Mr. Friehling said.

Mr. Friehling, who is cooperating with prosecutors, faces a statutory maximum of 114 years in prison on the charges.

He was previously charged in the matter in March. Mr. Friehling will be allowed to remain free on $2.5 million bail pending sentencing, which is tentatively set for February.

Separately, Mr. Friehling, without admitting or denying wrongdoing, agreed to a partial settlement in the SEC's separate civil case. Mr. Friehling, sole practitioner at Friehling & Horowitz CPAs PC, agreed to a permanent injunction restraining him or his accounting firm from violating securities laws.

Disgorgement, prejudgment interest and civil penalties will be determined at a later date. Mr. Friehling and his firm will be precluded from arguing that they didn't violate federal securities laws as alleged by the SEC for the purposes of determining disgorgement and any penalties.

Prosecutors from the U.S. Attorney's office in Manhattan alleged that Mr. Friehling, from 1991 to 2008, created false and fraudulent certified financial statements for Madoff's firm.

Mr. Friehling, who is married and has three children, said Tuesday that he was introduced to Mr. Madoff by Mr. Friehling's father-in-law, Jerome Horowitz.

Mr. Friehling, a certified public accountant, said Mr. Horowitz retired in 1991 but continued to assist him with Madoff's audits until 1998. Mr. Horowitz, who served as Madoff's auditor until the 1990s, died in March.

Prosecutors also alleged that Mr. Friehling failed to conduct independent audits of Madoff's firm that complied with generally accepted auditing standards and conformed with generally accepted accounting principles, and falsely certified that he had done so.

At the hearing, Assistant U.S. Attorney Lisa Baroni said Mr. Friehling prepared false tax returns for Mr. Madoff and others, but declined to say who those others are. "Just 'others' at this time," Ms. Baroni said.

The court-appointed trustee in charge of liquidating Madoff's firm said recently that he had identified $21.2 billion in cash investor losses.

Mr. Friehling is the third person to plead guilty to criminal charges in the case, including Mr. Madoff himself.

Mr. Madoff, 71, admitted in March to running a decades-long Ponzi scheme that bilked thousands of investors out of billions of dollars and is serving a 150-year sentence in a federal prison in North Carolina.

Frank DiPascali Jr., a key lieutenant to Mr. Madoff, pleaded guilty to criminal charges in August. Mr. DiPascali, who also is cooperating with prosecutors, has been jailed pending sentencing.

Mr. Madoff ran the scam for years through the investment advisory arm of his business by promising steady returns and by presenting an air of exclusivity by not taking all comers and recruiting investors via friends and associates.

Mr. Madoff claimed to have as much as $65 billion in his firm's accounts at the end of last November, but prosecutors said the accounts only held a small fraction of that.

Charles Ponzi (1882-1949) --- http://en.wikipedia.org/wiki/Charles_Ponzi
Ponzi Frauds --- http://en.wikipedia.org/wiki/Ponzi_game

Bernard Madoff --- http://en.wikipedia.org/wiki/Madoff

Ponzi Schemes Where Bernie Madoff Was King and the SEC was at best negligent and at worst fraudulent ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

Bob Jensen's threads on index and mutual fund frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds


A close-up look at the IT infrastructure behind the Madoff affair

December 17, 2009 message from Scott Bonacker [lister@BONACKERS.COM]

There is an article in the new Bank Technology News that might be of interest to anyone teaching internal controls or fraud detection. Or if you're just curious.

http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html

"Special Feature The IT Secrets from the Liar's Lair Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. On Dec. 11, 2008, when Madoff was arrested, he got his answer.A close-up look at the IT infrastructure behind the Madoff affair."

Scott Bonacker CPA
Springfield, MO

"The IT Secrets from the Liar's Lair," by John Dodge, Bank Technology News, December 2009 ---
http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html

Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon's job: To organize and document projects that would create custom technology for the firm's trading operations.

On Dec. 11, 2008, he got his answer.

That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients' money over decades. McMahon realized if "technologists" had replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.

Over the past six weeks, Securities Industry News, a sister publication of Bank Technology News, has dug into and beyond the court records to construct an extensive picture of how Madoff actually operated: The systems and technology he and underlings used to create - or fake - the most detailed set of customer accounts underlying a fraud in the history of the securities industry.

Included are details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, and information filed in court when two IT employees were arrested in mid-November. The documents, and subsequent interviews, describe how the real and the fake trading floors worked, and why the securities investors believed they owned are never going to be declared "missing." The answer: Because they never existed in the first place.

LEGITIMATE AND ILLEGITIMATE

"I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was because he had proprietary and legacy systems. And he relied on IT people he hired and paid," to not upset the status quo, says McMahon.

As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.

"I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation," says McMahon, today an operational performance consultant for Standard & Poors.

McMahon lasted less than a year at Madoff's firm. He was hired in February 2007, by long-time BLMIS chief information officer Elizabeth Weintraub. She died in September of that year. Differences over updating the systems and formalizing procedures with Weintraub's two successors led to his dismissal the following January, by McMahon's account.

Nader Ibrahim, who was on the support desk from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department was often tense and unusual.

"We did not have titles, which was definitely suspicious to me. We all knew who each other worked for, but nobody knew what the other person was doing," he said. "Everything was on a need-to-know basis. There was a lot of secrecy."

But the real secret about Madoff's purported trading for thousands of investment advisory clients, investigators say, is that it never happened.

To be fair, it's not as if Madoff didn't have a real trading floor. Madoff's legitimate market-making business was located on the 19th floor of 885 Third Ave., in New York, using one IBM Application System/400 computer, known within the firm as "House 5.'' BLMIS' information technology operation was located on the 18th floor, where McMahon had his cube and was supposed to organize and document projects involving custom technology for the trading operation.

What was on the 17th floor? The fake trading floor where a second IBM AS/400 known internally as "House 17" processed historical price information on securities allegedly bought for clients. The end result was phony trade confirmations and wholly manufactured-but official-looking-statements for 4,903 investment advisory clients.

OPEN AND CLOSED

Madoff's legitimate traders used a mix of green-screen and "M2" Windows-based desktop computers. These ran in-house trading software referred to as MISS, which McMahon recalled standing for something like "Madoff Investment Systems and Services." The internally-named and developed M2s ran MISS as a Windows application and were used by younger traders who wanted familiar software instead of the rigid green screen system, developed around 1985, where only text appeared on screen and instructions were in almost cryptic codes entered into command lines.

Support for House 5 was almost like that of a large investment bank's support of its trading operations. Nothing was too good, in theory, for the Madoff trading operation on the 19th floor. Even if it was not necessary.

"Madoff did not buy anything off the shelf. The IT team was doing proprietary software development. Maybe J.P. Morgan Chase needs all this heavy technology, but a hedge fund with 120 people doesn't have to be in systems development," says McMahon, adding that a similarly-sized firm might have a half dozen IT people. Both McMahon and Ibrahim pegged the number of people actively supporting technology at BLMIS at between 40 and 50.

But large staff and support for House 5 has not thrown off investigators. Court-appointed trustee Irving Picard, who is charged with liquidating Madoff's remaining assets, has instead focused on "House 17,'' where the daily administration of the Ponzi scheme was executed.

Picard hired an investigator, Joseph Looby, an accounting forensics expert who probably knows the most about the technology that aided Madoff in stealing client funds other than former members of Madoff's staff. Looby is an expert in electronic fraud and senior managing partner with FTI Consulting Inc. in New York.

Looby's 20-page declaration on Picard's behalf with the U.S. Bankruptcy Court for Southern District of New York on Oct. 16 amounts to the deepest examination yet of the foundational technology behind Madoff's fraud. The declaration seeks to deny paying Madoff's victims based on their last statements, dated Nov. 30, 2008, because the values stated were based on investments that were allegedly never bought or sold (see graphic at right).

Reached in his Times Square office, Looby, like Picard, said he could not elaborate on his examination of "House 17. But in the declaration, he reported that "House 5" supported Madoff's market-making operation and was networked to third parties outside the firm that would logically support a trading operation. One, for example, was the depository and clearing firm Depository Trust & Clearing Corp. (DTCC).

"[House 5] was an AS/400, consistent with a legitimate securities trading business," Looby wrote. In the declaration, he often compares House 5's legitimacy to House 17's illegitimacy.

House 17, for reasons that are now obvious, was shut off to anyone but Madoff's former chief finance officer and right-hand-man Frank DiPascali Jr. as well as his alleged accomplices. That list now includes Jerome O'Hara, 46, and George Perez, 43, who have both been charged in civil and criminal complaints with helping DiPascali create the phoney statements that supported the Ponzi scheme. O'Hara and Perez face 30 years in prison and more than $5 million in fines if convicted. DiPascali sits in a New York jail awaiting sentencing after pleading guilty to 10 felony counts on Aug. 11. He faces 125 years and his sentencing is scheduled for May 2010. In the interim, investigators are hoping to get his cooperation to implicate others.

"They want to squeeze him for more than what he's giving now so he can avoid 125 years in prison," says Erin Arvedlund, author of "Too Good to be True: The Rise and Fall of Bernie Madoff." The former reporter for Barron's in a widely-cited 2001 story challenged Madoff's implausible if not impossible returns and asked why hundreds of millions in uncollected commissions were left on the table. It appears now there were no trades made, from which to derive commissions. "[House 17] was a closed system, separate and distinct from any computer system utilized by the other BLMIS business units; consistent with one designed to mass produce fictitious customer statements," according to Looby's declaration. House 17's expressed purpose was to maintain phony records and crank out millions of phony IRS 1099s on capital gains and dividends, trade confirmations, management reports and customer statements. "The AS/400 was like a giant Selectric typewriter. When you're making up numbers like that, you're using your computer as a typewriter," says computer consultant Judith Hurwitz, president of Hurwitz & Associates in Newton, Mass.

ON THE HOUSE

House 17 held 4,659 active accounts overseen by DiPascali where Madoff purportedly executed a "split strike conversion" strategy on large cap stocks. In basic terms, it's a "collar," putting a floor and a ceiling on returns. A floor on potential losses is created by purchasing a put on a stock. The sale of a call then puts a ceiling on the returns. The "split" in "strike" prices is considered a "vacation trade.'' The trader doesn't worry about what happens until the expiration dates on the put or call options arrive.

The strategy was allegedly applied for the thousands of customers on "baskets" of large cap stocks. According to the faked BLMIS statements, these accounts typically yielded 11 to 17 percent returns annually.

Another 244 "non-split strike" accounts produced phony returns in excess of 100 percent and were managed by BLMIS employees other than DiPascali.

The "non-split strike" accounts included many "long time" Madoff customers and feeder funds such as those operated by Stanley Chais or Jeffry Picower and against whom Picard has filed civil suits to reclaim billions in profits alleged to be illegal. Picower of Palm Beach was found dead in his pool Oct. 25. Chais maintains he's innocent.

In the declaration, Looby repeatedly asserts that no securities were ever bought for BLMIS investment advisory customers. Proceeds sent in by clients for that purpose were "instead primarily used to make distributions to or payments on behalf of, other investors as well as withdrawals and payments to Madoff family members and employees," the declaration states.

Here's how it worked: BLMIS employees fed the AS/400 constantly with stock data, enough to support trades that would satisfy the expectations promised to Madoff's thousands of eventual victims. To support the fantasy returns, so-called "baskets" of S&P100 stocks would be bought and sold, on behalf of clients. Looby did not specify the typical size of a basket, but they were proportional to the proceeds a client had remitted to BLMIS. "If a basket was $400,000 and a customer had $800,000 available, two baskets of securities and options would be purportedly "purchased" for the account," Looby wrote. The types of stocks can be seen in a Madoff statement. Proceeds from purported basket sales existed only on "House 17" and on the paper it put out, which indicated the funds were put into safe U.S. Treasury bonds. Meanwhile, funds remitted by clients were being diverted to a JPMorgan Chase & Co. bank account known as "703."

The complaints against O'Hara and Perez add further rich detail to how Madoff and his accomplices used aging but extensive computer technology to maintain the fraud. They also seem to confirm what common sense suggests about such a massive and enduring fraud: Madoff and DiPascali had to have technical help.

"O'Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corp. reports and other phantom books and records to substantiate nonexistent trading. They assigned names to many of these programs that began with "SPCL," which is short for "special," according to an SEC press announcement about the civil complaint.

The "special" programs were found on backup tapes, according to an official close to the investigation and who asked not to be identified. He added that the pair has not been cooperating with authorities. The evidence in the complaints is from BLMIS computers and documents, according to the source.

Among 10 fraudulent functions detailed in the criminal complaint, the special programs altered trade details by using "algorithms that produced false and random results;" created "false and fraudulent execution reports;" and "generated false and fraudulent commission reports." The criminal complaint also charges the pair with helping Madoff and DiPascali create misleading reports between 2004-08 to throw off SEC investigators and a European accounting firm hired by a Madoff client.

In 2006, O'Hara and Perez cashed out their BLMIS accounts worth "hundreds of thousands of dollars" and told Madoff they would no longer "generate any more fabricated books and records." O'Hara's handwritten notes from the encounter allegedly say "I won't lie any longer."

However, the "crisis of conscience" did not stop them from asking for a 25 per cent bump in salary and a $60,000 bonus to keep quiet, the complaints allege.

"DiPascali then managed to convince O'Hara and Perez to modify computer programs to he and other 17th floor employees could create the necessary reports," according to the SEC complaint. The reference to "other 17th floor employees" suggests that O'Hara and Perez will not be the last to be charged.

A sharp eye could have detected that funds weren't where they were supposed to be: 2008 customer statements showed funds in a "Fidelity Spartan U.S. Treasury Money Market Fund" that hadn't been offered since 2005. The fabulous returns had lulled BLMIS clients to sleep. While some trading data was input by hand, DiPascali cleverly used "essentially a mail merge program" to replicate the same stock trading information across multiple accounts, according to the declaration.

Stocks in a basket were "priced" after the market closed (i.e., with the knowledge of the prior published price history). Customer statements were then fabricated by BLMIS staff on House 17 which appeared to outsiders to keep track of customer investments and funds in a manner typical of any investment advisor. "BLMIS staff confirmed it, the system facilitated it and consistent returns could not have been achieved without it," Looby's declaration states.

Indeed, the customer statements had been perfected as an instrument in the deception. Madoff investor Ronnie Sue Ambrosino, a former computer analyst who ironically had worked on an AS/400, told Securities Industry News that she never suspected a thing. After all, the Securities and Exchange Commission had given Madoff a clean bill of health on several occasions since 1992 by not digging deeply into his operations or just plain neglect.

"The statements were always perfect, neat and immaculately presented. They came on time and everything was like clockwork," says Ambrosino, 56, a victim and now activist representing a group of about 400 Madoff investors. She bristles when the AS/400 is called old or outdated. "I know the 400 and it's a pretty powerful machine." It was powerful enough to convince investors that whatever proceeds they sent to Madoff were being invested in the stocks cited on their statements. "Key punch operators were provided with the relevant basket information that they manually entered into House 17. The basket trade was then routinely replicated in selected BLMIS split strike customer accounts automatically and proportionally according to each customer's purported net equity," Looby's declaration says.

The situation was largely the same for non-split strike clients except that the purported trades were in single equities, not baskets. "Thousands of documents including customer statements, IA (investment advisory) staff notes, account folders and programs in the AS/400 were reviewed, and these documents confirm the fact that such statements were prepared on an account-by-account basis (i.e. not basket trading)," Looby wrote.

Looby verified that trades between 2002 and 2008 were phantom by cross-checking with various clearing houses such as DTCC, Clearstream Banking S.A. in Luxembourg, the Chicago Board of Options Exchange (CBOE) and four other clearing firms. He also compared the cleared trades on the AS/400 "House 5" and "99.9 percent" of the fake trades on "House 17" did not match. The only connection he found is what looked like a small portion of a single client's trades, which were directed by the client and recorded on House 5.

Madoff employees monitored the "baskets" for split strike accounts in an Excel spreadsheet to make sure "the prices chosen after-the-fact obtained returns that were neither too high or low."

However, such monitoring was far from perfect. Looby cited several examples where daily trading volumes at BLMIS exceeded the entire daily volume for several stocks.

For instance, Madoff reported the purchase of 17.8 million shares of Exxon Mobil on Oct. 16, 2002. This amounted to 131 percent of the company's trading volume for that day. BLMIS's actual Exxon Mobil holdings that October were verified by the DTCC at 5,730 shares. Similar discrepancies for Amgen, Microsoft and Hewlett Packard were found on Nov. 30, 2008, the date for the final batch of BLMIS customer statements, as it turned out.

BLMIS data for options puts and calls was even more blatantly unreal. On Oct. 11, 2002, Looby found that BLMIS "applied an imaginary basket to 279 accounts with a volume of 82,959 OEX (S&P 100 options) calls and 82,959 puts." That amounted to 13 times the OEX volume at the CBOE that day.

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

 


"Ernst & Young Prevails in $140 Million Case Brought by Frontier Creditors Trust Andrew Longstreth," The American Lawyer, December 14, 2009 --- http://www.law.com/jsp/article.jsp?id=1202436290441&rss=newswire&utm_source=twitterfeed&utm_medium=twitter

When the creditors of bankrupt companies draw up lists of litigation targets, auditing firms are often right there at the top. So it was for the creditors trust of the bankrupt insurer, Frontier Insurance Group. The trust, represented by John McKetta III of Graves Dougherty Hearon & Moody, alleged that Ernst & Young underestimated the reserves Frontier needed to hold, making the company look healthy when it was actually insolvent. It claimed $140 million in damages, plus interest.

But E&Y decided to make a stand. It refused to chip up, and instead headed for a jury trial before White Plains, N.Y., federal district court Judge Cathy Seibel. On Wednesday, after 12 days of trial, jurors needed only two hours to exonerate the auditor.

"This case shows that E&Y is willing to go to trial in a case it believes has no merit, even where the threatened damages are substantial," said Ernst & Young's outside counsel, Dennis Orr of Morrison & Foerster. Orr told us that Ernst & Young hopes other potential litigants get the message.

Trust counsel McKetta said no decision had been made about the trust's next move in the case. But he was gracious in defeat, complimenting Seibel, the jury, and even the team at Morrison & Foerster. "They did a terrific job," McKetta said.

"EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day," by Francine McKenna, re: The Auditors, Decenber 17, 2009 ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

Rueters News Item via Forbes --- http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

 Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, the U.S. Securities and Exchange Commission said Thursday.

The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally's 2001 and 2003 financial statements conformed with U.S. accounting rules.

Continued in article

Francine's Commentary ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/

“These opinions were false and misleading,” the SEC said in a statement.

“Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, theU.S. Securities and Exchange Commission said Thursday.

The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally’s 2001 and 2003 financial statements conformed with U.S. accounting rules.

Six of the accounting firm’s current and former partners also agreed to settle SEC accounting violation charges as part of this investigation, the SEC said.

In settling the allegations, Ernst & Young and the former and current partners did not admit to any wrongdoing, the SEC said.

“These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago,” Ernst & Young said.”

What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.

Three of the partners were members of EY’s leadership team/national office, giving advice, guidance, and making decisions about accounting standards on behalf of engagement teams nationwide.

Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.

EY can put an old case behind them… Yes, of course, since it’s December of 2009 and it’s taken the SEC six years to resolve a case from 2001-2003. No wonder the firms’ answer to any settlement or disciplinary proceeding is always, “that’s in the past.”

EY had independence issues recently and was supended from taking on new audit clients for six months. How many strikes does a firm get? Why no strong statement, sanction or other disciplinary action from the PCAOB for the partners or the firm in relation to this case? Maybe because Mr. Fletchall was also a member of the PCAOB’s Standang Advisory Group.

Bob Jensen's threads on E&Y litigation ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Will the big international auditing firms survive the subprime mortgage litigation ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


"FDIC: Uptick in 'money mule' scams," by Brian Krebs, The Washington Post, November 3, 2009 ---
http://voices.washingtonpost.com/securityfix/2009/11/fdic_uptick_in_money_mule_scam.html?wprss=securityfix

The Federal Deposit Insurance Corporation (FDIC) is warning financial institutions about an uptick in scams involving unauthorized funds transfers from hacked online bank accounts to so-called "money mules," people hired through work-at-home scams to help cyber criminals overseas launder money.

According to the FDIC, the following are examples of events that may indicate money mule account activity:

-A customer who just opened a new account suddenly receives one or several deposits, each totaling a little less than $10,000, and then withdraws all but approximately eight to 10 percent of the total (the mule's "commission").

-A foreign exchange student with a J-1 Visa and fraudulent passport opening a student account with a high volume of incoming/outgoing money transfer/wire activity.

In tracking more than 50 companies over the past five months that have been victimized with the help of willing or unwitting money mules, I've spoke to dozens of folks who got caught up in these scams.

While a majority of mules I interviewed received a single fraudulent payment from only one victimized company, some were sent money from multiple victims, or signed up with more than one mule recruitment firm. In fact, one mule I tracked down recently admitted to receiving funds from at least two hacked companies. This individual also was among the phantom employees added to a company's payroll after a breach last month at payroll processing giant PayChoice.

"The FDIC alert and reporting by the Washington Post suggest that cyber criminals are increasingly using money mules to target banks and related financial databases," PayChoice chief executive Robert Digby said in an e-mailed statement. "The recent attack on PayChoice appears to fit that pattern."

On Sept. 23, unknown hackers broke into Moorestown, N.J.-based PayChoice, a company that provides direct payroll processing services and licenses its online employee payroll management product to at least 240 other payroll processing firms, serving 125,000 organizations. The thieves stole the names, e-mail addresses, user names and passwords that a large number of PayChoice's customers used to access onlinemployer.com, PayChoice's service portal. Not long after that, the attackers then included that information in spoofed e-mails to PayChoice's clients, addressing each recipient by name and warning them that they needed to download a Web browser plug-in in order to maintain uninterrupted access to onlineemployer.com. The supposed plug-in was instead malicious software designed to steal the victim's user names and passwords.

When I first got wind of that breach, I immediately wondered if the culprits might be the same individuals responsible for a rash of incidents I've investigated this year in which attackers used password-stealing Trojans to swipe the banking credentials of small to mid-sized firms. In every case, the attackers used that access to put money mules on the payrolls of those companies and then send the mules sub-$10,000 bank transfers.

PayChoice responded to that breach by forcing customers to change their passwords. But sometime during the week of Oct. 12, some PayChoice customers reported seeing phantom employees added to their outgoing payroll. PayChoice alerted its customers that hackers had again breached its systems, and urged customers to be on the lookout for unauthorized payroll transfers to four specific people and associated bank accounts. PayChoice said one of those individuals was named Ronald Cutshall, and that an account associated with Cutshall ended in the numbers 7766.

Security Fix recently caught up a Ronnie Cutshall from Greeneville, N.C. who acknowledged having an account at the local GreenBank ending in those four digits.

Cutshall, 48, runs a small horse carriage service called Greeneville Carriage Co.. Cutshall said he had never heard of PayChoice, but he did admit to receiving $9,600 from a company called American Realty on Oct. 6. At least, that was the name of the company on the receipt his erstwhile employers sent him (see the screenshot below). The bank routing number on the $9,600 payment Cutshall said he received from American Realty traced back to Georgia, but attempts to reach the victim were unsuccessful (there are more than 100 companies in Georgia with some approximation of that name).

According to Cutshall, approximately three weeks prior to receiving that $9,600 bank transfer, he had been recruited over the Internet as a finance manager by a company called the Fairline Group (the company's Web site is at fairline-group.cn), which said it had found his resume on a popular job search site.


Madoff Accountant to Plead Guilty
The former accountant to convicted Ponzi-scheme operator Bernard Madoff is expected to plead guilty to fraud and other charges at a hearing next week, prosecutors said Friday. In a letter to U.S. District Judge Alvin K. Hellerstein, prosecutors from the U.S. Attorney's office in Manhattan said they expect David G. Friehling to plead guilty at a hearing Nov. 3 under a cooperation agreement with the government. Assistant U.S. Attorney Lisa Baroni, in her letter, said the charges Mr. Friehling is expected to plead guilty to are securities fraud, investment advisor fraud, obstructing or impeding the administration of Internal Revenue laws, and four counts of making false filings with the U.S. Securities and Exchange Commission.
Chad Bray, The Wall Street Journal, October 30, 2009 ---
http://online.wsj.com/article/SB125691406152218719.html?mod=WSJ_hps_LEFTWhatsNews


The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Taibbi vs. Goldman Sachs: Whose side are you on?

The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Place a barf bag in your lap before watching these videos!
But are they accurate?
In June and July Goldman Sachs put up a pretty good defense.
Now I'm not so sure.

Questions
Why is the SEC still hiding the names of these tremendously lucky naked short sellers in Bear Sterns and Lehman Bros.?
Was it because these lucky speculators were such good friends of Hank Paulson and Timothy Geithner?
Or is Matt Taibbi himself a fraud as suggested last summer by Wall Street media such as Business Insider?

Jensen Comment
Evidence suggests that the SEC may be protecting these Wall Street thieves!
Or was all of this stealing perfectly legal? If so why the continued secrecy on the part of the SEC?
Suspicion:  The stealing may have taken place in top investors needed by the government for bailout (Goldman Sachs?)

"Wall Street's Naked Swindle" by Matt Taibbi
Watch the Video at one of the following sites:
You Tube --- http://www.youtube.com/watch?v=OqZUbe9KIMs
Google video --- Click Here
Read the complete article --- Click Here

Video Updates for Matt Taibbi
GRITtv: Matt Taibbi & Michael Lux: Goldman's Coup --- http://www.youtube.com/watch?v=nFWjXQLDkXg

"Matt Taibbi's Goldman Sachs Story Is A Joke," Joe Weisenthal, Business Insider, July 13, 2009 ---
http://www.businessinsider.com/matt-taibbis-goldman-sachs-story-is-a-joke-2009-7

 "Goldman Sachs responds to Taibbi Post," by: Felix Salmon, Rueters, June 26, 2009 ---
Calls Taibbi "Hysterical" ---
http://blogs.reuters.com/felix-salmon/2009/06/26/goldman-sachs-responds-to-taibbi/

Others Now Argue it Is Not a Joke
"Taibbi's Naked-Shorting Rage: Goldman's Lobbying, SEC's Fail,
"l by bobswern. Daily Kohs, September 30, 2009 ---
http://www.dailykos.com/story/2009/9/30/787963/-Taibbis-Naked-Shorting-Rage:-Goldmans-Lobbying,-SECs-Fail 

Now, off we go to Goldman Sachs' notorious lobbying hubris, the historically-annotated, umpteenth oversight failure of the Securities Exchange Commission ("SEC"), and what I'm quickly realizing may well turnout to be the story with regard to it becoming the poster child for regulatory capture and supervisory breakdown as far as our Wall Street-based corporatocracy/oligarchy is concerned. Here's the link to Taibbi's preview blog post: "An Inside Look at How Goldman Sachs Lobbies the Senate."

Yesterday, as described in this lead-in piece from the Wall Street Journal, the SEC held a public roundtable discussion on "New Rules for Lending of Securities." (See link here:  "SEC Weighs New Rules for Lending of Securities.")

SEC Weighs New Rules for Lending of Securities
BY KARA SCANNELL AND CRAIG KARMIN
Wall Street Journal
Saturday, September 26th, 2009

Securities regulators are exploring new regulations for the multitrillion-dollar securities-lending market, the first major step regulators have taken in the area in decades.

Securities and Exchange Commission Chairman Mary Schapiro said she wants to shine a light on the "opaque market." After many large investors lost millions in last year's credit crunch, she said, "we need to consider ways to enhance investor-oriented oversight."

The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants...
 

Enter Taibbi: "An Inside Look at How Goldman Sachs Lobbies the Senate."

An Inside Look at How Goldman Sachs Lobbies the Senate
Matt Taibbi
TruSlant.com
(very early) Tuesday, September 29th, 2009

 

The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants contend. Securities lending is central to the practice of short selling, in which investors borrow shares and sell them in a bet that the price will decline. Short sellers later hope to buy back the shares at a lower price and return them to the securities lender, booking a profit. Lending and borrowing also help market makers keep stock trading functioning smoothly.

--SNIP--

Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned -- when I first started looking at the story months ago, I had some other issues in mind, but it turns out that there's no way to talk about Bear and Lehman without going into the weeds of naked short-selling, and to do that takes up a lot of magazine inches. So among other things, this issue takes up a lot of space in the upcoming story.

Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don't have or won't deliver to the buyer. The piece gets into all of this, so I won't repeat the full description in this space now. But as this week goes on I'm going to be putting up on this site information I had to leave out of the magazine article, as well as some more timely material that I'm only just getting now.

Included in that last category is some of the fallout from this week's SEC "round table" on the naked short-selling issue.

The real significance of the naked short-selling issue isn't so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies -- and that has been significant, don't get me wrong -- but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.

It's the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture," i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue.
 

Taibbi continues on to inform us that none of the invited speakers to this government-sponsored event represented stockholders or companies that could, or have, become targets/victims of naked short-selling. Also "...no activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are (were) either banks, financial firms, or companies that sell stuff to the first two groups."

Taibbi then informs us that there is only one panelist invited that's in favor of what may be, perhaps, the most basic level of regulatory control with regard to this industry practice: a "simple reform" called "pre-borrowing." Pre-borrowing requires short-sellers to actually possess the stock shares before they're sold.

It's been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement for the shares of 19 fat cat companies (no other companies were worth protecting, apparently). Naked shorting of those firms dropped off almost completely during that time.

The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

Taibbi then tells us of increased efforts by industry players, specifically noting Goldman Sachs being at the forefront of this effort,  and having "their presence felt."

Taibbi mentioned that he'd received two completely separate calls from two congressional staffers from different offices--folks whom Taibbi never met before--who felt compelled to inform him of Goldman's actions.

We learn that these folks both commented on how these Goldman folks were lobbying against restrictions on naked short-selling. One of the aides told Taibbi that they had passed out a "fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. "

I would later hear that Senate aides between themselves had discussed Goldman's lobbying efforts and concluded that it was one of the most shameless performances they'd ever seen from any group of lobbyists, and that the "fact sheet" the company had had the balls to hand to sitting U.S. Senators was, to quote one person familiar with the situation, "disgraceful" and "hilarious."

Checkout the whole story on his blog. Apparently, in the upcoming Rolling Stone piece, he gets into the nitty gritty with regard to how naked short-selling brought down both Bear Stearns and Lehman, last  year.

Should be pretty powerful stuff.

Meanwhile, getting back to the SEC roundtable, noted above, strike up the fifth item that I've now documented in the past 48 hours where it's becoming self-evident that our elected representatives and our government agencies aren't even bothering to author the new regulations and legislation that's so needed to prevent a recurrence of events such as those we witnessed through the economic/market catastrophes of the past 24 months; these legislators and high-ranking government officials are actually having the lobbyists navigate the discussion and write the damn stuff, too!

How much worse can it get? I really don't want to know the answer  to that rhetorical question. But, with the inmates running the asylum, we may just find out sooner than we think!

Bob Jensen's threads on noble and ignoble agendas of the bailout machine ---
http://www.trinity.edu/rjensen/2008Bailout.htm#IgnobleAgendas


November 19, 2009 message from Linda A Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

A very interesting filing from Overstock.com includes their reason for filing an unreviewed 10-Q.  It is a great illustration of the judgment involved in auditing. --- Click Here

http://snipurl.com/overstockgt     [www_sec_gov] 

Linda

Where’s Mary Mary Quite Contrary?
An SEC investigation of Overstock.com and Byrne seeking information as to the company's accounting policies, targets, projections, and estimates relating to its financial performance, continued but was dropped in June 2008.

http://en.wikipedia.org/wiki/Overstock.com

Here's the message from that overstocked "humble servant:"

Question
What does “we agree with PwC mean?”
Would PwC have handled this differently?

Overstock.com Files Unreviewed Form 10-Q for Q3 2009

 

SALT LAKE CITY — Overstock.com, Inc. (NASDAQ: OSTK) today filed an unreviewed Form 10-Q for the period ending September 30, 2009.  Below is a letter from Patrick Byrne, the company’s Chairman and CEO.

 

“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” — Friedrich Nietzsche

 

Dear Owner:

 

We have elected to file an unreviewed Form 10-Q for the period ending September 30, 2009.  Here is why:

 

1.

In February 2009, we were notified by a partner that we had overpaid it approximately $700,000, but that the partner wanted to reach a mutual solution to this overpayment and another open issue (the partner has asserted that we might owe it in excess of $400,000 regarding this other issue).  At that time, we doubted our ability to recover this overpayment and we could not reasonably estimate what we might recover.

 

 

2.

Thus, we had to decide between either immediately recognizing as income a sum whose magnitude, collection, and collectability was in doubt (which we felt was an incorrect and aggressive position, especially in light of the economic and retail environment of the time), or whether we should take a more conservative position of negotiating with this vendor who owed whom, how much, and on what terms, including timing of payment, and recognizing those sums only if and when we received the payments.

 


 

3.

The accounting for this transaction required significant judgment and interpretation of the facts and circumstances — which others with 20/20 hindsight might later question.  Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognize the sums as we recovered the money (that is, we thought the conservative position was the correct position). Our auditors at the time, PricewaterhouseCoopers (“PwC”), agreed with this course of action, and we prepared our 2008 Form 10-K on the basis of this decision.

 

 

4.

Although PwC had given us eight years of fine service, after we filed our 2008 Form 10-K, we ran a formal RFP process for selecting our 2009 auditors as a reflection of my belief that changing auditors every decade or so might be healthy. Grant Thornton won that RFP, and the Audit Committee selected Grant Thornton as our 2009 auditor.

 

 

5.

Before Grant Thornton took our audit engagement in Q1 2009, it reviewed our filed 2008 Form 10-K and told us it was comfortable with our past accounting practices.

 

 

6.

In late Q1 2009, we received $785,000 relating to the partner overpayment discussed in point 1 above (even though the other issue with that partner remained unresolved).  Thus, we recognized $785,000 in our 2009 Q1 Form 10-Q financials, which Grant Thornton reviewed as our auditors.  In addition we highlighted $1.9 million (of which the $785,000 was a part) attributable to the collected overpayment, certain partner under-billing collections, and a freight carrier’s refund of overcharges in one-time, non-recurring income in that quarter’s earnings release, earnings conference call and Form 10-Q.

 

 

7.

As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q’s for those quarters.  Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, “No.” In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.

 

 

8.

In early October and again in early November, the SEC sent us comment letters asking us, among other things, to advise it on and justify the accounting treatment we used regarding the $785,000.

 

 

9.

Last week, Grant Thornton advised us that, on further consultation and review within the firm, it had revised its position and that it now believes that we should have recorded the $785,000 as an asset in 2008.  As a result of its accounting position, Grant Thornton said it would be unable to complete its review of the financial statements in our Q3 Form 10-Q unless we amended our previous 2009 quarterly filings and restated our 2008 financial results.  On November 13, Grant Thornton also advised us that it believes that we should make disclosure or take action to prevent future reliance on our March 31, 2009 financial statements and June 30, 2009 financial statements filed in our Q1 and Q2 Form 10-Q’s, as a result of this issue.

 

 

10.

We disagree with Grant Thornton.  We, along with PwC, continue to believe that we have accounted for the $785,000 correctly and thus our Q1 and Q2 financial statements are correct.  Both we and PwC believe that it is not proper to reopen our 2008 Form 10-K, subject to resolution with the SEC of its comment letters.

 


 

11.

Thus, we are in a quandary: one auditing firm won’t sign-off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K.  Unfortunately, Grant Thornton’s decision-making could not have been more ill-timed as we ran into SEC filing deadlines.

 

As a result, we have elected to dismiss Grant Thornton, file an unreviewed Q3 Form 10-Q (as we have no current auditor), continue to work with the SEC on the issues addressed in its comment letters, and engage another independent audit firm.  Once we have completed these last two items, we will file a reviewed Q3 Form 10-Q/A.

 

In the meantime, I will continue to focus on the business during this busiest part of the year.

 

I will hold a conference call to further explain and answer questions regarding this matter on Wednesday afternoon at 5:00 p.m. EST (details below).  Until then, I remain,

 

Your humble servant,

 

Patrick M. Byrne

 

The WebCPA blurb on this is at
http://www.webcpa.com/news/Overstock-CEO-Objects-Grant-Thornton-Audit-52499-1.html


Bailing Out Big Banks Engaged in Sleaze and Sex
"Goldman Laid Down with Dogs," by Ryan Chittum, Columbia Journalism Review, November 4, 2009 ---
http://www.cjr.org/index.php 
This link was forwarded by my friend Larry.

Dean Starkman has been applauding McClatchy’s series on Goldman Sachs (an Audit funder) for a couple of days now. Add another Audit appreciation today.

McClatchy has been doing what Dean has been calling for for a long time now: Looking much more closely at how Wall Street fueled the mortgage crisis and how it was deeply connected to the shadier parts of the housing industry. Or as McClatchy’s Greg Gordon puts it:

… one of Wall Street’s proudest and most prestigious firms helped create a market for junk mortgages, contributing to the economic morass that’s cost millions of Americans their jobs and their homes.

Today, McClatchy examines Goldman’s relationship with New Century Financial, a firm that was something of the canary in the coalmine of this financial crisis—it was the second-biggest subprime mortgage lender when it went belly-up in April 2007, which was very, very early. In other words, it was one of the worst actors in the whole mess:

Perhaps no mortgage lender was more emblematic of the go-go atmosphere in the sprouting industry that was seizing an outsize share of the home loan market.

 

Traversing the country in private jets and zipping around Southern California in Mercedes Benzes, Porsches and even a Lamborghini, New Century executives reveled as the firm’s annual residential mortgage sales rocketed from $357 million in 1996 to nearly $60 billion a decade later…

What does that have to do with Goldman Sachs and Wall Street?

For $100 million in mortgages, New Century could command fees from Wall Street of $4 million to $11 million, ex-employees told McClatchy. The goal was to close loans fast, bundle them into pools and sell them to generate money for the next round.

 

Inside the mortgage company, the former employees said, pressure was intense to increase the firm’s share of an exploding market for mortgages that depended almost entirely on Wall Street’s seemingly unlimited hunger for bigger, faster returns.

Aha! But wait—why did Wall Street want to buy this trash?

Goldman and other investment banks could put $20 million in the till by taking a 1 percent fee for assembling, securitizing and selling a $2 billion pool of mostly triple-A rated bonds backed by subprime loans — and that was just stage one.

That takes you toThe Giant Pool of Money.” And that was far from the only juice being squeezed from these lemons. Goldman et al got servicing fees and the like, plus they “extended lines of credit to New Century — known as “warehouse loans” — totaling billions of dollars to finance the issuance of more home loans to other marginal borrowers. Goldman Sachs’ mortgage subsidiary gave the firm a $450 million credit line.”

In other words, Wall Street lent the money to the predatory firms to create the shady loans so it could buy them from them, slice them into securities and sell them to the greater fools. This was so profitable there weren’t enough decent loans to be made. So to feed the beast, mortgage lenders came up with disastrous inventions like NINJA loans (No Income, No Jobs, No Assets) and Wall Street, ahem, looked the other way.

It was a vicious circle of profit (virtuous—if you were one of those who lined their pockets through it) and was interrupted only when the underlying loans got so bad that borrowers like the ones with no income, no jobs, and no assets in many instances couldn’t even make a single payment on the loan. Panic!

McClatchy does well to report on the New Century culture, helpful in illustrating the lie-down-with-dogs-get-up-with-fleas thing, writing about the sexualization of some of the work, something reminds us of BusinessWeek’s fascinating story on the subprime industry’s descent into decadence (the sub headline on that one should be all that’s needed to entice you to read that one: “The sexual favors, whistleblower intimidation, and routine fraud behind the fiasco that has triggered the global financial crisis.”)

But it wasn’t just sex. New Century was giving kickbacks to mortgage brokers to get their loans, McClatchy quotes a former top underwriter there as saying.

Let’s not forget, and McClatchy doesn’t, thankfully, that borrowers were the marks here and took it on the chin:

The loans laid out financial terms that protected investors but punished homebuyers. They offered above-market interest rates, typically starting at 8 percent, with provisions that Lee said were “rigged” to guarantee the maximum 3 percent rise in interest rates after two years and almost assuredly another 3 percent increase through ensuing, twice-yearly adjustments.

This is top-notch work by McClatchy. It deserves a wide airing.

Bob Jensen's threads on Bailing Out Big Banks and Mortgage Companies Engaged in Sleaze and Sex ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

 


"SEC Sues Value Line Inc. and Two Senior Officers for $24 Million Fraudulent Scheme," SEC Press Release, November 4. 2009 ---
http://www.sec.gov/news/press/2009/2009-234.htm

 FOR IMMEDIATE RELEASE 2009-234 Washington, D.C., Nov. 4, 2009 — The Securities and Exchange Commission today charged New York City-based investment adviser Value Line Inc., its CEO, its former Chief Compliance Officer and its affiliated broker-dealer with defrauding the Value Line family of mutual funds by charging over $24 million in bogus brokerage commissions on mutual fund trades funneled through Value Line's affiliated broker-dealer, Value Line Securities, Inc. (VLS).

Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

Bob Jensen's Security Analyst Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


Some Great Role Models --- Ha! Ha!
"Dozens in Congress under ethics inquiry:
AN ACCIDENTAL DISCLOSURE Document was found on file-sharing network
," by Ellen Nakashima and Paul Kane, The Washington Post, October 30, 2009 --- Click Here

The report appears to have been inadvertently placed on a publicly accessible computer network, and it was provided to The Washington Post by a source not connected to the congressional investigations. The committee said Thursday night that the document was released by a low-level staffer.

The ethics committee is one of the most secretive panels in Congress, and its members and staff members sign oaths not to disclose any activities related to its past or present investigations. Watchdog groups have accused the committee of not actively pursuing inquiries; the newly disclosed document indicates the panel is conducting far more investigations than it had revealed.

Shortly after 6 p.m. Thursday, the committee chairman, Zoe Lofgren (D-Calif.), interrupted a series of House votes to alert lawmakers about the breach. She cautioned that some of the panel's activities are preliminary and not a conclusive sign of inappropriate behavior.

"No inference should be made as to any member," she said.

Rep. Jo Bonner (Ala.), the committee's ranking Republican, said the breach was an isolated incident.

The 22-page "Committee on Standards Weekly Summary Report" gives brief summaries of ethics panel investigations of the conduct of 19 lawmakers and a few staff members. It also outlines the work of the new Office of Congressional Ethics, a quasi-independent body that initiates investigations and provides recommendations to the ethics committee. The document indicated that the office was reviewing the activities of 14 other lawmakers. Some were under review by both ethics bodies.

A broader inquiry

Ethics committee investigations are not uncommon. Most result in private letters that either exonerate or reprimand a member. In some rare instances, the censure is more severe.

Many of the broad outlines of the cases cited in the July document are known -- the committee announced over the summer that it was reviewing lawmakers with connections to the now-closed PMA Group, a lobbying firm. But the document indicates that the inquiry was broader than initially believed. It included a review of seven lawmakers on the House Appropriations defense subcommittee who have steered federal money to the firm's clients and have also received large campaign contributions.

The document also disclosed that:

-- Ethics committee staff members have interviewed House Ways and Means Chairman Charles B. Rangel (D-N.Y.) about one element of the complex investigation of his personal finances, as well as the lawmaker's top aide and his son. Rangel said he spoke with ethics committee staff members regarding a conference that he and four other members of the Congressional Black Caucus attended last November in St. Martin. The trip initially was said to be sponsored by a nonprofit foundation run by a newspaper. But the three-day event, at a luxury resort, was underwritten by major corporations such as Citigroup, Pfizer and AT&T. Rules passed in 2007, shortly after Democrats reclaimed the majority following a wave of corruption cases against Republicans, bar private companies from paying for congressional travel.

Rangel said he has not discussed other parts of the investigation of his finances with the committee. "I'm waiting for that, anxiously," he said.

The Justice Department has told the ethics panel to suspend a probe of Rep. Alan B. Mollohan (D-W.Va.), whose personal finances federal investigators began reviewing in early 2006 after complaints from a conservative group that he was not fully revealing his real estate holdings. There has been no public action on that inquiry for several years. But the department's request in early July to the committee suggests that the case continues to draw the attention of federal investigators, who often ask that the House and Senate ethics panels refrain from taking action against members whom the department is already investigating.

Mollohan said that he was not aware of any ongoing interest by the Justice Department in his case and that he and his attorneys have not heard from federal investigators. "The answer is no," he said.

-- The committee on June 9 authorized issuance of subpoenas to the Justice Department, the National Security Agency and the FBI for "certain intercepted communications" regarding Rep. Jane Harman (D-Calif.). As was reported earlier this year, Harman was heard in a 2005 conversation agreeing to an Israeli operative's request to try to obtain leniency for two pro-Israel lobbyists in exchange for the agent's help in lobbying House Speaker Nancy Pelosi (D-Calif.) to name her chairman of the intelligence committee. The department, a former U.S. official said, declined to respond to the subpoena.

Harman said that the ethics committee has not contacted her and that she has no knowledge that the subpoena was ever issued. "I don't believe that's true," she said. "As far as I'm concerned, this smear has been over for three years."

In June 2009, a Justice Department official wrote in a letter to an attorney for Harman that she was "neither a subject nor a target" of a criminal investigation.

Because of the secretive nature of the ethics committee, it was difficult to assess the current status of the investigations cited in the July document. The panel said Thursday, however, that it is ending a probe of Rep. Sam Graves (R-Mo.) after finding no ethical violations, and that it is investigating the financial connections of two California Democrats.

The committee did not detail the two newly disclosed investigations. However, according to the July document, Rep. Maxine Waters, a high-ranking member of the House Financial Services Committee, came under scrutiny because of activities involving OneUnited Bank of Massachusetts, in which her husband owns at least $250,000 in stock.

Waters arranged a September 2008 meeting at the Treasury Department where OneUnited executives asked for government money. In December, Treasury selected OneUnited as an early participant in the bank bailout program, injecting $12.1 million.

The other, Rep. Laura Richardson, may have failed to mention property, income and liabilities on financial disclosure forms.

File-sharing

The committee's review of investigations became available on file-sharing networks because of a junior staff member's use of the software while working from home, Lofgren and Bonner said in a statement issued Thursday night. The staffer was fired, a congressional aide said.

The committee "is taking all appropriate steps to deal with this issue," they said, noting that neither the committee nor the House's information systems were breached in any way.

"Peer-to-peer" technology has previously caused inadvertent breaches of sensitive financial, defense-related and personal data from government and commercial networks, and it is prohibited on House networks.

House administration rules require that if a lawmaker or staff member takes work home, "all users of House sensitive information must protect the confidentiality of sensitive information" from unauthorized disclosure.

Leo Wise, chief counsel for the Office of Congressional Ethics, declined to comment, citing office policy against confirming or denying the existence of investigations. A Justice Department spokeswoman also declined to comment, citing a similar policy.

The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers


"Pay-to-Play Torts Pension middlemen get investigated; lawyers get a pass," The Wall Street Journal, October 31, 2009 ---
http://online.wsj.com/article/SB10001424052748704107204574473310387443816.html?mod=djemEditorialPage

Pay-to-play schemes involving public officials and the pension funds they oversee are finally getting the hard look they deserve. Some 36 states are investigating how financial brokers and other middlemen have used kickbacks and campaign contributions to gain access to retirement funds. Now if only plaintiffs law firms would get the same scrutiny.

Like investment funds, class-action law firms hire intermediaries to help win state business. But the more common practice is for plaintiffs lawyers to make campaign contributions to public officials with the goal of being selected by those same officials to represent the pension fund in securities litigation.

These enormous state funds are among the world's largest institutional investors, and they frequently sue companies on behalf of shareholders. The role of pension funds in such suits became all the more important after the securities-law reform of 1995 that limited the ability of some plaintiffs to file shareholder lawsuits. So plaintiffs law firms have worked especially hard to turn these pension funds into business partners in their pursuit of class action riches.

The law firms typically agree to take the cases on a contingency basis that means no fees up front but a huge share (30% or more) of any settlement or jury verdict. However, attorneys suing on the government's behalf are supposed to be neutral actors whose goal is justice, not lining their own pockets. When for-profit lawyers are involved with a contingency fee at the end of the lawsuit rainbow, the incentives shift toward settling to get a big payday.

This month, the New York Daily News reported that the lawyers representing New York state's $116.5 billion pension fund have received more than a half-billion dollars in contingency fees over the past decade. Meanwhile, state Comptroller Thomas DiNapoli, the fund's sole trustee, "has raked in more than $200,000 in campaign cash from law firms looking to represent the state's pension fund in big-money suits," the paper reported. Attorneys from one Manhattan firm, Labaton Sucharow, gave Mr. DiNapoli $47,500 in December 2008, only months after he chose the firm as lead counsel in a class action suit against Countrywide Financial. Mr. DiNapoli's office says firms that give money don't get preferential treatment.

The Empire State is hardly unusual. Labaton Sucharow has given more than $58,000 to Massachusetts State Treasurer Timothy Cahill, who recently announced his gubernatorial bid. The Labaton firm is representing state and county pension funds in more than a dozen security class action lawsuits.

The Louisiana State Employees' Retirement System is among the most litigious in the nation. John Kennedy, the state treasurer who helps decide when Louisiana's major pension funds should bring a law suit, has received tens of thousands of dollars in political donations from Bernstein Litowitz, which has offices in New York, New Orleans and San Diego and was the country's top-grossing securities class-action firm in 2008. The law firm has represented Louisiana's public pension funds at least 13 times since 2004, and its partners donated nearly $30,000 to Mr. Kennedy's two most recent campaigns, even though he ran unopposed both times.

In Mississippi, the state attorney general determines when the public employees retirement fund should bring a securities class action and which outside firms will represent the fund. Would you be shocked to learn that AG Jim Hood has frequently chosen law firms that have donated to his campaigns?

Mr. Hood is also partial to Bernstein Litowitz. On February 21, 2006, he chose the firm to represent the Mississippi Public Employees Retirement Fund in a securities class action against Delphi Corporation—just days after receiving $25,000 in donations from Bernstein Litowitz attorneys. The suit was eventually settled, and the lawyers on the case received $40.5 million in fees. Mr. Hood's campaign would appear to deserve a raise.

Back in New York, Attorney General Andrew Cuomo has garnered banner headlines and much praise for his pay-to-play pension fund probe that has already led to four guilty pleas by investors and politicians. Good for him. Yet when asked about pursuing the trial bar for similar behavior, his office says it has no jurisdiction to go after law firms in class action suits. He could at least turn down their campaign money, however.

Mr. Cuomo's campaign happens to have received $200,000 from securities law firms. Perhaps it's merely a coincidence that the expected candidate for governor in 2010 doesn't want to investigate his funders. Mr. Cuomo recently proposed legislation that puts restrictions on campaign donations from investment firms seeking pension business. His proposal does not seek the same restrictions on securities law firms. Perhaps that's another coincidence.

If Mr. Cuomo won't investigate pay-to-play torts on his own, then someone else should investigate Mr. Cuomo's relationship with these pay-to-play law firms.

The most criminal class writes the laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm


A lender at Fulton bank told me they were swamped over the summer with mortgage applications from unmarried couples living together where one of them owned the house and was selling to the other so they could get their $8000 from the US Treasury. This won't show up in the fraud stats but it certainly is not the behavior our wise leaders in DC intended with this credit.
Hossein Nouri

"First-Time Fraudsters A tax credit so silly even a four-year-old can exploit it," The Wall Street Journal, October 29, 2009 ---
http://online.wsj.com/article/SB10001424052748703574604574501253942115922.html?mod=djemEditorialPage

It's hard not to laugh when viewing the results of the federal first-time home-buyer tax credit. The credit, worth up to $8,000 for the purchase of a home, has only been available since April of last year. Yet news of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury's inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn't purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren't first-time buyers.

It's hard not to laugh when viewing the results of the federal first-time home-buyer tax credit. The credit, worth up to $8,000 for the purchase of a home, has only been available since April of last year. Yet news of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury's inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn't purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren't first-time buyers.

Among those claiming bogus credits, at least some of them were definitely first-timers. The credit has already been claimed by 500 people under the age of 18, including a four-year-old. This pre-K housing whiz likely bought because mom and dad make too much to qualify for the full credit, which starts to phase out at $150,000 of income for couples, $75,000 for singles.

As a "refundable" tax credit, it guarantees the claimants will get cash back even if they paid no taxes. A lack of documentation requirements also makes this program a slow pitch in the middle of the strike zone for scammers. The Internal Revenue Service and the Justice Department are pursuing more than 100 criminal investigations related to the credit, and the IRS is reportedly trying to audit almost everyone who claims it this year.

Speaking of the IRS, apparently its own staff couldn't help but notice this opportunity to snag an easy $8,000. One day after explaining to Congress how many "home-buyers" were climbing aboard this gravy train, Mr. George appeared on Neil Cavuto's program on the Fox Business Network. Mr. George said his staff has found at least 53 cases of IRS employees filing "illegal or inappropriate" claims for the credit. "In all honesty this is an interim report. I expect that the number would be much larger than that number," he said.

The program is set to expire at the end of November, so naturally given its record of abuse, Congress is preparing to extend it. Republican Senator Johnny Isakson of Georgia is so pleased with the results that he wants to expand the program beyond first-time buyers and double the income limits.

This is the point in the story when a taxpayer's sense of humor is bound to give way to a different emotion. The credit's cost is running at about $1 billion a month and $15 billion for the year. Also, even when employed by an honest buyer, it's another distortion that drives capital into housing and away from other more productive uses. For America's tens of millions of tax-paying renters, it's another subsidy they provide for their neighbors to be able to sell their houses at a higher price.

While the credit seems to have boosted home sales, many of those sales would have happened anyway and have merely been stolen from the future. Meanwhile, the credit continues to distort the housing market and postpone the day when home prices can find a floor that is a basis for a stable recovery.

More than two years into the housing bust, trillions of dollars in taxpayer losses or guarantees via Fannie Mae and Freddie Mac, and amid an ongoing plague of redefaults in federal programs to prevent foreclosures, politicians are still trying to manipulate housing prices. And leave it to Congress to design a program that even a four-year-old can scam.

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

What do you want to bet that Marvene got back into the action? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze


Why single out capitalism for immorality and ethics and fraud misbehavior?

Making capitalism ethical is a tough task – and possibly a hopeless one.
Prem Sikka (see below)

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.
Prem Sikka (see below)

Jensen Comment
Yeah right Prem, as if making the public sector and socialism ethical is an easier task. The least ethical nations where bribery, crime, and immorality are the worst are likely to be the more government (dictator) controlled and lower on the capitalism scale. And in the so-called capitalist nations, the lowest ethics are more apt to be found in the public sector that works hand in hand with bribes from large and small businesses.

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

We hang the petty thieves and appoint the great ones to public office.
Aesop

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

Why should members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides," The Wall Street Journal, March 28, 2006; Page A1 --- http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one

The Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties:  Few if any are uncorrupted
Committee members have shown no appetite for taking up all those cases and are considering an amnesty for reporting violations, although not for serious matters such as accepting a trip from a lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates that members of Congress have received more than $18 million in travel from private organizations in the past five years, with Democrats taking 3,458 trips and Republicans taking 2,666. . . But of course, there are those who deem the American People dumb as stones and will approach this bi-partisan scandal accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points for her minion, that are sure to come back and bite her .... “House Minority Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips she accepted from outside sponsors that were worth $8,580 and occurred as long as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National Ledger, January 6, 2006 --- http://www.nationalledger.com/artman/publish/article_27262498.shtml 

And when they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page A20  --- Click Here

Once again, the power of pork to sustain incumbents gets its best demonstration in the person of John Murtha (D-PA). The acknowledged king of earmarks in the House gains the attention of the New York Times editorial board today, which notes the cozy and lucrative relationship between more than two dozen contractors in Murtha's district and the hundreds of millions of dollars in pork he provided them. It also highlights what roughly amounts to a commission on the sale of Murtha's power as an appropriator: Mr. Murtha led all House members this year, securing $162 million in district favors, according to the watchdog group Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to create the National Defense Center for Environmental Excellence in Johnstown to develop anti-pollution technology for the military. Since then, it has garnered more than $670 million in contracts and earmarks. Meanwhile it is managed by another contractor Mr. Murtha helped create, Concurrent Technologies, a research operation that somehow was allowed to be set up as a tax-exempt charity, according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed; the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 --- http://www.captainsquartersblog.com/mt/archives/016617.php

"Several Democrats, including some closed allied to Speaker Nancy Pelosi, are the subject of ethics complaints," by Holly Bailey, Newsweek Magazine, October 3, 2009 --- http://www.newsweek.com/id/216687

Nancy Pelosi likes to brag that she's "drained the swamp" when it comes to corruption in the House, but ethics problems could come back to haunt Democrats in 2010. Democrats are currently the subject of 12 of the 16 complaints pending before the House ethics committee. Two of the lawmakers under scrutiny—Reps. Jack Murtha and Charlie Rangel—have close ties to Pelosi, who has come under criticism for not asking them to resign their committee posts. Murtha, chairman of a key defense-appropriations subcommittee, is is not formally under investigation but the ethics committee is reviewing political contributions he and other House lawmakers received from lobbying firm whose clients received millions of dollars in Defense earmarks. Rangel, chairman of the Ways and Means Committee, is facing scrutiny for not fully disclosing assets. The ethics committee is also looking into ties between Rangel and a developer who leased rent-controlled apartments to the congressman, and whether Rangel improperly used his House office to raise funds for a public policy institute in his name. Rangel and Murtha deny any wrongdoing. (Another lawmaker under investigation: Rep. Jesse Jackson Jr., who, according to the committee, "may have offered to raise funds" for then–Illinois governor Rod Blagojevich in exchange for the president's Senate seat—a charge Jackson denies. The panel deferred its probe at the request of the Justice Department, which is conducting its own inquiry.)

Pelosi has said little about Rangel's ethics problems, or those involving other Democrats; a Pelosi spokesman, Brendan Daly, e-mails NEWSWEEK, "The speaker has said that [Rangel] should not step aside while the independent, bipartisan ethics committee is investigating."

But watchdog groups, not to mention Republicans, are calling Pelosi hypocritical (as if they weren't equally hypocritical) since Democrats won back control of the House by, in part, trashing the GOP's ethics lapses. Republicans already plan to use the ethics issue against Democrats in 2010. Though Rangel and Murtha aren't as known as Tom DeLay, the GOP poster boy for scandal in 2006, the party aims to change that: this week the House GOP plans to introduce a resolution calling on Rangel to resign his committee post.

Pelosi "promised to run the most ethical Congress in history," says Ken Spain, a spokesman for the National Republican Congressional Committee, "and instead of cracking down on corruption, she promotes it (to garner votes in Congress)." Daly responds, "Since Democrats took control of Congress, we have strengthened the ethics process." (Daly has some magnificent ocean front property for sale in Arizona.)

"Can morality be brought to market?" by Prem Sikka, The Guardian, October 7, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/oct/07/bae-business-ethics-morality-markets

The BAE bribery scandal has once again brought discussions of business ethics to the fore. Politicians also claim to be interested in promoting morality in markets, but have not explained how this can be achieved.

There is no shortage of companies wrapping themselves in claims of ethical conduct to disarm critics. BAE boasts a global code of conduct, which claims that "its leaders will act ethically, promote ethical conduct both within the company and in the markets in which we operate". In the light of the revelations about the way the company secured its business contracts, such claims must be doubted.

BAE is not alone. There is a huge gap between corporate talk and action, and a few illustrations would help to highlight this gap. KPMG is one of the world's biggest accountancy firms. Its global code of conduct states that the firm is committed to "acting lawfully and ethically, and encouraging this behaviour in the marketplace … maintaining independence and objectivity, and avoiding conflicts of interest". Yet the firm created an extensive organisational structure to devise tax avoidance and tax evasion schemes. Former managers have been found guilty of tax evasion and the firm was fined $456m for "criminal wrongdoing".

The global code of conduct of Ernst & Young, another global accountancy firm, claims that "no client or external relationship is more important than the ethics, integrity and reputation of Ernst & Young". Partners and former partners of the firm have also been found guilty of promoting tax evasion.

UBS, a leading bank, has been fined $780m by the US authorities for facilitating tax evasion, but it told the world that "UBS upholds the law, respects regulations and behaves in a principled way. UBS is self-aware and has the courage to face the truth. UBS maintains the highest ethical standards."

British Airways paid a fine of £270m after admitting price fixing on fuel surcharges on its long-haul flights while its code of conduct promised that it would behave responsibly and ethically towards its customers.

These are just a tiny sample that shows that corporations say one thing but do something completely different. This hypocrisy is manufactured by corporate culture, and unless that process is changed there is no prospect of securing moral corporations or markets.

The key issue is that companies cannot buck the systemic pressures to produce ever higher profits. Capitalism is not accompanied by any moral guidance on how high these profits have to be, but shareholders always demand more. Markets do not ask any questions about the quality of profits or the human consequences of ever-rising returns. Behind a wall of secrecy, company directors devise plans to fleece taxpayers and customers to increase profits, and are rewarded through profit-related remuneration schemes. The social system provides incentives for unethical behaviour.

Within companies, daily routines encourage employees to prioritise profit-making even if that is unethical. For example, tax departments within major accountancy firms operate as profit centres. The performance of their employees is assessed at regular intervals, and those generating profits are rewarded with salary increases and career advancements. In time, the routines of devising tax avoidance schemes and other financial dodges become firmly established norms, and employees are desensitised to the consequences.

With increasing public scepticism, and pressure from consumer groups and non-governmental organisations (NGOs), companies manage their image by publishing high-sounding statements. Ethics itself has become big business, and armies of consultants and advisers are available for hire to enable companies to manage their image. No questions are raised about the internal culture or the economic incentives for misbehaviour. It is far cheaper for companies to publish glossy brochures than to pay taxes or improve customer and public welfare. The payment of fines has become just another business cost.

Making capitalism ethical is a tough task – and possibly a hopeless one. Any policy for encouraging ethical corporate conduct has to change the nature of capitalism and corporations so that companies are run for the benefit of all stakeholders, rather than just shareholders. Pressures to change corporate culture could be facilitated by closing down persistently offending companies, imposing personal penalties on offending executives and offering bounties to whistleblowers.

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm

Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers


  • What happened was an explosion of loans being made outside of the regular banking system. It was largely the unregulated sector of the lending industry and the underregulated and the lightly regulated that did that.
    Barney Frank

    Question
    How did banks circumvent mortgage regulations in before the subprime scandal broke?

    Jensen Comment
    For once I would like to bless Barney Frank, although as chairman of the House Financial Services Committee when these scandals were taking place, he should have stopped this banking house of cards before this banking fraud came tumbling down. In spite of yelling foul now, Rep. Frank helped create this pile of "Barney's Rubble." Pardon me for not blessing Barney now ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
    Was he left in the dark about mortgage fraud? Wink! Wink!
    I'm about to puke!

    Hint
    They used a ploy much like corporations used to keep real estate and other debt of the balance sheet before accounting standard setters put an end to the sham. For example, Avis Car rental at one time avoided putting millions of debt for financing its cars by creating a sham subsidiary financing subsidiary and then (in those good old days) did not consolidate the financing subsidiary into the consolidated balance sheet of Avis. Similarly, Safeway appeared to not own any stores or have any mortage debt on those stores because all this was hidden in an unconsolidated subsidiary. It took way to long in the United States for the FASB to put an end to the sham of off-balance-sheet-financing (OBSF):
    FAS 94:  Consolidation of All Majority-owned Subsidiaries--an amendment of ARB No. 51, with related amendments of APB Opinion No. 18 and ARB No. 43, Chapter 12 (Issued 10/87) --- http://www.fasb.org/summary/stsum94.shtml

    In the case of banks circumventing regulations on selling mortgages, here's how it worked with sham mortgage company subsidiaries.

    "Subprime and the Banks: Guilty as Charged," by Joe Nocera. The New York Times, October 14, 2009 ---
    http://executivesuite.blogs.nytimes.com/2009/10/14/subprime-and-the-banks-guilty-as-charged/

    “There has not been a case made that there is an enforcement problem with banks,” Edward Yingling, the head of the American Bankers Association, said last week. “There is a problem with enforcement on nonbanks.”

    As I wrote in my column last week, this has become something of a mantra for the banking industry. We aren’t the ones who brought the world to the brink of financial disaster, they proclaim. It was those awful nonbanks, the mortgage brokers and originators, who peddled those terrible subprime loans to unsuspecting or unsophisticated consumers. They’re the ones who need to be regulated!

    Apparently, when you say something long enough and loud enough, people start to believe it, even when it defies reality. Here, for instance, is the normally skeptical Barney Frank on the subject: “What happened was an explosion of loans being made outside of the regular banking system. It was largely the unregulated sector of the lending industry and the underregulated and the lightly regulated that did that.”

    To which I can now triumphantly reply: Oh, really???

    Last weekend, after the column was published, an angry mortgage broker — someone who felt she and her ilk were being unfairly scapegoated by the banking industry — sent me a series of rather eye-opening documents. They were a series of fliers and advertisements that had been sent to her office (and mortgage brokers all over the country) from JPMorgan Chase, advertising their latest wares. They were dated 2005, which was before the subprime mortgage boom got completely out of control. They’re still pretty sobering.

    “The Top 10 Reasons to Choose Chase for All Your Subprime Needs,” screams the headline on the first one. Another was titled, “Chase No Doc,” and described the criteria for a borrower to receive a so-called no-document loan. “Got Bank Statements?” asked a third flier. “Get Approved!” In a number of the fliers, Chase makes it clear to the mortgage brokers that the bank doesn’t need income or job verification — it just needs to look at a handful of old bank statements.

    “There were mortgage brokers who acted unethically, absolutely,” my source told me when I called her on Monday. (She asked to remain anonymous because she still has to work with JPMorgan Chase and the other big banks.) “But where do you think mortgage brokers were getting the subprime mortgages they were selling to customers? From the big banks, that’s where. Chase, Wells Fargo, Bank of America — they were all doing it.”

    So enough already about how the banks weren’t the problem. Of course they were. Here’s the evidence, right here. Read ’em and weep.

    Jensen Comment
    If you really want to see how sleazy mortgage lending became, read about the on Marvene's shack in Phoenix. She purchased the shack for $3,500 and later, with no improvements, got a $103,000 mortgage. When the mortgage was foreclosed, neighbors bought the shack and tore it down --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

    Bob Jensen's threads on the banking scandals accompanied by taxpayer bailouts ---
    http://www.trinity.edu/rjensen/2008Bailout.htm

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

    Rotten to the Core ---
    http://www.trinity.edu/rjensen/FraudRotten.htm


    Brooke Astor’s Son Guilty in Scheme to Defraud Her
    Anthony D. Marshall was convicted of stealing from the matriarch as she suffered from Alzheimer’s disease in the twilight of her life. He could face from 1 to 25 years behind bars . . . Mr. Marshall was found guilty of 14 of the 16 counts against him, including one of two first-degree grand larceny charges, the most serious he faced. Jurors convicted him of giving himself an unauthorized raise of about $1 million for managing his mother’s finances. Prosecutors contended that Mrs. Astor’s Alzheimer’s had advanced so far that there was no way she could have consented to this raise and other financial decisions that benefited Mr. Marshall. A second defendant in the case, Francis X. Morrissey Jr., a lawyer who did estate planning for Mrs. Astor, was convicted of forgery charges.
    John Eligon, The New York Times, October 8, 2009 ---
    http://www.nytimes.com/2009/10/09/nyregion/09astor.html?_r=1&hp


    Here’s an expanded view of questions raised about which constituencies credit rating agencies (and by analogy auditing firms) really serve.

    A message forwarded by my anonymous friend Larry on October 18, 2009

    How Moody's sold its ratings -- and sold out investors | McClatchy ---
    http://www.mcclatchydc.com/politics/story/77244.html
    Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

    "In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities," said Lawrence McDonald in his recent book, "A Colossal Failure of Common Sense."

    Nobody cared about due diligence so long as the money kept pouring in during the housing boom. Moody's stock peaked in February 2007 at more than $72 a share.

    Billionaire investor Warren Buffett's firm Berkshire Hathaway owned 15 percent of Moody's stock by the end of 2001, company reports show. That stake, largely still intact, meant that the Oracle from Omaha reaped huge financial rewards while Moody's overlooked the glaring problems in pools of subprime mortgages.

    A Berkshire spokeswoman had no comment.

    Moody's wasn't alone in ignoring the mounting problems. It wasn't even first among competitors. The financial industry newsletter Asset-Backed Alert found that Standard & Poor's participated in 1,962 deals in 2006 involving pools of loans, while Moody's did 1,697. In 2005, Standard & Poor's did 1,754 deals to Moody's 1,120. Fitch was well behind both.

    http://www.mcclatchydc.com/politics/story/77244.html

    Jensen Comment
    I’m frantically searching the writings of my very technical hero, Janet Tavakoli, to discover that all this is not true about my other hero, Warren Buffett. Of course there are huge and unknown, at this points, degrees of culpability.

    Janet is pretty rough on the ratings agencies in her writings. However, she’s always kind to Warren. One of my all-time favorite books is her Dear Mr. Buffet book. On Page 107, Janet writes as follows:

    At the end of 2007, Berkshire Hathaway owned 78 million shares of Moody’s Corporation, one of the top three rating agencies (the same shares owned when I first met Warren Buffett in 2005), representing just over 19 percent of the capital stock. The cot basis of the shares is $499 million. At the end of 200, the value was just under $1 billion. By the end of 2006, the value was around $3.3 billion, but it dropped to $1.7 billion at the end of 2007. The sharp increase in revenues is due chiefly to revenues generated from rating structured financial products, and the sharp decrease was due to the disillusionment of the market with the integrity of the ratings.

    On Page 109, Janet continues to berate the rating agency cartel (where I think it might be possible to substitute auditors for rating agencies interchangeably):

    The rating agencies seem to not care about the market’s forgiveness since not only have they not apologized ---  a necessary but not sufficient condition --- they seem to feel the market should change. Specifically, the market should change its point of view about what it expects from the rating agencies. Yet it seems that the market has the right to expect rating agencies to follow the basic principles of statistics.

    The tactic has mainly been successful because the rating agencies act as a cartel, leveraging their joint power to have fees magically converge and have ratings so similar that they have participated overrating AAA structured products backed by dodgy loans in 2007 that took substantial principal losses. Meanwhile, many market professionals, including me, pointed out in print that the AAA ratings were maeaningless. The rating agencies presented a farily united front in defending their methods (except for Fitch, which also participated on overrated CDOs and later seemed more responsive to downgrading structured products.

    . . .

    “Ma and pa” retail investors found that AAA product ended up in their pension funds and mutual funds because their money managers gave too much credence to an AAA rating.

    But nowhere have I yet found where Janet alludes to any insider profiteering on the part of Warren Buffett who also lost billions of dollars in the crash The difference between “ma and pa” and Mr. Buffet is that a billion dollars is pocket change to Warren Buffet. He can easily recoup his losses legitimately in trades with stupid hedge fund managers and bankers that rely too much on fallible models (at least that’s what mathematician Janet Tavakoli tells us in a very enlightening way).

    Expert Financial Predictions (John Stewart's hindsight video scrapbook) --- http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=23077&nlid=1840
    You have to watch the first third of this video before it gets into the scrapbook itself
    The problem unmentioned here is one faced by auditors and credit rating agencies of risky clients every day:  Predictions are often self fulfilling
    If an auditor issues going concern exceptions in audit reports, the exceptions themselves will probably contribute to the downfall of the clients
    The same can be said by financial analysts who elect to trash a company's financial outlook
    Hence we have the age-old conflict between holding back on what you really secretly predict versus pulling the fire alarm on a troubled company
    There are no easy answers here except to conclude that it auditors and credit rating agencies appeared to not reveal many of their inner secret predictions in 2008
    Auditing firms and credit rating agencies lost a lot of credibility in this economic crisis, but they've survived many such stains on their reputations in the past
    By now we're used to the fact that the public is generally aware of the fire before the auditors and credit rating agencies pull the alarm lever
    On the other hand, financial wizards who pull the alarm lever on nearly every company all the time lose their credibility in a hurry

    Bob Jensen's threads on credit rating agencies are at
    http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

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


    "How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 --- http://www.mcclatchydc.com/homepage/story/77244.html

    As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.

    A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

    Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

    As Congress tackles the broadest proposed overhaul of financial regulation since the 1930s, however, lawmakers still aren't fully aware of what went wrong at the bond rating agencies, and so they may fail to address misaligned incentives such as granting stock options to mid-level employees, which can be an incentive to issue positive ratings rather than honest ones.

    The Securities and Exchange Commission issued a blistering report on how profit motives had undermined the integrity of ratings at Moody's and its main competitors, Fitch Ratings and Standard & Poor's, in July 2008, but the full extent of Moody's internal strife never has been publicly revealed.

    Moody's, which rates McClatchy's debt and assigns it quite low value, disputes every allegation against it. "Moody's has rigorous standards in place to protect the integrity of ratings from commercial considerations," said Michael Adler, Moody's vice president for corporate communications, in an e-mail response to McClatchy.

    Insiders, however, say that wasn't true before the financial meltdown.

    "The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.

    "This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.

    After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.

    "As a matter of policy, Moody's does not comment on personnel matters, but no employee has ever been let go for trying to strengthen our compliance function," Adler said.

    Moody's was spun off from Dun & Bradstreet in 2000, and the first company shares began trading on Oct. 31 that year at $12.57. Executives set out to erase a conservative corporate culture.

    To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.

    Wall Street paid as much as $1 million for some ratings, and ratings agency profits soared. This new revenue stream swamped earnings from ordinary ratings.

    "In 2001, Moody's had revenues of $800.7 million; in 2005, they were up to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were fees from packaging . . . and for granting the top-class AAA ratings, which were supposed to mean they were as safe as U.S. government securities," said Lawrence McDonald in his recent book, "A Colossal Failure of Common Sense."

    He's a former vice president at now defunct Lehman Brothers, one of the highflying investment banks that helped create the global crisis.

    From late 2006 through early last year, however, the housing market unraveled, poisoning first mortgage finance, then global finance. More than 60 percent of the bonds backed by mortgages have had their ratings downgraded.

    "How on earth could a bond issue be AAA one day and junk the next unless something spectacularly stupid has taken place? But maybe it was something spectacularly dishonest, like taking that colossal amount of fees in return for doing what Lehman and the rest wanted," McDonald wrote.

    Ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide gorged themselves on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages.

    Before granting AAA ratings to bonds that pension funds, university endowments and other institutional investors trusted, the ratings agencies didn't bother to scrutinize the loans that were being pooled into the bonds. Instead, they relied on malleable mathematical models that proved worthless.

    "Everyone else goes out and does factual verification or due diligence. The credit rating agencies state that they are just assuming the facts that they are given," said John Coffee, a finance expert at Columbia University. "This system will not get fixed until someone credible does the necessary due diligence."

    Nobody cared about due diligence so long as the money kept pouring in during the housing boom. Moody's stock peaked in February 2007 at more than $72 a share.

    Billionaire investor Warren Buffett's firm Berkshire Hathaway owned 15 percent of Moody's stock by the end of 2001, company reports show. That stake, largely still intact, meant that the Oracle from Omaha reaped huge financial rewards while Moody's overlooked the glaring problems in pools of subprime mortgages.

    A Berkshire spokeswoman had no comment.

    One Moody's executive who soared through the ranks during the boom years was Brian Clarkson, the guru of structured finance. He was promoted to company president just as the bottom fell out of the housing market.

    Several former Moody's executives said he made subordinates fear they'd be fired if they didn't issue ratings that matched competitors' and helped preserve Moody's market share.

    Froeba said his Moody's team manager would tell his team that he, the manager, would be fired if Moody's lost a single deal. "If your manager is saying that at meetings, what is he trying to tell you?" Froeba asked.

    In the 1990s, Sylvain Raynes helped pioneer the rating of so-called exotic assets. He worked for Clarkson.

    "In my days, I was pressured to do nothing, to not do my job," said Raynes, who left Moody's in 1997. "I saw in two instances -- two deals and a rental car deal -- manipulation of the rating process to the detriment of investors."

    When Moody's went public in 2000, mid-level executives were given stock options. That gave them an incentive to consider not just the accuracy of their ratings, but the effect they'd have on Moody's -- and their own -- bottom lines.

    "It didn't force you into a corrupt decision, but none of us thought we were going to make money working there, and suddenly you look at a statement online and it's (worth) hundreds and hundreds of thousands (of dollars). And it's beyond your wildest dreams working there that you could make that kind of money," said one former mid-level manager, who requested anonymity to protect his current Wall Street job.

    Moody's spokesman Adler insisted that compensation of Moody's analysts and senior managers "is not linked to the financial performance of their business unit."

    Clarkson couldn't be reached to comment.

    Clarkson's own net worth was tied up in Moody's market share. By the time he was pushed out in May 2008, his compensation approached $3 million a year.

    Clarkson rose to the top in August 2007, just as the subprime crisis was claiming its first victims. Soon afterward, a number of analysts and compliance officials who'd raised concerns about the soundness of the ratings process were purged and replaced with people from structured finance.

    "The CEO is from a structured finance background, most of the people in the leadership were from a structured finance background, and it was putting their people in the right places," said Eric Kolchinsky, a managing director in Moody's structured finance division from January 2007 to November 2007, when he was purged, he said, for questioning some of the ratings. "If they were serious about compliance, they wouldn't have done that, because it isn't about having friends in the right places, but doing the right job."

    Another mid-level Moody's executive, speaking on the condition of anonymity for fear of retribution, recalls being horrified by the purge.

    "It is just something unthinkable, putting business people in the compliance department. It's not acceptable. I was very upset, frustrated," the executive said. "I think they corrupted the compliance department."

    One of the new top executives was Michael Kanef, who was experienced in assembling pools of residential mortgage-backed securities, but not in compliance, the division that was supposed to protect investors.

    "What signal does it send when you put someone who ran the group that assigned some of the worst ratings in Moody's history in charge of preventing it from happening again," Froeba said of Kanef. Clarkson and Kanef, who remains at Moody's, were named in a class-action lawsuit alleging that Moody's misled investors about its independence from companies that paid it for ratings.

    Kanef went after Scott McCleskey, the vice president of compliance at Moody's from the spring of 2006 until September 2008, and the man that Moody's said was the one to see for all compliance matters.

    "It's speculation, but I think Scott was trying to get people to follow some rules and people weren't ready to accept that there should be rules," Kolchinsky said.

    McCleskey testified before the House of Representatives Oversight and Government Reform Committee on Sept. 30 and described how he was pushed out on the heels of the people he'd hired.

    "One hour after my departure, it was announced that I would be replaced by an individual from the structured finance department who had no compliance experience and who, to my recollection, had been responsible previously for rating mortgage-backed securities," McCleskey testified.

    His replacement, David Teicher, had no compliance background. SEC documents describe him as a former team director for mortgage-backed securities from 2006 to 2008.

    McCleskey had raised concerns about the integrity of the ratings process, and Moody's had excluded him from meetings in January 2008 with the Securities and Exchange Commission about the eroding quality of pools of subprime loans that Moody's had blessed with top ratings.

    SEC officials, however, didn't bother to seek out McCleskey, even though he was the "designated compliance officer" in company filings with the agency. The SEC maintains that its officials met with Kanef because he was McCleskey's superior.

    SEC spokesman Erik Hotmire said that officials met with Kanef because "we ask to interview whomever we determine is appropriate."

    Another former Moody's executive, requesting anonymity for fear of legal action by the company, said the agency might've understood what was going wrong better if it had talked to the hands-on compliance officials.

    "If they had known he'd (Kanef) come from structured finance, the conflict of having him in that position should have been evident from the start," the former executive said.

    Others who worked at Moody's at the time described a culture of willful ignorance in which executives knew how far lending standards had fallen and that they were giving top ratings to risky products.

    "I could see it coming at the tail end of 2006, but it was too late. You knew it was just insane," said one former Moody's manager. "They certainly weren't going to do anything to mess with the revenue machine."

    Moody's wasn't alone in ignoring the mounting problems. It wasn't even first among competitors. The financial industry newsletter Asset-Backed Alert found that Standard & Poor's participated in 1,962 deals in 2006 involving pools of loans, while Moody's did 1,697. In 2005, Standard & Poor's did 1,754 deals to Moody's 1,120. Fitch was well behind both.

    "S&P is deeply disappointed in the performance of its ratings on certain securities tied to the U.S. residential real estate market. As far back as April of 2005, S&P warned investors about increased risks in the residential mortgage market," said Edward Sweeney, a company spokesman. S&P revised criteria and demanded greater buffers against default risks before rating pools of mortgages, he said.

    Still, S&P continued to give top ratings to products that analysts from all three ratings agencies knew were of increasingly poor quality. To guard against defaults, they threw more bad loans into the loan pools, telling investors they were reducing risk.

    The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.

    "As an analyst, I wouldn't have known there was a compliance function. There was an attitude of carelessness, or careless ignorance of the law. I think it is a result of the mentality that what we do is just an opinion, and so the law doesn't apply to us," Kolchinsky said.

    Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.

    "If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."

    Bob Jensen's threads on the scandals of credit rating companies (corrupt to the core) ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

    Big Four Auditors who live in glass houses should not throw stones ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


    According to the Attorney General of New York
    "Homeless Organization Is Called a Fraud (with poor accounting)," by Nicholas Confessore, The New York Times, November 24, 2009 ---
    http://cityroom.blogs.nytimes.com/2009/11/24/homeless-organization-called-fraud/?partner=rss&emc=rss

    They are a familiar sight on street corners across the five boroughs: Men and women standing behind folding card tables, urging passers-by to throw a little change into the empty plastic water jug marked “U.H.O.”

    But an investigation by Attorney General Andrew M. Cuomo appears to have confirmed what many New Yorkers secretly (if somewhat guiltily) suspected all along: The United Homeless Organization, supposedly a nonprofit group set up to help feed and house the homeless, was actually an elaborate fraud.

    According to a complaint filed by Mr. Cuomo [pdf] on Tuesday morning, U.H.O. does not operate a single shelter, soup kitchen or food pantry. It does not provide food or clothing to the homeless. It does not even donate money to other charities that do.

    Most of those coins and bills, Mr. Cuomo contended, end up in the pockets of those working the donation tables, who paid a daily fee to the group’s founder and president, Stephen Riley, and its director, Myra Walker, for the right to use the U.H.O. tables, jugs and aprons. The rest of the money is kept by Mr. Riley and Ms. Walker, and has been used for a variety of expenses not related to U.H.O. business, including expenses at Weightwatchers.com fees, Toys ‘R’ Us, PC Richards, Bed, Bath & Beyond, as well as premium cable and electricity bills at their homes.

    Those papers that U.H.O.’s workers display on their card tables? Nothing more than copies of the group’s certification of incorporation, according to Mr. Cuomo, used to mislead the public into believing they are permits. Incorporation does not give any special right to solicit on the streets, the lawsuit notes.

    “U.H.O. exploits the good intentions of people who thought that their charitable donations were helping to fund services for the homeless,” Mr. Cuomo said in a statement. “Instead, their donations go directly to U.H.O.’s principals and workers, who abused the organization’s tax-exempt status to line their own pockets.”

    Mr. Cuomo charged that U.H.O. had failed to maintain any records of donations or expenditures, including at least half of the cash withdrawn from the group’s bank account in 2007 and 2008. Mr. Riley and Ms. Walker also violated state law by operating U.H.O. without any board or independent oversight and the organization has not held an election for directors since its incorporation in 1993, according to Mr. Cuomo.

    It’s been long known that the money in U.H.O. is pocketed by the people at the table. The New York Times wrote about it in 2001, when a program director said the best advocates for the homeless are the homeless themselves. The New York Post likewise wrote about the pocketed money in 2008.

    However, the lawsuit is charging improper use of the collected feeds, poor accounting, and false claims of how the money would be used.


    The Deep Shah Insiders Leak at Moody's:  What $10,000 Bought
    Leaks such as this are probably impossible to stop
    What disturbs me is that the Blackstone Group would exploit investors based up such leaks

    "Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall Street Journal, October 20, 2009 ---
    http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box

    From their first day at Moody's Investors Service, junior analysts are warned against sharing confidential information with outsiders. They are even told not to mention company names in the elevators at the credit-rating firm's Lower Manhattan headquarters.

    Federal prosecutors now allege that a former junior analyst, identified by a person familiar with the matter as Deep Shah, breached that trust in July 2007 when he passed on inside information about Blackstone Group's pending $26 billion takeover of Hilton Hotels.

    Mr. Shah and other employees of the ratings firm, owned by publicly traded Moody's Corp., had advance notice about the takeover as part of a standing practice to prebrief credit analysts about planned deals. Prosecutors allege that the junior analyst shared the Hilton information with an unidentified third party, who in turn passed the tip to Galleon Group's Raj Rajaratnam. The tip enabled Mr. Rajaratnam to reap $4 million in profits from trading Hilton shares, a federal complaint alleges.

    While Mr. Shah's role in the alleged insider-trading affair is small, his link to the third party -- now a key cooperating witness in the probe -- could shed light on how investigators uncovered the trading ring. Unusual trading in Hilton's shares was one of the first events that attracted scrutiny from regulators in 2007. The same cooperating witness was friends with an executive at Polycom Inc. and also passed on information about Google Inc.

    The complaint said the cooperating witness arranged to pay $10,000 to the Moody's associate analyst, a title that describes staffers who aren't considered full analysts but assist them in analyzing data. Mr. Shah hasn't been charged with a crime. It isn't known if he is under investigation or if he will face charges.

    Mr. Shah couldn't be reached for comment. A Moody's spokesman declined to comment on the alleged role of Mr. Shah. He reiterated the company's statement last week, saying that the alleged wrongdoing by one of its employees "would be an egregious violation" of the rating firm's policies.

    Moody's has drawn flak in the past year for inaccurate credit ratings on mortgage securities and has had to battle recent accusations from a former employee that it still issues inflated ratings on complex securities. Throughout the financial crisis, however, Moody's credit ratings on corporate bonds have largely conformed to expectations.

    Still, critics say the Hilton incident may raise questions about whether ratings firms should be privy to inside information. Companies often inform rating analysts about mergers, acquisitions or other transactions ahead of time, to let analysts digest and analyze the information and announce rating actions soon after the deals become public.

    Like law firms and investment banks, credit-rating agencies have policies and controls to limit the number of people privy to inside information. "But you can't watch everyone all the time, and if someone is determined to violate the law they will do so," said Scott McCleskey, a former Moody's compliance officer who is now U.S. managing editor of Complinet Inc.

    Mr. Shah, who is in his mid-20s, left Moody's more than a year ago and is believed to have returned to his home country of India, according to former colleagues. One ex-colleague described him as "mellow."

    He joined the ratings firm in an entry-level position, and worked with analysts who rated companies in the technology, lodging and gaming sectors, according to Moody's reports that listed Mr. Shah's name from 2005 to early 2008.

    According to the U.S. attorney's complaint, Hilton executives contacted a Moody's lead analyst by phone on the afternoon of July 2, the day before Blackstone Group announced it would acquire Hilton. The complaint said that, shortly afterward, an associate analyst "involved" in the rating called the unidentified third party three times from a cellphone with information that Hilton was to be taken private. The information was passed to Mr. Rajaratnam who traded Hilton's stock, according to the complaint.

    As an associate analyst, Mr. Shah would have been paid roughly $90,000 in annual salary, plus a bonus that could reach $30,000, according to former Moody's employees.

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

    Rotten to the Core ---
    http://www.trinity.edu/rjensen/FraudRotten.htm


    FBI Arrest in What Appears to Be the World's Largest Case Involving Insider Information
    More and more keeps coming out, including revelations of wiretapping

    "8 trades the insiders allegedly made The government's case against the Galleon crew includes transactions in companies like Google, AMD, Hilton and Sun," by Michael Copeland, Fortune, October 19, 2009 --- Click Here
    http://money.cnn.com/2009/10/19/markets/insider_trading_arrests.fortune/?postversion=2009101912

    The government's case in what it is calling the largest insider trading case involving a U.S. hedge fund contains a detailed list of trades involving household-name companies.

    Investigators have pieced together a case that alleges more than $25 million in illegal gains based on trading in 2006-09 on companies including Advanced Micro Devices (AMD, Fortune 500), Akamai (AKAM), Clearwire (CLWR), Google (GOOG, Fortune 500), Hilton, Polycom (PLCM) and Sun Microsystems (JAVA, Fortune 500), among others.

    The six people charged include hedge fund billionaire Raj Rajaratnam, founder of Galleon Group; Robert Moffat, IBM's (IBM, Fortune 500) top hardware executive and an oft-discussed CEO candidate; Mark Curland and Danielle Chiesi, executives of the hedge fund New Castle Partners; Anil Kumar, a director at consulting firm McKinsey & Co.; and Rajiv Goel, an executive in Intel's treasury department.

    Just what did they allegedly do? Using information gleaned from wiretapped conversations between the accused and others, along with the statements of an apparent informant, SEC investigators have pieced together a series of episodes alleging to show how the defendants used inside information and well-timed trades to turn million-dollar profits.

    Those charged have yet to enter pleas in the case. Jim Waldman, a lawyer for Rajaratman, told the Wall Street Journal that the hedge fund chief "is innocent. We're going to fight the charges." Lawyers for some of the other accused said their clients are shocked by the charges and deny wrongdoing.

    What follows is a condensed account of eight major trades the suspects made and the inside information they capitalized on, according to the the SEC investigation and complaint. At the center of some of the trades is an unnamed "Tipper A," a person who gathered a great deal of information on companies for Rajaratnam, and whose identity presumably will be made public as the case unfolds in court.

    Polycom beats the Street

    On Jan. 10, 2006, the unnamed source identified in the SEC's complaint as "Tipper A" told Galleon's Rajaratnam that, based on information received from a Polycom insider, revenues at the video-conferencing company for the fourth-quarter of 2005 were about to beat Wall Street estimates. Polycom was set to announce its earnings more than two weeks later.

    Rajaratnam sent an instant message to his trader instructing him to "buy 60 [thousand shares] PLCM" for certain Galleon Tech funds. All told, from Jan. 10 through Jan. 25, the date of the Polycom earnings release, Rajaratnam and Galleon bought 245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did beat the Street, and collectively, the Galleon Tech funds made over $570,000 in connection with their Polycom trades based on Tipper A's tip.

    The same scenario was repeated for Polycom's first-quarter 2006 earnings, the complaint says. Galleon made $165,000 on the information. Tipper A made $22,000.

    The Hilton takeover

    Tipper A allegedly obtained confidential information in advance of a July 3, 2007, announcement that a private equity group would be buying Hilton for $47.50 per share, a premium of $11.45 over the July 3 closing price. Tipper A obtained the information from an analyst who, at the time, was working at Moody's, a rating agency that was evaluating Hilton's debt in connection with the planned buyout. Tipper A bought call option contracts based on the information, and passed on the tip to Rajaratnam.

    On July 3, Rajaratnam and Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That evening, the Hilton transaction was announced. Tipper A sold all of the Hilton call option contracts for a profit of more than $630,000, the complaint says. To compensate the source for the Hilton tip, Tipper A paid the source $10,000. The Galleon Tech funds sold their Hilton shares after the July 3 announcement for a profit of more than $4 million.

    Google Misses

    Around July 10, 2007, a PR consultant to Google allegedly told Tipper A that Google's second-quarter earnings per share would be down about 25 cents. The Street had estimated yet another strong quarter for the search giant, which was scheduled to report earnings July 19.

    Two days later Tipper A bought put options in Google and passed along details of the pending Google miss to Rajaratnam. He and Galleon began buying Google put options for the Galleon Tech funds, and continued buying them through July 19. In addition, Galleon funds bought other options betting on a fall in Google shares and sold short Google stock beginning July 17.

    On July 19, Google announced its earnings results, disclosing that its earnings-per-share was indeed 25 cents lower than the prior quarter. Google's share price fell from over $548 per share to almost $520 per share. The Galleon Tech funds' profits from the Google tip were almost $8 million. Tipper A sold all of the put options the day after the July 19 announcement for a profit of over $500,000.

    Trading in Intel

    Rajaratnam allegedly tapped former Wharton classmate and Intel executive Rajiv Goel just before Intel's (INTL) scheduled fourth-quarter 2006 earnings announcement to get inside information on the world's largest chipmaker. On Jan. 8, 2007, Rajaratnam contacted Intel's Goel. The next day, Rajaratnam bought 1 million shares of Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per share.

    Goel and Rajaratnam communicated again multiple times over the Martin Luther King Day weekend that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam reversed course, selling the Galleon Tech funds' entire 1.5 million share long position in Intel at $22.03 per share, and making a profit of a little over $1 million

    Later that day, after the markets closed, Intel released its fourth-quarter 2006 earnings. Although the company's earnings beat analysts' projections, its guidance was below expectations. Intel's stock price fell nearly 5% on the news, but Rajaratnam was already out of the stock.

    According to Intel officials, Goel has been placed on administrative leave pending the court case.

    Clearwire Gets a Partner

    In early February 2008, Goel allegedly tipped Rajaratnam that there was a pending joint venture between wireless broadband company Clearwire and Sprint (S, Fortune 500). Intel was a huge shareholder in Clearwire. Over the next three months, Galleon Tech funds bought and sold Clearwire shares on three occasions. Each time, the Galleon Tech funds traded in advance of news reports relating to the deal between Clearwire and Sprint, and shortly after calls between Goel and Rajaratnam. Overall, the Galleon Tech funds realized gains of about $780,000 on their Clearwire trading between February and May 2008. On May 8, the joint venture between Sprint and Clearwire was publicly announced.

    As payback for Goel's tips, Rajaratnam (or someone acting on his behalf) executed trades in Goel's personal brokerage account based on inside information concerning Hilton and PeopleSupport (the government notes that a Galleon director sits on the PeopleSupport's board of directors though no charges of wrongdoing have been brought against that person), which resulted in nearly $250,000 in profits for Goel.

    Shorting Akamai

    Another hedge fund executive, New Castle's Danielle Chiesi, is an acquaintance of Rajaratnam. When an Akamai executive told her that the Internet infrastructure company would trend lower in the company's second-quarter 2008 guidance to investors, the government claims she passed along the information to Rajaratnam. The consensus among Akamai's management was that Akamai's stock price would decline in the wake of the lowered guidance scheduled for July 30.

    Chiesi and the Akamai source spoke multiple times between July 2 and July 24. Chiesi told what she had learned from the Akamai source to her colleague at New Castle, Mark Kurland. On July 25, several New Castle funds took short positions in Akamai shares. The positions grew through July 30. Rajaratnam's Galleon funds also built up a short position during the same period.

    In its second-quarter 2008 earnings announcement on July 30, Akamai's results disappointed investors. The stock fell nearly 20% following the announcement. New Castle made $2.4 million. The Galleon Tech funds took home more than $3.2 million.

    IBM knows Sun

    In January 2009, IBM was conducting due diligence on Sun Microsystems in preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL, Fortune 500)). As part of that process, Sun opened its books to IBM, providing its second-quarter 2009 results in advance of the scheduled Jan. 27 announcement.

    Because much of Sun's business is hardware, IBM's top hardware executive Robert Moffat was involved in the evaluation of Sun. Moffat allegedly had access to Sun's earnings results. He and Chiesi were also friends and contacted each other repeatedly during January 2009. The frequency of contact between the two increased just prior to the Sun earnings release, investigators say.

    On Jan. 26, New Castle began acquiring a substantial long position in Sun. On Jan. 27, after the market close, Sun reported earnings that exceeded Wall Street's estimates, posting a two-cent per-share profit when analysts had expected a loss. Sun shares soared 21% on the news. New Castle made almost $1 million.

    AMD gets out of manufacturing

    On June 1, 2008, McKinsey & Co. began advising Advanced Micro Devices over its negotiations with two Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi government, Advanced Technology Investment Co., would take over AMD's chip manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala Investment Co., would provide a large investment in AMD (in the end, it would total $314 million). According to the SEC, Anil Kumar was one of the McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.

    On Aug. 14, Kumar learned that the two deals were finally getting done. The next day he told Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon increased their long position in AMD by buying more than 2.5 million shares in Galleon funds and continuing to build their long position until just before the announcement of the AMD transactions. Rajaratnam and Galleon bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on Oct. 3. On Oct. 8, the deals were announced publicly. AMD's stock price increased by about 25%. All told, the value of Galleon's entire position in AMD increased approximately $9.5 million in Oct. 6-7.

    However, the allegedly ill-gotten gain was wiped out by the financial crisis of the time. Because the Galleon Tech funds had accumulated much of their AMD position beginning in August, before the crisis sent stock prices, including AMD's, tumbling in September and October, the funds lost money on the overall trade

    The Deep Shah Insiders Leak at Moody's:  What $10,000 Bought
    Leaks such as this are probably impossible to stop
    What disturbs me is that the Blackstone Group would exploit investors based up such leaks
    "Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall Street Journal, October 20, 2009 ---
    http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box

    "Billionaire among 6 nabbed in inside trading case Wall Street wake-up call: Hedge fund boss, 5 others charged in $25M-plus insider trading case," by Larry Neumeister and Candice Choi,  Yahoo News, October 16, 2009 --- Click Here

    One of America's wealthiest men was among six hedge fund managers and corporate executives arrested Friday in a hedge fund insider trading case that authorities say generated more than $25 million in illegal profits and was a wake-up call for Wall Street.

    Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.

    U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured by $20 million in collateral despite a request by prosecutors to deny bail. He also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York City.

    U.S. Attorney Preet Bharara told a news conference it was the largest hedge fund case ever prosecuted and marked the first use of court-authorized wiretaps to capture conversations by suspects in an insider trading case.

    He said the case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.

    "Greed is not good," Bharara said. "This case should be a wake-up call for Wall Street."

    Joseph Demarest Jr., the head of the New York FBI office, said it was clear that "the $20 million in illicit profits come at the expense of the average public investor."

    The Securities and Exchange Commission, which brought separate civil charges, said the scheme generated more than $25 million in illegal profits.

    Robert Khuzami, director of enforcement at the SEC, said the charges show Rajaratnam's "secret of success was not genius trading strategies."

    "He is not the master of the universe. He is a master of the Rolodex," Khuzami said.

    Galleon Group LLP said in a statement it was shocked to learn of Rajaratnam's arrest at his apartment. "We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities," the statement said.

    The firm added that Galleon "continues to operate and is highly liquid."

    Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the world's wealthiest billionaires, with a $1.3 billion net worth.

    According to the Federal Election Commission, he is a generous contributor to Democratic candidates and causes. The FEC said he made over $87,000 in contributions to President Barack Obama's campaign, the Democratic National Committee and various campaigns on behalf of Hillary Rodham Clinton, U.S. Sen. Charles Schumer and New Jersey U.S. Sen. Robert Menendez in the past five years. The Center for Responsive Politics, a watchdog group, said he has given a total of $118,000 since 2004 -- all but one contribution, for $5,000, to Democrats.

    The Associated Press has learned that even before his arrest, Rajaratnam was under scrutiny for helping bankroll Sri Lankan militants notorious for suicide bombings.

    Papers filed in U.S. District Court in Brooklyn allege that Rajaratnam worked closely with a phony charity that channeled funds to the Tamil Tiger terrorist organization. Those papers refer to him only as "Individual B." But U.S. law enforcement and government officials familiar with the case have confirmed that the individual is Rajaratnam.

    At an initial court appearance in U.S. District Court in Manhattan, Assistant U.S. Attorney Josh Klein sought detention for Rajaratnam, saying there was "a grave concern about flight risk" given Rajaratnam's wealth and his frequent travels around the world.

    His lawyer, Jim Walden, called his client a "citizen of the world," who has made more than $20 million in charitable donations in the last five years and had risen from humble beginnings in the finance profession to oversee hedge funds responsible for nearly $8 billion.

    Walden promised "there's a lot more to this case" and his client was ready to prepare for it from home. Rajaratnam lives in a $10 million condominium with his wife of 20 years, their three children and two elderly parents. Walden noted that many of his employees were in court ready to sign a bail package on his behalf.

    Rajaratnam -- born in Sri Lanka and a graduate of University of Pennsylvania's Wharton School of Business -- has been described as a savvy manager of billions of dollars in technology and health care hedge funds at Galleon, which he started in 1996. The firm is based in New York City with offices in California, China, Taiwan and India. He lives in New York.

    According to a criminal complaint filed in U.S. District Court in Manhattan, Rajaratnam obtained insider information and then caused the Galleon Technology Funds to execute trades that earned a profit of more than $12.7 million between January 2006 and July 2007. Other schemes garnered millions more and continued into this year, authorities said.

    Bharara said the defendants benefited from tips about the earnings, earnings guidance and acquisition plans of various companies. Sometimes, those who provided tips received financial benefits and sometimes they just traded tips for more inside information, he added.

    The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."

    The agent said he learned from federal authorities that Rajaratnam had a ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.

    Also charged in the scheme are Rajiv Goel, 51, of Los Altos, Calif., a director of strategic investments at Intel Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and group executive at International Business Machines Corp.'s Systems and Technology Group.

    The others charged in the case were identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60, also of New York City.

    According to court papers, Chiesi worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc. that had assets worth about $1 billion under management. Kurland is a top executive at New Castle.

    Kumar's lawyer, Isabelle Kirshner, said of her client: "He's distraught." He was freed on $5 million bail, secured in part by his $2.5 million California home.

    Kerry Lawrence, an attorney representing Moffat, said: "He's shocked by the charges."

    Bail for Kurland was set at $3 million while bail for Moffat and Chiesi was set at $2 million each. Lawyers for Moffat and Chiesi said their clients will plead not guilty. The law firm representing Kurland did not immediately return a phone call for comment.

    A message left at Goel's residence was not immediately returned. He was released on bail after an appearance in California.

    A criminal complaint filed in the case shows that an unidentified person involved in the insider trading scheme began cooperating and authorities obtained wiretaps of conversations between the defendants.

    In one conversation about a pending deal that was described in a criminal complaint, Chiesi is quoted as saying: "I'm dead if this leaks. I really am. ... and my career is over. I'll be like Martha (expletive) Stewart."

    Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company whose stock plummeted after a negative public announcement. She served five months in prison and five months of home confinement.

    Prosecutors charged those arrested Friday with conspiracy and securities fraud.

    A separate criminal complaint in the case said Chiesi and Moffat conspired to engage in insider trading in the securities of International Business Machines Corp.

    According to another criminal complaint in the case, Chiesi and Rajaratnam were heard on a government wiretap of a Sept. 26, 2008, phone conversation discussing whether Chiesi's friend Moffat should move from IBM to a different technology company to aid the scheme.

    "Put him in some company where we can trade well," Rajaratnam was quoted in the court papers as saying.

    The complaint said Chiesi replied: "I know, I know. I'm thinking that too. Or just keep him at IBM, you know, because this guy is giving me more information. ... I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too."

    According to the court papers, Rajaratnam replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well, not really. I mean, come on. ... you know, we nailed it."

    Continued in article

    "Arrest of Hedge Fund Chief Unsettles the Industry," by Michael J. de la Merced and Zachery Kouwe, The New York Times, October 18, 2009 --- http://www.nytimes.com/2009/10/19/business/19insider.html?_r=1

    The firm made no secret that its investors included technology executives. Among them was Anil Kumar, a McKinsey director who did consulting work for Advanced Micro Devices and was charged in the scheme. Another defendant, Rajiv Goel, is an Intel executive who is accused of leaking information about the chip maker’s earnings and an investment in Clearwire.

    Prosecutors also say that a Galleon executive on the board of PeopleSupport, an outsourcing company, regularly tipped off Mr. Rajaratnam about merger negotiations with a subsidiary of Essar Group of India. Regulatory filings by PeopleSupport last year identified the director as Krish Panu, a former technology executive. He was not charged on Friday.

    Galleon has previously been accused of wrongdoing by regulators. In 2005, it paid more than $2 million to settle an S.E.C. lawsuit claiming it had conducted an illegal form of short-selling.

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

    Rotten to the Core ---
    http://www.trinity.edu/rjensen/FraudRotten.htm


    Another one from that Ketz guy
    He knows about Altman’s Z-score model for non-manufacturers ---
    http://en.wikipedia.org/wiki/Bankruptcy_prediction

    "Hertz Diverts and Subverts (Where Are You, Mary?)," by: J. Edward Ketz, SmartPros, October 2009 ---
    http://accounting.smartpros.com/x67864.xml 

    In a recent perversion, Hertz Global Holdings (HTZ) sued Audit Integrity because it had the audacity to predict that Hertz was in danger of bankruptcy. This is another example of issuer retaliation and it must stop. The Congress and the SEC need to rein in corporate America when it attempts to enforce censorship against anybody that criticizes them.

    The facts in the case are simple.  Earlier this year Audit Integrity moved Hertz on to its watch list for companies in financial distress.  Hertz demanded a retraction and sent a copy of the letter to 19 other firms that made the list, encouraging them to join Hertz  in “protecting the investing public.”  Then Hertz sued Audit Integrity for defamation.  (See Sue Reisinger, “Hertz GC Sues Analyst Who Said Company Could Go Bankrupt”)

    Audit Integrity responded with an open letter to the SEC.  James Kaplan, Chairman of Audit Integrity, wrote “As Hertz’s ultimate goal was to silence an independent research firm calling regulatory and investor attention to the company’s real and material financial risk, the matter warrants an investigation by the Securities and Exchange Commission.”

    Quite frankly, the court should just toss out the case.  Any introductory student of mine can compute the Altman Z-score and indeed discover that Hertz is in financial distress.  Its 2008 10-K is quite revealing, with net income a negative $1.2 billion and EBIT a negative $164 million.  Retained earnings has a deficit of almost one billion dollars.  And its capital structure is heavily tilted on the debt side as its debt-equity ratio exceeds 10.  Any neophyte would agree with Audit Integrity.

    Altman’s Z-score model for non-manufacturers is:

     Z = 6.56 * WC/TA + 3.26 * RE/TA + 6.72 * EBIT/TA + 1.05 * BVE/TD

    where WC = working capital
    TA= total assets
    RE = retained earnings
    EBIT = earnings before interest and taxes
    BVE = book value of equity and
    TD = total debts.

    One interprets the Z-score as follows.  If Z>2.6, then we predict the firm is healthy and relatively free from financial distress.  If 1.1<Z<2.6, the company is in the indeterminate zone.  It faces some financial distress, but more investigation is needed to determine how serious it is.  But, if Z<1.1, then the model predicts that the firm faces a serious chance of going into bankruptcy.

    When I plug Hertz’s 2008 numbers into the model, I obtain a Z-score of 0.417.  Altman’s model therefore predicts bankruptcy.  I guess Hertz should sue Professor Altman for inventing such a model.  After all, if the firm goes under, it must be his fault.

    A few years ago Senator Wyden expressed concerns about corporate managers who attempt to intimidate those who issue research reports critical of them and their operations.  He correctly stated that the impact of such retaliation could have an adverse reaction on the publication of objective research, which in turn could have a negative impact on the quality of information that is employed by the investment community and could lead to an inefficient allocation of resources.

    Chairman Cox responded to the Senator on September 1, 2005.  He stated that he shared Sen. Wyden’s concerns about issuer retaliation and its adverse impact on the investment community.  He promised to tackle the issue, but never did. 

    Mary Schapiro, it is your turn.  Are you going to embrace the mission statement of the SEC and be an advocate for investors or are you going to be like your predecessor and say one thing but behind the scenes enable managers and directors to defraud the investment community?

    Issuer retaliation is an incredible problem in this country.  If it isn’t stopped, independent investors will stop performing independent research analyses.  And there will be more and more Enrons bursting on the scene. 

    Mary, where are you?  Where do you stand on the issues of the day?

    Jensen Comment
    An enormous problem faced by security analysts, credit rating agencies, and auditors is that when a company is on the edge of bankruptcy, these professionals are no longer confined to professionalism in evaluation. They become decision makers to the extent that "yelling fire" greatly increases the odds of helping to cause a fire.

    Bob Jensen's threads on difficulties security analysts encounter when trying (or not trying) to issue negative reports on companies --- http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

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


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

    "The Milberg Double Cross," The Wall Street Journal, July 14, 2008; Page A16 ---
    http://online.wsj.com/article/SB121599290265249457.html?mod=djemEditorialPage

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

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

    Continued in article

    Jensen Comment

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

    Bob Jensen's threads on how white collar crime pays even if you get caught are at http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays




    Other Links
    Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm 

    Bob Jensen's Enron Quiz --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

    Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism 

    Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

    Bob Jensen's threads on ethics and accounting education are at 
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

    Incompetent and Corrupt Audits are Routine ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

    Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm 

    Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

     

     


     

    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

     

     

     

     

    Bob Jensen's home page is at http://www.trinity.edu/rjensen/