The Latest Target of Thieves When Brad Lipman took his family out for dinner in July 2006, he had no idea it would end up costing him $1,800. Lipman paid for the $60 meal with his debit card. After the waiter took the card, someone swiped it through a portable "skimmer." This handheld electronic device allowed the thief to copy Lipman's account information and security codes, and clone his card.

Over the following week, the culprit drained Lipman's checking account and tapped into his overdraft line. He didn't realize anything was amiss until his credit union called him about some unusual charges. "It's hard to explain the feelings of violation," says Lipman, 40, owner of a lending company in Thousand Oaks, California. "Someone had their hand directly in my money."

Many people wrongly assume that debit cards offer the same protection against fraud as credit cards. But when a debit card is stolen or copied, there's no grace period while you contest the charges. Your cash has already been electronically zapped from your checking account. And if it falls short, as Lipman's did, you could face expensive overdraft charges that your bank isn't required to repay.

Debit cards have overtaken credit cards as Americans' plastic of choice for in-store transactions—33 percent debit, compared with 19 percent credit. Financial experts often recommend them as a money-management tool. Three years from now, debit card use will account for more than half our retail purchases, according to the Nilson Report, a payment-systems industry publication.

Debit cards have become the latest target of thieves, and it's not just random cases like Lipman's. In early 2007, hundreds of customers of a national chain restaurant in Sioux City, Iowa, learned their debit card numbers had been stolen. Thieves made cloned cards and are using them in stores in California and northern Mexico. And in 2006, the TJX Companies, which owns T.J. Maxx and Marshalls, reported one of the largest customer-data breaches ever: 45.7 million debit and credit card numbers were stolen from the retailer's computer systems over an 18-month period. Authorities still don't fully know the scope.

There's little you can do to predict a mass retail theft. But you can be smarter about how you use your card to avoid these and other common pitfalls. In addition to scams, hidden overdraft fees are at an all-time high, not to mention surprise holds and mismanagement traps that could land your account in the red faster than the ATM can spit out your receipt.

Know When to Hold 'Em

When Ann Agent of Portland, Oregon, was planning to attend a children's book publishing conference in Tulsa, Oklahoma, she booked her hotel room over the phone by debit card. She and three colleagues intended to split the bill and each pay the hotel directly at checkout time.

Two days into the conference, Agent's husband called from home to read her a letter from her bank: Her checking account was overdrawn, and she was being charged $35 a day in overdraft fees. "I thought there had to be a mistake," Agent, 45, says. "I keep close track of my account balance."

Turns out when Agent reserved the room, the hotel "blocked," or held, enough money in Agent's account to cover the entire four nights' stay, plus miscellaneous charges, amounting to $580. This blocked every available penny she had and caused her to overdraw. The charges weren't reversed until Agent returned home the following Monday.

Holds are common practice in the travel and hospitality industry. They're the merchant's way of ensuring you'll pay your bill. If you rent a car, the agency could block several thousand dollars to make sure you return the vehicle. Some restaurants will place debit card holds for large parties, and a friendly bartender can put a hold on your card if you start a tab. The hold is usually removed within five business days, sometimes much sooner.

Gas stations are notorious for holds. On a Friday morning in January 2005, Jessica Hathaway of Allentown, Pennsylvania, bought $22.29 of gas by debit. On Saturday, the 34-year-old single mother of three checked her bank balance and learned she was almost broke. Right before the gas station debited Hathaway's account for the gas, it imposed a $75 block.

"I was living paycheck to paycheck. I didn't have much extra in my account, and this $75 charge worried me all weekend," she says. Hathaway was out of luck—and cash—until the following Tuesday, when her bank released the hold.

The kind of hold Hathaway described is a standard preauthorization for signature (non-PIN) transactions. Stations vary widely in their hold amounts. Because Hathaway bought gas before the weekend, her hold may have taken longer than usual to clear.

Avoid the Trap

Leave your debit card at home when traveling. "People should use a credit card, even if they don't any other time," advises Clark Howard, consumer advocate and radio host of The Clark Howard Show. Never use a debit card any place your card is taken out of sight, like a restaurant. Book dinner reservations on a credit card. If you must use debit at a gas station—a hot spot for skimming—use your PIN inside or at the pump. Your card is safest if it stays in your hand, and typing in a PIN eliminates the hold.

Be Wary on the Web Say you buy an MP3 player for $80 through an Internet discounter. You wait two weeks. Your music player never arrives, and now the seller is nowhere to be found.

If you used your credit card to buy the player, you've got options. Under the terms of the Fair Credit Billing Act, your card company must remove the questionable charge from your bill while it investigates. The law says you're liable for up to $50, but you'll most likely end up owing nothing.

If you paid by debit card, you're doubly out of luck: no pocket tunes for you, and your money is already gone. Under the Electronic Fund Transfer Act, your debit card issuer isn't required to step in if you make a deal with an unscrupulous merchant. You get to wrangle with the seller yourself, no matter what your bank promised when you opened your account.

Then there's the fraud issue. Federal law generally limits your liability to no more than $50 if your debit card is stolen or copied, as long as you report the crime within two days of receiving your statement. However, if you don't notice the suspicious activity till weeks later, you may be liable for up to $500 or more. As with transaction disputes, recouping your cash isn't a sure thing.

Avoid the Trap

Don't use debit for online purchases, especially if you don't know the retailer's reputation, says Avivah Litan, electronic security specialist for Gartner, an information technology research firm that works with banks. Also opt for credit for all expensive items, like furniture.

Fraud is trickier because it can strike even if you're careful. Nessa Feddis, a senior federal counsel to the American Bankers Association, recommends checking your printed statements every month. Better yet, register for online banking and track your money trail even more frequently.

Some card issuers offer zero liability policies, meaning they won't hold customers responsible for even that first $50 in fraud charges. But they are not legally bound to do so. "We get calls from listeners who struggle for weeks to get their own money back," notes Howard. Even if a store's card reader prompts for your PIN, you can override the system by pressing Credit/Other or asking the cashier to process the sale that way. When you sign a receipt, your debit transaction piggybacks on the credit card processing system, triggering the zero liability policy to kick in.

Steer Clear of Hidden Fees At the end of the week, most of us pull a wad of debit receipts out of our wallets and purses. Do we religiously record these amounts? Probably not. And even a $5 purchase can cause you to overdraw if your balance is tight.

"Banks sometimes change the order of transactions at night. They take your biggest transactions and run them first," says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. By manipulating the order of checks and debits, banks can cause you to overdraw sooner and more often than you thought, earning huge overdraft fees for themselves. Debit purchases and withdrawals are now the single largest cause of customer overdrafts, according to the Center for Responsible Lending (CRL). "Five years ago, if you didn't have enough money in your account to buy something, your card would be declined," says Leslie Parrish, a CRL senior researcher. Today banks extend "courtesy overdraft loans," the financial euphemism for letting you overdraw and then charging you for it. Charges average $34 per transaction and add up to an estimated $17.5 billion in annual fees for financial institutions, says the CRL.

Avoid the Trap

Link your checking account to another account in case you overdraw. The fee, if any, is much lower than overdraft loans. If you incur fees, banks will often waive them if you ask. Some banks offer e-mail or text-message alerts if your balance gets too low. That could be a warning that someone has copied your card or charged you incorrectly.

What's Next?

If you thought debit cards were popular now, just wait. The young tech-savvy generation is entering its prime earning and spending phase of life, and they live by their debit cards.

All the more reason for debit card security to step up a notch. Brad Lipman, the man who lost $1,800 at a restaurant (his credit union eventually returned his money, including overdraft fees) was inspired to develop TablePay, a device that allows diners to safely swipe their debit cards right at their tables. Before long, U.S. debit card issuers may embed electronic chips in cards' magnetic strips, predicts Litan, the security specialist. These sophisticated cards are much harder to copy and use fraudulently.

And that's good, since even fraud victims like Lipman aren't willing to part with their debit cards. "I just can't give up the convenience," he says.

How to avoid those huge debit card fees?
Debit cards may seem attractive to consumers who want to avoid racking up credit charges, because they appear to have the safeguard of drawing from your checking account. But it is possible to overdraw from your debit card, and the resulting fees are very high. Here's how to avoid such charges.
Michelle Singletary, "Watch Your Debit Card Balance," NPR, July 31, 2007 --- http://www.npr.org/templates/story/story.php?storyId=12374687

Bob Jensen's threads on the dirty secrets of credit card and debit card companies are at
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO

"Merck to Pay Over $650 Million To Settle Pricing Suits," by Sarah Rubenstein and Avery Johnson, The Wall Street Journal, February 8, 2008; Page B4

Merck & Co. will pay more than $650 million to settle a variety of lawsuits and probes related to past sales and marketing practices, Merck and U.S. government officials said.

The major issue involved a practice known as "nominal pricing" in a lawsuit filed by a former Merck employee and joined by the Justice Department and all states except Arizona. The settlement allocates $218 million to the federal government and $181 million to 49 states and the District of Columbia.

Merck also said it is paying $250 million to resolve a suit involving pricing of its heartburn drug Pepcid, filed in Louisiana by a local doctor and joined by the Justice Department and the same 49 states. In all, the company agreed to pay $649 million plus interest.

The two men who originally sued Merck will benefit significantly from the settlements.

Continued in article

"Fair dues:  Corporate tax dodging places a greater burden on those least able to pay. It's time we made the multinationals play by new rules," by Prem Sikka, The Guardian, March 4, 2008 --- http://commentisfree.guardian.co.uk/prem_sikka_/2008/03/fair_dues.html

Before reading this module you may want to read about Governmental Accounting at http://en.wikipedia.org/wiki/Governmental_accounting

Corruption, whether in government or in private industry, serves as a serious drag on a nation's wealth and creates a less favorable climate for business, says GSB Professor Ernesto Dal Bó. For one thing, corruption swells the number of employees needed, driving up costs and sidetracking workers from jobs that could help grow an economy.
Research News, Stanford University, December 2007 --- http://www.gsb.stanford.edu/news/research/dal_bo_corruption.html

"The Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion of your money each year," by Ryan Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 --- http://www.rd.com/content/the-government-is-wasting-your-tax-dollars/4/

1. Taxes:
Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what's owed and what's collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn't have the resources to adequately pursue big offenders and their high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially when dealing with multinational corporations with offshore headquarters."

Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that were negotiated for drilling rights on public lands don't pass the straight-face test, especially given current crude oil prices." And Big Oil isn't alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab: $352.5 billion

2. Healthy Fixes.
Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

The U.S. spends more than $400 per person on health care administration costs and insurance -- six times more than other industrialized nations.

That's because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what's spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5 billion

3. Military Mad Money.
You'd think it would be hard to simply lose massive amounts of money, but given the lack of transparency and accountability, it's no wonder that eight of the Department of Defense's functions, including weapons procurement, have been deemed high risk by the GAO. That means there's a high probability that money—"tens of billions," according to Walker—will go missing or be otherwise wasted.

The DOD routinely hands out no-bid and cost-plus contracts, under which contractors get reimbursed for their costs plus a certain percentage of the contract figure. Such deals don't help hold down spending in the annual military budget of about $500 billion. That sum is roughly equal to the combined defense spending of the rest of the world's countries. It's also comparable, adjusted for inflation, with our largest Cold War-era defense budget. Maybe that's why billions of dollars are still being spent on high-cost weapons designed to counter Cold War-era threats, even though today's enemy is armed with cell phones and IEDs. (And that $500 billion doesn't include the billions to be spent this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to rebuild Iraq has been wasted.")

Meanwhile, the Pentagon admits it simply can't account for more than $1 trillion. Little wonder, since the DOD hasn't been fully audited in years. Hoping to change that, Brian Riedl of the Heritage Foundation is pushing Congress to add audit provisions to the next defense budget.

If wasteful spending equaling 10 percent of all spending were rooted out, that would free up some $50 billion. And if Congress cut spending on unnecessary weapons and cracked down harder on fraud, we could save tens of billions more.

The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion

4. Bad Seeds.
The controversial U.S. farm subsidy program, part of which pays farmers not to grow crops, has become a giant welfare program for the rich, one that cost taxpayers nearly $20 billion last year.

Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted Turner, who got $590,823 for farms in four states during the same period. A Cato Institute study found that in 2005, two-thirds of the subsidies went to the richest 10 percent of recipients, many of whom live in New York City. Not only do these "farmers" get money straight from the government, they also often get local tax breaks, since their property is zoned as agricultural land. The subsidies raise prices for consumers, hurt third world farmers who can't compete, and are attacked in international courts as unfair trade.

The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20 billion = $657.5 billion

5. Capital Waste.
While there's plenty of ongoing annual operating waste, there's also a special kind of profligacy—call it capital waste—that pops up year after year. This is shoddy spending on big-ticket items that don't pan out. While what's being bought changes from year to year, you can be sure there will always be some costly items that aren't worth what the government pays for them.

Take this recent example: Since September 11, 2001, Congress has spent more than $4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships than it did before that money was spent, what 60 Minutes called "a fiasco that has set new standards for incompetence." Then there's the Future Imagery Architecture spy satellite program. As The New York Times recently reported, the technology flopped and the program was killed—but not before costing $4 billion. Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was scrapped after a $170 million investment. Or the almost $1 billion the Federal Emergency Management Agency has wasted on unusable housing. The list goes on.

The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion + $30 billion = $687.5 billion

6. Fraud and Stupidity.
Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better monitor the veracity of people drawing disability payments from its $100 billion pot. By one estimate, roughly $1 billion is wasted each year in overpayments to people who work and earn more than the program's rules allow.

The federal Food Stamp Program gets ripped off too. Studies have shown that almost 5 percent, or more than $1 billion, of the payments made to people in the $30 billion program are in excess of what they should receive.

One person received $105,000 in excess disability payments over seven years.

There are plenty of other examples. Senator Coburn estimates that the feds own unused properties worth $18 billion and pay out billions more annually to maintain them. Guess it's simpler for bureaucrats to keep paying for the property than to go to the trouble of selling it.

The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion

7. Pork Sausage.
Congress doled out $29 billion in so-called earmarks—aka funds for legislators' pet projects—in 2006, according to Citizens Against Government Waste. That's three times the amount spent in 1999. Congress loves to deride this kind of spending, but lawmakers won't hesitate to turn around and drop $500,000 on a ballpark in Billings, Montana.

The most infamous earmark is surely the "bridge to nowhere"—a span that would have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn tried to redirect that money to repair the city's Twin Span Bridge. He failed when lawmakers on both sides of the aisle got behind the Alaska pork. (That money is now going to other projects in Alaska.) Meanwhile, this kind of spending continues at a time when our country's crumbling infrastructure—the bursting dams, exploding water pipes and collapsing bridges—could really use some investment. Cutting two-thirds of the $29 billion would be a good start.

The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20 billion = $709.5 billion

8. Welfare Kings.
Corporate welfare is an easy thing for politicians to bark at, but it seems it's hard to bite the hand that feeds you. How else to explain why corporate welfare is on the rise? A Cato Institute report found that in 2006, corporations received $92 billion (including some in the form of those farm subsidies) to do what they do anyway—research, market and develop products. The recipients included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow Chemical, Ford Motor Company, DuPont and Johnson & Johnson.

The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50 billion = $759.5 billion

9. Been There,
Done That. The Rural Electrification Administration, created during the New Deal, was an example of government at its finest—stepping in to do something the private sector couldn't. Today, renamed the Rural Utilities Service, it's an example of a government that doesn't know how to end a program. "We established an entity to electrify rural America. Mission accomplished. But the entity's still there," says Walker. "We ought to celebrate success and get out of the business."

In a 2007 analysis, the Heritage Foundation found that hundreds of programs overlap to accomplish just a few goals. Ending programs that have met their goals and eliminating redundant programs could comfortably save taxpayers $30 billion a year.

The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion + $30 billion = $789.5 billion

10. Living on Credit.
Here's the capper: Years of wasteful spending have put us in such a deep hole, we must squander even more to pay the interest on that debt. In 2007, the federal government carried a debt of $9 trillion and blew $252 billion in interest. Yes, we understand the federal government needs to carry a small debt for the Federal Reserve Bank to operate. But "small" isn't how we would describe three times the nation's annual budget. We need to stop paying so much in interest (and we think cutting $194 billion is a good target). Instead we're digging ourselves deeper: Congress had to raise the federal debt limit last September from $8.965 trillion to almost $10 trillion or the country would have been at legal risk of default. If that's not a wake-up call to get spending under control, we don't know what is.

The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion + $194 billion = $983.5 billion

What YOU Can Do Many believe our system is inherently broken. We think it can be fixed. As citizens and voters, we have to set a new agenda before the Presidential election. There are three things we need in order to prevent wasteful spending, according to the GAO's David Walker:

• Incentives for people to do the right thing.

• Transparency so we can tell if they've done the right thing.

• Accountability if they do the wrong thing.

Two out of three won't solve our problems.

So how do we make it happen? Demand it of our elected officials. If they fail to listen, then we turn them out of office. With its approval rating hovering around 11 percent in some polls, Congress might just start paying attention.

Start by writing to your Representatives. Talk to your family, friends and neighbors, and share this article. It's in everybody's interest.

"Taxpayers distrustful of government financial reporting," AccountingWeb, February 22, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104680

The federal government is failing to meet the financial reporting needs of taxpayers, falling short of expectations, and creating a problem with trust, according to survey findings released by the Association of Government Accountants (AGA). The survey, Public Attitudes to Government Accountability and Transparency 2008, measured attitudes and opinions towards government financial management and accountability to taxpayers. The survey established an expectations gap between what taxpayers expect and what they get, finding that the public at large overwhelmingly believes that government has the obligation to report and explain how it generates and spends its money, but that that it is failing to meet expectations in any area included in the survey.

The survey further found that taxpayers consider governments at the federal, state, and local levels to be significantly under-delivering in terms of practicing open, honest spending. Across all levels of government, those surveyed held "being open and honest in spending practices" vitally important, but felt that government performance was poor in this area. Those surveyed also considered government performance to be poor in terms of being "responsible to the public for its spending." This is compounded by perceived poor performance in providing understandable and timely financial management information.

The survey shows:

The American public is most dissatisfied with government financial management information disseminated by the federal government. Seventy-two percent say that it is extremely or very important to receive this information from the federal government, but only 5 percent are extremely or very satisfied with what they receive.

 

Seventy-three percent of Americans believe that it is extremely or very important for the federal government to be open and honest in its spending practices, yet only 5 percent say they are meeting these expectations.

 

Seventy-one percent of those who receive financial management information from the government or believe it is important to receive it, say they would use the information to influence their vote.

Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this survey to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are glad to have established a benchmark against which we can track progress in years to come."

He continued, "AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information -- through reams of audited financial statements that have little relevance to the taxpayer -- must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward."

Justin Greeves, who led the team at Harris Interactive that fielded the survey for the AGA, said, "The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group, and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive. These are significant findings that I hope government and the public find useful."

This survey was conducted online within the United States by Harris Interactive on behalf of the Association of Government Accountants between January 4 and 8, 2008 among 1,652 adults aged 18 or over. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated.

You can read the Survey Report, including a full methodology and associated commentary.

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

Update on Frauds from That Perfect Storm for Cheaters

"9th ward activist to be sentenced in mortgage scam," by Susan Finch, The Times Picayune, February 26, 2008 --- http://www.nola.com/news/index.ssf/2008/02/9th_ward_activist_to_be_senten.html

Robert Green, who became a symbol of suffering and resilience in the Lower 9th Ward after Hurricane Katrina, will be sentenced in federal court Wednesday for his role in a house-flipping scam before the 2005 storm.

Green's personal experience when floodwaters poured into his neighborhood through a break in a levee has become emblematic of the misery many others suffered: his home was destroyed and he lost two family members: his 73 year-old mother and a 3 year-old granddaughter.

But according to federal prosecutors -- and by his own admission in a guilty plea last spring -- Green used his skills as a preparer of income tax returns to help further a scheme that left the federal government responsible for paying off hundreds of thousands of dollars in home mortgages defaulted on by borrowers who used false tax returns prepared by Green to qualify for federally insured loans.

Green, the sixth person convicted in the scam allegedly endorsed by Citywide Mortgage Co. owner Michael O'Keefe Jr., could be sentenced to as much as five years in prison and fined up to $250,000. Green pleaded guilty in a deal with prosecutors that requires him to testify for the government if called on to do so.

Green said today he's sorry that he broke the law and that the federal government lost money as a result. He said the sentencing is "something I have to deal with."

Continued in article

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

"Jury Finds Former Insurance Executives Guilty," The New York Times, February 25, 2008 ---
http://www.nytimes.com/aponline/us/AP-CT-GenRe-AIGTrial.html

A Connecticut jury found five former insurance company executives guilty Monday of a scheme to manipulate the financial statements of the world's largest insurance company.

The verdict came in the seventh day of jury deliberations following a month long trial in federal court.

The defendants, four former executives of General Re Corp. and a former executive of American International Group Inc., sat stone-faced as the verdict was read. They were accused of inflating AIG's (NYSE:AIG) reserves through reinsurance deals by $500 million in 2000 and 2001 to artificially boost its stock price.

The defendants were former General Re CEO Ronald Ferguson; former General Re Senior Vice President Christopher P. Garand; former General Re Chief Financial Officer Elizabeth Monrad; and Robert Graham, a General Re senior vice president and assistant general counsel from about 1986 through October 2005.

Also charged was Christian Milton, AIG's vice president of reinsurance from about April 1982 until March 2005.

Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

"This is a very sad day, not only for Ron Ferguson, but for our criminal justice system," Clifford Schoenberg, Ferguson's personal attorney, said in a statement distributed at U.S. District Court in Hartford. "I and the rest of Ron's legal team will not rest until we see him -- and justice -- vindicated."

Reinsurance policies are backups purchased by insurance companies to completely or partly insure the risk they have assumed for their customers.

Prosecutors said AIG Chief Executive Maurice "Hank" Greenberg was an unindicted coconspirator in the case. Greenberg has not been charged and has denied any wrongdoing, but allegations of accounting irregularities, including the General Re transactions, led to his resignation in 2005.

Continued in article

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

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

Jury Orders U. of Phoenix Parent to Pay $277 Million
With a major lawsuit challenging its admissions practices looming on the horizon, the Apollo Group — parent of the University of Phoenix — took a beating in another legal proceeding Wednesday. A federal jury in Arizona ordered Apollo to pay an estimated $277.5 million to shareholders who sued the higher education company and two former executives in 2004 for securities fraud. The lawsuit alleged that company officials withheld a harshly critical U.S. Education Department report in February 2004 that accused Apollo of violating a federal prohibition against paying recruiters based on the number of students they enrolled. The company did not disclose the report in its Securities and Exchange Commission filings or in calls with analysts or reporters for months. When the company finally released the preliminary report, in September when it announced a $9.8 million settlement with the Education Department, its stock took a dive. That month, a group of shareholders, led by the Policemen’s Annuity and Benefit Fund of Chicago, sued the company under federal securities fraud laws, seeking to recoup the money they said they had lost.
Doug Lederman, Inside Higher Ed, January 17, 2008 --- http://www.insidehighered.com/news/2008/01/17/apollo

"NIH Doesn't Check Academics on Financial Conflicts of Interest, Auditors Say," by Jeffrey Brainard, Chronicle of Higher Education, January 21, 2008 --- http://chronicle.com/daily/2008/01/1308n.htm?utm_source=at&utm_medium=en

The National Institutes of Health has failed to adequately oversee hundreds of financial conflicts of interest among university biomedical researchers, partly because the reports universities sent the agency about the conflicts lacked any details, according to a new audit.

The NIH rarely asks universities to provide missing details about the nature of the conflicts and how they were resolved, information that the agency needs to determine whether universities acted properly, said the inspector general of the Department of Health and Human Services. The agency "should take a more active role" and obtain and evaluate that information more often, the inspector general said in the audit, released on Thursday. (The department is the NIH's parent agency.)

The NIH disagreed in a response. The existing system for reporting conflicts, which largely relies on universities to police themselves, provides "an appropriate framework for the effective management" of them, the agency said. NIH officials asserted, and the audit report agreed, that the agency was following the letter of existing regulations, which require only reporting of the conflicts' existence, without details.

But one bioethicist observed that if universities' reports contain no useful information, their submission is a pointless, bureaucratic exercise. Jeffrey P. Kahn, director of the Center for Bioethics at the University of Minnesota-Twin Cities, said the NIH "has no evidence to support their assertion that things are working fine."

Continued in article

Federal Monitor Finds Health-Sciences U. in N.J. Lacks Research Compliance
Despite receiving a much-improved bill of health this month from a federal monitor, the University of Medicine and Dentistry of New Jersey’s troubles may not be over. A previously undisclosed portion of the monitor’s report — which was released as federal oversight of the university ended after two years — found that the institution had “no research compliance capability,” according to The Star-Ledger, a newspaper in New Jersey.
Chronicle of Higher Education, January 21, 2008 --- Click Here

Bob Jensen's threads on college accountability are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

Broken Promises and Pork Binges
The Democratic majority came to power in January promising to do a better job on earmarks. They appeared to preserve our reforms and even take them a bit further. I commended Democrats publicly for this action. Unfortunately, the leadership reversed course. Desperate to advance their agenda, they began trading earmarks for votes, dangling taxpayer-funded goodies in front of wavering members to win their support for leadership priorities.
John Boehner, "Pork Barrel Stonewall," The Wall Street Journal, September 27, 2007 --- http://online.wsj.com/article/SB119085546436140827.html

"Earmarks Again Eat Into the Amount Available for Merit-Based Research, Analysis Finds," by Jeffrey Brainard, Chronicle of Higher Education, January 9, 2008 --- http://chronicle.com/daily/2008/01/1161n.htm

After a one-year moratorium for most earmarks, Congress resumed directing noncompetitive grants for scientific research to favored constituents, including universities, this year, a new analysis says.

Spending for nondefense research fell by about one-third in the 2008 fiscal year, compared with 2006, but the earmarked money nevertheless ate into sums available for traditional, merit-reviewed grants, the analysis by the American Association for the Advancement of Science found.

In all, Congress earmarked $4.5-billion for 2,526 research projects in appropriations bills for 2008, according to the AAAS. Legislators approved the measures in November and December, and President Bush signed them.

More important, lawmakers increased spending for earmarks in federal research-and-development programs by a greater amount than they added to the programs for all purposes, the AAAS reported. That will result in a net decrease in money available for nonearmarked research grants, which federal agencies typically distributed based on merit and competition.

For example, Congress added $2.1-billion to the Pentagon's overall request for basic and applied research and for early technology development, but lawmakers also specified an even-larger amount, $2.2-billion, for earmarked projects in those same accounts.

For nondefense research projects, Congress showed restraint in earmarking, providing only $939-million in the 2008 fiscal year, which began in October. That was down from about $1.5-billion in 2006 and appeared to reflect a pledge by Congressional Democrats to reduce the total number of earmarks.

For the Pentagon, total spending on research earmarks of all kinds reached $3.5-billion, much higher than the $911-million tallied by the AAAS in 2007. (Pentagon earmarks were among the only kind financed by Congress that year.) However, the apparent increase was largely the result of an accounting change: For 2008, Congress mandated increased disclosure of earmarks, a change that especially affected the tally of Pentagon earmarks, said Kei Koizumi, director of the association's R&D Budget and Policy Program. Adjusting for that change, the total number of Defense Department earmarks appears to have fallen in 2008, he said.

As in past years, lawmakers avoided earmarking budgets for the National Institutes of Health and the National Science Foundation, the two principal sources of federal funds for academic research. The Departments of Energy and Agriculture were the most heavily earmarked domestic research agencies. After being earmark-free for the first years of its existence, the Department of Homeland Security got $82-million in research-and-development earmarks for 2008.

The AAAS did not report how much of the earmarked research money will go to colleges, but academic institutions have traditionally gotten most of it. Some research earmarks go to corporations and federal laboratories. In addition, many colleges obtain earmarks for nonresearch projects, like renovating dormitories and classroom buildings, but the AAAS does not track that spending.

Academic earmarks more than quadrupled from 1996 to 2003, The Chronicle found. The practice is controversial because some critics see it as circumventing peer review and supporting projects of dubious quality. Supporters call earmarks the only way to finance some types of worthy projects not otherwise supported by the federal government.

When Jeff Flake was elected to Congress in 2000 from Arizona’s Sixth Congressional District with the hope of “effectively advanc[ing] the principles of limited government, economic freedom, and individual responsibility,” he was a relatively unknown entity outside Arizona. Some may have dismissed the Arizona newbie as just another congressman out of a 435-member body, but that would have been a big mistake.Over his seven years in the House, the mild-mannered contrarian has become the bane of porkers everywhere. To the chagrin of his congressional colleagues, the Arizona representative has made a career out of targeting some of Congress’s most outrageous pork projects by introducing amendments to eliminate those projects from congressional spending bills. In 2006, Flake introduced nineteen amendments, putting each member of Congress on record either in favor or in opposition to spending taxpayer dollars on such crucial projects as the National Grape and Wine Initiative, a swimming pool in California, and hydroponic tomato production in Ohio.
Pat Toomey, "Make It Flake! An appropriating move," National Review, January 17, 2008 --- Click Here
Jensen Comment
Jeff Flake is a thorn in Majority Speaker Nancy Pelosi's side as she agrees to earmarks in order to grease legislation through the House. It's really hard to manage a bunch of thieves  without giving them something to steal.

Bob Jensen's threads on higher education controversies are at http://www.trinity.edu/rjensen/HigherEdControversies.htm

Yawn:  Just Billions More in World Bank Frauds Coming to Light
Corruption is an endemic problem in bank projects, swallowing unknown but significant chunks from its $30 billion-plus annual portfolio. No less a problem has been the bank staff's ferocious resistance to anything that might stand in the way of its lending ever more money to projects run by the same governments that tolerate this malfeasance. Yet nothing we've seen so far can compare to what has now been uncovered about five health projects in India, involving $569 million in loans. The projects were the subject of a "Detailed Implementation Review," a lengthy forensic examination undertaken by Ms. Folsom's Department of Institutional Integrity, known within the bank as INT. As of this writing the bank has not publicly released the review, though it's been shared with the bank's board. But we've seen a copy and are posting its executive summary on www.wsj.com/opinion  and www.OpinionJournal.com   (click here to see it).
"World Bank Disgrace," The Wall Street Journal, January 14, 2008; Page A12 --- http://online.wsj.com/article/SB120026972002987225.html

Question
Why doesn't Section 401 of the Sarbanes-Oxley Act apply to attestation of internal controls in the World Bank?

"World Bank Reckoning," The Wall Street Journal, September 13, 2007; Page A16 --- http://online.wsj.com/article/SB118964274677625838.html

Since we're talking about the world's second most out-of-control international bureaucracy -- no prizes for guessing the first -- we shouldn't get our hopes up. But in the past week some prominent outsiders have been forcing the World Bank to reckon with the alien concept of accountability. Now it's up to new bank President Robert Zoellick to see that their efforts bear fruit.

First up is former Federal Reserve Chairman Paul Volcker. For the past five months, Mr. Volcker and a panel of international experts have been conducting an independent review of the Department of Institutional Integrity, the bank's anticorruption unit known internally as the INT. Their report, which readers can find on OpinionJournal.com, is being released to the public today.

In sober and measured terms, Mr. Volcker's report provides a devastating indictment of what it calls the bank's "ambivalence" toward both corruption and its own anticorruption unit. "There was then, and remains now, resistance among important parts of the Bank staff and some of its leadership to the work of INT," the report says (our emphasis).

It goes on to say that, "Some resistance is more parochial. There is a natural discomfort among some line staff, who are generally encouraged by the pay and performance evaluation system to make loans for promising projects, to have those projects investigated ex post, exposed as rife with corruption, creating an awkward problem in relations with borrowing clients." To put it more plainly, the report is saying that every incentive at the bank is to push more money out the door, and bank employees hate the anticorruption effort because it interferes with that imperative.

The report endorses the work of the INT, which was created a mere six years ago and which has been under what it calls a "particularly strong" institutional attack ever since. The INT, the Volcker panel says, "is staffed by competent and dedicated investigators who work hard and long hours with professionalism" and deploy "advanced investigative methods to detect and substantiate allegations of fraud and corruption." And it goes on to recommend that the anticorruption crusaders "should be nurtured and maintained as an exemplary investigative organization" within the bank.

In a phone interview yesterday, Mr. Volcker added that he gives "high marks" to current INT director Suzanne Rich Folsom. Mr. Volcker's endorsement should stop cold the recent attempts by some in the bank's entrenched bureaucracy to run Ms. Folsom out of the bank, as they did Paul Wolfowitz.

The bank is also being put on notice by the U.S. Senate through provisions in its foreign operations appropriations bill. The provision threatens to withhold 20% of U.S. funds to the bank's International Development Association arm (which provides interest-free loans to the world's poorest countries) until it is assured that the bank "has adequately staffed and sufficiently funded the Department of Institutional Integrity." The bill also demands that the bank provide "financial disclosure forms of all senior World bank personnel." Now, that will get the bureaucracy's attention.

Notably, it's a Democrat -- Evan Bayh of Indiana -- who's taken the lead on this issue. Mr. Bayh has ordered a Government Accountability Office report on the effectiveness of IDA loans and their susceptibility to corruption, the bank's procurement procedures, as well as the legendary pay packages enjoyed by its senior management. "There's a tendency [at the bank] to say 'just give us the money and go away,'" the Senator told us by phone yesterday. "Until there are some tangible consequences, they won't take us seriously. We shouldn't let that happen."

Continued in article

January 15, 2008 reply from Randy Kuhn [jkuhn@BUS.UCF.EDU]

I am in no way surprised. As a part of the Deloitte audit team the first year after we “won” the engagement, I can clearly speak on the attitudes displayed by some World Bank staffers. The CFO at the time was an ex-employee of the previous auditing firm and frankly treated us with utter contempt repeatedly commenting on how much better the other firm was. I was not permitted to speak or ask questions in any Bank meetings that I attended (direct order from the CFO). If I wanted clarification on anything, I needed to schedule time with staffers through a central person. Even when formally scheduled, staffers would blow me off and tell me to reschedule when I arrived at the agreed upon time and the firm ate the costs of these inefficiencies. Due to confidentiality reasons, I cannot reveal any of the control weaknesses but, in general, there was either an overall lack of appreciation for the value of internal controls or lack of understanding of their purpose. As more issues like these are revealed, however, I am led to believe there might have been other underlying reasons for the constant battles we faced auditing the Bank.

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

Note that there's a pretty good summary of the Sarbanes-Oxley Act at http://en.wikipedia.org/wiki/Sarbanes-Oxley

Buffett Won’t Be Witness in Fraud Trial
Defense lawyers rested their case at the fraud trial of General Reinsurance executives accused of helping the American International Group mislead investors, without jurors hearing from the billionaire investor Warren E. Buffett. Closing arguments are scheduled for Monday, and the case is expected to go to the jury shortly after that. Mr. Buffett’s holding company, Berkshire Hathaway, owns General Re. In the case, four former executives from General Reinsurance and one from A.I.G. are accused of conspiring on a transaction that let A.I.G. inflate loss reserves by $500 million in 2000 and 2001. Lawyers for two defendants presented character witnesses on Thursday.
"Buffett Won’t Be Witness in Fraud Trial," Bloomberg News via The New York Times, February 8, 2008 ---
http://www.nytimes.com/2008/02/08/business/08genre.html?_r=1&ref=business&oref=slogin

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 ---
http://online.wsj.com/article/SB113919423276365730.html?mod=todays_us_money_and_investing

Bob Jensen's threads on the A.I.G. frauds are at  http://www.trinity.edu/rjensen/FraudRotten.htm 

Update on Professors Who Cheat

"Columbia U. Professor Denies Plagiarism, Saying Accusers Instead Stole Her Work," by Thomas Bartlett, Chronicle of Higher Education, February 22, 2008 --
- http://chronicle.com/daily/2008/02/1798n.htm

A Columbia University professor who was found to have committed numerous acts of plagiarism struck back at her accusers on Thursday, saying it was they who stole her work and accusing administrators of blackmail and intimidation.

In a lengthy interview with The Chronicle, Madonna G. Constantine, a professor of psychology and education at Columbia's Teachers College, spelled out her side of the story. She said she believes that her accusers are motivated by professional envy and possibly racism. Ms. Constantine also contended that the president of Teachers College, Susan H. Fuhrman, is biased against her.

As for the alleged plagiarism itself, Ms. Constantine insisted that her work was finished first and that she was the victim of academic fraud. In a written statement, she said she had "documentary proof that my scholarly work under question was started and completed well before the accusers' own work."

Ms. Constantine promised to provide that proof once all the materials had been gathered. She plans to submit her evidence to a faculty appeals committee, which will then make a nonbinding recommendation to the president of the Teachers College.

A law firm hired by the university concluded, after an 18-month investigation, that Ms. Constantine had plagiarized the work of two former students and a former colleague. As part of that investigation, Ms. Constantine was allowed to submit a rebuttal to the complaints against her. The law firm investigating the matter, Hughes Hubbard & Reed LLP, found that the evidence she presented was not credible.

As a result of the investigation, the university reduced her salary and, according to Ms. Constantine, asked for her resignation, which she declined to give. A university spokeswoman could not confirm that the university asked for the professor's resignation.

Ms. Constantine, however, argues that the investigation was biased and that she was not given a full opportunity to make her case. She also questions the neutrality of the investigation because her three accusers were given indemnity—a fact, she argues, that proves that they received favorable treatment.

But, according to Christine Yeh, a former associate professor at Teachers College whose work Ms. Constantine was found to have copied, she and the two former students insisted on such protections in case Ms. Constantine filed a lawsuit—which she had previously threatened to do. The agreement with the university did not protect them from charges of plagiarism, had the law firm discovered that they were to blame. But Columbia did agree to defend them if they were to be sued.

Who Saw What When?

Untangling the opposing allegations is difficult. The two former students both say Ms. Constantine stole their unpublished work and published it as her own. Ms. Constantine says it was the other way around.

In the case of the accusation by Ms. Yeh, who now teaches at the University of San Francisco, Ms. Constantine's paper was published in 2004, several months before Ms. Yeh's. Both papers focused on indigenous healing. Ms. Yeh's research has long centered around indigenous healing, and drafts of her paper had circulated as early as 2001 in the department of counseling and clinical psychology, where both women taught.. In addition, Ms. Yeh's co-authors had presented a version of the paper at a meeting of the American Psychological Association in 2002.

It would have been easy, Ms. Yeh says, for Ms. Constantine to get a copy of an earlier draft.

Ms. Constantine says Ms. Yeh must have obtained a copy of a proposal she sent to the editor of the journal that published her paper. She did not know how Ms. Yeh might have obtained that proposal.

For Ms. Yeh, the study of indigenous healing has been a lifelong endeavor. Her father, now deceased, was a professor at Villanova University and studied indigenous healing himself. When he was ill, she used energy-healing techniques to help him. "The idea that I would make this up or steal her work when I have been doing this for so long is ridiculous," she said.

Nearly Identical Language

One of the former graduate students, Tracy Juliao, says Ms. Constantine borrowed a number of passages from her dissertation on the multiple roles of women for a paper the professor published in 2006 in the journal Professional School Counseling. The two documents share many of the same ideas, along with examples of identical or near-identical language.

For instance, here is an excerpt from Ms. Juliao's dissertation, which was completed in 2004 and published the following year:

"The theory acknowledges that different roles might come into conflict with one another, but proposes that adjusting the entire system of roles to accommodate the conflicts will produce more rewarding results."

And here is a passage from Ms. Constantine's 2006 paper:

"Role balance theory acknowledges that different roles might come into conflict with each other, but women's ability to adjust their entire system of roles to accommodate potential conflicts will likely produce more rewarding results."

Several other examples of parallels between the two documents were provided to The Chronicle. And Ms. Yeh confirmed that Ms. Juliao had been working in the area of multiple roles of women since 2000. For a time, Ms. Constantine was Ms. Juliao's academic adviser, and the two discussed her research. And, as a faculty member, Ms. Constantine would have had access to student dissertations before they were published.

Ms. Constantine says she did not see Ms. Juliao's dissertation until the fall of 2006, after her paper was published. She says they both talked about their ideas freely. Ms. Constantine could not explain how Ms. Juliao would have been able to copy her paper several years before it was published.

Ms. Juliao says she had no clue, until she saw the paper, that Ms. Constantine might be copying her work. "This is very personal to me," she said. "I have pictures of her playing with my daughter on graduation day. Just looking at that makes me sick to my stomach now."

Assertions About the Role of Race

The accusations and the resulting investigation are part of what Ms. Constantine terms a "conspiracy" and a "witch hunt."

"There are people working behind the scenes collectively, as a unit, to create distress and dissension and to bring people down," Ms. Constantine said on Thursday.

Among those people, according to Ms. Constantine, is Ms. Fuhrman, the president of Teachers College. Ms. Constantine said she did not know why Ms. Fuhrman disliked her. However, she cited a memorandum about the plagiarism investigation that was sent to faculty members earlier this week as proof of animus from the administration. The fact that the memo was hand-delivered, rather than being sent through the campus mail, shows that the president is trying to intimidate her, she said.

According to a spokeswoman for the university, Marcia Horowitz, Ms. Fuhrman barely knows Ms. Constantine.

Ms. Constantine said she believes that one reason she is being accused of plagiarism is that she African-American. Race, she said, plays a major role in the investigation.

. . .

Professors at the Teachers College also received an e-mail message from Karen Cort, the other graduate student whose work Ms. Constantine was found to have copied. In the message, Ms. Cort says that Ms. Constantine, who was her mentor, had told her that her work was not good enough to be published. She later saw portions of that same work in print, under Ms. Constantine's name.

Ms. Cort, who is African-American, says Ms. Constantine's claim that the investigation is motivated by race is "what pains me the most."

In the e-mail message, Ms. Cort calls her former mentor "the most hypocritical person I ever met in my life."

Bob Jensen's threads on professors who cheat are at http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

Fishy Politics Leads to Fishy Accounting

"Shrimp Shame," by Greg Bushford, The Wall Street Journal, March 6, 2008 ---
http://online.wsj.com/article/SB120475150477614511.html?mod=djemEditorialPage

A three-judge World Trade Organization panel has ruled America's method for taxing shrimp imports out of line with the country's WTO obligations. What happens next will say a lot about the credibility of American leadership in promoting free trade.

The new WTO ruling is the latest twist in a politically charged case involving some $2 billion in annual shrimp exports to the U.S., counting not just India and Thailand -- the two countries pressing the current litigation -- but also China, Vietnam, Brazil and Ecuador. Three years ago, the U.S. Commerce Department slapped punitive duties ranging from 4% to 113% on shrimp from the six countries, alleging that they had been "dumping" their seafood delicacies in the U.S. at "unfairly" low prices.

That move was bad enough. But then U.S. Customs officials made matters worse by rolling out a novel accounting trick. Customs decided that shrimp imports from the six involved countries would be subject to a newfangled policy concoction called "continuous bonds."

In practice, that meant that an importer who planned to bring in, say, $100 million annually in shrimp subject to a 6% antidumping tariff would normally be required to post a $6 million cash deposit to cover the expected duties. On top of that, the importer would pay a $50,000 surety bond as "insurance" that payment can be made, in case import duties -- which can subsequently be raised or lowered by Commerce officials -- exceed the expected amount that year. Such bonds are backed by credit lines extended by the duty payer's banks.

But the new continuous-bond policy morphed the traditional $50,000 bonds into a bond equal to the expected-duty deposit over again -- meaning in the example above a bond of $6 million, in addition to the $6 million cash deposit importers already had to put up. While Customs was aiming at foreign exporters, the agency ended up squeezing the American importers who normally pay the duties.

For importers, the continuous bonds have been a continuous nightmare. They've been forced by lenders to scramble to obtain enormous annual credit lines, secured by putting up a portion of their businesses as collateral. Whether or not the importers end up having to borrow against their credit lines, the burdensome bonds constrain their ability to raise capital to re-invest in their businesses, as assets against which they could ordinarily borrow are already tied up. Predictably, some U.S. shrimp importers have been forced to exit the business, as their credit lines have been over-extended.

Customs officials justified the new policy -- which was announced without official prior notice in the Federal Register, and thus with no opportunity for affected importers to comment publicly -- as necessary to prevent possibly shady shrimp importers from failing to ante up duties when they are calculated at year's end. Such evasions had occurred in previous antidumping cases involving Vietnamese catfish and Chinese crawfish.

But when the National Fisheries Institute, whose members import some 80% of the seafood that Americans eat, challenged the Customs' paperwork burdens in the New York-based U.S. Court of International Trade, evidence of unsavory political calculations surfaced. Citing the agency's internal documents, U.S. Judge Timothy Stanceu found that Customs officials had been motivated "by domestic political pressures to take action directed against the shrimp importing industry." The bureaucrats had calculated that lawmakers from shrimp-producing states wielded more influence on important congressional committees than did representatives from shrimp-importing states. Despite that finding, the case is still wending its way through the federal courts.

Continued in article

Credit Default Swaps:  Another Stumbling Block for Fair Value Accounting and FAS 133/IAS 39
The banks, as counterparties, are on the hook for billions in insurance they bought to hedge credit-derivatives positions. The insurance policies, called credit default swaps, have exploded in popularity in the last few years, with some $45 trillion outstanding. Closely watched bond guru Bill Gross of Pacific Investment Management calls banks' participation in the CDS market a ponzi scheme that may trigger losses of $250 billion. Bank disclosure is sketchy, and the market is hard to evaluate for lack of information. Credit default swaps are sold over the counter, are not traded on an exchange and are outside the close scrutiny of regulators. 'The ultimate systemic risk caused by the weakened positions of the monoline insurers is overwhelming and scary,' said CIBC World Markets analyst Meredith Whitney in a late-December research note. 'The impact will be sizable and very negative for the banks.'"
 Liz Moyer, "You Should Worry About Ambac, Forbes, January 17, 2008 --- Click Here

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

Bob Jensen's threads on credit swaps can be found under "Credit Derivative and Credit Risk Swap" at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms

February 7, 2008 question from Miklos A. Vasarhelyi [miklosv@ANDROMEDA.RUTGERS.EDU]

Does anyone understand what this is?
miklos

Jensen Comment
Miklos forwarded interactive graphics video link on monoline insurance --- Click Here

February 7, 2008 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]

Miklos,

Buyers of bonds can insure against default risks by buying policies from monoline insurance companies who service exclusively the capital markets. To protect against default by the monoline on its policy, you buy a credit swap on it from another monoline insurance company (which would be obligated to either buy the bonds at face value or to pay the difference between that and the recovery value in case of default).

When such trades take place, the buyer of the bonds (usually investment banks) have theoretically transferred the risk in bonds, and so can account for the bundle of transactions and recognise "profits".

Apparently, these trades have been very lucrative for banks and so have taken the profits in such transactions over the entire life of the bonds at the consummations of such transactions.

The problem with such accounting for profits is that, if the monoline insurance companies are downgraded, the risk on the bonds reverts to the holder (bank), who must reverse the profits.

The usual culprits in these fancy transactions are investment banks. It is difficult to account for the "profits" because the bonuses paid to the traders on such transactions might have been paid years ago.

What a wonderful fiction we accountants have created wheere profits are not what they seem. Alice in Wonderland pales by comparison.

I should have stuck with my first intended profession (actuary).

Regards,

Jagdish

February 7, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]

Jagdish,

Thank you for explaining this. The fault is not entirely ours. Deregulated finance entrepreneurs have invented these complex transactions, which, frankly, can't be accounted for (part of the motivation for their design is precisely because they can't be accounted for). In theory the probability that a bond issuer will default is not altered by these arrangements.

All they do is shift the risk many degrees removed from where it originated. An interesting empirical issue is whether the probability of default does change in the presence of these risk shifting transactions. How does it alter the monitoring of debtors by their creditors when their creditors may not even know they are their creditors?

Do these risk shifting arrangements change the risk? Anyone out there know of any literature that addresses the issue?

February 7, 2008 reply from Bob Jensen

Hi Miklos, Jagdish, Paul, and others,

Actually there’s a very good module (one of the best) on the history of monoline insurance in Wikipedia --- http://en.wikipedia.org/wiki/Monolines  There are excellent references as to when (belatedly) and why monoline insurance companies have been put under review by credit rating agencies.

Credit rating agencies placed the other monoline insurers under review [16]. Credit default swap markets quoted rates for default protection more typical for less than investment grade credits. [17] Structured credit issuance ceased, and many municipal bond issuers spurned bond insurance, as the market was no longer willing to pay the traditional premium for monoline-backed paper[18]. New players such as Warren Buffett's Berkshire Hathaway Assurance entered the market[19]. The illiquidity of the over-the-counter market in default insurance is illustrated by Berkshire taking four years (2003-06) to unwind 26,000 undesirable swap positions in calm market conditions, losing $400m in the process. By January 2008, many municipal and institutional bonds were trading at prices as if they were uninsured, effectively discounting monoline insurance completely. The slow reaction of the ratings agencies in formalising this situation echoed their slow downgrading of sub-prime mortgage debt a year earlier. Commentators such as investor David Einhorn [20] have criticized rating agencies for being slow to act, and even giving monolines undeserved ratings that allowed them to be paid to bless bonds with these ratings, even when the bonds were issued by credits superior to their own.

It has been particularly problematic for investors in municipal bonds.

Bob Jensen

Bob Jensen's threads on credit derivatives accounting --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#CreditDerivatives

Bob Jensen's threads on derivative financial instrument frauds are at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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

Foreign hackers seek to steal Americans' health records
Foreign hackers, primarily from Russia and China, are increasingly seeking to steal Americans’ health care records, according to a Department of Homeland Security analyst. Mark Walker, who works in DHS’ Critical Infrastructure Protection Division, told a workshop audience at the National Institute of Standards and Technology that the hackers’ primary motive seems to be espionage. “They’ve been focused on the [Department of Defense] – the military – but now are spreading out into the health care private sector,” Walker said. Early in 2007, a virus was placed on a Centers for Disease Control and Prevention Web site, he said, and in April a Military Health System server holding Tricare records was hacked. Walker said the hackers are seeking to exfiltrate health care data. “We don’t know why,” he added. “We want to know why.” At the same time, he said, it’s clear that “medical information can be used against us from a national security standpoint.”
Nancy Ferris, Federal Computer Week, January 17, 2008 --- http://www.fcw.com/online/news/151334-1.html

Bob Jensen's threads on computing and networking security are at http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

"Bringing down Public Enemy No. 1: IRS makes Al Capone’s records public," AccountingWeb, March 6, 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=104748
The IRS archives are at http://www.irs.gov/foia/article/0,,id=179352,00.html

All Federal tax records are confidential by law. The availability of historical records is highly unusual. However, the records of the criminal investigation of Al Capone below are of historical significance and of interest to the public. Therefore, they are being made available under the Freedom of Information Act (FOIA). The IRS is committed to its FOIA obligations and to an open government by making information available as authorized by law. No other IRS records meet the unique set of circumstances that make the Capone records publicly available.

Two stories forwarded by my good friend Bob Every

STORY NUMBER ONE  
Many years ago, Al Capone virtually owned Chicago. Capone wasn't famous for anything heroic. He was notorious for enmeshing the windy city in everything from boot-legged booze and prostitution to murder. 

Capone had a lawyer nicknamed "Easy Eddie." He was Capone's lawyer for a good reason. Eddie was very good! In fact, Eddie's skill at legal maneuvering kept Big Al out of jail for a long time.  To show his appreciation, Capone paid him very well. Not only was the money big, but also, Eddie got special dividends. For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of the day. The estate was so large that it filled an entire Chicago City block. 

Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him.  Eddie did have one soft spot, however. He had a son that he loved dearly. Eddie saw to it that his young son had clothes, cars, and a good education. Nothing was withheld. Price was no object.  And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong. Eddie wanted his son to be a better man than he was.  Yet, with all his wealth and influence, there were two things he couldn't give his son; he couldn't pass on a good name or a good example.  One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done. 

He decided he would go to the authorities and tell the truth about Al "Scarface" Capone, clean up his tarnished name, and offer his son some semblance of integrity. To do this, he would have to testify against The Mob, and he knew that the cost would be great.  So, he testified.  Within the year, Easy Eddie's life ended in a blaze of gunfire on a lonely Chicago Street  But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he could ever pay. Police removed from his pockets a rosary, a crucifix, a religious medallion, and a poem clipped from a magazine. The poem read: "The clock of life is wound but once, And no man has the power to tell Just when the hands will stop At late or early hour. Now is the only time you own. Live, love, toil with a will. Place no faith in time. For the clock may soon be still. 

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STORY NUMBER TWO  World War II produced many heroes. One such man was Lieutenant Commander Butch O'Hare. He was a fighter pilot assigned to the aircraft carr ier Lexington in the South Pacific. One day his entire squadron was sent on a mission. After he was airborne, he looked at his fuel gauge and realized that someone had forgotten to top off his fuel tank. He would not have enough fuel to complete his mission and get back to his ship. His flight leader told him to return to the carrier.

Reluctantly, he dropped out of formation and headed back to the fleet. As he was returning to the mother ship he saw something that turned his blood cold: a squadron of Japanese aircraft was speeding its way toward the American fleet. The American fighters were gone on a sortie, and the fleet was all but defenseless. He couldn't reach his squadron and bring them back in time to save the fleet. Nor could he warn the fleet of the approaching danger. There was only one thing to do. He must somehow divert them from the fleet.

Laying aside all thoughts of personal safety, he dove into the formation of Japanese planes. Wing-mounted 50 caliber's blazed as he charged in, attacking one surprised enemy plane and then another. Butch wove in and out of the now-broken formation and fired at as many planes as possi ble until all his ammunition was finally spent. Undaunted, he continued the assault. He dove at the planes, trying to clip a wing or tail in hopes of damaging as many enemy planes as possible and rendering them unfit to fly. Finally, the exasperated Japanese squadron took off in another direction.

Deeply relieved, Butch O'Hare and his tattered fighter limped back to the carrier. Upon arrival, he reported in and related the event surrounding his return . The film from the gun-camera mounted on his plane told the tale. It showed the extent of Butch's daring attempt to protect his fleet. He had, in fact, destroyed five enemy aircraft. This took place on February 20, 1942, and for that action Butch became the Navy's first Ace of W.W.II, and the first Naval Aviator to win the Congressional Medal of Honor. A year later Butch was killed in aerial combat at the age of 29.

His hometown would not allow the memory of this WW II hero to fade, and today, O'Hare Airport in Chicago is named in tribute to the courage of this great man. So, the next time you find yourself at O'Hare International, give some thought to visiting Butch's memorial displaying his statue and his Medal of Honor. It's located between Terminals 1 and 2. 

SO WHAT DO THESE TWO S TORIES HAVE TO DO WITH EACH OTHER?
Butch O'Hare was "Easy Eddie's" son.?

Jensen Comment
Snopes says parts of the stories are true albeit exaggerated --- http://www.snopes.com/glurge/ohare.asp
The Senior Eddie in reality was a really bad gangster!