Bankers bet with their bank's capital, not their own. If the bet goes right, they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by Avital Louria Hahn, "Missing:  How Poor Risk-Management Techniques Contributed to the Subprime Mess," CFO Magazine, March 2008, Page 53 --- http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to bail out these crooks with taxpayer funds makes it all the worse.

The bourgeoisie can be termed as any group of people who are discontented with what they have, but satisfied with what they are
Nicolás Dávila

This one on the report card business schools seemed too important to pass up.  I think it relates to the points Dr. Brazil made in the quotation that I placed (with permission) in http://www.trinity.edu/rjensen/book05q1.htm#020805
(You have to scroll down some distance to find the Brazil quotation.)

Today's Bourgeoisie
Education molds not just individuals but also common assumptions and conventional wisdom. And when it comes to the business world, our universities - and especially their graduate business schools - are powerful shapers of the culture.

The New York Stock Exchange's report on the pay package given to its former chairman, Dick Grasso, made clear the excessiveness of the compensation and the ineffectiveness of the safety controls that failed to stop it. What the report didn't provide, however, was an answer to an obvious question: Why did nobody on the exchange's board look at that astronomical sum and feel some personal responsibility to find out what was happening?  I can't read minds, but I think it's fair to say that to some extent the players in this drama - as well as those in the ones now being played out in courtrooms and starring former executives of Tyco, WorldCom and HealthSouth - have been shaped by the broader business culture they have worked in for so long. And, as with any situation in which we are puzzled by how a group of people can think in a seemingly odd way, it helps to look back to how they were educated. Education molds not just individuals but also common assumptions and conventional wisdom. And when it comes to the business world, our universities - and especially their graduate business schools - are powerful shapers of the culture.
Robert J. Shiller, "How Wall Street Learns to Look the Other Way," The New York Times, February 8, 2005 --- http://www.nytimes.com/2005/02/08/opinion/08shiller.html 

Ending a bitter public fight over whether former New York Stock Exchange Chief Executive Dick Grasso was paid too much, a state appeals court ruled that Mr. Grasso can keep every penny collected from his $187.5 million multiyear compensation package. The 3-to-1 ruling by the Appellate Division of the New York State Supreme Court was a vindication for the relentless Mr. Grasso, who was ousted after details of his lucrative pay were revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall Street Journal, July 2, 2008; Page A1 --- http://online.wsj.com/article/SB121492781324819635.html?mod=todays_us_page_one

Clinton's famously crude remark
And I hope that comes through in the book (Infectious Greed).  I am very critical of the tax law changes that created the incentives for companies to pay executives with stock options, which were made at the beginning of the Clinton Administration to appease populist anti-corporation forces among his supporters by appearing to do something about what, even then, was alleged to be excessive pay for corporate executives.  Not to mention his Administration's hands-off approach to Wall Street (when Arthur Levitt headed the SEC).  There's that great story --- perhaps apocoryphal --- that I recount in the book about Clinton's famously crude remark when he discovered that voters cared much more about whether the stocks were going up than his economic program.
Frank Partnoy, Partnoy's Solutions, welling@weeden, October 21, 2005

Symptoms include "excessive and sometimes fraudulent risks
Add to the growing number of recently diagnosed diseases in America the Icarus Syndrome. This malady, discovered by a law professor, is said to affect corporations in particular. The symptoms include "excessive and sometimes fraudulent risks." The disease has attacked corporate America not only in our own scandal-plagued times but, it seems, since about 1873.  Icarus in the Boardroom (Oxford University Press, 250 pages, $25) is an attempt to alert public-health officials, so to speak, to the dangers of this contagion. David Skeel, a professor of law at the University of Pennsylvania, labels all sorts of apparently admirable traits -- "self-confidence, visionary insight, the ability to think outside the box" -- as potential Icaran qualities, full of danger. They "may spur entrepreneurs to take misguided risks," he writes, "in the belief that everything they touch will eventually turn to gold." Fortunately, he offers a number of cures, ranging from small doses of regulation to massive doses of regulation.  And little wonder. What is most interesting about "Icarus in the Boardroom" is the vast divide it reveals -- between American lawyers who study corporations and, well, everybody else. Following common sense and economic logic, most people view corporate risk-taking and corporate fraud as different things: Fraud involves lying; risk-taking does not. As in the case of Enron and WorldCom, fraudulent executives often misstate how much risk their investors will assume.  For academic lawyers such as Mr. Skeel, however, it seems that risk-taking and fraud are points on a continuum. Risk-taking quickly fades into "excessive" risk-taking, which then morphs into fraud. Mr. Skeel never says just how we are to distinguish acceptable risks from the excessive and fraudulent kind. Apparently, though, lawmakers and regulators will figure out a formula, for it falls to them, in Mr. Skeel's view, "to prevent risk-taking that edges toward market manipulation or fraud."
Jonathan R. Macey, "A Risky Proposition," The Wall Street Journal,  March 15, 2005; Page D8 --- http://online.wsj.com/article/0,,SB111083993718979142,00.html?mod=todays_us_personal_journal 

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

Two months ago, shortly before Japan ordered Citigroup to close its private banking unit there for, among other things, failing to guard against money laundering, Charles O. Prince, the chief executive, commissioned an independent examination of his bank's lapses. When he received the assessment in mid-October, he got an eyeful.
"It's Cleanup Time at Citi," by Timothy L. O'Brien and Landon Thomas, Jr., The New York Times, November 7, 2004 --- http://www.nytimes.com/2004/11/07/business/yourmoney/07citi.html  

In the years after Enron, many chief executives had been operating in a defensive crouch. Last year, however, they switched to offense, yelping about the new securities rules — way too strict and so time-consuming — and whining that Eliot Spitzer and his meddlesome investigations could wreck the nation’s economy. The United States Chamber of Commerce even sued the Securities and Exchange Commission, hoping to overturn its new rule requiring mutual fund chairmen to be independent.  So as 2005 dawns, it is again time to grant the Augustus Melmotte Memorial Prizes, named for the charlatan who parades through “The Way We Live Now,” the novel by Anthony Trollope. Mr. Melmotte, who would fit just fine into today’s business world, is a confidence man who takes London by storm in the late 1800’s.
Gretchen Morgensen, "The Envelopes, Please," The New York Times, January 1, 2005 --- http://www.nytimes.com/2005/01/01/business/yourmoney/02award.backup.html?oref=login 
Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/fraud001.htm#Governance 

Who's Preying on Your Grandparents?
Back in February, Jose and Gloria Aquino received a flier in the mail inviting them to a free seminar on one of their favorite topics: protecting their financial assets. As retirees, they were always on the lookout for safe investment strategies as well as tips on how to make sure they didn't outlive their savings. Besides, the flier promised a free lunch for anyone attending the workshop, so what did they have to lose? Potentially plenty, they would soon discover.
Gretchen Morgenson, "Who's Preying on Your Grandparents?" The New York Times, May 15, 2005 --- http://www.nytimes.com/2005/05/15/business/yourmoney/15vict.html?

How the Gatekeepers Failed in Their Responsibilities to Protect the Public from Corporate and Banking Fraud

Brooksley Born, chair of the Commodity Futures Trading Commission --- suggested that government should at least study whether some regulation might make sense, a stampede of lobbyists, members of Congress, and other regulators --- including Alan Greenspan and Robert Rubin --- ran her over, admonishing her to keep quiet.  Derivatives tightened the connections among various markets, creating enormous financial benefits and making global transacting less costly --- no one denied that.  But they also raised the prospect of a system-wide breakdown.  With each crisis, a few more dominos fell, and regulators and market participants increasingly expressed concerns about systematic risk --- a term that described a financial-market epidemic.  After Long-Term Capital collapsed, even Alan Greenspan admitted that the financial markets had been close to the brink.  
Frank Partnoy, Infectious Greed (Henry Holt and Company, 2004, Page 229)

Throughout 1994 and 1995, Brickell (the banking industry's pit bull in Washington) and Levitt (Head of the SEC) worked to protect the finance industry from new legislation.  In early 1994, lobbyists waited for investors to calm down from the shock of how much money-fund managers and corporate treasures had lost gambling on interest rates.  When legislation was introduced, Brickell fought it and Levitt gave speeches saying the financial industry should police itself.  The issues were complicated, and the public --- once angered by the various scandals ---  ultimately lost interest.  Instead of new derivatives regulation, Congress, various federal agencies, and even the Supreme Court created new legal rules that insulated Wall Street from liability and enabled financial firms to regulate themselves.   Under the influence of Levitt and Brickell, regulators essentially left the abuses of the 1990s to what Justice Cardozo had called the "morals of the market place."
Frank Partnoy, Infectious Greed (Henry Holt and Company, 2004, Page 143)

In God, but not our financial advisor, we trust!
Declining trust has spurred some 25% of the affluent investors surveyed to move a portion of their assets out of their financial-services firms in the past two years, according to a study by Spectrem Group, a Chicago research and consulting firm. A litany of complaints, including poor investment performance, conflicts of interest, hidden fees and financial scandals, prompted wealthy investors to move their business elsewhere.
Rachel Emma Silverman, "Wealthy Lose Trust in Advisers," The Wall Street Journal, February 2, 2005, Page D2 --- http://online.wsj.com/article/0,,SB110730662305243216,00.html?mod=todays_us_personal_journal 

One of the world's most widely known and respected economists, Henry Kaufman is almost single-handedly responsible for founding the spectator sport known as "Fed watching." He began a 26-year career at Salomon Brothers in 1962, when he was probably the only Wall Street employee with a doctorate. There he built one of the most prestigious securities research departments and became a senior partner and vice chairman. In the last 30 years, he has been one of the most vocal critics of insufficient financial oversight and regulation, and his pronouncements and prognostications have often moved markets. We interviewed Dr. Kaufman in his New York office, where he heads his own international economic consulting firm.
Wall Street Wisdom --- http://www.amazon.com/exec/obidos/tg/feature/-/41979/102-2649781-5248131 

Question
What is the SEC's new NMS?
In the best possible marketplace, all buyers see the prices asked by all sellers and all sellers see the prices offered by all buyers -- and little guys are treated the same as big ones. The result: competition that insures the most efficient interplay of supply and demand. In theory, it sounds great. And indeed, this is the idea behind the Security and Exchange Commission's push for an integrated stock market called the National Market System, or NMS. But could the best intentions backfire? Wharton finance professor Marshall E. Blume answers that question in a new research paper titled, "Competition and Fragmentation in the Equity Markets: The Effect of Regulation NMS."
"Will the SEC's National Market System Stifle the Innovation It Hopes to Promote?" Wharton Business School at the University of Pennsylvania, Knowledge@Wharton, April 4, 2007 --- Click Here

Question
"U.S. Securities Law: Does 'High Intensity' Enforcement Pay Off?" Knowledge@Wharton, May 30, 2007 ---
Click Here

Strong enforcement is critical to obtaining good governance and adding value to corporations, and investors stand to gain from it.

. . .

In the U.K., the FSA budget for enforcement is between 12.5% and 13% of its total budget, which Coffee said is consistent with many other countries. The SEC spends around 40% of its overall budget on enforcement, and Australia spends even more -- nearly 47% in 2005. Coffee also noted that the SEC has 1,200 attorneys working full time for the agency. The FSA, he said, maintains a "skeletal" legal staff and outsources cases when necessary. In Britain and many other countries, regulators place more emphasis on negotiating settlements to avoid formal enforcement actions. "They don't like to keep a legal enforcement staff because they see enforcement as a last-ditch effort."

. . .

In the wake of corporate scandals in the U.S., criminal enforcement is the "ultimate deterrence," Coffee said. Citing research from cases between 1978 and 2004, he noted that some 755 individuals and 40 firms were indicted for "financial misrepresentation," which he said is just a small subset of securities violations. In all, 1,230.7 years of incarceration and 397.5 years of probation were imposed, with an average sentence of 4.2 years.

Continued in article

There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud.
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

The entire year 2006 ethics flap about climbers not rendering aid to a supposedly dying climber on Mt. Everest was preceded by a great 1983 real world case called the Parable of the Sadhu from the Harvard Business School --- Click Here

The Parable of the Sadhu was and still is widely used in ethics courses, especially regarding issues of situational ethics and group versus individual ethics. The author Bowen H. McCoy was the managing director of the investment banking firm Morgan Stanley & Co. After returning to New York, McCoy was conscious stricken about leaving a dying religious man during an Everest climb. The climbers at that time shed some clothes to keep the dying man warm. But climbers from various nations (U.S., Switzerland, and Japan) actually moved on and did not help the man down to shelter because they all felt that he was going to die in any case. Also, the weather was such that the climbers could not complete their climbing goal if they delayed to carry the dying man to shelter.

McCoy wrote the following after returning to New York:

We do not know if the sadhu lived or died. For many of the following days and evenings Stephen and I discussed and debated our behavior toward the sadhu. Stephen is a committed Quaker with deep moral vision. He said, "I feel that what happened with the Sadhu is a good example of the breakdown between the individual ethic and the corporate ethic. No one person was willing to assume ultimate responsibility for the sadhu. Each was willing to do his bit just so long as it was not too inconvenient. When it got to be a bother everyone just passed the buck to someone else and took off . . . "

. . .

Despite my arguments, I feel and continue to feel guilt about the sadhu. I had literally walked through a classic moral dilemma without fully thinking through the consequences. My excuses for my actions include a high adrenaline flow, super-ordinate goal, and a once-in-a-lifetime opportunity --- factors in the usual corporate situation, especially when one is under stress.

Real moral dilemmas are ambiguous and many of us hike right through them, unaware that they exist. When, usually after the fact, someone makes an issue of them, we tend to resent his or her bringing it up. Often, when the full import of what we have done (or not done) falls on us, we dig into a defensive position from which it is very difficult to emerge. In rare circumstances we may contemplate what we have done from inside a prison.

Had we mountaineers have been free of physical and mental stress caused by the effort and the high altitude, we might have treated the sadhu differently. Yet isn't stress the real test of personal and corporate values? The instant decisions executives make under pressure reveal the most about personal and corporate character.

Among the many questions that occur to me when pondering my experience are:  What are the practical limits of moral imagination and vision? Is there a collective or institutional ethic beyond the ethics of the individual? At what level of effor or commitment can one discharge one's ethical responsibilities?

Continued in this 1983 Harvard Business School Case.

Jensen Comment
I might add that this 1983 case was written before the breakdown in ethics during the 1990s high tech bubble in which investment banking, executive compensation, corporate governance, and corporate ethics in general sometimes become rotten to the core --- http://www.trinity.edu/rjensen/FraudRotten.htm

********************

You can read more about the 2006 repeat of the dilemma at
"Everest pioneer appalled that climber was left to die," by Steve McMorran, Seattle Times, May 25, 2006 --- http://seattletimes.nwsource.com/html/nationworld/2003017177_everest25.html

May 28, 2006 reply from Andrew Priest [a.priest@ECU.EDU.AU]

Hi Bob

And you can contrast this action and the 2006 with the help given to Lincoln Hall again this year (events still going on). Lincoln was left on the mountain, assumed dead. He was not and is lower down the mountain and doing okay. Details at < http://www.mounteverest.net/news.php?id=3315>  and more details at
< http://www.mounteverest.net/news.php?id=3311> .

Compassion and caring wins out every time in my view over selfishness.

Andrew

"Remarks by Chairman Alan Greenspan Before a conference sponsored by the Office of the Comptroller of the Currency, Washington, D.C. October 14, 1999 --- http://federalreserve.gov/boarddocs/speeches/1999/19991014.htm 

Measuring Financial Risk in the Twenty-first Century

During a financial crisis, risk aversion rises dramatically, and deliberate trading strategies are replaced by rising fear-induced disengagement. Yield spreads on relatively risky assets widen dramatically. In the more extreme manifestation, the inability to differentiate among degrees of risk drives trading strategies to ever-more-liquid instruments that permit investors to immediately reverse decisions at minimum cost should that be required. As a consequence, even among riskless assets, such as U.S. Treasury securities, liquidity premiums rise sharply as investors seek the heavily traded "on-the-run" issues--a behavior that was so evident last fall.

As I have indicated on previous occasions, history tells us that sharp reversals in confidence occur abruptly, most often with little advance notice. These reversals can be self-reinforcing processes that can compress sizable adjustments into a very short period. Panic reactions in the market are characterized by dramatic shifts in behavior that are intended to minimize short-term losses. Claims on far-distant future values are discounted to insignificance. What is so intriguing, as I noted earlier, is that this type of behavior has characterized human interaction with little appreciable change over the generations. Whether Dutch tulip bulbs or Russian equities, the market price patterns remain much the same.

We can readily describe this process, but, to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific investments that make up our broad price indexes of stocks and other assets.

Nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant.

Probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. Furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics. Under these circumstances, fear and disengagement on the part of investors holding net long positions often lead to simultaneous declines in the values of private obligations, as investors no longer realistically differentiate among degrees of risk and liquidity, and to increases in the values of riskless government securities. Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account.

The uncertainties inherent in valuations of assets and the potential for abrupt changes in perceptions of those uncertainties clearly must be adjudged by risk managers at banks and other financial intermediaries. At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources--reserves or capital--to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence. These reserves will appear almost all the time to be a suboptimal use of capital. So do fire insurance premiums.

The above is only a quotation from the speech.

UNEQUAL TREATMENT:  Rotten to the Core

"Playing Favorites:  Why Alan Greenspan's Fed lets banks off easy on corporate fraud," by Ronald Fink, CFO Magazine, April 2004, pp. 46-54 --- http://www.cfo.com/article/1,5309,12866||M|886,00.html 

The module below is not in the above online version of the above article.  However, it is on Page 51 of the printed version.

UNEQUAL TREATMENT

IF THE FEDERAL RESERVE BOARD AND THE SECURITIES AND EXCHANGE Commission pursue the same agenda, why were Merrill Lynch & Co. and the Canadian Imperial Bank of Commerce (CIBC) treated so differently by the Corporate Fraud Task Force--a team with representatives from the SEC, the FBI, and the Department of Justice (DoJ) set up to prosecute perpetrators of Enron's fraud--than were Citigroup and J. P. Morgan Chase & Co.?  After all, all four banks did much the same thing.

Under settlements signed with the SEC last July, Citigroup and Chase were fined a mere $101 million (including $19 million for its actions relating to a similar fraud involving Dynegy) and $135 million, respectively, which amounts to no more than a week of either's most recent annual earnings.  And they agreed, in effect, to cease and desist from doing other structured-finance deals that mislead investors.  That contrasts sharply with the punishment meted out by the DoJ to Merrill and CIBC, each of which not only paid $80 million in fines, but also agreed to have their activities monitored by a supervising committee that reports to the DoJ.  Even more striking, CIBC agreed to exit not only the structured-finance business but also the plain-vanilla commercial--paper conduit trade for three years.  No regulatory agency involved in the settlements would comment on the cases, though the SEC's settlement with Citigroup took note of the bank's cooperation in the investigation.

But Brad S. Karp, an attorney with the New York firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, suggested recently that the terms of the SEC settlement with its client, Citigroup, reflected a lack of knowledge or intent on the bank's part.  As Karp noted more than once at a February conference on legal issues and compliance facing bond-market participants, the SEC's settlement with Citigroup was ex scienter, a Latin legal phrase meaning "without knowledge."

However, the SEC's administrative order to Citigroup cited at least 13 instances where the bank was anything but in the dark about its involvement in Enron's fraud.

As Richard H. Walker, former director of the SEC's enforcement division and now general counsel of Deutsche Bank's Corporate and Investment Bank, puts it, all the banks involved in Enron's fraud "had knowledge" of it.  Yet Walker isn't surprised by their disparate treatment at the hands of regulators.  "The SEC does things its way," he says, "and the Fed does them another."  *Ronald Fink and Tim Reason

Most of us enter the investment business for the same sanity-destroying reasons a woman becomes a prostitute:  It avoids the menace of hard work, is a group activity that requires little in the way of intellect, and is a practical means of manking money for those with no special talent for anything else.
Richard New, The Wall Street Jungle (as quoted by Frank Partnoy in FIASCO:  The Inside Story of a Wall Street Trader.)

Behind every great fortune there lies a great crime.
Honore de Balzac (as quoted by Frank Partnoy in FIASCO:  The Inside Story of a Wall Street Trader.)

But for Freddie Mac, the other pillar of the colossal U.S. mortgage market, Freddie Mac's restatement has only caused headaches and has even raised new questions about the quality of financial reporting.
Patrick Barta, "Restatement by Freddie Mac Puts Fannie on the Spot," The Wall Street Journal, January 12, 2004, Page C1.

The problem is the companies' (Freddie Mac versus Fannie Mae) business and financial statements have become so complex that they are effectively "unanalyzable" says James Bianco, president of Bianco Research, a Chicago-based fixed-income research firm that has been critical of Fannie and Freddie in the past.  He says the same is becoming true of other large financial institutions, particularly those that, like Fannie and Freddie, use large volumes of derivatives, which are investment contracts that can be used by companies to offset risk from interest rate shifts.
Ibid

The Timeline of the Recent History of Fannie Mae Scandals 2002-2008 --- http://www.trinity.edu/rjensen/caseans/000index.htm#FannieMae
"Fannie Mayhem: A History," The Wall Street Journal, July 14, 2008

So what's a little business deal among friends?  It's trouble, if the friends are college or college-foundation trustees who benefit personally from the decisions they make on behalf of the institutions they serve.  
Julianne Basinger, "Boars Crack Down on Members' Insider Benefits," The Chronicle of Higher Education, February 6. 2004, Page A1.

Mutual-fund investors sent a record $14 billion in net assets to exchange-traded funds last month as they sought escape from the recent share-trading scandal.
Aaron Lucchetti, The Wall Street Journal, January 23, 2004 --- http://online.wsj.com/article/0,,SB107482213730209735,00.html?mod=mkts_main_news_hs_h 

S. Scott Voynich, Chair of the American Institute of Certified Public Accountants, has stated that further changes were necessary to regain the confidence of American investors. Voynich was the keynote speaker at the Institute’s 2003 AICPA National Conference on Current SEC Developments  .
http://accountingeducation.com/news/news4675.html 

Nothing wrong with overcharging, so long as everyone else is doing it, right?
Gretchen Morgenson"The Mutual Fund Scandal's Next Chapter," The New York Times, December 7, 2003
(See below)

Are you disgusted enough with mutual funds to raise a stink?  So far, savers don't seem nearly as outraged as they were about Enron--yet deceptive funds and sneaky "financial advisers" have swiped more money, from more people, than all the corporate scandals combined.  The House of Representatives just passed a reform bill, but in the Senate, the going looks tough.  Your legislators are scooping up money from the mutual-fund lobby, which hopes to head off any major change.  To counter the lobby, Congress needs angry protest calls from voters like you.
Jane Bryant Quinn (See Below)

One the one hand, eliminating the middleman would result in lower costs, increased sales, and greater consumer satisfaction;  on the other hand, we're the middleman.
New Yorker Cartoon, Page 29, The New Yorker Book of Business Cartoons
In the context of the recent mutual fund scandals, financial advisors have become those middlemen.

Boyer had also asked Kmart's auditors at PricewaterhouseCoopers in several cases to look into various accounting issues and was unsatisfied with the firm's work, according to the lawsuit.
"Fired From Kmart, Ex-CFO Is Key Figure in Lawsuits," SmartPros (See below)

"I believe this (mutual fund rip-off) is the worst scandal we've seen in 50 years, and I can't say I saw it coming," said Arthur Levitt, the former chairman of the Securities and Exchange Commission for nearly eight years under the Clinton administration. "I probably worried about funds less than insider trading, accounting issues and fair disclosure to investors" by public companies.
Stephen Labaton --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

Illegal or unfair trading isn't hard for directors (or the SEC) to spot, says New York Attorney General Eliot Spitzer, who brought the first of these scandals to light.  They just have to compare their funds' total sales with total redemptions.  When the two are about the same, skimming might be going on.  I asked Lipper, a fund-tracking service, to list the larger funds where redemptions reached 90 to 110 percent of sales.  It found 229, some looking obviously churned.
Jane Bryant Quinn --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

One thing your can count on:  When you invest, a lot of the people you trust are going to cheat.  Billions of investor dollars whirl through the system.  It's all too easy for insiders to stick their hands into that current and grab.  We're not talking about a bad apple here and there.  Cheating runs through Wall Street's very seams --- even in the sainted mutual funds.
Jane Bryant Quinn --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

But Wall Street's Lobbyists Still Have a Firm Grip Where it Counts
While Representative Baker pushes his bill in the House, the Senate is not expected to take up a measure before next year. Some lawmakers have filed bills, but Senator Richard Shelby, the Alabama Republican who heads the Senate banking committee, has said he is not convinced of the need for new laws.
Stephen Labaton, "S.E.C. Offers Plan for Tightening Grip on Mutual Funds," The New York Times, November 19, 2003 --- http://www.nytimes.com/2003/11/19/business/19sec.html 

You can read more about SEC Chairman William H. Donaldson's defense of his quick and some say marshmallow punishment of mutual fund cheaters at http://www.trinity.edu/rjensen/fraud.htm#Cleland  

What makes this such a big scandal is that the savings of half the households in the U.S. are at stake here.  The tragedy is that now that the scandal is surfacing in the media and in state courts, the SEC is only wrist slapping mutual funds.  This is along with the continued wrist slapping of investment banking (e.g., why is Merrill Lynch still in existence after frauds dating back to Orange County ?) is the real evidence of industry power over regulators.  Sarbanes-Oxley won’t do it!  It’s still rotten to the core in Washington DC as long as industries have regulators in their well-financed  pockets --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

New York State Attorney General Eliott Spitzer's charges of improper trading practices by several leading mutual fund families are another blow to public trust in financial institutions. Mutual funds have been the place you would advise the most unsophisticated investors to go: Mutual funds were designed for grandpa and grandma, and repeatedly recommended to them by all kinds of benevolent authorities. Thus scandals in the mutual fund sector are potentially much more damaging to public trust in our financial institutions than are scandals in other sectors -- such as the one playing out in the New York Stock Exchange right now.
See Robert Shiller's article below.

If you don't know jewelry, know your jeweler.
Warren Buffett,

Lowly investors who lost their retirement accounts following the advice of Citigroup's Jack Grubman or followed the "research" of some other firm that was bought and paid for by favored clients can only burn with shame and disbelief. Restore investor confidence in Wall Street? Not likely for baby boomers, who've already been publicly fleeced in broad daylight. Wall Street will have to wait for another generation of innocents to prey upon.
Richard Dooling, The New York Times, May 4, 2003

Mr. Quattrone's rise shows how some who were on the inside during the tech boom piled up huge fortunes in part through special access, unavailable to other investors, to the machinery of that era's frenzied stock market. But now he faces a crunch. The steep yearlong downturn in tech stocks has hurt the profits of his technology group. And in recent weeks, the group he heads has come under scrutiny in connection with a federal probe into whether some investment-bank employees awarded shares of hot IPOs in exchange for unusually high commissions, and whether those commissions amounted to kickbacks.
Susan Pulliam and Randall Smith, The Wall Street Journal, May 3, 2003 --- http://online.wsj.com/article/0,,SB988836228231147483,00.html?mod=2_1040_1

The Investment Banker Who Got Away to Start Another Day
The (Frank Quattrone) deal marks the end of a sorry chapter in American business history. While high-profile white-collar crime persists, the dramatic criminal cases that were launched just after the dotcom economy fizzled are now mostly completed. The icons of massive, turn-of-the-century corporate fraud--Ken Lay and Jeff Skilling of Enron, Bernie Ebbers of WorldCom, Dennis Kozlowski and Mark Swartz of Tyco--are convicted and, in Lay's case, dead. Even Martha Stewart has served time. And many, if not most, of the cases the feds brought against smaller fish--to help assuage a share-owning public that had been scammed by phony accounting and overhyped stock--are resolved. The government claims that since mid-2002 it has won more than 1,000 corporate-fraud convictions, including those of more than 100 CEOs and presidents.
Barbara Kiviat, "The One Who Got Away:  The decision to abandon a high-profile case against a dotcom poster boy marks the end of a sorry era,"  Time Magazine, August 27, 2006 --- Click Here

Cleaning Up Corporate Japan
Is Japan Inc. finally moving toward more responsible corporate governance? After last week's arrest of Yoshiaki Tsutsumi, owner of the country's major railway, hotel and resort conglomerate Seibu group, there's at least reason to believe that the government is finally demanding more accountability from its corporate leaders.  Mr. Tsutsumi, former chairman of Seibu railway and its holding company, Kokudo, was arrested on Thursday on charges of insider trading and falsification of documents. While his guilt of these charges is still to be determined, the Japanese press has not held back from criticizing the politically influential Mr. Tsutsumi and his business empire, portraying them as powerful symbols of corporate Japan's lack of transparency and disregard for shareholder interests.
"Cleaning Up Corporate Japan," The Wall Street Journal, March 10, 2005 --- http://online.wsj.com/article/0,,SB111040748350775119,00.html?mod=opinion&ojcontent=otep 

Hi Milt,

I think the problem in the investment banking industry that spilled over into accounting, banking, mutual funds, securities dealers, and large corporations is truly "infectious greed." When deregulations came 8n 1995, executives watched as investment bankers became filthy rich and many, certainly not all, decided to join in the fun.

What is important in Parnoy's latest book is a greater explanation of "how" it was done.

And yes, I think that many would do it again even if they knew they would get caught. See http://www.trinity.edu/rjensen/fraudconclusion.htm#CrimePays  
Many of the perpetrators in the 1990s are now sitting in places like London and Switzerland enjoying a very nice life with no longer having to work. Many of them will gladly sacrifice pride for wealth, which is something that I gather would never appeal to you.

As for Nixon, I think his years in public office drove him to pathological paranoia. He was driven more by fear than greed. I think he wanted to go down in history as a great statesman, and he feared his enemies were out keep him from realizing his dream.

Bob Jensen

-----Original Message----- 
From: MILT COHEN [mailto:uncmlt@juno.com]  
Sent: Sunday, April 25, 2004 9:06 AM 
To: Jensen, Robert 
Subject: comment on your comments

Hi Bob

I read your comments on various books written on securities fraud and related "fun & games" with investors per Cheryl Dunn's request --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

Just a couple of comments from my view. I read one of the books you wrote on - namely Liar's Poker and I also read a book on Michael Milkens dealings during his days at Drexel, his downfall along with Drexel's, and how others of that era that were involved in those dealings.

It seems to me that most of these books get muddled down into the same expose type of writing and/or reporting. It's like, wow! Is that what really happened? Or, I guess I forgot about that. Each book seems to be a primer for the next "hero" who wlll take investors and accountants for another fleecing. And make lawyers rich.

My question to you (and you may have the same feeling I have) is why are there so many fraudulent happenings in the security arena? One would think that with jail sentences and monetary fines being given (even Martha Stewart), people's reputations driven into a ditch - perhaps forever (notwithstanding Michael Milken's good deeds in medicine and education) is the wealth obtained so worthy of being convicted of being a thief? Does anyone have that answer? Is it all worth it just to get out of jury duty? Back in history when I was an under grad back in the 1950s the big defalcation (as it was titled) was the McKesson Robbins inventory cover-up of the 1930s. The next one that comes to my mind was the Equity Funding matter of the 1960-1970 era that centered on the fraud of writing nonexistent life insurance contracts that brought attention to the firm of Seidman & Seidman (I had a friend working for them during that era). 

After Equity Funding, the fraud circuit was quiet for awhile, but in the last fifteen or so years, it seems we experience one hit after another (like airplanes in a flight plan at LAX) - all centering on the oversight of audits that have gone on for years or even decades. The latest being the B of A involvement with the Italian dairy company. (how a bank account could be overlooked or confirmed when it didn't exist is beyond me). My conclusion after 45 years in this "game" is that it all relates back to Richard Nixon. Nixon in his day depicted the worst of fraud and lying in the matter of Watergate. (He also was depicted as a less than ethical politician here in California. The name "tricky Dick" didn't come from nowhere). Anyway, he showed the populace that anyone can "get away with it". Fast forward to Bill Clinton and we have another example of not telling the truth. (only he has the definition of sex?) So what can our kids and students think as they trudge through college. If ethics is not emphasized in class (and I assume it is not a major topic these or any other days) and ethical actions are not depicted in real life as well as in movies and TV (look at Ormirosa's actions on the Donald Trump show) how can we expect that these financial frauds will not be a continual event? Perhaps the next reality show should be centered on financial fraud. It might bring in bigger ratings than Trump's show did. (And Trump is such an icon of ethical behavior in business dealings too - (that's a joke)).

Anyway, I just thought I'd share my feelings on your thoughts and comments on current readings and topical events.

Sincerely,
Milt Cohen Chatsworth, Ca.

Hi Again Milt,

The entire body of agency theory that evolved in the past three decades is built upon the underlying assumption that managers' utility functions are also in the best interest of the prosperity of corporations and shareholders. Agency theory falls apart when managers like Fastow, Kozwalski, Waksal, etc. are willing to loot the company and/or rob shareholders for personal gain even if they know they will get caught and spend some relaxing time in Club Fed --- http://www.trinity.edu/rjensen/fraudconclusion.htm#CrimePays 

We always hope that dastardly managers are few and far between such that your assumptions and agency theory still hold water. What we saw in the late 1990s, however, was that highly infectious greed that commenced to sicken entire industries such as investment banking, energy traders, stock brokers, and securities dealers after Federal regulations were eliminated in 1995 --- http://www.trinity.edu/rjensen/FraudRotten.htm 

Sadly, the auditing profession was not immune to infectious greed as consulting opportunities exploded in auditing clients. We would hope that integrity is being restored in the auditing profession, but the scandals in tax shelter marketing and client billing cheating since the Sarbanes-Oxley legislation have further eroded the credibility of auditing firms --- http://www.trinity.edu/rjensen/Fraud.htm#others 

See "ACCOUNTING PROFESSIONALISM: THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf 

Bob Jensen

-----Original Message----- 
From: MILT COHEN [mailto:uncmlt@juno.com]  
Sent: Sunday, April 25, 2004 2:31 PM To: Jensen, Robert 
Subject: Re: comment on your comments

You may be precisely correct in your conclusion, but one would like to think that the greedy bunch wouldn't want to ruin the 'game" for everyone else. That old story about killing the goose that lays the golden eggs is happening. Another story about the bar owner watching a new bartender steal every other drink that is sold. Finally when the bartender pockets two in a row, the owners calls him over and asks, "aren't we partners on that one?" I mean, in order for investors to part with money the thieves have to let others make a few bucks just to sweeten the pot, or the game is over, in my view. The flip side is that with new laws and the emphasis on accountant's trust, many students will opt out of accounting and just head for the finance sign. I tutored a student last year who was trying to understand Intermediate Accounting. He said he did well in the Principle course. His last remark to me was that if he blows the mid-term he'll drop the course and take up Finance just to keep his grade average. So much for tenacity and commitment.

Sincerely Milt Cohen

"8 Accused of Kickbacks, Fraud at Wall Street Brokerage Firms," SmartPros, May 23, 2008 --- http://accounting.smartpros.com/x61954.xml

"Eliot Spitzer's Case Book," by Elizabeth Weinstein, The Wall Street Journal, April 28, 2005

Eliot Spitzer is a man on the hunt. From mutual funds to music, executive compensation to counterfeit drugs, the New York attorney general has pursued investigations of alleged misdeeds in half a dozen industries.

Though sometimes criticized for focusing too closely on Wall Street -- and on his own bid for New York state governor in 2006 -- Mr. Spitzer's probes have led to stricter controls on Wall Street research and spurred other attorneys general to action. His landmark investigations have zeroed in on high-profile executives, most recently Maurice Greenberg at insurer American International Group.

Last year alone, the New York attorney general's office recovered a record $2.38 billion earmarked for restitution to individual shareholders and other consumers. Mr. Spitzer's office, which has an annual budget of $214 million, has added nearly 50 lawyers to its staff of more than 500 attorneys since 1999.

Here is an overview of key investigations:

Investment Banking ­ Stock research
Probe launched: 2001
At issue: Misleading information in analysts' public research reports

An investigation into the stock research issued by Merrill Lynch & Co.'s Internet group, whose star analyst was Henry Blodget, showed that some analysts harbored different opinions privately from those they expressed in their public research reports. The investigation spawned a wide-ranging probe over nearly two years into the procedures at many firms. Ultimately, 10 of the largest securities firms agreed to pay $1.4 billion to settle charges that they routinely issued misleading stock research to curry favor with corporate clients during the stock-market bubble of the late 1990s. The firms consented to the charges without admitting or denying wrongdoing. The $1.4 billion settlement was among the highest ever imposed by securities regulators, and both Mr. Blodget and Jack Grubman of Salomon Smith Barney were banned from the securities business.

Investment Banking - IPOs
Probe launched: 2001
At issue: Unfair allocations of shares in initial public offerings

Mr. Spitzer's office also charged that several big Wall Street firms improperly doled out coveted shares in initial public offerings to corporate executives in a bid to win banking business. Two companies, Citigroup Inc.'s Citigroup Global Markets unit, formerly Salomon Smith Barney, and Credit Suisse Group's Credit Suisse First Boston, settled these charges as part of the $1.4 billion pact with securities firms and did so without admitting or denying wrongdoing. In a related probe, former star CSFB banker Frank Quattrone was convicted of obstruction of justice for impeding and investigation of CSFB's IPO allocations.

Insurance - Improper transactions
Probe launched: 2003
At issue: Whether several AIG business deals were designed to manipulate its financial statements

In 2003, the Securities and Exchange Commission and Mr. Spitzer's office looked into insurance transactions that American International Group Inc. conducted with two firms, cellphone distributor Brightpoint Inc. and PNC Financial Services Group Inc. AIG paid $126 million in a settlement without admitting or denying guilt. Later, both the SEC and Mr. Spitzer's office scrutinized a deal struck between AIG and Berkshire Hathaway's General Reinsurance unit in 2000 to determine if the deal was aimed at making the giant insurer's reserves look healthier than they were. Longtime Chairman Maurice R. "Hank" Greenberg retired from the company, and in late March, AIG admitted to a broad range of improper accounting. Other AIG executives were forced out, including chief financial officer Howard Smith. Meanwhile, Berkshire chief Warren Buffett this week told investigators that he didn't know details about the contentious transaction. Mr. Greenberg also was deposed and repeatedly invoked his constitutional right against self incrimination.

Insurance - Broker fees
Probe launched: 2004
At issue: Whether fees paid by insurance companies to insurance brokers and consultants posed a conflict of interest

Mr. Spitzer and other state attorneys general as well as insurance regulators in New York and Illinois alleged that insurance companies routinely paid fees to brokers and consultants who advised employers on where to buy policies for workers, a potential conflict of interest. Mr. Spitzer accused several insurance brokers of accepting undisclosed commissions and, in the case of Marsh & McLennan, of bid-rigging -- soliciting fake bids from insurers to help steer business to favored providers. In February 2005, Marsh agreed to pay $850 million in restitution to clients of its Marsh Inc. insurance brokerage firm who allegedly were cheated by Marsh brokers. Marsh neither admitted nor denied wrongdoing.

The investigations shook up an insurance dynasty. Marsh was run by Jeffrey W. Greenberg, the eldest son of AIG's former head Maurice Greenberg, before he was ousted as a result of the probe. Another insurance firm included in the probe, Ace Ltd., is run by Evan Greenberg, Jeffrey's younger brother. Meanwhile, Aon Corp. reached a $190 million settlement without admitting or denying wrongdoing, and earlier this month, insurance broker Willis Group Holdings Ltd. said it would pay $51 million and change its business practices to end an investigation by attorneys general in New York and Minnesota. Willis admitted no wrongdoing or liability.

NYSE - Executive Compensation
Probe launched: 2004
At issue: Whether then-New York Stock Exchange Chairman Dick Grasso's compensation was excessive

Mr. Spitzer sued Mr. Grasso, the NYSE and the Wall Street executive who headed its compensation committee for what Mr. Spitzer claimed was a pay package so huge that it violated the state law governing not-for-profit groups. Mr. Spitzer said the compensation -- valued at nearly $200 million -- came about as a result of Mr. Grasso's intimidation of the exchange's board of directors. Mr. Grasso, who denied there was anything improper about his pay, was forced to resign from the Big Board in September 2003 following a public outcry over his compensation. The lawsuit, which is still in progress, led to new governance oversight at the Big Board.

Retail
Probe launched: 2004
At issue: Antitrust violations by retailers

Mr. Spitzer claimed that Federated Department Stores Inc. and May Department Stores Co. conspired to pressure housewares makers Lenox Inc., a unit of Brown-Forman Corp. and Waterford Wedgwood PLC's U.S. unit to pull out as planned anchors of Bed Bath & Beyond Inc.'s new tableware department. The case was settled in August when the four companies agreed to pay a total of $2.9 million in civil penalties but admit no wrongdoing. Later, Mr. Spitzer charged James M. Zimmerman, Federated's retired chairman, with perjury, alleging that he lied under oath to conceal evidence of possible antitrust violations. Mr. Zimmerman has pleaded not guilty.

Music
Probe launched: 2004
At issue: Payments by music companies middlemen aimed at securing better airplay for the labels' artists

Mr. Spitzer's investigation, which is continuing, centers around independent promoters -- middlemen between record companies and radio stations -- whom music labels pay to help them secure better airplay for their music releases. Broadcasters are prohibited from taking goods or cash for playing songs on their stations. The independent-promotion system has been viewed as a way around laws against payola -- undisclosed cash payments to individuals in exchange for airplay. Last fall, Mr. Spitzer requested information from Warner Music Group, EMI Group PLC, Vivendi Universal SA's Universal Music Group, and Sony Corp. and Bertelsmann AG's Sony BMG Music Entertainment. Warner Music received an additional subpoena last week.

Marketing
Probe launched: 2004
At issue: Software secretly installed on home computers to put ads on screens

After a six-month investigation into Internet marketer Intermix Media Inc., Mr. Spitzer in April 2005 filed suit, claiming the company installed a wide range of advertising software on home computers nationwide. The software, known as "spyware" or "adware," prompts nuisance pop-up advertising on computer screens, setting users up for PC slowdowns and crashes. The programs sometimes don't come with "un-install" applications and can't be removed by most computers' add/remove function. Mr. Spitzer said the suit is designed to combat the practice of redirecting of home computer users to unwanted Web sites, the adding of unnecessary toolbar items and the delivery of unwanted ads that pop up on computer screens. The civil suit accuses Intermix of violating state General Business Law provisions against false advertising and deceptive business practices, and also of trespass under New York common law. Intermix has said it doesn't "promote or condone spyware" and has ceased distribution of the software at issue, which it says was introduced under prior leadership.

Health Care
Probe launched: 2005
At issue: Covert sales of counterfeit drugs

Mr. Spitzer's office has sent subpoenas to three big drug wholesalers -- Cardinal Health Inc., Amerisource Bergen Corp. and McKesson Corp. -- related to the companies' purchase of drugs on the secondary market. Although few details about the probe have emerged, some industry analysts have said that the subpoenas are likely connected to sales transactions involving counterfeit products. Counterfeit drugs are those sold under a product name without proper authorization -- they can include drugs without the active ingredient, with an insufficient quantity of the active ingredient, with the wrong active ingredient, or with fake packaging. The investigation focuses on the secondary market, where the wholesalers buy drugs from each other, often at lower prices, and counterfeit drugs are hard to track. It isn't clear whether the wholesalers are the focus of a probe or just sources of information.

How Grasso Got Greener:  Grasso Took Fifth In SEC Testimony
An official in the office of New York state's attorney general yesterday said former New York Stock Exchange Chief Executive Dick Grasso last year declined to answer certain questions during a deposition by the Securities and Exchange Commission regarding that regulator's probe of trading firms at the Big Board. Avi Schick, a lawyer working for Attorney General Eliot Spitzer, made that assertion during a pretrial hearing in New York state court for a civil lawsuit claiming that Mr. Grasso's $187.5 million pay package as Big Board chief was excessive under New York law covering not-for-profits. (The NYSE has since become a public company, NYSE Group Inc.) The disclosure could be useful to Mr. Spitzer in the compensation case if he can use it to suggest that Mr. Grasso was an inadequate market regulator.
Chad Bray, "Grasso Took Fifth In SEC Testimony, Spitzer Aide Says," The Wall Street Journal, March 17, 2006; Page C3 --- Click Here

Ending a bitter public fight over whether former New York Stock Exchange Chief Executive Dick Grasso was paid too much, a state appeals court ruled that Mr. Grasso can keep every penny collected from his $187.5 million multiyear compensation package. The 3-to-1 ruling by the Appellate Division of the New York State Supreme Court was a vindication for the relentless Mr. Grasso, who was ousted after details of his lucrative pay were revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall Street Journal, July 2, 2008; Page A1 --- http://online.wsj.com/article/SB121492781324819635.html?mod=todays_us_page_one

American History of Fraud --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Securities Fraud --- http://en.wikipedia.org/wiki/Securities_fraud

Securities fraud, also known as investment fraud, is a practice in which investors are deceived and manipulated, resulting in losses.^[1] Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.

Securities fraud frequently includes theft of capital from investors and misstatements on a public company's financial reports. The term also encompasses a wide range of other actions, including insider trading.

Sometimes the losses caused by securities fraud are difficult to quantify, but real. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.

This white collar crime has become increasingly frequent as the Internet and World Wide Web are giving criminals greater access to prey. The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants. Securities regulators and other prominent groups estimate civil securities fraud totals approximately $40 billion per year. Fraudulent schemes perpetrated in the securities and commodities markets can ultimately have a devastating impact on the viability and operation of these markets.

According to the FBI, securities fraud includes false information on a company's financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.

Overview --- http://en.wikipedia.org/wiki/Securities_fraud

1 Types of securities fraud 1.1 Internet fraud 1.2 Insider trading 1.3 Microcap fraud 1.4 Accountant fraud 1.5 Boiler rooms 2 Pervasiveness of securities fraud 3 Characteristics of victims and perpetrators 4 Other effects of securities fraud 5 Related subjects 6 See also 7 References

Timeline of Financial Scandals, Auditing Failures, and the Evolution of International Accounting Standards ---- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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

Online Searching for Law, Accounting, and Finance --- http://securities.stanford.edu/

Stanford University Law School Securities Class Action Clearinghouse --- http://securities.stanford.edu/

Securities Law Archives --- http://www.bespacific.com/mt/archives/cat_securities_law.html

Securities and Exchange Commission --- http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission

Accounting Fraud --- http://www.trinity.edu/rjensen/Fraud.htm

Question
Why are so many Ivy League alumni behind bars?

From Bloomberg.com July 3, 2008 --- http://www.bloomberg.com/apps/news?pid=20601103&sid=awkNQpGwkfkU&refer=us

No matter which prison former Refco Inc. Chief Executive Officer Phillip Bennett serves the 16-year sentence he received today in Manhattan federal court, chances are he will be the only one there with a master's degree from Cambridge University in England.

The head of what was once the biggest independent U.S. futures broker, Bennett also was ordered to forfeit $2.4 billion in assets for what prosecutors said was ``among the very worst'' white-collar crimes. He faced a possible life sentence after pleading guilty to bank fraud and money laundering.

Bennett, 60, joins at least a dozen other wealthy corporate executives with degrees from elite institutions such as Harvard University and the University of Pennsylvania's Wharton School who've been incarcerated for white-collar crimes this decade. Exceptional intelligence, self-confidence and feeling special, common among those educated at such schools, can turn into deviousness, arrogance and entitlement, said Tom Donaldson, a professor of ethics and law at Wharton in Philadelphia.

``If the devil exists, he no doubt has a high IQ and an Ivy League degree,'' Donaldson said. ``It's clear that having an educational pedigree is no prophylactic against greed and bad behavior.''

Imprisoned executives with Ivy League degrees include Jeffrey Skilling, 54, former CEO of Enron Corp. (Harvard Business School); Timothy Rigas, 52, former chief financial officer of Adelphia Communications Corp. (Wharton); and William Sorin, 59, former general counsel of New York-based Comverse Technology Inc. (Harvard Law School).

Elite Schools

Some of these convicted executives have multiple degrees. Conrad Black, the former CEO of Chicago-based Hollinger International Inc., now serving a 6 1/2-year sentence for stealing $6.1 million from the company, has two bachelor's degrees from Carleton University, a master's degree from McGill University and a law degree from Laval University, all in Canada.

``There is a correlation between going to an elite school and ending up as a CEO,'' said Edwin Hartman, a professor of business ethics at New York University's Stern School of Business. ``Look at the list of the heads of the 400 elite companies. They certainly didn't go to no-name state schools.''

A top-level education may also cultivate arrogance, said Maurice Schweitzer, who teaches information management at Wharton.

`They Feel Special'

``We tell our students at premier institutions that they are special, and they certainly feel special,'' Schweitzer said. ``We have famous faculty and great resources. They are surrounded by accomplished peers, and recruiters flock to them.''

Massachusetts-based Harvard University spokeswoman Rebecca Rollins said the school didn't have an immediate comment.

Wrongdoing in the executive suite is more about character flaws than alma maters, said Andrew Weissmann, a former federal prosecutor who led the U.S. Justice Department task force that investigated the collapse of Enron.

``Just because you went to a good school doesn't mean you have a good moral compass,'' Weissmann said.

Moreover, some of the executives convicted since the Sarbanes-Oxley Act was passed in 2002 in response to corporate corruption didn't attend elite schools. HealthSouth Corp. founder Richard Scrushy, 55, sentenced to almost 7 years in prison for bribery, has a bachelor's degree from the University of Alabama in Birmingham. Former Tyco International Ltd. CEO L. Dennis Kozlowski, convicted of stealing $137 million from the company and in prison for 8 1/3 to 25 years, has a bachelor's degree from Seton Hall University.

Risk Takers

Executives with top educations may end up trading their pin stripes for prison jumpsuits because they're driven to excel.

``People who succeed in corporate America are risk-takers,'' said Anthony Barkow, a former federal prosecutor and Harvard Law School graduate who is now a New York University Law School professor. ``They're smart, confident and sometimes even arrogant. That's what it takes to succeed. Risk-takers get closer to the line and sometimes cross it.''

Graduates from top-tier universities may feel so special, they think law doesn't apply to them, Wharton's Schweitzer said.

``We encourage our students to explore and think outside the box,'' Schweitzer said. ``In general, this approach is very constructive, but it may prompt people to be less likely to recognize an ethical dilemma.''

Morgenthau's Warning

Current and former prosecutors who've handled white-collar cases said the defendants' most common trait was avarice.

``It doesn't matter if you graduated from the best schools in the world and had every privilege accorded to you or not,'' said Campbell, a member of the Enron Task Force with degrees from Yale University and the University of Chicago School of Law. ``Greed is a strong motivation, and it can cause you to make mistakes.''

Robert Morgenthau, the Manhattan District Attorney who is a graduate of Amherst College and Yale Law School, issued this warning:

``No matter what your position is in life or where you went to school, if you commit a crime in our jurisdiction, we'll be happy to prosecute you.''

Question
What are do so many executives cheat in recent years?

Answer
See Question 1 and Answer 1 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm

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

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

"Merrill Lynch Settlement With SEC Worth Up to $7B," SmartPros, August 25, 2008 --- http://accounting.smartpros.com/x62971.xml

Federal regulators said Friday that investors who bought risky auction-rate securities from Merrill Lynch & Co. before the market for those bonds collapsed will be able to recover up to $7 billion under a new agreement.

The largest U.S. brokerage will buy back the securities from thousands of investors under a settlement with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators over its role in selling the high-risk bonds to retail investors. Under that deal, announced Thursday, Merrill agreed to hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion of the securities from investors by Jan. 2.

Merrill also agreed to pay a $125 million fine in a separate accord with state regulators.

The $330 billion market for auction-rate securities collapsed in mid-February.

The SEC's estimate of a $7 billion recovery is based on its projection of the eventual amount of the bonds that will be cashed in by the affected investors, who bought them before Feb. 13. The $10 billion to $12 billion is the total amount that Merrill is committing to buy back. The firm has to offer redemptions to all investors, though not all may cash in the securities.

The SEC said the new agreement will enable retail investors, small businesses and charities who purchased the securities from Merrill "to restore their losses and liquidity."

New York-based Merrill neither admitted nor denied wrongdoing in agreeing to the federal settlement, which is subject to approval by SEC commissioners.

The firm wasn't fined under the accord, but the SEC said Merrill "faces the prospect" of a penalty after completing its obligations under the agreement. The amount of the penalty, if any, would take into account the extent of Merrill's misconduct in marketing and selling auction-rate securities, and an assessment of whether it fulfilled its obligations, the SEC said.

"Merrill Lynch's conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement," Linda Thomsen, the agency's enforcement director, said in a statement. "We will continue to aggressively investigate wrongdoing in the marketing and sale of auction-rate securities."

Merrill, Goldman Sachs Group Inc. and Deutsche Bank on Thursday brought to eight the number of global banks that have settled a five-month investigation into claims they misled customers into believing the securities were safe.

The auction-rate securities market involved investors buying and selling instruments that resembled regular corporate debt, except the interest rates were reset at regular auctions - some as frequently as once a week. A number of companies and retail clients invested in the securities because, thanks to the regular auctions, they could treat their holdings as liquid, almost like cash.

Major issuers included companies that financed student loans and municipal agencies like the Port Authority of New York and New Jersey. When big banks ceased backstopping the auctions with supporting bids because of concerns about credit exposure, the bustling market collapsed. That left some issuers paying double-digit interest rates because of the terms under which they issued the securities.

Regulators have been investigating the collapse in the market to determine who was responsible for its demise and whether banks knowingly misrepresented the safety of the securities when selling them to investors.

Jensen Comment
It's unbelievable how many huge frauds there are in which Merrill Lynch has been an active participant. For example, do a word search for "Merrill" in this document that you are reading now.

The Most Criminal Class Writes the Laws

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 wa