Accounting Scandal Updates and Other Fraud Between January 1 and March 31, 2006
Bob Jensen at Trinity University

Bob Jensen's Main Fraud Document --- 

Bob Jensen's Enron Quiz (and answers) ---

Other Documents

Many of the scandals are documented at 

Resources to prevent and discover fraud from the Association of Fraud Examiners --- 

Self-study training for a career in fraud examination --- 

Source for United Kingdom reporting on financial scandals and other news --- 

Updates on the leading books on the business and accounting scandals --- 

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

Security threats and hoaxes ---

25 Hottest Urban Legends (hoaxes) --- 

Stay up on the latest and the oldest hoaxes ---
Cyber Museum of Scams and Frauds ---

The Most Criminal Class Writes the Laws

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

Congress is our only native criminal class.
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 ---

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 --- 

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

Bob Jensen's Rotten to the Core threads are at

Trial Bar Cleanup: Would you believe that many lawyers actually commit fraud?
It's amazing what a little courage from the bench can do to clean up the justice system. Now that word is out that most silicosis lawsuits are shams, ever more judges are helping to expose the corruption. The latest is Florida state Judge David Krathen, who in a recent hearing rebuked plaintiffs lawyers for inventing silicosis suits, and declared "mind-boggling" the effect that phony suits were having on the "economic well-being of this country." He vowed to ride herd on the claims in his court, separating the good cases from the fake.
"Trial Bar Cleanup," The Wall Street Journal, February 11, 2006; Page A8 ---

It was his illegal fraud for a good political cause says the Meathead
The question is what good might have been done with the $23 million he stole?

"When Rob Met Tobacco," The Wall Street Journal,  March 30, 2006; Page A14 --- Click Here 

Hollywood political activist Rob Reiner resigned yesterday as head of a California state commission that's been accused of misappropriating public funds. So perhaps now debate can shift back to the economic damage that would be caused by Mr. Reiner's universal preschool scheme.

Back in 1998, the director ("When Harry Met Sally") backed a successful ballot initiative that raised the state's tobacco tax by 50 cents a pack to pay for early childhood programs. Mr. Reiner was later appointed head of the commission that handles the proceeds, which have totaled some $3.4 billion. Hundreds of millions have gone to PR firms and others who helped him pass the 1998 initiative. That might be unabashed cronyism, but it's not necessarily illegal. However, it's also alleged that Mr. Reiner used $23 million of the tobacco loot to fund a new initiative on universal preschool that's qualified for the June 6 ballot. If Mr. Reiner was using taxpayer money to garner support for his new referendum, that violates state law.

Continued in article

The Never-Ending Saga of Merrill Lynch Fraud
The appeal has unsealed a trove of documents offering a rare glimpse of a Wall Street firm pursuing a tempting profit opportunity over the objections of internal watchdogs. On repeated occasions some Merrill employees voiced concern that the three brokers were doing something wrong and took steps to stop them. Yet their immediate bosses often pushed back, allowing the trading to continue.
"How Merrill, Defying Warnings, Let 3 Brokers Ignite a Scandal:  Bosses Back Lucrative Trades By Stars, Then Fire Them; Big Defamation Judgment 'Rewards Outweigh the Risks'," by Susanne Craig and Tom Lauricella, The Wall Street Journal, March 27, 2006; Page A1 ---

For more tidbits on Merrill Lynch fraud search for "Merrill" at

Debit Card Fraud Jumps
Several banks have reported that account information has been stolen and consumers have reported mysterious fraudulent account withdrawals. Litan told MSNBC, “This is the absolute worst hack that has happened, the biggest scam to date.” Using a debit card to steal cash is a more direct process for thieves. Stealing merchandise and converting it into cash can be a risky business. MSNBC reports this so-called “white card” fraud does not require interaction with clerks or other store staff. Careless PIN storage is to blame for these losses.
"Debit Card Fraud Jumps," AccounitngWeb, March 13, 2006 ---

Bob Jensen's threads on ID theft are at

Bob Jensen's threads on computer and network security are at

Yawn, more fraud on top of a mountain of fraud at Merrill Lynch
Merrill Lynch & Co. has agreed in principle to pay $164 million to settle 23 class-action lawsuits related to its stock-research coverage of Internet companies during the tech-stock bubble era. The settlements leave Merrill with two suits still pending out of an initial 150 in which investors claimed to have been misled by the company's former top tech-stock analyst, Henry Blodget, and his team. The suits alleged that Mr. Blodget recommended 27 stocks to help Merrill win investment-banking assignments, even as he privately disparaged many of them.
Jed Horowitz, "Merrill to Settle Research Suits," The Wall Street Journal, February 18, 2006; Page B2 ---

Bob Jensen's threads on security analysts' fraud are at

SEC fines Merrill Lynch Again and Again and Again and Again . . .
Merrill Lynch & Co. agreed to pay $2.5 million and to hire an independent consultant to settle allegations that it failed to promptly produce email records, the Securities and Exchange Commission said yesterday. Federal regulators had accused the New York brokerage firm of repeatedly failing to furnish email from October 2003 through February 2005. The SEC said Merrill Lynch had failed to retain certain business-related emails and that its policies and procedures designed for the prompt production of email were deficient.
Siobhan Hughes, "Merrill to Pay Fine Over Emails" The Wall Street Journal, March 14, 2006; Page C5 ---

To find out more about the repeated fines paid by Merrill Lynch, search for "Merrill" at

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

Bob Jensen's "Rotten to the Core" threads are at

How Bear Stearns Got Greener
The strong earnings increase was also clouded by details of long-expected regulatory charges unveiled yesterday showing how three separate Bear units aided improper mutual-fund trading -- in some cases intentionally and despite thousands of complaints from the funds. Bear settled the charges by the Securities and Exchange Commission and the New York Stock Exchange, without admitting or denying wrongdoing, by agreeing to pay $250 million -- including $160 million in disgorgement of gains and a $90 million fine.
Randall Smith and Tom Lauricella, "Bear Stearns to Pay $250 Million Fine; Net Rises 36%," The Wall Street Journal, March 17, 2006; Page C3 ---

Bob Jensen's mutual fund scandal threads are at

Just Another Day on the Fraud Beat
"Executive Loses Case on Trading," by Gretchen Morgenson, The New York Times, February 11, 2006 ---

Eliot Spitzer, the New York attorney general, sued the executive, Clark E. McLeod, and four other high-profile telecommunications executives in 2002, contending that they had steered investment banking business to Salomon Smith Barney in exchange for inflated ratings on their companies' stocks and hot new shares of other companies.

Mr. McLeod netted $9.96 million in profits on 34 stock allocations from 1997 to 2000, the court filings said. Salomon Smith Barney received more than $77 million in underwriting fees from McLeodUSA.

In a decision issued Thursday, Justice Richard B. Lowe III of New York State Supreme Court in Manhattan wrote that Mr. McLeod's acceptance of initial public offering shares from the same brokerage firm that his company used as an investment banker, a practice known as spinning, was "a sophisticated form of bribery."

Continued in article

Bob Jensen's threads on Wall Street fraud are at

KPMG Tax-Shelter Settlement May Be Revised Amid Opt-Outs
"This settlement could be in jeopardy," said attorney Edmundo Ramirez, whose client was one of 284 potential members of the KPMG class. Mr. Ramirez said his client rejected the original settlement, considering it "a sweetheart deal for KPMG."
Nathan Koppel, "KPMG Tax-Shelter Settlement May Be Revised Amid Opt-Outs," The Wall Street Journal, February 10, 2006; Page C4 ---

Bob Jensen's threads on KPMG's happiness face and woeful face are at

"Judge Blasts Credibility of Ex-KPMG Ex," SmartPros, March 10, 2006 ---

A federal judge on Wednesday agreed that former KPMG accounting executive David Greenberg can be freed on $25 million bail in his tax fraud case - but he attacked Greenberg's character and vowed to ruin his family financially should he decide to flee.

Greenberg is not expected to meet strict bail conditions for at least several days in what prosecutors call the largest criminal tax case in U.S. history, a fraud that helped rich people evade $2.5 billion in taxes.

Even as he set bail, U.S. District Judge Lewis A. Kaplan described Greenberg as "an extremely skilled individual who spent his whole life trying to figure out how to hide the pea."

He was referring to a version of a deceitful street game known as three-card monte, in which a pea is moved among three cups and viewers are asked to guess where the pea ended up.

The judge said Greenberg's finances were in such disarray that it was impossible to figure out where his assets were and how much he was worth.

"I have no idea how much went in, came out and remains," he said.

The judge warned Greenberg's family members that if he flees, the court would make sure they "will be financially ruined and stripped of everything they have."

He added, "If they're willing to take that risk, I'm willing to take that risk of non-appearance."

He also required Greenberg to live in Manhattan and submit to electronic monitoring.

The judge said Greenberg spent his professional career "scheming how to protect other people's assets from the United States government."

Greenberg is charged in an indictment accusing 17 former KPMG partners and managers with devising and marketing fraudulent tax shelters that cost the U.S. Treasury $2.5 billion.

The indictment says the ex-KPMG executives teamed with a former partner at a prominent law firm and another defendant to defraud the Internal Revenue Service by filing false income tax returns and by concealing the tax shelters from the IRS.

The judge said he was particularly disturbed that Greenberg apparently forged the signatures of his ex-wife and his father on papers establishing a limited liability company holding assets worth up to $13 million. He noted that the government has alleged Greenberg boasted that he could flee with money he controlled in the names of others.

Greenberg has denied the allegations. His lawyers declined to comment after Wednesday's hearing.

KPMG is a worldwide network of professional firms providing audit, tax and advisory services, according to its Web site. It operates in 144 countries and has more than 6,700 partners.

Bob Jensen's threads on KPMG are at

One Case in Which KPMG is Not in Favor of Transparency

"KPMG Aims to Cloak Details of Client's Case:  Auditor's Settlement Offer Would Muzzle Targus Group Regarding Sanctions Order," by David Reilly, The Wall Street Journal, March 20, 2006; Page C3 --- Click Here

In trying to settle a lawsuit brought against it by a former client, KPMG LLP has proposed terms aimed at preventing other clients from learning the auditor was sanctioned by a judge in the matter.

KPMG has offered to settle for $22.5 million a suit filed against it by Targus Group International Inc., a California computer-case maker, according to a draft settlement proposal reviewed by The Wall Street Journal. Targus claimed the accounting giant was negligent in failing to detect alleged embezzlement by a former executive at the company. KPMG has disputed that claim.

The proposed settlement payout is small compared with the $465 million KPMG agreed to pay last year as part of a deferred-prosecution agreement reached with the Justice Department. That agreement, which helped the firm avoid a potentially catastrophic criminal indictment, related to KPMG's sale of questionable tax shelters.

But the nonmonetary settlement terms being proposed by KPMG to Targus underscore how big accounting firms are pursuing every means at their disposal to limit their litigation liability and curtail the ability of clients to bring cases against them. Other measures taken include terms that some auditors are writing into their engagement contracts that would limit the clients' ability to pursue legal action against them.

In the proposed settlement with Targus, KPMG wants details of the case sealed and wants Targus to ask the state judge who sanctioned KPMG to vacate, or overturn, that order, according to the settlement document. The order, filed last July, sanctioned KPMG for obstruction during pretrial proceedings, known as discovery, and fined it $30,000. The judge also instructed any jury hearing the case against KPMG to take into account the firm's failure to produce "requested documents in a full and timely manner." At the time, KPMG said that it complied with the judge's discovery orders and appealed the ruling. That appeal is pending in the California Court of Appeal.

Continued in article

Bob Jensen's threads on the two faces of KPMG are at

The unfolding debit card scam that rocked Citibank this week is far from over, an analyst said Thursday as she called this first-time-ever mass theft of PINs "the worst consumer scam to date."
The scam has hit national banks like Bank of America, Wells Fargo, and Washington Mutual, as well as smaller banks, all of which have reissued debit cards in recent weeks, says a Gartner research vice president.
Gregg Keizer, "PIN Scandal 'Worst Hack Ever'; Citibank Only The Start,"
Information Week, March 9, 2006 ---

Bob Jensen's threads on ID theft are at

Pharmaceutical Companies and Medical Schools
The Association of American Medical Colleges announced Tuesday that it would create a special panel to examine potential conflicts of interest in the relationships between pharmaceutical companies and medical schools, teaching hospitals and their employees. Jordan J. Cohen, the association’s president, said its executive committee had agreed to establish the committee in the wake of an recent studies suggesting that the drug industry’s marketing efforts could undermine the objectivity of medical educators and future doctors.
Inside Higher Ed, February 22, 2006 ---

Survey: Unrealistic Business Goals, Deadlines Cause Unethical Behavior
Pressure from management or the Board to meet unrealistic business objectives and deadlines is the leading factor most likely to cause unethical corporate behavior, according to a new survey on business ethics.
SmartPros, January 18, 2006 ---

Bob Jensen's threads on professionalism in accounting are at

Not Your Typical Class Project at USC

"Class Project on Fraud," by Scott Jaschik, Inside Higher Ed, March 27, 2006 ---

The University of Southern California has put an instructor in its business school on leave after he was arrested by Federal Bureau of Investigation agents Friday on charges that he used students — without their knowledge — to defraud them and investors of more than $1.5 million.
Barry H. Landreth, the instructor, is being held in jail and could not be reached for comment. His lawyer told California reporters that he hadn’t had time to review the charges and so couldn’t respond to them.

Landreth, who earned a master’s degree in real estate development from the university in 2001, has worked in recent years as a part-time lecturer at Southern Cal’s public policy and business schools. University officials said that they couldn’t comment on the case except to confirm that he had been employed there, and that he was currently on leave, but had been teaching this semester.

But court documents filed by the FBI charge that Landreth used his classes to recruit unwitting assistants for his scheme. According to the FBI documents, Landreth recruited students in his courses to sell investments through a real estate company he ran, which he said had the rights to valuable property in Chicago and Las Vegas.

The students were told that they would be paid for their work and that investments they made would show huge returns. Several of the students invested their own money and family members’ money — sometimes in excess of $100,000 — as well as seeking funds from others.

According to the FBI, some of the students — who are identified only by first names in the court documents — began to suspect that something was wrong when they were not paid and the promised payoffs on their investments and those of their family members were not coming through. The documents portray the students as becoming increasingly concerned about the run-around they were receiving from Landreth and the excuses that didn’t make sense to them.

The charges against Landreth say that he didn’t invest the money he received, but instead spent the funds buying and caring for show horses.

Red Faced GM delays annual report because of accounting "errors"
Note mention of GM's argument with its auditors (Deloitte)
Also note the historical reference to fraud fighter Abe Briloff

"Now G.M. Has Woes on Audits ," by Floyd Norris, The New York Times, March 18, 2006 ---

There was a time when General Motors was seen as the paragon of financial quality. Its bonds were rated triple A, and it was known for the most conservative accounting. Let other companies use liberal accounting rules to make results look better; G.M. did not need such things.

The announcement late Thursday that General Motors would revise profit figures for every year of this decade, and would have to restate the 2005 earnings it had already reported, shows how far the icon has fallen. Less than a year after it lost its investment-grade bond rating, its bonds are viewed as middling even among junk bonds.

"You have to question what controls are in place," said Charles W. Mulford, an accounting professor at Georgia Tech. "When companies like G.M. are profitable, there is not a need to engage in aggressive accounting. What we are seeing now is a pattern of very aggressive accounting that took them well beyond the limits of generally accepted accounting principles."

. . .

At one hearing, G.M. told the accounting rule makers that it should not be required to follow revised pension accounting rules because they conflicted with its union contract. The rule makers were unimpressed. Today, G.M.'s generous pension policies are one reason it is in trouble.

In 1984 and 1986, when it made two major acquisitions, buying Electronic Data Systems and Hughes Aircraft, it used tracking stock, which it invented. Those shares were supposed to trade based on profits of the acquired subsidiaries. Abraham Briloff, an accounting professor at Baruch College, complained that G.M. was overstating those profits because they ignored good will charges, but G.M. made no changes.

Then in 1987, G.M. decided that it had been too conservative in evaluating the useful lives of many of its assets. By stretching out the depreciation of the assets, it increased pretax profits that year by more than $1 billion. But a few years later, it had to write down the value of many assets.

The latest announcement, coming just when G.M. had planned to file its annual report, seemed to indicate that the company may have been in an argument with its auditors from Deloitte & Touche. It cited consultations with Deloitte as a reason for one change. A Deloitte spokeswoman declined to comment.

Some of the changes may also have reflected changes at the top of the company. In December, G.M. announced that John M. Devine, who had been chief financial officer since 2001, would step aside and be succeeded in January by Frederick Henderson, who had been running the company's European operations. That move came weeks after the company said it had uncovered accounting errors that would be detailed in the annual report.

While the changes will raise its stated loss for 2005 by $2 billion, those additional losses do not affect cash flow and attracted less attention than the issue that was new, and that the company said had delayed the filing of its annual report.

"GM Board Seeks Probe of Mistakes In Bookkeeping:  Last-Minute Error at GMAC Caught Directors by Surprise; Share Price Drops Nearly 5%," by Monica Langley and Lee Hawkins Jr., The Wall Street Journal, March 18, 2006; Page A1 ---

The board of General Motors Corp. called for an investigation into the cause of newly uncovered accounting errors that forced the troubled auto maker to delay filing its annual report and could postpone a critical sale of part or all of its financing arm, said people familiar with the matter.

During a hastily scheduled conference call Friday morning, directors expressed displeasure over the last-minute filing delay to Chairman and Chief Executive Rick Wagoner, who was calling in from Asia, and to Chief Financial Officer Frederick "Fritz" Henderson, these people said.

Philip Laskawy, the director in charge of the audit committee, asked for an analysis of the last-minute problem. Jerome B. York, the newly elected board member who represents billionaire Kirk Kerkorian, GM's largest shareholder, followed up by pushing for an in-depth review of what GM would do to fix its accounting problems.

Mr. Wagoner said little during the meeting and did not offer an explanation for the accounting issue or the delay, these people said. The directors' questions were answered by Mr. Henderson. Mr. Henderson, who just took over as CFO this year, told the board he hoped to have preliminary answers next week.

The unusual meeting came just hours after the late Thursday announcement in which GM said it had to delay filing its 10-K report to the Securities and Exchange Commission after discovering the accounting errors by a residential mortgage business owned by its finance arm, General Motors Acceptance Corp.

GM, which already faces an SEC probe into its accounting practices, also disclosed that its 10-K report, when filed, will outline a series of accounting mistakes that will force the car maker to restate its earnings from 2000 to the first quarter of 2005. GM also said it was widening by $2 billion the loss it reported for 2005.

GM shares sank 4.9% to $21.13 in 4 p.m. composite trading Friday on the New York Stock Exchange on news of its latest setback. In recent months the company has been struggling amid poor demand for its vehicles in North America and high labor and other costs.

Continued in article

From The Wall Street Journal Accounting Weekly Review, March 31, 2006

TITLE: GM Races to Correct Errors for Report to SEC
REPORTER: Lee Hawkins, Jr.
DATE: Mar 27, 2006
TOPICS: Financial Accounting, Accounting, Accounting Changes and Error Corrections, Auditing, Auditor/Client Disagreements, Cash Flow

SUMMARY: "GM management has spent more than a week gathering details on the chain of events that led to a last-minute discovery of accounting errors in the financial statements of ResCap, MAC's residential-mortgage unit, which caused GM to miss its 10-K filing deadline March 16... The ResCap mistakes were discovered after GM's auditors refused to sign off on ResCap's financial statements " The accounting issues relate to classifying cash flows from proceeds of sale of mortgage loans as investing activities rather than operating activities. "GM and its chairman and chief executive, Rick Wagoner, are under pressure to fix the errors and offer a new statement by Friday, since missing that deadline could put GM at risk of violating covenants related to $32 billion in bonds." A related opinion page piece argues that Mr. Wagoner will likely face ouster by his Board this summer.

1.) Describe the problematic accounting issue at GM's residential mortgage lending unit.

2.) Cite the specific accounting requirements indicating that cash flows from sales of mortgages should be shown as operating cash flows rather than investing cash flows. In your answer, refer to the nature of the industry in which ResCap operates as well as the specific references to the accounting literature.

3.) Why is it important to see cash flows categorized into operating, investing, and financing cash flows?

4.) Why do you think that ResCap's auditors refused to sign off on the classification of cash flows for sales of loans even though this was not the first year that these cash flows were shown in that way? Why do you think that the auditors had "signed off" on these transactions in the past?

5.) What other accounting issue is GM currently facing? Are the issues with reporting cash flows related to the issues requiring restatement of earnings? In your answer, address both the purely accounting issues as well as the nature of concerns in general with GM's reporting over this time period.

6.) Refer to the related article. How does the timing of the accounting and reporting issues at GM coincide with the timing of Mr. Wagoner's tenure there?

7.) How do GM's problems reflect fundamental problems of management in addition to concerns about the state of the automotive industry? How does that additional concern about management exacerbate negative opinions about the company?

8.) What is a forensic accountant? How would hiring one help GM with its current woes?

SMALL GROUP ASSIGNMENT: Establish 4 person groups. Have each group access the General Motors SEC filings

Have each group identify all forms filed with the SEC on March 28, 2006. The students should identify Form 8-K, Form 10-K, Form 10-Q/A and Form 10-K/A.

Answer the following questions:

1. What is the purpose of each filing?
2. Describe the contents of each filing and state how those contents support the purpose of the filing.
3. How are the changes identified in the WSJ articles presented in the filings? Specifically describe the ways in which those changes are presented (footnotes, tabular disclosures, restatements on the face of financial statements, etc.) 4. Identify the accounting standard requiring the treatments shown in each of the SEC filings, if applicable.

Reviewed By: Judy Beckman, University of Rhode Island

--- RELATED ARTICLES --- TITLE: General Malaise REPORTER: Paul Ingrassia PAGE: A16 ISSUE: Mar 27, 2006 LINK: 

TITLE: U.S. Grand Jury Subpoenas GM Over Handling of Supplier Credits REPORTER: Lee Hawkins, Jr. PAGE: A3 ISSUE: Mar 29, 2006 LINK:

Fraud at Harvard
In a legal settlement reached last summer, Harvard agreed to pay $26.5 million

Did fraud by by a Harvard professor ultimately sink its President Summers?

"Did an Exposé Help Sink Harvard's President?" by Sara Ivry, The New York Times, February 27, 2006 ---

"I was surprised that he was gone by February of '06," said Mr. McClintick, and "that it happened as rapidly as it did."

"How Harvard Lost Russia" was published in the January issue of Institutional Investor magazine, a subscription-only publication, about a month and a half before Dr. Summers's resignation, which he announced last Tuesday. The move came just two weeks after a Feb. 7 meeting when the president was challenged on several issues, including his reaction to events described in Mr. McClintick's article.

In roughly 18,500 words, (22,007 including sidebars), Mr. McClintick chronicled financial improprieties by those in charge of Harvard's Russia project, including Andrei Shleifer, a professor of economics who is a friend and protégé of Dr. Summers's, and Jonathan Hay, a Harvard-trained lawyer. The two men were accused of making personal investments in Russia at a time when they were working under contract to establish capitalism in the former Soviet nation.

Their behavior led the United States government to file civil charges against Harvard, Mr. Shleifer and Mr. Hay for fraud, breach of contract and making false claims. In a settlement reached last summer, Harvard agreed to pay $26.5 million. Mr. Hay was ordered to pay a fine based on his future earnings and Mr. Shleifer agreed to pay $2 million, though none of the parties admitted wrongdoing. Mr. Shleifer has not been subjected to any disciplinary action from Harvard.

Some Harvard watchers attribute that to Dr. Summers's influence, though he formally recused himself from the matter, and they see the entire affair, assiduously detailed by Mr. McClintick, as an indelible stain on Harvard's reputation.

Mr. McClintick, 65, a 1962 graduate of Harvard, is a former reporter for The Wall Street Journal and the author of several books, including "Indecent Exposure," which investigated financial scandal at Columbia Pictures. That book was a finalist for the National Book Award and helped solidify Mr. McClintick's reputation as a meticulous investigator.

Continued in article


Will  Phil and Wendy Gramm forever go unpunished in the Enron scandal?
Enron trial unfolds, it's depressing that Phil and Wendy Gramm, the company's political enablers, are going unpunished and uncriticized.
Robert Scheer, "Enron's Enablers " The Nation, February 1, 2006 ---

Back in 1993, when Enron was an upstart energy trader and Wendy Gramm occupied the position of chair of the CFTC, she granted the company, the biggest contributor to her husband's political campaigns, a very valuable ruling exempting its trading in futures contracts from federal government regulation.

She resigned her position six days later, not surprising given that she was a political appointee and Bill Clinton had just defeated her boss, the first President Bush. Five weeks after her resignation, she was appointed to Enron's board of directors, where she served on the delinquent audit committee until the collapse of the company.

There was perfect quid pro quo symmetry to Wendy Gramm's lucrative career: Bush appoints her to a government position where she secures Enron's profit margin; Lay, a close friend and political contributor to Bush, then takes care of her nicely once she leaves her government post.

Although she holds a doctorate in economics and often is cited as an expert on the deregulation policies she so ardently champions, Gramm insists that while serving on the audit committee she was ignorant of the corporation's accounting machinations. Despite her myopia, or because of it, she was rewarded with more than $1 million in compensation.

A similar claim of ignorance of Enron's shenanigans is the defense of her husband, who received $260,000 in campaign contributions from Enron before he pushed through legislation exempting companies like Enron from energy trading regulation.

"This act," Public Citizen noted, "allowed Enron to operate an unregulated power auction--EnronOnline--that quickly gained control over a significant share of California's electricity and natural gas market."

The gaming of the California market, documented in grotesque detail in the e-mails of Enron traders, led to stalled elevators, hospitals without power and an enormous debt inflicted on the state's taxpayers. It was only after the uproar over California's rolling blackouts, which Enron helped engineer, that the Federal Energy Regulatory Commission finally re-imposed regulatory control--and thereby began the ultimate unraveling of Enron's massive pyramid of fraud.

Jensen Comment
I've always been a bit harsh on Wendy Gramm because of the way she significantly helped Enron deregulate energy markets while she worked for the Government and later joined Enron's Board of Directors. In fairness, however, I must point out that while serving on the Board of Directors of Enron, Wendy Gramm's stock sales were exceedingly modest compared with the big winners ---

Bob Jensen over the years has written quite a lot about Wendy Gramm ---

Seems a bit more than a $1,600 shower curtain that got a Stanford University president in hot water
Texas Southern University President Priscilla Slade has reimbursed the university more than $138,000 for the cost of landscaping her new home, according to records released Wednesday. Slade, who wrote the check Monday, is hoping to get back into the good graces of the university's board of regents before they meet Friday to discuss her future. She is also under scrutiny for charging roughly $87,000 to TSU for household furnishings, according to a source familiar with the inquiry. Although some board members have been strongly supportive of Slade, there are still unanswered questions about the source of the money and whether...
Matthew Tresaugue, "TSU head returns $138,000 to school:  President hopes to ease concerns about expenses as regents prepare to discuss her future,", February 2, 2006 --- 

Also see "Kennedy: Where ideal meets reality in university life" --- 

The price of dealing with unregulated hedge funds
A group of current and former professional football players filed a civil lawsuit in Georgia state court against an Atlanta hedge-fund firm in which they had invested millions of dollars, accusing its principals of theft, forgery and fraud. In their suit, the investors say they put a total of about $15 million into funds managed by International Management Associates LLC, its affiliates and principal Kirk S. Wright. They allege that Mr. Wright, other principals and the firm have failed to honor withdrawal requests made Dec. 5, misled investors as to the funds' investment style and forged their names on checks that bounced when deposited in the investors' bank accounts.
"NFL Players Sue A Hedge Fund For Fraud, Theft:  State Judge to Freeze All Assets Of International Management; 'Stick to Being Anesthesiologists'," by Ian McDonald and Valerie Bauerlein, The Wall Street Journal, February 18, 2006; Page B1 ---

Bob Jensen's threads on hedge funds are under the H-terms at

Title Washing: How Car Titles Get Laundered
Unsuspectingly you may be purchasing a car that was flooded during a hurricane
Thousands of vehicles that sat in the murky waters left by hurricanes Katrina and Rita are starting to show up on the used-car market. Most states require that flooded cars be labeled as such on the title. But scam artists have found loopholes in the system. They re-register cars in states with looser title laws -- sometimes two or three states -- until the warning that the car was flooded is gone. This fraudulent practice is known as "title washing."
Jeff Brady, "Holes in Monitoring System Let Lemons Get Resold," NPR, January 31, 2006 ---

Is your church or favorite charity violating its tax exempt status?

Among the prohibited activities, the examiners found that charities and churches had distributed printed material supporting a preferred candidate and assembled improper voter guides or candidate ratings. Religious leaders had used the pulpit to endorse or oppose a particular candidate, and some groups had shown preferential treatment to candidates by letting them speak at functions. Other charities and churches had made improper cash contributions to a candidate's political campaign. The IRS said the cases covered "the full spectrum" of political viewpoints.
"IRS Finds Charities Overstep Into Politics," SmartPros, February 28, 2006 ---

SEC Says NetEase, Former Officers Settled Action Over Accounting
The Securities and Exchange Commission filed a settled enforcement action against Chinese online-games operator Inc. and two former officers over alleged improper accounting in 2000 and 2001. The SEC alleged that NetEase "materially overstated its revenues and understated its net loss by improperly recognizing revenue."
"SEC Says NetEase, Former Officers Settled Action Over Accounting," The Wall Street Journal, February 28, 2006; Page B11 ---

For details see

Fannie Mae Unearths More Accounting Problems
The new problems include improper accounting for certain investment securities and for some of the fees and obligations that arise from Fannie's guarantees of payments on mortgages bundled into securities and sold to investors world-wide. The newly disclosed problems also relate to accounting for the costs of dealing with houses acquired through foreclosures, for debt restructurings and for interest on delinquent loans, among other things.
James R. Hagerty, "Fannie Mae Unearths More Accounting Problems:  Company Expects to Meet Its Capital Requirements; Market Share Drops Again," The Wall Street Journal, March 14, 2006; Page A3 ---

Bob Jensen's threads on accounting fraud at Fannie Mae are at

Tobacco Companies Don't Win Them All on Appeal
The Oregon Supreme Court affirmed a $79.5 million punitive-damage award against Philip Morris USA in favor of a smoker's widow, dealing a setback in the Marlboro maker's long-running battle against tobacco litigation. Philip Morris USA, a unit of Altria Group Inc., had appealed the 1999 award to Mayola Williams, who lost her husband, Jesse Williams, to lung cancer in 1997. She had sued Philip Morris for negligence and fraud, claiming the company waged a 40-year publicity campaign to undercut published concerns about the dangers of smoking. The damages award was based on the fraud claim only.
Vanessa O'Connell and Mary Ellen Lloyd, "Philip Morris Loses Appeal Of Oregon Damage Award," The Wall Street Journal, February 3, 2006; Page B3 ---

Accounting Fraud Can Cost Billions
AIG is close to a deal involving a payment of at least $1.5 billion to resolve accounting fraud and other allegations with federal and state authorities. The expected agreement could be the largest finance-industry regulatory settlement with a single company in U.S. history.
Kara Scannell and Ian McDonald, "AIG Close to Deal To Settle Charges, Pay $1.5 Billion," The Wall Street Journal, February 6, 2006; Page C1 ---

Bob Jensen's threads on insurance company and mutual fund frauds are at

German Bank to Settle Fraud Claims for $134 Million
Deutsche Bank AG said it expects to pay about $134 million as part of a settlement with federal, state, and self-regulatory agencies related to investigations into market-timing issues. The German bank also said its Scudder Distributors business has received a so-called Wells notice from the National Association of Securities Dealers regarding noncash compensation to "associated persons of NASD member firms." A Wells notice allows recipients to respond before the regulator takes civil action.
Gepffrey Rogow, "Deutsche Bank Offers Payment To Settle Market-Timing Probe, The Wall Street Journal, January 28, 2006; Page B13 ---

Bob Jensen's threads on banking and securities frauds are at

ChoicePoint Case Spotlighted ID Thef
Data broker ChoicePoint Inc. yesterday agreed to pay a $10 million federal fine over security breaches that exposed more than 160,000 people to possible identity theft. Privacy experts praised the settlement as a warning to companies to get more serious about protecting sensitive information. The Alpharetta, Ga.-based company, one of the nation's largest buyers and sellers of personal information such as Social Security numbers, birth dates and addresses, also agreed to pay $5 million into a fund to compensate people who suffered as a result of the breaches.
Arshad Mohammed, "Record Fine for Data Breach:  ChoicePoint Case Spotlighted ID Theft," The Washington Post, January 27, 2006 ---

Bob Jensen's threads on phishing and pharming are at

AIG Expected to Pay $1 Billion-Plus to Settle Probes
AIG is expected to pay more than $1 billion to settle state and federal civil-fraud charges alleging the giant insurer used improper accounting to polish its earnings. Former CEO Hank Greenberg is not included in the accord.
Ian McDonald and Monica Langley, "AIG Expected to Pay $1 Billion-Plus to Settle Probes:  Huge Penalty Would Resolve Fraud Case Against Insurer But Wouldn't Cover Ex-CEO," The Wall Street Journal, January 13, 2006; Page A1 ---

Bob Jensen's threads on insurance company frauds are at

Former Wal-Mart Top Executive Confesses to Fraud and Tax Evasion
Former Wal-Mart Stores Inc. Vice Chairman Thomas Coughlin has agreed to plead guilty later this month to federal wire-fraud and tax-evasion charges, according to people familiar with the proposed plea agreement he has struck with prosecutors. The deal, if it holds, will bring down the curtain on a bizarre chapter in Wal-Mart's history. Mr. Coughlin, a Wal-Mart legend who was a protégé and former hunting buddy of founder Sam Walton, left the company early last year amid accusations that he misappropriated as much as $500,000 from Wal-Mart through fraudulent reimbursements and improper use of gift cards.
James Bandler, "Former No. 2 At Wal-Mart Set To Plead Guilty:  Thomas Coughlin to Admit To Fraud and Tax Evasion;
Protégé of Sam Walton, The Wall Street Journal, January 7, 2006; Page A1 ---

It gets harder to get convictions for white collar crime
In Oregon this month, a judge dismissed criminal charges against three corporate executives, saying the Justice Department unconstitutionally pursued a stealth criminal investigation under the cloak of a less-threatening civil proceeding by the SEC. And in Alabama last year, a judge dismissed charges that former HealthSouth Corp. Chief Executive Richard Scrushy lied to the SEC, ruling that he should have been warned that the Justice Department already had opened a criminal investigation when the SEC questioned him. In both cases, the judges found the line between the agencies' roles had become improperly blurred.
Peter Lattman and Kara Scannell, "Slapping Down a Dynamic Duo: SEC and the Justice Department Fight Financial Crime Together, But Is It an Unfair Double-Team?" The Wall Street Journal, January 25, 2006; Page C1--- 

Bob Jensen's threads on white collar crime are at

How to Fight Global Crime and Corruption
Transparency International (News, Tools, etc.) --- 

Bob Jensen's threads on fraud reporting are at

Cozy Relationships Between Physicians and Device Makers
The documents shed new light on a matter that has troubled the medical device industry for years: the assertion that companies employ a variety of financial ruses to pay doctors who use their devices, a practice that medical and legal experts say is unethical and possibly illegal. But despite industry efforts to clean up such practices, the documents and accusations made by former Medtronic employees suggest that the problem persists and may have gotten worse.
Reed Abelson, "Whistle-Blower Suit Says Device Maker Generously Rewards Doctors," The New York Times, January 24, 2006 ---

Deloitte Settles With a a Japanese Audit Client for More Than $200 Million
Deloitte & Touche LLP has paid about $100 million to a Japanese insurer to settle litigation related to the collapse of a giant aviation reinsurance pool, bringing the total paid by Deloitte in the case to well more than $200 million in what has become one of the costliest-ever legal settlements for an auditing firm.
Mark Maremont and Miho Inada, "Deloitte Pays Insurers More Than $200 Million," The Wall Street Journal,  January 6, 2006; Page C3 ---

Bob Jensen's threads on Deloitte's legal woes are at

It's beginning to look like fraud and creative accounting at Delta Airlines
Creditors often have a hard time collecting from companies in bankruptcy, but a group of plane owners trying to retrieve three leased Boeing 767s claims Delta Air Lines is going too far. The aircraft owners, mostly investment banks such as Morgan Stanley and Natexis Banques Populaires SA of France, claimed in a court filing last week that Delta violated bankruptcy rules by disassembling the aircraft and storing the frames and engines in separate locations.
"Delta Air's Fight With Creditors Over Leased Jets Heads to Court," by Evan Perez, The Wall Street Journal, January 5, 2006; Page A2 ---

Jensen Comments
This reminds me of a clever ploy used by car thieves in San Antonio.  One of the problems in stealing a car and then selling it in the U.S. in the vehicle's VIN number.  What some thieves purportedly do is steal a luxury car and separate the body from the drive train.  Then the body is abandoned where the police will find it.  The police (possibly in cahoots with the thieves) then sell the body at a public auction.  Keep in mind that the body has no engine or transmission.  The thieves then buy the body and thereby acquire a legitimate ownership of the VIN number.  Then they install the original drive train and sell the entire care for a handsome profit.

Accounting Issue:  The Bright Line Problem
I'll just bet these aircraft were carried as operating leases rather than capital leases since airlines tend to push to the edge of bright line rules of FAS 13.  How do you account for operating leases of assets that are disassembled for parts?

Bob Jensen's threads on how bright lines are used to hide debt with operating leases are at

Did Enron change executive looting tendencies?
Despite an array of new and expensive laws and regulations that were adopted to tighten corporate oversight after the wave of scandals earlier in the decade, serious accounting problems continue to trouble publicly owned companies. In the last year, a record number have been forced to correct erroneous earnings statements, which often led to sharp stock declines. Moreover, for all the widespread criticism of high pay of executives at Enron and other companies that later proved derelict, studies show that there is still little overall correlation between the performance of many companies and the executive compensation set by their directors.
Stepen Labaton, "Four Years Later, Enron's Shadow Lingers as Change Comes Slowly," The New York Times, January 5, 2005 ---

Bob Jensen's threads on outrageous executive compensation are at

"The Case for Cutting the Chief's Paycheck," by William J. Holstein, The New York Times, January 29, 2006 ---

Bob Jensen's threads on outrageous executive compensation are at

I thank Rachel McCarthy in the U.K. for pointing this link out to me.
"Government U-turn on Corporate Reporting Rules is a Farce say Ernst & Young Commentators," International Accountant, February 3, 2006 --- 

Gerald Russell, Senior Partner at Ernst & Young and Head of the Audit Quality Forum, says, "This has all the elements of a Brian Rix farce - now you see it, now you don’t. There was extensive consultation before the OFR was adopted - what on earth is the point of going through it all again? It would be much better to admit the error and reinstate the original position.

"It is in the interests of good reporting that companies cover what was in the original OFR, and many companies have already gone down the fuller disclosure route. The main problem is that there were no ‘safe harbour’ provisions and, naturally, directors are likely to be circumspect about what they might include in an OFR - but this is no reason for having abolished it."

Will Rainey, Head of the Financial Reporting Advisory at Ernst & Young, adds, "We had a law [OFR] and on the 12 of January it was repealed. Now we are in a consultation. What we really want is a proper process and some consistency – this has turned into a farce.”

Correcting this CEO IPO fraud is long overdue

"A Major Perk For Executives Takes a Big Hit:  McLeod Ruling Makes It Tougher To Accept Lucrative IPO Shares; Broader Definition of 'Spinning'," by Michael Siconolfi, The Wall Street Journal, February 21, 2006; Page C1 ---

Corporate executives, take note: The definition of improper stock trading in your brokerage account just got broader.

A New York state court recently found former telecommunications executive Clark E. McLeod liable for receiving hot new stocks in his personal brokerage account. The rationale: His company was sending business to the same securities firm, Citigroup Inc.'s Salomon Smith Barney, that doled him the new stocks.

That is a big change. Previously, "spinning" of initial public offerings of stock involved a direct quid pro quo. In a common form, securities firms allocated IPOs to the personal accounts of corporate executives, so the shares could then be sold, or "spun," for quick profits -- in exchange for business from the executives' companies.

IPO shares are coveted because they often surge on their first trading day. Spinning has raised concerns among investors that the IPO market is rigged.

Bottom line: Senior executives now could skate on thin legal ice if they receive IPO shares from a Wall Street firm with which their company at some point does business, and don't disclose it to their board or shareholders.

The ruling has broader ramifications. Even though Mr. McLeod lived and worked in Cedar Rapids, Iowa, the judge said the New York attorney general could bring the case because the transactions were made through a New York firm. Most securities firms do business in New York.

This is an "expansive interpretation" of corporate executives' duty, says Joseph Grundfest, a former commissioner at the Securities and Exchange Commission and now a law and business professor at Stanford University.

The ruling comes as the IPO market heats up again. So far this year, there have been 32 new stock issues brought to market, raising $5.8 billion; the average first-day gain has been 11%, according to Richard Peterson, a senior researcher at Thomson Financial, a New York financial-data provider.

Mr. McLeod, 59 years old, declined to comment. He will appeal the "completely novel" ruling, says one of his lawyers, Richard Werder, a partner at Jones Day.

A former mathematics and science teacher, Mr. McLeod started a long-distance company out of his garage in 1980. He eventually founded McLeod Inc., a telecom upstart now known as McLeodUSA Inc. that fell victim to the bursting of the technology-stock bubble. He left as chief executive in April 2002; McLeodUSA emerged from bankruptcy-law protection last month. He currently is CEO of Fiberutilities of Iowa, a utility-management company.

Continued in article

Bob Jensen's threads on security frauds are at

Bob Jensen's threads on outrageous executive compensation are at

Will it ever be possible to audit Pentagon spending?

Answer:  Never!

"Pentagon Bookkeeping Stops Auditors," AccountingWeb, February 20, 2006 ---

The Department of Defense (DOD) has failed its audit to the extent that auditors have stopped wasting money trying to audit their books, according to Black Enterprise. Problems with the Pentagon books has allowed the DOD to pay troops, civilian workers, and contractors the wrong amounts; to lose track of equipment, such as planes and tanks; and to document trillions of dollars in transactions improperly, according to Black Enterprise. Gregory D. Kutz, managing director of the General Accounting Office (GAO), told Congress last summer that these accounting problems would cost taxpayers $13 billion in 2005. The GAO is the investigative arm of Congress.

The “clean audit” of DOD books scheduled for 2007 is not in sight, according to Black Enterprise. The DOD has received a “clean opinion” on only 16 percent of its assets and 49 percent of its liabilities as of June 2005, according to Thomas B. Modly, deputy undersecretary of defense for financial management. Black Enterprise reported that Modly said the DOD hopes to settle their balance sheet on 47 percent of assets and 49 percent of liabilities by 2007. It might help to understand the problem by understanding the size of Pentagon operations. Black Enterprise reports it had in fiscal year 2005:

  • $1.3 trillion in assets
  • $1.9 trillion in liabilities
  • 3 million in personnel
  • $635 billion in operational costs
  • 2,569 facilities in the country and 807 outside of the United States

One of the other problems cited is that DOD has about 5.2 million items in its inventory, according to Modly. Wal-Mart only has 11,000 and Home Depot only has 50,000 inventory items, according to Black Enterprise. Another problem is the gridlock of some 4,150 different business operations, including 713 different human resources systems.

Jack Minnery, a Defense Finance and Accounting Service accountant, told Black Enterprise, “The Pentagon wasn’t in the business of making money, so they never needed an income statement. They expensed their assets like planes and buildings and such. They dished money out, and they never kept track of what they owned.” Minnery continued, “That’s one of the main reasons I don’t believe they’ll ever have a clean [audit].” Minnery complained about missing money in 2002 to earn his label as a whistle-blower.

Minnery told Black Enterprise, “Their systems can’t keep track of who they’ve sold stuff to, who owes them, who they owe.” Concerning the inter-service gaggle of ordering codes, Minnery said, “The Navy has a set of [codes], the Army has a set, the Air Force has a set. They don’t have the same number of digits, and they don’t match each other.”

In 1990, the GAO started assigning some government agencies to a “high risk” list. DOD’s supply chain and weapon systems acquisitions have remained on this list since that time and six other defense divisions made the list in 2005. Danielle Brian, executive director of the watchdog group Project on Government Oversight, told Black Enterprise, “Nothing’s gotten better. It keeps getting worse.” reports that Jeffrey Steinhoff, GAO’s managing director for financial management and assurance, said, “They’re not close to the finish line. They have a long way to go.”

Untangling the mess has seemed elusive except “by making the business process support the war-fighter more effectively, we are seeing a significant amount of momentum,” according to Paul Brinkley, deputy undersecretary of defense for business transformation. Effective might be an overly optimistic opinion as Black Enterprise reports that the government spent $179 million on two automation systems meant to resolve disbursement problems that failed, according to the GAO.

Winslow T. Wheeler, director of a military reform project at the Center for Defense Information (CDI), told Black Enterprise, “We don’t know how badly managed it is. It’s not that DOD flunks audits, it’s that DOD’s books cannot be audited. DOD aspires for the position where it flunks an audit. If this were a public company, it would have gone belly up before World War II.” CDI is an independent monitor of the military.

In more wasteful news, Stuart Bowen, special inspector general for Iraq reconstruction, told Political Gateway that $8.8 billion is unaccounted for due to inadequate oversight from Coalition Provisional Authority (CPA) that “was relatively nonexistent.” Bowen is in charge of tracing the funds.

Frank Willis, the former number two official at the CPA transportation ministry, told Political Gateway that the CPA kept billions in cash to pay for its projects because Iraq is without the financial infrastructure that would support the use of checks or money orders. Willis said, “I would describe (the accounting system) as nonexistent.” Willis told a CBS interviewer, “Fresh, new, crisp, unspent, just-printed 100-dollar bills. It was the Wild West.”

In other wasteful news, the GAO has released a report finding that the Bush Administration spent more than $1.6 billion in public relations and media contracts over two and a half years, according to the California Chronicle. Congressman Henry A. Waxman, (D-Calif.), House Democratic Leader Nancy Pelosi, (D-Calif.), and Congressmen George Miller, (D-Calif.), and Elijah E. Cummings, (D-Md.), with other senior Democrats, released the report.

More bad news is continued at

What has been one of the most massive, if not the most massive, fraud in the history of the U.S. (aside from Department of Defense ongoing fraud discussed above)?

The attorney/physician rip off on phony asbestos health damage claims. 

"Diagnosing for Dollars A court battle over silicosis shines a harsh light on mass medical screeners—the same people whose diagnoses have cost asbestos defendants billions," by Roger Parloff, Fortune, June 13, 2005, pp. 96-110 ---,15114,1066756,00.html

How, then, to account for this: Of 8,629 people diagnosed with silicosis now suing in federal court in Corpus Christi, 5,174—or 60%—are "asbestos retreads," i.e., people who have previously filed claims for asbestos-related disease.

That anomaly turns out to be just one of many in the Corpus Christi case that sorely challenge medical explanation. At a hearing in February, U.S. District Judge Janis Graham Jack characterized the evidence before her as raising "great red flags of fraud," and a federal grand jury in Manhattan is now looking into the situation, according to two people who have been subpoenaed.

The real importance of those proceedings, however, is not what they reveal about possible fraud in silica litigation but what they suggest about a possible fraud of vastly greater dimensions. It's one that may have been afflicting asbestos litigation for almost 20 years, resulting in billions of dollars of payments to claimants who weren't sick and to the attorneys who represented them. Asbestos litigation—the original mass tort—has bankrupted more than 60 companies and is expected to eventually cost defendants and their insurers more than $200 billion, of which $70 billion has already been paid.

The odor around asbestosis diagnosis has been so foul for so long that by 1999, professor Lester Brickman of the Benjamin N. Cardozo School of Law was referring to asbestos litigation as a "massively fraudulent enterprise." At the request of his defamation lawyer, Brickman says, he toned that down to "massive, specious claiming"

Continued in the article

Bob Jensen's working paper on the history of fraud in the U.S. is at

"SEC Shuts Down $50 Million Autosurf Ponzi Scam," by Gregg Keizer, InformationWeek, February 28, 2006 ---

The Securities and Exchange Commission has filed fraud charges against the owner of an Autosurf site who it accused of running a $50 million Ponzi scam and pocketing nearly $2 million.

Less than two weeks ago, the FBI opened an investigation into's promises of large returns on members' investments. In exchange for buying $6 units -- up to a maximum of $6,000 worth -- members were promised a 144 percent return within 12 days simply for viewing a dozen Web ads daily.

The SEC dubbed a "paid autosurf program" but said it was in reality an illegal Ponzi, a scam where income from incoming members is used to pay existing members' returns.

"The defendants falsely represented that upgraded membersSMQ-8217-SMQ earnings 'are financed not only [by] incoming member fees, but also with multiple income streams including advertising, and off-site investments,'" the SEC said in a statement issued Monday. "In fact, at least 95 percent of revenues have come from new investments in the form of membership fees from new or existing members. The other 'multiple income streams' from advertising revenues or off-site investments were either negligible or non-existent."

Johnson's scheme, said the SEC's complaint, had raised more than $50 million from over 300,000 members since mid-2005. Johnson, meanwhile, had transferred about $1.9 million from to her personal bank account, the SEC alleged.

The SEC asked the court to freeze Johnson's and's assets, as well as those of her payment providers, which included StormPay, an online payment service based in Tennessee that is under investigation by state authorities.

12dailypro essentially shut down after StormPay, which said it suspected an illegal scheme, turned off the payment spigot in late January. In less than two weeks, StormPay was hit with a denial-of-service (DoS) attack that knocked it offline for two days. The DoS attacker has not been identified.

"Nortel Offers $2.4 Billion to Settle Lawsuits ," Ian Austen, The New York Times, February 9, 2006 ---

Nortel Networks, the troubled maker of telecommunications equipment, offered about $2.4 billion in cash and stock Wednesday to settle two class-action lawsuits over an accounting debacle two years ago.

The announcement was the latest in a series of steps taken by Mike S. Zafirovski, the company's chief executive, to strengthen Nortel. The company is recovering from the collapse of the technology bubble in 2000 and from accounting irregularities, among them reporting sales that had not yet been made, that led to the firing of seven of its top executives in 2004. The company later restated four years of results.

If the settlement is accepted, Nortel would pay the plaintiffs $575 million cash and issue shares equal to about 14.5 percent of its outstanding equity. Nortel will take charges totaling about $2.47 billion to cover the cost of the settlement in the fourth quarter, which it has not yet reported. The $575 million payment will come out of Nortel's cash reserves, which now total $3 billion.

Nortel, based in Brampton, Ontario, is not acknowledging any wrongdoing under the settlement proposal, nor would the deal have any impact on criminal and securities investigations of the company in the United States and Canada.

"Our intent is to achieve a fair resolution of these lawsuits and avoid a prolonged, uncertain and costly litigation process," Harry J. Pearce, Nortel's chairman, wrote in a statement. "A final settlement would remove a significant impediment to Nortel's future success and allow Mike Zafirovski and the Nortel team to move forward."

Continued in article

Nortel (NT :Nasdaq) this week joined a fast-growing string of public companies to say prior financial reports inflated real business trends - - - Nortel restate earnings for 2003 and earlier periods; Nortel already restated earnings for the past three years in October 2003
"Rash of Restatements Rattles," by K.C. Swanson,, March 17, 2004 

Jensen Comment
Nortel's external auditor is Deloitte, an auditing firm that seems to have a lot of patience with repeated restatements by Nortel.
Question What is "cookie jar" accounting?

Answer from
Earnings management, often revenue reporting manipulation, that entails the use of reserves to smooth earnings volatility.

Canada-Based Nortel Accounting Cookie Jar Accounting Update: Details Mistakes, Says Executives Will Return Millions in Bonus Payments. Five directors, including Chairman Lynton Wilson and former ambassador James Blanchard, who is also a former Michigan governor, will step down.

When auditors get fired
Network Associates fired PricewaterhouseCoopers, according to various news reports, after the auditor cited "material weakness" in its internal controls in the company's annual report
"Rash of Restatements Rattles," by K.C. Swanson,, March 17, 2004 

When auditors quit
Case in point: Last week Gateway (GTW:NYSE) said longtime auditor PricewaterhouseCoopers won't work for it anymore. PwC did the books back in 2000 and 2001 -- an era of aggressive accounting that still haunts Gateway, though it's now under different management.
"Rash of Restatements Rattles," by K.C. Swanson,, March 17, 2004 

Bob Jensen's threads on problems of auditing firms are at

Sarbanes-Oxley:  What is too much of a seemingly good thing?

"Class-Action Sarbox," The Wall Street Journal,  January 7, 2006; Page A6 --- 

At first glance, the study from Stanford University and Cornerstone Research seems to be good news, noting that the number of class-action suits filed in 2005 dropped to 176 from 213 in 2004 -- a 17% decrease. Good-governance types are claiming this decline is a direct result of the 2002 Sarbanes-Oxley legislation working as intended, keeping companies on the straight and narrow.

Yet as any first-year Wall Street analyst knows, this minor legal reprieve is better attributed to last year's relatively stable stock market. Class-action suits arise out of booms and busts in equity markets: As share prices dive, plaintiffs' lawyers swarm. Yet with last year's stock market less volatile than at any point since 1996, the "strike suit" pickings were lean.

So what then accounts for those 176 suits? Try . . . Sarbanes-Oxley. It appears the tort bar is now using the law's strict financial-reporting requirements as its latest excuse to sue. A whopping 89% of the suits alleged misrepresentations in financial documents, while 82% claimed false forward-looking statements. Lawyers have certainly used financial documents as a reason to sue in the past, but this year's notable uptick in the number of suits filed that cite this cause of action suggests that the tort bar has found a whole new line of business.

The real news here is that lawyers managed to drum up so many results-related suits in a year when the stock market was stable and corporate earnings were strong. Just wait for the next economic downturn, when class-action lawyers will be able to exploit Sarbox's new "internal controls" documentation as a roadmap. Our guess is that we have only begun to discover the ways in which Sarbox will be a trial-bar bonanza.

Continued in article

Jensen Comments
A useful reference site from Cornerstone is at
A Stanford University Press Release is at
The Stanford University Law School Class Action Clearinghouse is at

Widespread price scanner fraud and errors
Please verify that your cash register receipt records the prices promised.
You may be getting unknown charges to your credit card account.
I wonder if they ever undercharge? I doubt it!

"New Legislation Would Prevent Overpricing," by Suzanne Le Mignot, CBS2Chicago, February 4, 2006 ---

It's called scanner scamming. The price on the scanner doesn't match the price on a store shelf, and consumers get overcharged.

As CBS 2's Suzanne Le Mignot explains, Illinois Lt. Gov. Pat Quinn is proposing a new retail consumer act that hits stores with a steep penalty if they are caught making a scanner error.

Bob Hinde reported that he bought two tomatoes at a Dominick's food store in Des Plaines, and he said he was charged a lot more than the tomatoes cost.

"This was so egregious," Hinde said. "It was a clerical error of $102.15."

Hinde added: "They were very embarrassed. They gave us our money back immediately. But this is a mistake easy to catch."

Hinde happens to be the former consumer protection administrator in Des Plaines. In that position, he was responsible for making sure the prices on store shelves matched those at the register.

"The ones you don't catch are the 50 cents. The dollar and a half. The $3," he said. "Today, mothers and fathers are both working -- (they) dash into stores, boom, pay, out again."

Continued in article

Bob Jensen's threads on consumer fraud are at

Bob Jensen's fraud updates are at

The Sad, Sad State of Corruption in Mexico
In 2005, a survey conducted by Transparency International showed that between 31 and 45% of Mexicans had someone in their family forced to pay a bribe to a public official in the past year. Corruption is an endemic aspect of Mexican government. Extending from the local police who routinely shake down people who commit minor infractions for cash all the way to top government officials who habitually cut deals with political cronies and drug traffickers to shape Mexican law. After endless decades, this culture of corruption has taken its toll. Over 20% of the Mexican population lives in poverty, only 62% of people have access to clean drinking water, 25% of the economy is illegal, and in the oil rich state of Chiapas; 40% of all homes have dirt floors and 21% have no electricity. All in a country with a $1 trillion gross domestic product.
Justin Darr, "America Versus Mexico's Ponzi Pyramid Scheme," GOPUSA," January 24, 2006 ---

Mexican Army Invades U.S. Border
Mexican soldiers and civilian smugglers had an armed standoff with nearly 30 U.S. law enforcement officials on the Rio Grande in Texas on Monday afternoon, according to Texas police and the FBI. Mexican military Humvees were towing what appeared to be thousands of pounds of marijuana across the border into the United States, said Chief Deputy Mike Doyal, of the Hudspeth County Sheriff's Department. Mexican Army troops had several mounted machine guns on the ground more than 200 yards inside the U.S. border -- near Neely's Crossing, about 50 miles east of El Paso -- when Border Patrol agents called for backup. Hudspeth County deputies and Texas Highway patrol officers arrived shortly afterward, Doyal said.
Sara A. Carter and Kenneth Todd Ruiz, "Police face Mexican military, smugglers Armed standoff along U.S. border," Daily Bulletin, January 24, 2006 ---
Jensen Comment
In its favor, the Mexican Army also rushed troops to Mississippi to seriously help clean up some of the Katrina mess in Mississippi.

The Sad, Sad State of Corruption After Katrina
The FBI has uncovered fraud by public officials in the wake of Hurricane Katrina and has created a task force to investigate corruption as federal money pours into the Gulf Coast region, Mississippi's top agent said Monday. "We are seeing public officials facilitating some of the fraud," John G. Raucci, agent in charge in Mississippi, said in an interview with The Associated Press. "It's not widespread, I will say that, but we have seen it and we have begun addressing it."
"FBI Uncovers Post-Katrina Fraud," ABC News, January 23, 2006 ---

Where does criminal money go? To the laundry!
An international money manager who catered to wealthy criminals in New York and around the globe has been nabbed for allegedly laundering a stunning $1 billion his clients accumulated doing everything from stock fraud to peddling the "date-rape" drug. Martin Tremblay, 43, billed his Bahamas-based Dominion Investments as a legitimate company offering "expertise" in "international tax planning, asset protection and other wealth preservation techniques." But, according to the feds, Tremblay, a Canadian citizen, lined his pockets by servicing an...
"MONEY MAN LAUNDERED $1B: FEDS," New York Post, January 24, 2006 ---

What can you do to prevent being taken on eBay?
(Word of Caution:  Never open an email message that pretends to be from Pay-Pal)

Two brothers have published a book of "true tales of treachery, lies and fraud" from eBay. "Dawn of the eBay Deadbeats" contains stories written by eBay buyers and sellers. From stories of disappointing purchases to out-and-out fraud, the book is a manual of what can go wrong when buying and selling on auction sites. Brothers Stephen and Edward Klink co-wrote the book, illustrated by Clay Butler. The idea for the book sprung from a website Stephen Klink had created. A New Jersey police office, he founded - a site that aims to help people avoid auction scams - after he himself was ripped off online.
Ina Steiner, "Dawn of the eBay Deadbeats: New Book Uncovers Online Auction Treachery,",  December 28, 2005 ---


"Beware of eBay deadbeats, author warns," PhysOrg, March 1, 2006 ---

Imagine buying vintage Spiderman comics for $16,000 and receiving instead, a box of printer paper or losing a whopping $27,000 in purchasing a big rig that didn't exist in the first place. These are just many of the online auction fraud horror stories that brothers Edward and Steve Klink compiled from their eBay watchdog Web site (E.T.S.).

In their book "Dawn of the eBay Deadbeats," some 70 strange-but-true stories were collected and retold with the help of illustrator Clay Butler.

The December 2005 publishing of the book comes just in time as the online auction giant has been criticized by consumer groups, most recently by the U.K. magazine "Computing Which?" for its passive and sometimes delayed approach in handling fraud reports.

At any given time, the site has 78 million listings, and 6 million new listings are added each day.

And while, eBay maintains that less than .01 percent of all listings end in a confirmed case of fraud, that could mean that of the 1.9 billion listings reported by eBay in 2005, that 190,000 cases were confirmed frauds in the last year.

Currently there are almost 900 horror stories from eBay fraud victims are on the E.T.S. site whose motto is "Winning the war on deadbeats."

And already the brothers are working on the next volume of horror stories, encouraging victims who want to get their tales to be told to get into contact with them.

United Press International spoke with Edward Klink about the recent book, their watchdog
Web site, and the current state of eBay.

"We had collected hundreds of stories
on the Web site and figured it was time to take these stories to a wider audience and let the victims have their say," Edward Klink said. "Plus with our combined backgrounds, Steve is a police officer and I'm a business writer, we felt we were ideally suited to get the job done."

Fraud on eBay can take on many forms including items paid for that vary from the description in the sale, unpaid items, and spoof eBay or Pay-Pal e-mails.

And like the many victims on their site, the brothers too have encountered the problem of auction fraud.

In 2003, Steve, a New Jersey police officer, won a set of "new" speakers, only to find that it looked as if they were "gnawed on by a wild animal."

"The seller said they weren't that way when mailed, and eBay said there was nothing they could do," Klink said. "Annoyed that he was stuck with the merchandise and given no recourse, Steve started and stories began pouring in from around the world."

And the site has received a positive response since it's been up and running.

"People love it," Klink said. "On eBay, their official boards are closely monitored and talk about problems and scams and eBay's failings are not generally tolerated. So E.T.S. gives them an outlet. When it first came out was featured on and newspapers as far away as South Africa."

According to Klink, while eBay has what could be considered --"the ultimate
business model" -- of collecting fees and delegating the marketing, selling, packaging, shipping, and customer service to eBay users, it's very easy for these same users to fall victim to fraud.

"I think consumers let their guard down when they are sitting at home and surfing the Web with their coffee," he said. "If a stranger offered them a $1,400 antique vase on the street they'd most likely walk away, but when that same vase is on
the Internet for some reason the reaction is more, 'Say, now that looks interesting.'"

And have the brothers seen any improvements in eBay's handling of the fraud issue?

"eBay says it is a tiny fraction of all auctions," Klink said, "but the hundreds of people who told us their stories hate being in that tiny group and never thought they would be. Lots of fraud is underreported, too. EBay encourages users to settle it among themselves, and if they can't, then they are directed to pay $20.00 to have SquareTrade, a third party, mediate the dispute. But it's not often a scammer shows up for mediation!"

. . .

"We want people on eBay to have a good buying and selling experience - transparent, well-lit, and safe," the spokesperson said. "Fraud on all levels is something we take seriously."

The company also has a team dedicated to working with law enforcement rather it be educating them on fraudulent cases and working proactively taking information on specific cases to them or cooperating with investigations.

"We would invite anyone to visit the site and read more," said the spokesperson, who also emphasized that the no. 1 issue for online shoppers is to pay safely using Pay-Pal or a credit card than any other form of payment.

In many cases, consumers are able to get their money back, Pay-Pal offers up to $1,000 back with buyer protection and credit card programs usually have a pay back program in cases of fraud. In many cases, Pay-Pal offers a way for consumers to make purchases without providing personal information and at the same time protecting money.

"Dawn of the eBay Deadbeats" ($12.95) is available on Amazon, eBay, and in select bookstores.

What is "dividend recapitalization?"

White Collar Crime Pays
This is how rich guys loot companies
Many Private-Equity Firms Drain Out Dividends and Fees, Saddling Companies With Debt

"Takeover Artists Quench Thirst," by Henny Sender, The Wall Street Journal, January 5, 2006; Page C1--- 

The ink had barely dried on the sale documents about a year ago when the new private-equity owners of satellite operator Intelsat -- Apax Partners Inc., Apollo Management, Madison Dearborn Partners and Permira Advisers -- paid themselves a $350 million dividend financed with newly issued Intelsat debt.

In a technique practically unheard of just five years ago, private-equity firms, emboldened by easy financing, are paying themselves lavish dividends and fees from the companies they acquire. Typically, private-equity firms have generated returns by acquiring companies with a mix of cash and debt, taking them private, restructuring them and then either taking them public or selling them.

But a favorable financing environment has given rise to a high volume of dividends and fees, often paid well ahead of any operational turnaround, primarily through the aggressive issuance of debt by the acquired companies. A spokesman for Apollo, which led the Intelsat transaction, declined to comment.

In the past two years, private-equity firms garnered more than $50 billion from so-called dividend recapitalizations, according to Standard & Poor's Corp. By contrast, there were virtually no such dividend financings just five years ago. As much as 50% of the returns that buyout firms have paid their investors in the past two years came from such dividends, financed mostly with new debt, according to calculations by some private-equity firms.

The pace of the dividends is dizzying. Blackstone Group bought Celanese Corp. for $3.4 billion in June 2004, contributing $650 million of the purchase price. In the nine months following the closing, Celanese paid Blackstone $1.3 billion in dividends.

Continued in article

Bob Jensen's threads on how white collar crime pays even if you know you'll be caught are at

I wonder if this is legitimate if they take women employees along to the strip clubs?
Morgan Stanley has fired a stock-research analyst and three sales staffers in the Wall Street firm's institutional-stock division after they accompanied one or more clients on a visit to an adult-entertainment club, according to people familiar with the matter. The firing of the staffers, all men, sent a message that exclusionary, male-only activities won't be tolerated at the firm, according to people familiar with the matter. In mid-2004, Morgan Stanley agreed to pay $54 million to settle a gender-discrimination case. As part of the settlement, Morgan Stanley denied wrongdoing but agreed to take additional steps to promote diversity and conduct antidiscrimination training.
"Morgan Stanley Fires Male Staffers For Strip-Club Trip," by Randall Smith, The Wall Street Journal, January 5, 2006; Page C3 ---

Jensen Comment
My favorite source for investment banking scandals is Frank Partnoy.  His early books reveal how back in the 1990s Morgan Stanley and some other investment banks had some bizarre sexcapades, including bikini-clad women in their trading rooms ---

What are the "dirty dozen" things that bad guys might try to do to you in tax season?
The answer comes from IRS Commissioner Mark V. Everson

"Be on the Lookout For: IRS Names “Dirty Dozen” for 2006," AccounitngWeb, February 9, 2006

Two new schemes have joined the Internal Revenue Service’s (IRS’) list of most noxious tax scams this filing season. Several usual suspects also remain on the list, which was released earlier this week. The IRS reminds taxpayers and tax preparers that involvement with tax schemes can lead to fines and even imprisonment.

“When it comes to taxes, everyone has to pay their fair share,” IRS Commissioner Mark V. Everson said in a prepared statement detailing the 2006 list. “I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the Dirty Dozen or similar schemes can lead to big headaches.”

The Dirty Dozen List

  1. Zero Wages NEW! A taxpayer attaches either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 showing no or very little wages or other income. A statement indicating the taxpayer is rebutting information submitted to the IRS by the payer, a reference to the paying company’s refusal to issue a corrected Form W-2 for fear of IRS retaliation or an explanation on Form 4852 citing the “statutory language behind Internal Revenue Code (IRC) 3401 and 3121,” may also be included when the tax return is filed.


  2. Form 843 Tax Abatement NEW! This faulty interpretation of the IRC involves the use of Form 843 by the taxpayer to request abatement of previously assessed tax. Form 843 is used to provide a list of reasons for the request, which often includes “Failed to properly compute and/or calculate IRC Section 83 – Property Transferred in Connection with Performance of Service.” This scam is most frequently used by those who have not previously filed tax returns in an attempt to abate tax assessed by the IRS through the Substitute for Return Program.


  3. Phishing Identity thieves, posing as financial institutions or even the IRS itself, attempt to acquire personal information and financial data that can be used to access the financial accounts of consumers. Ficticious e-mail messages, phone calls and other correspondence, solicit taxpayer Social Security Number, credit card number, PIN number and other data, by pretending to notify them of suspicious activity on their account or that their account is under audit/review. NOTE: The IRS DOES NOT use e-mail to initiate contact with taxpayers about issues related to their accounts. Taxpayers can confirm authentic IRS contact by calling 800-829-1040.


  4. Zero Return Taxpayers enter all zeros or enter zero income, their withholding and write “nunc pro tunc” (“now for then” in Latin) on their federal tax return. This is also done with amended returns in hope that the IRS will disregard the original return on which they reported wages and other income. This is similar to the “Zero Wages” listed in Number 1 above.


  5. Trust Misuse Taxpayers are encouraged, with promises of reducing the income subject to tax deductions for personal expenses and reduced estate or gift taxes, to transfer assets into trusts. Some trusts, however, do not deliver the promised tax benefits. The IRS is actively examining these arrangements, with more than 200 active investigations currently underway, as well as three dozen injunctions obtained against the promoters of non-performing trusts since 2001.


  6. Frivolous Arguments Promoters of this tactic have been known to make wild claims including: the Sixteenth Amendment, concerning the power of Congress to lay and collect taxes, was never ratified; wages are not income; filing returns and paying taxes is voluntary; being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy; and more. These arguments are false and have been thrown out of court.


  7. Return Preparer Fraud Dishonest return preparers, who derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services, cause many headaches for taxpayers lured in by the promise of big refunds. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns. The Department of Justice has filed complaints against dozens of others. More than 110 tax preparers were convicted of tax crimes during fiscal year 2005.


  8. Credit Counseling Agencies The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling. Taxpayers are encouraged to exercise caution when considering utilizing the services of credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may increase existing debt levels.


  9. Abuse of Charitable Organizations and Deductions Tax-exempt organizations are being increasingly used to improperly shield income or assets from taxation. According to the IRS this can occur when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund, but maintains control over the assets or income, thereby obtaining a tax deduction without transferring commensurate benefits to charity.


  10. Offshore Transaction Taxpayers continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts, or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance policies, despite crackdowns by the IRS and state tax agencies, which yielded 68 convictions on charges of promotion and use of abusive tax schemes designed to evade taxes during fiscal year 2005.


  11. Employment Tax Evasion A number of illegal schemes, based on an incorrect interpretation of Section 861 and other parts of tax law, instruct employers not to withhold federal income tax, or other employment taxes, from wages paid to their employees. The IRS has observed an increase in activity in the area of so-called double dip parking and medical reimbursement issues lately and courts have issued injunctions against more than a dozen persons, ordering them to stop promoting the scheme. More than 50 individuals were sentenced to an average of 30 months in prison for employment tax evasion during fiscal year 2005. Employers can also be held responsible for back payments of employment taxes, plus penalties and interest. Employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.


  12. ”No Gain” Deduction Taxpayers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A by listing their AGI in the section labeled “Miscellaneous Deductions” and attache a statement to the return referring to court documents and including the phrase “No Gain Realized.”

Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral or by sending a letter detailing the alleged fraudulent activity to the Internal Revenue Service, Fresno, CA 93888. The letter should contain specific information regarding who is being reported, the activity being reported, how the individual reporting the activity gained knowledge of it, when the activity took place, the amount of money involved and any additional information that might be helpful in an investigation. The person reporting the alleged violation are not required to identify themselves, although it is helpful and their identity can be kept confidential. The individual may also be entitled to a reward.

The two scams that dropped of the “Dirty Dozen” list this year were the “claim of right” and “corporation sole”. IRS personnel have noticed less activity using these scams over the past year as a result of court cases against a number of promoters.

Bob Jensen's threads on consumer frauds are at

Bob Jensen's tax helpers are at

March 3, 2006 message from Denmark (and it's not about cartoons)

Dear Professor Jensen,

Recently here in Denmark several companies have been added to Icelandic portfolios. For example Magasin Nord is now 83% owned by the Baugur Group. Straumur-Burdaras and B2B Holdings. I have been intrigued by the financing of these deals. I read that within the space of four years Icelandic equity fund companies raised seven billion dollars for purchasing companies and shares. It all seems bizarre and dare I say it, “fishy.” On a cursory cruise through the company web-pages I realised that the board members of all the top banks and private holdings are connected. Here is one example, the Landsbanki is chaired by the father of the chairman of Samson Holdings and connected with Avion the air and shipping company. Interestingly the father was charged with 450 cases of fraud and embezzlement in 1986 when he owned a shipping company which went bankrupt. He was not found guilty except for a book-keeping count –there was a ministerial tie-in. The son went to New York to study business –then co-founded up a brewery in St. Petersburg, Russia. That company Bravo was sold for 400 million to Heineken. These connections are intriguing. I am sure Abraham Briloff would agree. I almost feel that the Icelandic financial system is a shell-game – what is your take on these shenanigans? Is it at all possible that the Russian criminal organisations have a finger in the honeypot or is that too fanciful?



So Long Footnoted Liabilities
Pensions and other retiree benefits are graduating to the balance sheet; how far should a company go to protect its compensation information?; choosing your auditor wisely may help protect your stock price; and more.

"So Long Footnoted Liabilities," by Rob Garver, CFO Magazine, February 2006, pp. 16-17 ---

Verizon, Ford, and ExxonMobil, pay attention. It looks as though pensions and other retiree benefits are about to graduate from the footnotes to the balance sheet. And companies that have previously been able to hide underfunded retirement programs may have to count them as liabilities — often multi-billion-dollar liabilities.

In November, the Financial Accounting Standards Board voted to move toward a proposal that would require companies to report the difference between the net present value of their pension- and other retirement-benefit obligations and the amount the company has set aside to meet those obligations. And although a final decision is a year or more away, the numbers won't be pretty. (See "Will Washington Really Act?")

Standard & Poor's, in fact, estimates a retirement-obligations shortfall of some $442 billion in the S&P 500 alone. Indeed, it is difficult to understate the potential impact of the FASB plan, which is expected to be only the first phase in a larger effort to overhaul the accounting treatment of pensions and benefits. "We believe this FASB project will have a significant impact on stock evaluations, income statements, and balance sheets, and will become the major issue in financial accounting over the next five years," S&P wrote in its December report.

The news was welcome to many in the accounting business who have been concerned that current rules allow companies to hide retiree obligations in the footnotes. John Hepp, a senior manager with Grant Thornton LLP, praised the board's decision to move toward a "simplified approach. We think this will be a big step forward."

But it won't be without pain for many companies faced with adding a large negative number to their balance sheets, such as telecom giant Verizon Communications Inc. Standard & Poor's reported in December that Verizon has underfunded the nonpension portion of its postretirement benefits by an estimated $22.5 billion. The company is clearly trying to get a handle on retirement benefits and health-care costs, announcing that same month that it will freeze the pension benefits of all managers who currently receive them.

While the company refused to comment, Verizon is far from alone. Ford and General Motors have underfunded their retirement obligations by $44.7 billion and $69.0 billion, respectively, and other big names facing a shortfall include ExxonMobil ($16.4 billion) and AT&T ($14.8 billion).

If any of these companies think the markets will treat these obligations as a one-time problem, they had better think again, says S&P equity market analyst Howard Silverblatt. "Moving this onto the balance sheet is going to wake people up," he says. "The bottom line is that shareholder equity [in the S&P 500] is going to be decreased by about 9 percent." And as companies begin to explore their legal options for limiting the financial damage — including paring back benefits even further — Silverblatt predicts that the issue will become more politicized and remain in the public eye for years to come.

Bob Jensen's threads on pension and post-retirement liability accounting are at

Who are the big criminals in Washington DC?  Gingrich ought to know!
"You can't have a corrupt lobbyist unless you have a corrupt member (of Congress) or a corrupt staff. This was a team effort," Gingrich told a Rotary Club lunch in Washington on Wednesday. He called for systematic changes to reduce the enormous financial advantages that incumbents have in congressional elections. As head of a conservative movement based on ethics concerns and promises to curb federal growth, Gingrich led the GOP in 1994 to its first House majority in 42 years. But he decided to resign in 1998 when Republicans lost seats a year after Gingrich himself was fined $300,000 for violating House rules barring the use of tax-exempt foundations for political purposes.
Michael J. Sniffen, "GOP Politicians Dump Abramoff Donations," Yahoo News, January 5, 2005 ---

Meanwhile in California
"Abramoff, clients gave thousands to California officials," Michael R. Blood, ModBee, January 5, 2005 ---

Seeing Fakes, Angry Traders Confront EBay
Of course, fakes are sold everywhere, but the anonymity and reach of the Internet makes it perfect for selling knockoffs. And eBay, the biggest online marketplace, is the center of a new universe of counterfeit with virtually no policing. EBay, based in San Jose, Calif., argues that it has no obligation to investigate counterfeiting claims unless the complaint comes from a "rights owner," a party holding a trademark or copyright. A mere buyer who believes an item is a fake has almost no recourse. "We never take possession of the goods sold through eBay, and we don't have any expertise," said Hani Durzy, an eBay spokesman. "We're not clothing experts. We're not car experts, and we're not jewelry experts. We're experts at building a marketplace and bringing buyers and sellers together." Company officials say they do everything they can to stop fraud. The company says only a minute share of the items being sold at any given time — 6,000 or so — are fraudulent. But that estimate reflects only cases that are determined by eBay to be confirmed cases of fraud, like when an item is never delivered.
Katie Hafner, "Seeing Fakes, Angry Traders Confront EBay," The New York Times, January 29, 2006 ---

Seeing Fakes, Angry United Airline Employee-Shareholders Should be Confronting the Bankruptcy Judge
The deal went through — with staggering compensation to Wall Street — and in 1994 the American employees of UAL, as a group, became its largest owners. Within a few years, overseas personnel were allowed the privilege of tossing their life savings into UAL, too. Trouble was not far behind. The employees found management demanding pay cuts, big (and, for passengers, inconvenient) changes and cuts in scheduling and services, and even silly changes in their once-great flight attendant uniforms. Then came the blows of 9/11 and a recession, and then rising fuel costs. There were demands for more cuts in pay and benefits and more layoffs. That was not enough. About three years ago, UAL was "forced" to enter bankruptcy to stay alive. This step meant that UAL could drastically cut workers' pay — and it did. Pensions were simply jettisoned and made the burden of the federal government's Pension Benefit Guaranty Corporation, which meant cuts of close to two-thirds in some pilots' pension payments. And, of course, the bankruptcy simply eliminated all of that equity in UAL that the employees had bought with their hard-earned savings.
Ben Stein, "When You Fly in First Class, It's Easy to Forget the Dots," The New York Times, January 29, 2006 ---

Here comes the good part: management has asked the bankruptcy court to let it have — free — roughly 15 percent of the stock in the new company, or about $900 million. Mr. Tilton, the chief executive, who plays the Orson Welles character in this drama, would get about $90 million personally for his hard work shepherding UAL through bankruptcy (for which he was already paid multiple millions of dollars).

The bankruptcy court, instead of ordering Mr. Tilton's arrest, instead cut the management share to about 8 percent, so he will get more than $40 million, more or less. That is more than Lee R. Raymond, the chief executive of Exxon Mobil, one of the most successful companies of all time, was paid in 2004 (not counting Mr. Raymond's 28 million shares of restricted stock).

So here it is in a nutshell: employees are goaded into investing a big chunk of their wages and benefits in UAL stock. They lose that. Then they lose big parts of their pay and pensions. They become peons of UAL. Management gets $480 million, more or less. "Creative destruction?" Or looting?

Wait, Mr. Tilton and Mr. Bankruptcy Judge. The employees were the owners of UAL. They were the trustors, and Mr. Tilton and his pals were trustees for them. How were the trustors wiped out while the trustees, the fiduciaries, became fantastically rich? Is this the way capitalism is supposed to work? Trustors save up, and their agents just take their savings away from them?

If the company is worth so much that management has hundreds of millions coming to them, shouldn't the employee-owners get a taste? Does capitalism mean anything if the owners of the capital can be wiped out while their agents grow wealthy? Is this a way to encourage savings and the ownership society? Or is this a matter of to him who hath shall be given?

I know that this is basically the same story I described recently concerning the Delphi Corporation, where something similar is going on. But that's exactly the point. Management is using competition, higher fuel costs and every other cost complaint to cut the pay and pensions of its own employees while enriching itself.

And I can well imagine what goes through Mr. Tilton's mind as he does it: "Hey, I'm a great executive. Great executives in private-equity firms make more than I do. Why shouldn't I get the moolah? Basically, I've worked it so UAL is now a private-equity deal anyway. That's what it's all about now, isn't it? Who's got the most at the end of the day at Bighorn or the Reserve or whatever golf course I choose to retire at? And, anyway, wouldn't you take $48 million for a few of those dots we used to call our employees and owners to stop moving?"


PwC 2005 Global Annual Review

January 25, 2006 message from

We'd like to make the Annual Review available to you, so that you may explore the contents in an interactive manner via the link below. 

PricewaterhouseCoopers Global Economic Crime Survey 2005

The threat of fraud from apparently simple cases of bribery to complex financial misrepresentation is more prominent than ever on the agendas of company directors and financial regulators. PwC's third biennial Economic Crime Survey is based on interviews with more than 3,600 senior executives in 34 countries, and reveals their experiences with fraud, its causes and losses, their responses and recovery actions and the effectiveness of fraud prevention measures. Please click to the link below to access the full survey. 

Protecting International Trade

How can we reduce the risk that terrorists will exploit legitimate trade to attack the United States? One answer is described in PwC's "Cargo Security White Paper." It provides an example of the application of internal control processes to increase protection and expedite cargo. Please click to the link below to access the white paper. 

PwC on Fortune "100 Best Companies to Work For"

As we communicated to you in the past, we have placed a significant focus on our people initiatives. As a result of these efforts, we have seen a substantial reduction in turnover; and as external validation of our focus we were pleased to hear the recent announcement that PwC is on the Fortune "100 Best Companies to Work For" in 2006. Our emphasis on the development and retention of our people continues to be a top priority for us.

As always we welcome your feedback and appreciate hearing from you on how PwC can best support you as faculty members.


Brent Inman and Jean Wyer

Click Fraud Gets Smarter
Internet ad-traffic scams could be ripping off as much as $1 billion annually. Are Web companies like Google doing enough to foil them?

"Click Fraud Gets Smarter," by Burt Helm, Business Week, February 27, 2006 --- Click Here 

Internet ad-traffic scams could be ripping off as much as $1 billion annually.  Are Web companies like Google doing enough to foil them?

Web consultant Greg Boser has an ingenious method for sending loads of traffic to clients' Internet sites.  Last month he began using a software program known as a clickbot to create the impression that users from around the world were visiting sites by way of ads strategically placed alongside Google search results.  The trouble is, all the clicks are fake.  And because Google charges advertisers on a per-click basis, the extra traffic could mean sky-high bills for Boser's clients.

But Boser's no fraudster.  He cleared the procedure with clients beforehand and plans to reimburse any resulting charges.  What's he up to?  Boser wants to get to the bottom of a blight that's creating growing concern for online advertisers and threatens to wreak havoc across the Internet: click fraud.

BILLION-DOLLAR QUESTION.  The practice can wildly skew statistics on the popularity of an ad, drain marketing budgets, and enrich the scam artists behind it.  While click fraud isn't new, the methods for carrying it out--take Boser's clickbot software--are getting increasingly sophisticated.  And some advertisers, analysts and consultants question whether Web companies such as Google (GOOG) and Yahoo (YHOO) are doing enough to nip click fraud in the bud.  "No one has any idea how much of this is actually going on," says Boser.  "So we're going to see how well [the search engines] actually try to protect advertisers."

One of Boser's biggest challenges is putting a finger on exactly how widespread the practice is.  Some search consultants say click fraud accounts for upwards of 20% of all traffic, and may generate more than $1 billion in dubious sales a year.  Others say those stats vastly overstate the problem.

Now, one of the biggest players in fraud detection aims to end the guessing.  Fair Isaac (FIC), which analyzes 85% of U.S. credit card transactions, in partnership with Web search consultancy Alchemist Media, will unveil plans at this week's Search Engine Strategies Conference for what it says is the most rigorous study ever of click fraud.  Fair Issac will invite companies to submit traffic data that can be mined for aberrations that may signify fraud.  "We've seen indications that the overall losses due to click fraud could equal more than $1 billion [a year]--larger than the total magnitude of credit card fraud in the U.S.," says Kandathil Jacob, Fair Issac's director of product marketing.  "It's certainly worth our effort to look at it."

MORE CLICKS, MORE DOLLARS.  A rising number of companies would agree.  The percentage of advertisers listing click fraud as a "serious" problem tripled in 2005, to 16%, according to a survey by the Search Engine Marketing Professional Organization.  Advertisers have filed at least two class-action suits saying Google, Yahoo, and other search engines ought to be more up-front about methods for combating the practice.  Google says the suits are meritless.  Yahoo declines to comment.

And in January, Standard & Poor's equity analyst Scott Kessler downgraded Google stock in part because he considers click fraud a "notable risk" (see BW Online, 1/17/06, "S&P Downgrades Google to Sell").  Among his concerns: the prospect of false clicks may sour companies from placing ads on Google.  He too says Google needs to be more forthcoming on the issue.  "No one has any idea as to what Google assesses [as] its own percentage of clicks that are generated by fraud, no idea what that process consists of, and all the things that are being done to battle it," he says.

Bob Jensen's theads on consumer fraud are at

From The Wall Street Journal Accounting Weekly Review on January 27, 2006

TITLE: Google Stock-Sharing Plan may Bite Investors
REPORTER: Gregory Zuckerman
DATE: Jan 19, 2006
TOPICS: Accounting, Advanced Financial Accounting, Financial Accounting, Financial Statement Analysis, Stock Options

SUMMARY: Google has awarded an increasing number of 'performance-based stock units' (restricted shares and options) as its business grows. The article analyzes the impact of these issuances on future earnings. Questions focus on understanding the accounting for stock options, the use of that information for analysis presented in the article, and the FASB's concept statements on objectives of financial reporting and qualitative characteristics of financial information (particularly, predictive value).


1.) The author describes the issuances of employee stock options and restricted stock by Google. Based on the information presented in the article, summarize the accounting entries Google made .

2.) From where does the author obtain the information to forecast the expected impact of these stock and option issuances on Google's future earnings? To answer this question, access Google's most recent 10-Q filing (for the 3 quarters ended 9/30/2005 and filed on 11/14/2005, available on the SEC's web site at  Specifically state where information that is presented in the article can be found.

3.) Robert Willens, a Lehman Brothers analyst, notes that compensation expenses for stock options and restricted stock could impact earnings negatively "unless the employees who are incentivized generate more than enough revenue to cover the cost." Explain this analyst's statement.

4.) The use of information from financial statements in the way that is done for this article exemplifies the concept of the predictive value of financial information identified in the Financial Accounting Standard's Board's Concept Statements. Explain how this is so, including a definition of "predictive value" as the phrase is used in the concept statements.

5.) Identify an objective of financial reporting in the FASB's Concept Statement No. 1 that is exemplified by this article; support your choice with an explanation.

Reviewed By: Judy Beckman, University of Rhode Island

Bob Jensen's threads on accounting for stock compensation are at

Tobacco Road
In addition to being the world's largest producer of counterfeit $100 dollar bills, North Korea is also the world's largest producer of counterfeit cigarettes

"Tobacco Firms Trace Fakes To North Korea," by Gordon Fairclough, The Wall Street Journal, January 27, 2006; Page B1 ---

In Philip Morris USA's ongoing war against counterfeiters, it was a fairly simple operation: Buy a pack of Marlboros from a corner bodega on Manhattan's Upper East Side to follow up on a tip about contraband cigarettes.

But it took until 2005, the year after the pack was purchased, company officials say, before they could trace the artfully counterfeited smokes to one of the world's most isolated countries, North Korea.

The communist nation has become a leading source of counterfeit cigarettes -- with the capacity to churn out more than two billion packs a year, tobacco companies say. Philip Morris, a unit of New York-based Altria Group Inc., says over the past several years it has discovered North Korean-made knockoffs of its Marlboro brand in more than 1,300 places, from New York to Oklahoma City, Seattle and Los Angeles.

Continued in article

"Combating Corporate Fraud," AccountingWeb, January 13, 2006 ---

The number of companies around the world that reported incidents of fraud increased 22 percent in the last two years, according to the 2005 biennial survey by PricewaterhouseCoopers (PwC), which interviewed more than 3,000 corporate officers in 34 countries. In England, a recent Ernst & Young survey of the Times Top 1000 indicated the average cost of each fraud exceeded $200,000. But fraud is not the only problem. There's also misconduct, unethical behavior, lying, falsification of records, sexual harassment, and drug and alcohol abuse.

PwC found that “accidental” ways of detecting fraud, such as calls to hotlines or tips from whistleblowers, accounted for more than a third of the cases. Internal audits were responsible for detecting fraud about 26 percent of the time.

Steven Skalak, Global Investigations Leader at PwC, told Reuters: "I think the investment in control systems is paying off and detecting more crime." The study found that companies with a larger number of controls could better determine the full impact of the fraud, uncovering three times as many losses as companies with fewer controls.

Many of the new and increased controls were generated through the passage of The Sarbanes-Oxley (SOX) Act of 2002, which made having confidential, anonymous reporting mechanisms a legal requirement for any publicly traded company. But private, government and non-profit organizations would be well advised to also create and implement this important tool.

While executives get the headlines, 43 percent of surveyed people admit to having engaged in at least one unethical act in the workplace in the last year, and 75 percent observed such an act and did nothing about it. Not spoken to the employee in question, not reported it, nothing. As much as we do not like to admit it, theft, fraud and malfeasance are common occurrences in companies. Unfortunately these practices exist in every level of the organization and irrespective of size or sector. Non-profits are stolen from in equal measure.

The Association of Certified Fraud Examiners 2002 Report to the Nation indicates, "the most common method for detecting occupational fraud is by a tip from an employee, customer, vendor or anonymous source." It additionally comments, "the presence of an anonymous reporting mechanism facilitates the reporting of wrongdoing and seems to have a recognizable effect in limiting fraud and losses."

The report concludes, "organizations with hotlines can cut their fraud losses by approximately 50 percent per scheme." To be effective, a confidential, anonymous reporting mechanism must be operated by an independent, third party. Employees are understandably hesitant and reluctant to report another employee. There is not only the fear of retaliation; there is the fear of retribution and of being ostracized by co-workers. In fact, in an independent survey, 54 percent gave this as the main reason for their silence.

There is also a concern if the incident involves management, or the person required to take the report or initiate the investigation. Employees must be confident in knowing they can report an incident effectively, confidentially and anonymously. Furthermore, statistics prove that an internal hotline or reporting mechanism is rarely perceived as truly anonymous.

You can become aware of and build upon the positive aspects of employee relations while proactively addressing and heading off potentially negative issues with Ethical Advocate’s confidential, anonymous reporting mechanisms and feedback system.

Confidential, anonymous reporting mechanisms serves as an early warning system, enabling organizations to react quickly to investigate issues, and often resolve problems prior to increased malfeasance, costly stealing, litigation, or negative publicity. Spending a few dollars early on can save untold dollars and valuable time. It also creates a culture of ethical behavior that over time will diminish the prospects of these actions.

When installed properly, confidential, anonymous reporting mechanisms can uncover a variety of information that can improve processes, resolve issues, and prevent catastrophic financial losses. Like a computer network and a website, an employee hotline was once just a good idea that top companies had adopted. Now it's a mandatory part of doing business.

Bob Jensen's threads on fraud are at

Bob Jensen's threads on the importance of whistle blowing are at

Bob Jensen's PowerPoint files on fraud are

Peerage Fraud in the U.K. --- January.htm

Fear not! There is a new scheme that offers even greater recognition. The idea is to move into a tent, sell the house and buy a peerage. When Lloyd George was caught selling peerages, there was a great scandal. Now all the parties are at it. Of course, there are those who think it is a disgrace to a once great nation that membership of the upper house can be bought for the price of a modest dwelling, but it is a tribute to the achievements of one Great Leader that he can not only change the moral climate in a few short years, but he also makes such a facility available at such a modest cost.

The way the scheme works is that you make your donation to one of the three main parties. You also have to give a small amount to charity, as that is the best official excuse for the award. You get the money back from the taxpayer over the years in attendance allowances at the House. The beauty of this scheme is that taxpayers’ money is transferred to the party machines without the mechanism being obvious. It is better than that, though, because you also become qualified for various City directorships, which require very little effort for a substantial screw.

There is one remaining problem for those of us that suffer from the Hamlet syndrome (the inability to make up one’s mind). With three indistinguishable parties available (not to mention the Official Green Party) how is one to choose?

Fraudulent (Supposed) Publishers and Phony Contests (especially targeting poets) --- 

White Collar Crime Pays Big Even If You Get Caught


Why white collar crime pays for Chief Financial Officer: 
Andy Fastow's fine for filing false Enron financial statements:  $30,000,000
Andy Fastow's stock sales benefiting from the false reports:     $33,675,004
Andy Fastow's estimated looting of Enron cash:                          $60,000,000
That averages out to winnings of $6,367,500 per year for each of the ten years he's expected to be in prison.
You can read what others got at 
Nice work if you can get it:  Club Fed's not so bad if you earn $17,445 per day plus all the accrued interest over the past 15 years.

The following is from Kurt Eichenwald's, Conspiracy of Fools (Broadway Books, 2005, pp. 671-672) --- 

Prosecutors informed Fastow that they would shelve plans to charge Lea (Fastow's wife)  if he would plead guilty.  Fastow refused and Lea was indicted.  Suddenly, the Fastows faced the prospect that their two young sons would have to be raised by others while they served lengthy prison terms.  The time had come for Fastow to admit the truth.

"All rise."

At 2:05 on the afternoon of January 14, 2004, U.S. District Judge Kenneth Hoyt walked past a marble slab on the wall as he made his way to the bench of courtroom 2025 in Houston's Federal District Courthouse.  Scores of spectators attended, seated in rows of benches.  In front of the bar, Leslie Caldwell, the head of the Enron Task Force, sat quietly watching the proceedings as members of her team readied themselves at the prosecutors' table.

Judge Hoyt looked out into the room.  To his right sat an array of defense lawyers surrounding their client, Andy Fastow, who was there to change his pleas.  Fastow, whose hair had grown markedly grayer in the past year and a half, sat in silence as he waited for the proceedings to begin.

Minutes later, under the high, regal ceiling of the courtroom, Fastow stepped before the bench, standing alongside his lawyers.

"I understand that you will be entering a plea of guilty this afternoon," Judge Hoyt asked.

"Yes, your honor," Fastow replied.

He began answering questions from the judge, giving his age as forty-two and saying that he had a graduate degree in business.  When he said the last word, he whistled slightly on the s, as he often did when his nerves were frayed.  He was taking medication for anxiety, Fastow said; it left him better equipped to deal with the proceedings.

Matt Friedrich, the prosecutor handling the hearing, spelled out the deal.  There were two conspiracy counts, involving wire fraud and securities fraud.  Under the deal, he said, Fastow had agreed to cooperate, serve ten years in prison, and surrender $23.8 million worth of assets.  Lea would be allowed to enter a plea and would eventually be sentenced to a year in prison on a misdemeanor tax charge.

Fastow stayed silent as another prosecutor, John Hemann, described the crimes he was confessing.  In a statement to prosecutors, Fastow acknowledged his roles in the Southampton and Raptor frauds and provided details of the secret Global Galactic agreement that illegally protected his LJM funds against losses in their biggest dealings with Enron.

Hemann finished the summary, and Hoyt looked at Fastow.  "Are those facts true?"

"Yes, your honor," Fastow said, his voice even.

"Did you in fact engage in the conspiratorious conduct as alleged?"

"Yes, your honor."

Fastow was asked for his plea.  Twice he said guilty.

"Based on your pleas," Hoyt said, "the court finds you guilty."

The hearing soon ended.  Fastow returned to his seat at the defense table.  He reached for a paper cup of water and took a sip.  Sitting in silence, he stared off at nothing, suddenly looking very frail.

Why white collar crime pays for Chief Enron Accountant: 
Rick Causey's fine for filing false Enron financial statements:    $1,250,000
Rick Causey's stock sales benefiting from the false reports:     $13,386,896
That averages out to winnings of $2,427,379 per year for each of the five years he's expected to be in prison
You can read what others got at 
Nice work if you can get it:  Club Fed's not so bad if you earn $6,650 per day plus all the accrued interest over the past 15 years.

"Ex-Enron Accountant Pleads Guilty to Fraud," Kristen Hays, Yahoo News, December 28, 2005 ---

A former top accountant at Enron Corp. sealed his plea deal with prosecutors Wednesday, becoming a key potential witness in the upcoming fraud trial of former CEOs Kenneth Lay and Jeffrey Skilling.

Lay and Skilling were granted two extra weeks to adjust to the setback before their much anticipated trial, the last and biggest of a string of corporate scandal cases, starts at the end of January.

The accountant, Richard Causey, pleaded guilty to securities fraud Wednesday in return for a seven-year prison term — which could be shortened to five years if prosecutors are satisfied with his cooperation in the trial. He also must forfeit $1.25 million to the government, according to the plea deal.

Causey's arrangement included a five-page statement of fact in which he admitted that he and other senior Enron managers made various false public filings and statements.

"Did you intend in these false public filings and false public statements, intend to deceive the investing public?" U.S. District Judge Sim Lake asked.

"Yes, your honor," replied Causey, who said little during the short hearing, appearing calm, whispering to his attorneys and answering questions politely.

Continued in article

Jensen Comment
I forgot to mention the millions that Fastow and Causey will probably make on the lecture circuit after they are released from prison.  Scott alludes to this below:

January 3, 2005 reply from Scott Bonacker [aecm@BONACKER.US]

Was someone asking about ZZZZ Best?

"Morze created 10,000+ phony documents, and no one caught it. He teaches his course Fraud: Taught by the Perpetrator many times each year for the Federal Reserve, bar associations, Institute of Internal Auditors, CPA and law firms.

Public speaking does seem to benefit the speakers. Guys in Gary's group are dealing better than other white-collar criminals, says Mark Morze, one of Mr. Zeune's speakers, who served more than four years in jail for his role in ZZZZ Best Co., the carpet-cleaning enterprise that bilked banks and investors for some $100 million back in the 1980s. Guys who are in denial pay the price forever, Mr. Morze says. Source: The Wall Street Journal, May 25, 1999"


Scott Bonacker, CPA
Springfield, Missouri

Fastow Leaves Stand Insisting Lay and Skilling Knew
Andrew S. Fastow, Enron's former chief financial officer, ended his testimony on Monday, still insisting that Jeffrey K. Skilling and Kenneth L. Lay joined him in telling investors that Enron was profitable and healthy when all of them knew otherwise . . . Mr. Fastow struggled to further corroborate his testimony about the so-called Global Galactic list of illicit side deals he said he made with one of the former chiefs, Mr. Skilling, to guarantee profits. Mr. Fastow also tried to buttress his claims that he warned Mr. Lay, Enron's founder, in a private meeting that Enron was in desperate need of a "massive restructuring."

Alexei Barrionuevo, "Fastow Leaves Stand Insisting Lay and Skilling Knew," The New York Times, March 14, 2006 --- 

Bob Jensen's Enron scandal threads are at

Earnings Restatements Due to FAS 133 on Hedge Accounting

"Hedge Accounting Gets On Regulators' Radar:  Some Firms Using the Tool Have to Restate Earnings; The New Lease Accounting?" by Michael Rapoport, The Wall Street Journal, January 27, 2006; Page C3

A year ago, companies were rushing to restate their earnings because of problems with how they accounted for lease obligations on their stores and plants. Something similar may be happening with the bookkeeping for financial instruments that some firms use to guard against risk.

In 2005, at least 40 companies, from small banks to conglomerates like General Electric Co., restated past earnings because of problems with "hedge accounting," according to a new report from research and proxy advisory firm Glass Lewis & Co.

And more such revisions could be on the way. "I don't think it's really over," says Jason Williams, a Glass Lewis analyst who noted in the report that these restatements may show "a pattern similar to the recent lease-accounting restatements."

So far, the hedging moves are only a fraction of the hundreds of lease-accounting restatements. And there has been no high-profile warning from the Securities and Exchange Commission about the need to shape up on hedge accounting, as was the case with lease accounting.

But a number of smaller indications -- a recent comment in an audit firm's inspection report, a speech by an SEC staffer -- suggest that regulators may indeed be pushing companies and their auditors to clean up hedge accounting.

Hedge accounting is complex, but the goal is easy to understand: When a company uses derivatives to hedge exposure to risks like changes in interest rates and fluctuations in foreign currencies, it wants those derivatives to qualify for hedge-accounting treatment under accounting rules because any changes in the derivatives' value can be excluded from current earnings. The value changes are "smoothed" into earnings over time. Without that special accounting status, the derivatives' ups and downs would make earnings unpredictable, which companies and shareholders dislike.

To qualify for hedge accounting, however, companies have to meet a strict set of criteria. And dozens have discovered lately that either they haven't fully complied or have cut corners they shouldn't have. Some have found their hedges don't do the job they're supposed to in offsetting the changes caused by the risk they're hedging. Others don't have sufficient documentation for their hedges.

In such cases, a company typically is disqualified from using hedge accounting, and it has to restate earnings to add back in the changes in the derivatives' values -- often boosting earnings in some periods but lowering them in others.

Last fall, for instance, brokerage TD Ameritrade Holding Corp. restated earnings lower for fiscal 2003 and higher for fiscal 2004 and 2005 over documentation issues. In December, finance company CIT Group Inc. restated first-half 2005 earnings higher and third-quarter earnings lower because it used the shortcut when it shouldn't have. Representatives for both companies couldn't be reached to comment.

Many companies have said they decided to restate on their own or in consultation with auditors. Yet regulators have been voicing concern about the matter as far back as 2004, when the SEC said it had seen instances of "aggressive interpretation" of hedge-accounting rules, and cases in which companies "have not been diligent" in satisfying the requirements.

And at least a couple of the restating companies say they've had contact with regulators over hedge accounting. TD Ameritrade said it held discussions with the SEC before making its restatement in November. And the SEC is investigating GE over its hedge accounting. But Russell Wilkerson, a GE spokesman, says the company was already in the process of finding its hedge problems through an internal audit before it heard from the SEC.

One small sign that regulators are concerned over hedge accounting: Some comments the Public Company Accounting Oversight Board, which regulates auditors, has made in its recent inspection reports of big audit firms.

In a few instances, the PCAOB has indicated that firms haven't been as diligent as they should have been on hedge accounting in individual audits that the board has reviewed. In an inspection report on KPMG LLP issued in September, for instance, the PCAOB cited an audit of an unidentified client in which KPMG "failed to appropriately address" improper derivatives accounting. A report on Grant Thornton LLP last week said the firm "failed to perform sufficient audit procedures" over one client's interest-rate derivatives and didn't evaluate another's hedge accounting over foreign-currency futures.

A KPMG spokesman says the firm works with both regulators and clients to make sure clients apply accounting principles as regulators want "in an area where accounting practices continue to evolve." Grant Thornton couldn't be reached.

And in a speech last month, Mark Northan, an SEC professional accounting fellow, said some companies have used the "shortcut" to hedge accounting when they haven't met all the conditions for doing so.

Bob Jensen's tutorials on hedge accounting are at

Bob Jensen's glossary on hedge accounting is at

More bad news for KPMG from the SEC regarding KPMG audit quality and professionalism

"SEC: KPMG Auditors Ignored 'Red Flags'," SmartPros, February 21, 2006 ---

The Securities and Exchange Commission accused two KPMG auditors who had overseen the audit of Royal Ahold NV's U.S. Foodservice unit of failing to act upon numerous "red flags" amid the unit's estimated $30 billion accounting fraud. 

The SEC on Thursday announced administrative proceedings against Kevin Hall, a KPMG partner, and Rosemary Meyer, a senior manager. The agency said that even though Hall and Meyer identified or had evidence of accounting problems with U.S. Foodservice's fiscal 1999 financial statements, the two ignored irregularities and failed to clarify inconsistencies or bring problems to the attention of the company's audit committee.

"This case is an example of our continuing efforts to hold auditors and other gatekeepers responsible for failing to fulfill their professional obligations," said Scott Friestad, associate director of the SEC's enforcement division.

Bill Baker, an attorney for Hall, declined to comment. An attorney for Meyer could not immediately be reached.

Tom Fitzgerald, a KPMG spokesman, said, "our partners look forward to presenting the facts in support of the work that was performed under the circumstances at U.S. Foodservice in 1999."

Ahold, the Dutch supermarket operator, in 2004 settled SEC charges that its filings for at least fiscal 2000 through 2002 were false and misleading because its U.S. Foodservice unit had inflated "promotional allowances." These are payments that food makers make to wholesalers such as U.S. Foodservice that choose which goods to keep in stock.

Hall and Meyer knew that the company's dependence on promotional allowances was rapidly growing, and that without the rebates, the company would have operated at a loss, the SEC said. They also knew that U.S. Foodservice had no automated system for tracking the payments, according to the SEC.

Even so, and even after flagging some discrepancies between the promotional allowances claimed by U.S. Foodservice and information provided by vendors, Hall and Meyer accepted explanations from management that the rebates were properly accounted for, the SEC said.

Hall and Meyer were also accused in connection with their review of a supply contract for U.S. Foodservice's 2000 second quarter. The SEC said that the two KPMG auditors allowed the distributor to avoid expensing payments they would be obligated to make if minimum purchase requirements weren't met.

From The Wall Street Journal Accounting Weekly Review on December 2, 2005

TITLE: Ahold to Settle Shareholder Suit For $1.1 Billion
REPORTER: Nicolas Parasie, Fred Pals, Chad Bray
DATE: Nov 29, 2005
TOPICS: Accounting, Contingent Liabilities, Financial Accounting, Auditing

SUMMARY: "Ahold NV said it settled a U.S. class-action lawsuit related to its accounting scandal two years ago, agreeing to pay 945 million euro, or about $1.1 billion, to shareholders world-wide." The company "...operates Stop & Shop and Giant supermarkets in the US."

1.) For what losses did Ahold NV shareholders file their class-action lawsuit? In your answer, define the term "class-action." How was this lawsuit resolved?

2.) Based on information given in the main article and a related one, what were the means by which the company overstated its profits? What steps were undertaken to avoid the outside auditor's detection of the accounting irregularities? Is it possible for an auditor to undertake procedures to overcome such collusion?

3.) What factors besides the accounting irregularities committed by the company could have impacted Ahold NV's share price during the years 2003 and 2004? How likely do you think it is that the company might have been able to defend against the shareholder lawsuit on the argument that other factors caused the company's stock price decline? Explain your reasoning for your answer to this question.

4.) Access Ahold's SEC filing on Form 20-F for under company name Royal Ahold (Ticker Symbol AHO). How were these outstanding lawsuits disclosed in the company's financial statements for the year ended January 2, 2005 filed with the SEC on June 24, 2005? To answer, describe the specific location of the disclosure and summarize the statements made therein.

5.) In what time period was most of the expense associated with this lawsuit settlement recorded? Based on the information provided in the article, provide a summary journal entry to account for the lawsuit settlement.

6.) What accounting literature in USGAAP requires the disclosure described in answer to question 4 and the accounting treatment described in answer to question 5? Specifically cite the standard and its paragraphs promulgating this accounting and reporting.

Reviewed By: Judy Beckman, University of Rhode Island

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

Bob Jensen's threads on the revenue accounting controversies are at

Bob Jensen's threads on professionalism in auditing are at


U.S. Legislators Still Want to Maintain Their Pork Farms by Resisting Transparency in Reporting

"Cured Pork," The Wall Street Journal, January 28, 2006; Page A8 ---

Democrats insist they can do a better job than Republicans of protecting taxpayers from parochial spending on Capitol Hill. And it's hard to imagine they could do worse. The number of special-interest earmarks inserted into spending bills has quadrupled in five years to 14,000, and the price tag has more than doubled -- to $27.1 billion last year.

Defenders of pork-barrel projects contend they are a trivial expense in a $2.6 trillion budget. Sadly, that's true, but it speaks volumes about the culture of overspending in Washington that $27,100,000,000 is dismissed as a rounding error. Unfathomably large spending bills, with hundreds upon hundreds of pages of line-item expenditures, have become normal budgeting practice in Congress. In this environment, $10 million giveaways start to seem like loose change.

So what can be done, apart from denying Congress the money in the first place by keeping taxes low? Representative Jeff Flake of Arizona and Senators Tom Coburn and John McCain have one good idea, which is to bring more transparency to earmarking. They would require that every earmark be specifically included in the text of the legislation Congress is voting on. We'd also like to see a requirement that every earmark list its main Congressional sponsor and its purpose (other than to re-elect the Member).

Appropriators who control the spending process complain that this transparency would make the legislative process "unwieldy," which would only be a good thing. The potential for embarrassment might deter Members from inserting the pork at all. And if they go ahead anyway, the sight of Dr. Coburn exposing these projects on the Senate floor would be both good theater and politically hygienic.

If Republicans were smart -- notice the subjunctive -- they'd go much further and pledge a pork moratorium for the rest of the year. This "zero tolerance for earmarks" idea is modeled after the famous "broken windows" concept of fighting crime by cleaning up petty vandalism. If Members can't abuse the process on small items, they might be less willing to do it on entitlements as well.

Continued in article

It's almost the same thing as robbing the jewelry in your house and then asking $300 for the map to where it's buried --- only this time Ole would say "the yoke's on yew."

But I have to admit that it is a clever password.

"New Trojan Ransoms Files, Demands $300:  The Trojan archives 44 file types with a ZIP library, then password-protects the files and deletes the originals. But some have discovered the password needed to free the files," by Gregg Keizer, Information Week, March 16, 2006 ---

A Trojan is loose that locks up files and then demands a $300 ransom to return access, several security firms said Thursday, but at least two have discovered the password needed to free the files.

Dubbed "Cryzip" by some anti-virus vendors and "Zippo.a" by others, the Trojan archives 44 file types -- including .doc (Microsoft Word), .pdf (Adobe Acrobat), and .jpg (images) -- with a ZIP library, then password-protects the files and deletes the originals.

A "ransom note" is left on the machine, and reads in part: "Do not try to search for a program what encrypted your information - it is simply do not exists in your hard disk anymore. If you really care about documents and information in encrypted files you can pay using electonic [sic] currency $300.

"Reporting to police about a case will not help you, they do not know password."

At least two security firms, however, have dug up the password, which was left in plain view within one of the DLL files dropped by the Trojan. According to both Sophos and LURHQ, the password is:

C:\Program Files\Microsoft Visual Studio\VC98

"Because this string often appears inside projects compiled with Visual C++ 6, the author likely figured anyone who found the infecting DLL and examined its strings looking for the password would simply overlook it," LURHQ wrote in its Cryzip advisory.

"There should be no need for anyone to pay the reward," said Graham Cluley, a senior technology consultant with Sophos, in a separate statement. "It looks like this password was deliberately chosen by the author in an attempt to fool analysts into thinking it was a directory path instead."

Victims can use any ZIP utility to unlock the files with the password.

Ransom-like attacks, labeled "ransomware," are rare. The last full-fledged attack was in May 2005 when another security company, California-based Websense, spotted a Trojan that demanded $200 for a decryption key.

Other, and more common, forms of ransomware-style attacks are used by bogus spyware vendors, who claim that users' PCs harbor massive amounts of adware and spyware, and try to sell their phony products to spooked consumers.

Bob Jensen's threads on computer and networking security are at

Bob Jensen's threads on reporting computer frauds are at

Hands-off executives like Ken Lay may face better odds of getting away with crime

"White-Collar Crime: Who Does Time? Corporate criminals are punished more harshly today than in the '80s, but hands-off executives may still face better odds," Business Week, February 6, 2006 ---

Does corporate crime pay? The record can seem pretty arbitrary. Tyco International Ltd.'s (TYC ) L. Dennis Kozlowski and WorldCom Inc.'s Bernie Ebbers got hammered for their misdeeds. But plenty of other corporate and financial titans at companies engaged in chicanery have come away only mildly bruised. Michael Milken, the embodiment of an earlier generation of scandals, served less than two years and left prison in 1992 with a fortune of roughly $500 million. Banker Frank Quattrone, a key figure in the more recent brouhaha over allocation of initial public offerings, faces 18 months and will keep much of the $200 million he made in the late 1990s.

Some beat the rap altogether. HealthSouth Corp.'s (HLSH ) Richard M. Scrushy, acquitted of charges he directed a $2.7 billion fraud, remains one of the largest shareholders of the chain of rehabilitation centers. A host of others at scandal-wracked companies, such as Global Crossing Ltd. (GLBC ) founder Gary Winnick, pocketed millions from stock sales and faced no criminal or civil charges at all.

As haphazard as these outcomes may appear, there are rules of thumb to keep in mind as the trial of Enron Corp.'s Kenneth L. Lay and Jeffrey K. Skilling gets under way in Houston. Here are a few:

Generally speaking, convicted corporate figures get punished more harshly today than they did in the late '80s and early '90s. Milken, now-defunct Drexel Burnham Lambert's king of high-interest "junk" bonds, pleaded guilty to conspiracy and securities fraud in 1990 in exchange for a 10-year sentence, later reduced to 22 months for good behavior and cooperation with prosecutors. A defendant of his notoriety would not get off as lightly today, according to veteran prosecutors.

Federal sentencing guidelines, which weren't in effect when Milken's crimes took place, have ratcheted up the penalties for white-collar offenders, particularly where huge shareholder losses are involved. Attitudes have also changed. Public outrage over Milken's stock-manipulation schemes was relatively muted because the victims were primarily companies and faceless institutional investors. By the late 1990s, however, roughly half of American households had piled into the stock market, according to the Investment Company Institute, many through retirement plans. When the bubble burst in 2000, legions saw their brokerage accounts and 401(k) balances dip sharply. As it became clear that fraud lay behind some of the biggest corporate collapses, a large constituency demanded severe consequences, says Ira Lee Sorkin, a former prosecutor and official with the Securities & Exchange Commission now in private practice. "Middle America lost a lot of money, which has led to cries for tougher enforcement to put the scoundrels away," he says.

Financial penalties have become stiffer, too. Convicted in July of orchestrating the $11 billion accounting fraud at WorldCom, onetime billionaire Ebbers has little left to his name after settling with regulators, shareholders, and his former company. Adelphia Communications Corp. (ADELO ) founder and ex-CEO John J. Rigas, who received a 15-year sentence on fraud and conspiracy charges related to the looting of the cable-TV provider, faces a similar financial fate. He is appealing.

Many companies played accounting games during the 1990s boom. But neither greed, dubious bookkeeping, nor suspiciously timed trading are necessarily criminal. Prosecutors must demonstrate not only that an action violated a specific law but also that the executive intentionally committed the bad act. "The evidence is very rarely black and white, and the law is often amorphous," says Steven R. Peikin, a former federal prosecutor now in private practice.

Ebbers and Winnick played similar roles as evangelists of the telecom boom, and both racked up huge stock gains before their companies crumpled. But while Ebbers will likely report to federal prison in Yazoo City, Miss., if he loses his appeal, Winnick hasn't been charged with a crime. The difference: The scam at WorldCom -- pretending that everyday expenses were capital investments, which artificially boosted earnings -- unmistakably violated accounting standards and securities law. Global Crossing did swaps of fiber-optic network capacity that made it look stronger financially than it was. But the swaps weren't clearly illegal.

Winnick had another big advantage: Unlike Ebbers, he wasn't his company's chief executive. As co-chairman of Global Crossing's board, Winnick persuaded investigators that he wasn't personally enmeshed in the company's problems. Enron's Lay, who served as both chairman and CEO at various times, is expected to attempt a similar defense.

Quattrone, a star banker at Credit Suisse First Boston (CSR ), helped dole out hot IPO shares to favored clients and supervised analysts who allegedly boosted wobbly Internet companies. But these practices, distasteful as they are to many, didn't lead to charges because they didn't violate any law. He was convicted of obstructing justice and witness tampering for suggesting, after learning of a grand jury probe, that workers tidy up their e-mail. He is appealing.

Some of the hit-or-miss feel of white-collar justice stems from the defendant's dicey choice of pleading vs. facing a jury. Given the difficulties of proving complex frauds, prosecutors typically try to strike deals with midlevel executives to build cases against the top bosses. The difference in sentencing can be huge. Compare the five years WorldCom CFO Scott D. Sullivan got for helping prosecutors nail his boss with the 25 that Ebbers might serve.

But juries can exonerate as well as convict. Last summer, Scrushy fended off charges that he was at the center of the accounting fraud that permeated HealthSouth. Prosecutors thought they had a strong case, based on testimony from five former HealthSouth chief financial officers, who all pleaded guilty and implicated Scrushy. But his team poked holes in their testimony, and he played his hometown advantage shrewdly. He drew visible support from black pastors in Birmingham, whose presence as courtroom spectators may have impressed some members of the predominantly black jury. "The world may have thought he'd be convicted, as they now think Ken Lay and Jeff Skilling will be," says Robert Morvillo, a New York defense lawyer. "But trials take on a life of their own."


Bob Jensen's threads on how white collar crime pays even if you get caught ---

Bob Jensen's threads on the Enron/Andersen frauds ---

Bob Jensen's Enron Quiz --- 



Other Links
Main Document on the accounting, finance, and business scandals --- 

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Bob Jensen's threads on pro forma frauds are at 

Bob Jensen's threads on ethics and accounting education are at

The Saga of Auditor Professionalism and Independence ---

Incompetent and Corrupt Audits are Routine ---

Bob Jensen's threads on accounting theory are at 

Future of Auditing --- 




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