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

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

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

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

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

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at
http://www.trinity.edu/rjensen/2008Bailout.htm

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

From CNN:  Clark Howard's Informative Advice About Shopping, Financial Planning, and Warnings About Scams ---
http://www.cnn.com/CNN/Programs/clark.howard/?iref=allsearch

Bob Jensen's warnings about scams ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's shopping helpers ---
http://www.trinity.edu/rjensen/Bookbob3.htm

Accounting Scandals
The funny thing is that I never looked up this item before now. Jim Mahar noted that it is a good link.

Accounting Scandals --- http://en.wikipedia.org/wiki/Accounting_scandals

Bob Jensen's threads on accounting scandals are in various documents:

Accounting Firms --- http://www.trinity.edu/rjensen/Fraud001.htm

Fraud Conclusion --- http://www.trinity.edu/rjensen/FraudConclusion.htm

Enron --- http://www.trinity.edu/rjensen/FraudEnron.htm

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

Fraud Updates --- http://www.trinity.edu/rjensen/FraudUpdates.htm

American History of Fraud --- http://www.trinity.edu/rjensen/FraudAmericanHistory.htm

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

AICPA Fraud Resource Center --- Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx

"New Report Shows Changing Fraud Environment," by Curtis C. Verschoor, AccountingWeb, March 18, 2013 ---
http://www.accountingweb.com/article/new-report-shows-changing-fraud-environment/221374

Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view

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

PBS Frontline:  Why don't some of biggest fraudsters in history go to prison?
"The Untouchables," Frontline, January 22, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/untouchables/?elq=923e1cf54bd4465092ea4b303aac1291&elqCampaignId=511
Thank you Dennis Huber for the heads up.

Jensen Comment
I highly respect this video, although it tends to not blame the major source of the fraud on Main Street --- that blame that falls on government for pressuring Fannie Mae and Freddy Mack to buy up millions of mortgages generated on Main Street without having any recourse to the banks and mortgages companies who knowingly granted mortgages without to borrowers who could never repay those loans. This was compounded by granting loas way in excess of collateral value such as when Fannie Mae had to buy a fraudulent loan of $103,000 on a shack that Marvene (a woman on welfare and food stamps) purchased for $3,000.
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Barney's Rubble --- http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
 

"Federal Tax Crimes, 2013," by John A. Townsend, SSRN, February 5, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212771

Abstract:     
This is the 2013 01 edition of the Federal Tax Crimes book that I started many years ago for use in a Tax Fraud and Money Laundering course at the University of Houston Law School. With some colleagues, we substantially revised that earlier version into a separately targeted book, titled Tax Crimes published by LEXIS-NEXIS. The full title of the LEXIS-NEXIS book is John Townsend, Larry Campagna, Steve Johnson and Scott Schumacher, Tax Crimes (LEXIS-NEXIS Graduate Tax Series 2008).

This pdf text offered here is a self-published version of my original text that I have kept up since publication of the LEXIS-NEXIS book. The LEXIS-NEXIS book is more suitable for students in a classroom setting and is targeted specifically for graduate tax students. This pdf book I make available here is not suitable for students in a class setting, but is more suitable for lawyers in practice, covering far more topics and with far more detail and footnotes that may be helpful to the busy practitioner. It cannot be used fruitfully for the target audience of the LEXIS-NEXIS book.

"How Pervasive is Corporate Fraud," by I. J. Alexander Dyck, Adair Morse, and Luigi Zingales, SSRN, February 22, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222608

 Abstract:
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.

Number of Pages in PDF File: 56

Keywords: corporate fraud, governance, detection

Jensen Comment
The definition of "fraud" is subject to a lot of dispute.
For example, the controversial accounting of Repo 105 sales by Lehman Bros. that were 100% certain to be returned in a few weeks from former Lehman employees could be defined as fraudulent accounting and most certainly was defined as fraud by the Bank Examiner overseeing the subsequent bankruptcy. But auditors Ernst & Young vehemently denied that this was fraud and eventually prevailed in court due to a loophole in FAS 140. I question using the letter of the law as an excuse to deceive, but who am I to judge.

Detected frauds may only be the tip of the iceberg in the same way that the number of student and faculty cheating incidents detected and prosecuted by a university may only be the tip of icebergs.

Hence when the above article concludes that "detected" fraud costs investors 22% we really do not know how much undetected fraud adds to this cost.

Also the partitioning of losses may be somewhat arbitrary.
In the above example, we might conclude that, if the Repo accounting at Lehman was fraudulent, it was a nail in the coffin that carried Lehman to its demise. However, many non-fraudulent activities are millions of nails in that same coffin --- such as the financial decisions to buy real estate mortgages when not knowing that many of those investments would would be defaulted.

Whenever Government Hangs Up a Piñata, Organized Crime Usually Brings its Long Poles

"11 in Detroit Charged in Student-Loan Fraud, Inside Higher Ed, March 29, 2013

Federal authorities have charged 11 people in the Detroit area in four separate crime rings in which people applied for student loans for which they were not eligible, costing the government more than $1 million, The Detroit Free Press  reported. The schemes generally involved distance education providers where students need not be physically present in class. Those applying for the loans lacked either a high school diploma or a GED and thus were not eligible.

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

Labor Hoarding --- http://en.wikipedia.org/wiki/Underemployment

"Housing has been booming! Construction jobs haven’t. Here’s why," by Neil Irwin, The Washington Post, March 19, 2013 ---
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/19/housing-has-been-booming-construction-jobs-havent-heres-why/

. . .

Key to understanding the sluggish growth in construction jobs is a concept called “labor hoarding.” That’s what happens during a recession when companies don’t fire as many workers as the decline in business would seem to have justified. Firms don’t want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years. Kris Dawsey and Hui Shan at Goldman’s economics research group calculated that the economic value added per construction worker fell from $80,000 in 2006 to under $60,000 at the end of 2012. That is labor hoarding in a nutshell.

But because construction companies never fired as many workers as the collapse in their business would have justified, that means that over the last year, they haven’t needed to hire additional workers to keep up with the uptick in business.

Continued in article

Jensen Comment
I think an even bigger reason that a housing boom is disappointing for reducing unemployment is the way housing contractors outsource much of the construction work to skilled tradesmen who are self-employed and not included in the employment-unemployment data generated by the government ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

For example, such things as basement construction, plumbing, electrical wiring, bricklaying, siding, roofing, landscaping, swimming pool installation, etc. are outsourced mainly for reasons of not having to pay benefits to employees and unemployment insurance. The self-employed subcontractors often hire unskilled and unreported helpers in the underground market where no benefits like health care, Social Security, Unemployment Compensation, and Medicare payments must be paid.

In San Antonio, for example, hundreds and hundreds of workers, many undocumented, crowd selected street corners in south San Antonio waiting for subcontractors to pick them up for day work. Their self-employed bosses have the trade skills, but they need helpers who do not have to be so skilled. The one fringe benefit is that unskilled workers often learn tricks of the trade, like bricklaying, and eventually become their own self-employed subcontractors.

I replaced my roof twice in San Antonio with the same roofing company over a period of 24 years. My roofing contractor did not have a single employee on the books and did not go up on the roof himself after the day he estimated the price of each job. I never met any of his workers who could speak much, if any, English. However, some of them who worked for my contractor were regulars over the years who became quite skilled at roofing.  I was happy with their work even if I always hated having a flat roof next to enormous live oak trees, I grew very tired of having to rake and blow leaves from my roof in San Antonio. In what remains of my life I will never again own a house with a flat roof or swimming pool.

"5 Dumbest Things on Wall Street This Week: March 22, 2013, The Street ---
http://www.thestreet.com/story/11876599/1/5-dumbest-things-on-wall-street-this-week-march-22.html?kval=dontmiss

1 (To Bob Jensen Cyprus is beginning to sound like the mouse that roared)
By the time you finish this sentence the nation of Cyprus may be solvent or insolvent, in or out of the European Union or possibly even reborn as Vladimir Putin's private island getaway. The situation is still too fluid for us to predict.

2 (Auditors only stick with managements they don't trust if the clients are too big to lose)
Maxwell Storage, the energy storage device maker announced the resignation of its public accounting firm McGladrey LLP in an SEC filing Tuesday. In its farewell letter to Maxwell's audit committee, McGladrey confirmed "it could no longer rely on management's representations," nor the "information obtained directly from certain third parties." Maxwell added it will be forced to delay the reporting of its 2012 financials while it looks for an accountant to replace McGladrey. Shares of the company sank 14% to $6.40 on the news.

3 (As Bob Jensen understands it these tights are no problem doing yoga as long as you don't bend over)
Give us some credit Dumbest fans. Did you really think we would forget about the sheer madness this week at Lululemon (LULU)? The athletic-apparel purveyor announced Monday it was recalling shipments of women's yoga pants with an unacceptably high "level of sheerness" from its stores. And while Lulu says it plans to see the problem through, the company admitted the issue will indeed impact its bottom line. Shares of the company got pantsed on the news, dropping 3% to $64 on Tuesday.

4 (How could any megabanks survive without "flawed risk models?"
Ina Drew, the former head of the "London Whale" trading unit at JPMorgan Chase (JPM), blamed a "flawed" risk model and "deceptive" traders for the massive $6 billion loss at the bank in her prepared testimony last Friday before the Senate Permanent Subcommitee on Investigations. Drew resigned from her position of chief investment officer in May 2012 as a result of the scandal

5 (Since when is overstating revenue a big deal. Federal and state governments do it all the time with smoke and mirrors.)
Great Lakes Dredge & Dock revealed it overstated second-quarter revenue by $3.9 million and third-quarter revenue by $4.3 million. It also said it will review $5.6 million in questionable fourth-quarter sales.

Instructional Teaching Case for Accounting Teachers

The Brooks Brothers Tangle With the SEC
The company had four independent auditors over the course of this saga
David Brooks apparently made threatening remarks to certain of his company's independent auditors
"Of Hurricanes and Harness Racing:  The Accounting Fraud at DHB Industries, by Michael C. Knapp and Carol A. Knapp, Issues in Accounting Education, Vol. 28, No. 1, February 2013, pp. 131-152 ---
http://aaajournals.org/doi/full/10.2308/iace-50297

You can't make up a story like this.
Andrew Cohen, Senior Legal Analyst, CBS News

ABSTRACT:

This instructional case focuses on an accounting and financial reporting fraud involving DHB Industries, Inc., the nation's largest manufacturer of bullet-resistant vests. Three executives of this Securities and Exchange Commission (SEC) registrant, including its founder and CEO, masterminded a large-scale fraud that grossly misrepresented DHB's financial statements. The three executives colluded to conceal their misdeeds from the four accounting firms that served as the company's independent auditors over the course of the fraud. In late 2010, a federal jury convicted DHB's former CEO and COO of multiple counts of fraud and related charges. This case addresses a wide range of auditing issues raised by the DHB fraud, including the identification of fraud risk factors, auditing of related-party transactions, the impact of frequent auditor changes on audit quality, and the internal control reporting responsibilities of auditors.

. . .

Circus Trial

The criminal trial of David Brooks and his co-defendant Sandra Hatfield commenced in late January 2010. Brooks faced a 17-count federal indictment that included allegations of corporate fraud, insider trading, conspiracy, and obstruction of justice. Hatfield faced similar charges in the 16-count federal indictment filed against her.

Throughout the trial, jurors were pelted with an unrelenting stream of evidence that documented how Brooks had used “DHB as his personal piggy bank” (SEC 2007). Personal expenditures paid with corporate funds included purchases of luxury automobiles, expensive art, jewelry, designer clothing, and real estate. Court testimony revealed that the largest benefactor of Brooks' embezzlement scheme was his beloved harness racing operation. Brooks reportedly diverted nearly $15 million of DHB funds through TAP to help finance his expensive hobby.

Other testimony during the long criminal trial documented how Brooks had repeatedly lied to DHB's independent auditors to conceal his fraudulent scams. Schlegel's testimony laid out in minute detail the extreme lengths to which she, Brooks, and Hatfield had gone to mislead the auditors. The most elaborate hoaxes were required to conceal the large overstatements of inventory from the curious and persistent teams of auditors.

Throughout the eight-month trial, the presiding federal magistrate, Judge Joanna Seybert, faced the daunting task of maintaining a sense of civility and decorum in her Long Island courtroom. The first drama involved the revocation of David Brooks' bail. In January 2008, three months after his initial arrest, Brooks' attorneys secured his release on bail. Because Judge Seybert believed that Brooks posed a significant flight risk, she required him to post a $400 million bail bond that included cash and other collateral of nearly $50 million. The bail terms also required Brooks to retain a security firm at an estimated cost of $3,500 per day to monitor him around the clock. ABC News (2008) reported that Brooks' bail terms were more stringent than those imposed years earlier by a federal judge on the infamous mobster John Gotti.

Just as Brooks' trial was beginning, Judge Seybert revoked his bail and remanded him to jail because of two reports given to her by the FBI. An undercover video forwarded to the FBI by Scotland Yard detectives allegedly showed Jeffrey Brooks and one of his subordinates transferring millions of euros to a large safety deposit box in a London bank. The FBI was convinced that the funds belonged to David Brooks. The FBI also informed Judge Seybert that they had discovered evidence suggesting that Brooks had secretly transferred tens of millions of dollars to bank accounts in the tiny European nation of San Marino. Judge Seybert revoked Brooks' bail because the two incidents violated the conditions of his bail agreement that mandated that all of his financial assets be “frozen.”

Midway through the trial, Judge Seybert threatened to have David Brooks removed from the courtroom after he was discovered attempting to smuggle anxiety-suppression medication into his jail cell. The anti-anxiety pills were hidden in a ballpoint pen that had been placed at Brooks' desk during a break in the courtroom proceedings. Following this incident, Judge Seybert barred Jeffrey Brooks and one of David Brooks' close friends from the courtroom. Brooks' personal psychiatrist subsequently testified that the psychiatrist at the correctional facility where Brooks was being held had prescribed him an insufficient dosage of the anti-anxiety medication. Brooks reportedly needed larger than normal dosages of that medication to ward off the panic attacks that he frequently experienced.

Later in the trial, federal prosecutors revealed that several months earlier, David Brooks had allegedly asked a veterinarian who worked in his harness racing operation to obtain a medication administered to horses. If taken by a human, this medication would supposedly wipe out his or her memory. According to the veterinarian, Brooks hoped to somehow administer the medication to Dawn Schlegel, the prosecution's principal witness, prior to the beginning of his criminal trial. This revelation and Brooks' other antics during the trial caused Comedy Central's Stephen Colbert to name Brooks his “Alpha Dog of the Week” during the August 2, 2010, airing of the popular television program The Colbert Report.

Andrew Cohen, a senior legal analyst for CBS News who monitored Brooks' trial, observed that many of its details were so salacious that major publications, such as The New York Times, would not report them (Cohen 2010). One veteran reporter summarized some of the more outrageous events and testimony that took place during the trial:

It's not an everyday federal trial in which an FBI agent walks into the courtroom in the middle of a trial and seizes the contents of a defendant's wastebasket as part of a still ongoing investigation into whether Brooks tampered with the jury. Or in which the defense asserts that the payment of company money to prostitutes might be an acceptable technique to motivate employees. Or in which a defendant says he is entitled to have his company pay for the grave of his mother, camp tuition for his children, a $60,000 sculpture of a Wall Street bull, family trips to St. Barts and St. Tropez, or allegedly drains millions of dollars off through a shell company to pay for the upkeep of harness stables. (Cohen 2010)

After spending two months studying the massive amount of evidence that prosecutors had presented to prove their allegations, a federal jury convicted Brooks on all 17 counts that had been filed against him. Sandra Hatfield, Brooks' former colleague and co-defendant, was found guilty on 14 of the 16 counts included in her federal indictment.

Epilogue

In April 2010, near the midpoint of David Brooks' criminal trial, Point Blank Solutions, the successor to DHB Industries, Inc., filed for protection from its creditors in U.S. Bankruptcy Court. To date, a reorganization plan for the company has not been approved by the federal judge presiding over the company's bankruptcy filing. Point Blank remains an operating entity and continues to claim that it is the world's leading manufacturer of body armor.

Following the completion of Brooks' trial, his attorneys immediately appealed his conviction. Among other arguments, the attorneys maintained that Brooks was incompetent and unable to contribute to his defense during much of the trial because of the anti-anxiety medication that he was taking. With his appeal still pending, Brooks has yet to be sentenced. Shortly after his criminal trial ended, Brooks pled guilty to tax evasion charges that had been pending against him for several years. Brooks is yet to stand trial on contempt charges filed against him as a result of his behavior during his criminal trial.

In February 2011, the SEC filed a civil complaint against three former members of DHB's audit committee. The federal agency charged the three individuals with being “willfully blind to numerous red flags signaling accounting fraud, reporting violations, and misappropriation at DHB” (SEC 2011). The civil complaint went on to allege that the three former audit committee members “merely rubber-stamped the decisions of DHB's senior management while making substantial sums from sales of DHB's securities” (SEC 2011).

 

QUESTIONS

1. Exhibits 1 and 4 present DHB's original 2003–2004 balance sheets and income statements and the restated balance sheets and income statements for those two years, respectively. Review the original and restated financial statements for 2004 and identify the “material” differences between them. (Note: You are not required to identify the sources of these differences.) Defend your choices.
2. Identify the fraud risk factors posed by DHB for its independent auditors. Which of these factors, in your opinion, should have been of primary concern to those auditors?
3. During the 2004 DHB audit, the company's independent auditors had considerable difficulty obtaining reliable audit evidence regarding the $7 million of obsolete vest components that allegedly had been destroyed by a hurricane. What responsibility do auditors have when the client cannot provide the evidence they need to complete one or more audit tests or procedures?
4. What responsibility, if any, do auditors have to search for related-party transactions? If auditors discover that a client has engaged in related-party transactions, what audit procedures should be applied to them?
5. Compare and contrast the internal control reporting responsibilities of the management and independent auditors of public companies.
6. What potential consequences do frequent changes in auditors have for the quality of a given entity's independent audits? Identify professional standards or other rules and regulations that are intended to discourage auditor changes or provide disclosure of the circumstances surrounding them.
7. David Brooks apparently made threatening remarks to certain of his company's independent auditors. What actions should auditors take when they are the target of hostile statements or actions by client executives or employees?
8. Does the SEC have a responsibility to protect the investing public from self-interested corporate executives? Do professional auditing standards or other rules or regulations impose such a responsibility on independent auditors?
9. The audit committee of DHB Industries was criticized for failing to carry out its oversight responsibilities. What are the primary responsibilities of a public company's audit committee?

March 26, 2013 message from Paul Caron

IRS Releases 'Dirty Dozen' Tax Scams

The IRS today released (IR-2013-33) its 2013 “dirty dozen” list of tax scams:

1. Identity Theft
2. Phishing
3. Return Preparer Fraud
4. Hiding Income Offshore
5. “Free Money” from the IRS & Tax Scams Involving Social Security
6. Impersonation of Charitable Organizations
7. False/Inflated Income and Expenses
8. False Form 1099 Refund Claims
9. Frivolous Arguments
10. Falsely Claiming Zero Wages
11. Disguised Corporate Ownership
12. Misuse of Trusts

Bob Jensen's threads on tax frauds ---
http://www.trinity.edu/rjensen/FraudReporting.htm#TaxScams

This type of celebrity bankruptcy that frequently happens to professional athletes should not be happening to the likes of Diane Warwick with assets of $25,500 and debts of more than $10,700,000.

"Singer Dionne Warwick files for bankruptcy," Reuters, March 26, 2013 ---
http://www.reuters.com/article/2013/03/26/entertainment-us-dionnewarwick-idUSBRE92P04J20130326

As Joe Lewis supposedly said:
I been poor
And I been rich
Rich is better

"SoCal Woman Sentenced to 13 Years in Federal Prison in Medicare Fraud Scheme Involving Durable Medical Equipment," FBI, March 28, 2013 ---
http://www.fbi.gov/losangeles/press-releases/2013/socal-woman-sentenced-to-13-years-in-federal-prison-in-medicare-fraud-scheme-involving-durable-medical-equipment

Teaching Case
From The Wall Street Journal Accounting Weekly Review on March 7, 2014

Citi Caught Sleeping in Mexico
by: John Carney
Feb 28, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Factoring, Foreign Subsidiaries, Fraud, Fraud Detection

SUMMARY: On Friday, 2/28/14, Citigroup disclosed stolen funds of $400million through factoring activities. Citi's Mexican subsidiary provided financing of accounts receivables to Mexican oil-services company Oceanografia. Oceanografia, Citgroup says, falsified invoices to Petroleos Mexicanos, or Pemex, the giant, state-owned oil company.

CLASSROOM APPLICATION: The article is useful in a financial reporting class covering factoring, in a systems or auditing class covering internal controls, or in an international business class.

QUESTIONS: 
1. (Advanced) What is receivables-financing, also called factoring?

2. (Introductory) How did Mexican oil-services company Oceanografia obtain false receivables- financing from Citigroup?

3. (Advanced) Why does the fact that Citigroup missed this fraud for what may have been a long period of time pose concern for the bank's internal control system, particularly in Latin America? In your answer, identify an internal control or audit test that should uncover the fraud committed by Oceanografia.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Citigroup Takes $400 Million Hit, Alleging Fraud in Mexico
by Saabira Chaudhuri, Amy Guthrie And Shayndi Raice
Mar 01, 2014
Page: B1

"Citi Caught Sleeping in Mexico," by John Carney, The Wall Street Journal, February 28, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304071004579411394085850728?mod=djem_jiewr_AC_domainid

As far as bank heists go, the one Citigroup C +0.59% disclosed Friday was big, about $400 million. Even though that might not move the needle much in terms of the bank's earnings, it raises questions for investors about its controls and ability to manage emerging-markets risks.

That's because the funds weren't carried away by a modern day Willie Sutton. They left the vault the way bank funds are supposed to, through loans.

These were made through a receivables-financing arrangement Citi's Mexican subsidiary had extended to Mexican oil-services company Oceanografia. Citigroup said invoices from state-owned Mexican oil giant Petróleos Mexicanos, or Pemex, which backed the loans, were falsified.

The after-tax hit to Citi's 2013 earnings of just $235 million was manageable, reducing net income to $13.7 billion from $13.9 billion. Still unclear is how many people were involved or how long it had been going on, although the large amount suggests it may have occurred over some time.

While this would be troublesome at any bank, it's a particular concern for Citi given much of its value lies in its international businesses. Growth in Latin America helped in the fourth quarter to offset a slowdown in Citi's mortgage business in North America.

About 8.6% of Citi's overall net income is generated in Mexico, Evercore estimates. And roughly 10% of Citi's consumer-loan book, or about $30 billion, is in that country.

All told, Citi had average assets of $180 billion in Latin America last year, equal to about 10% of assets in its core Citicorp business. And Latin America in 2013 generated the highest return on assets for the bank, at 1.85%, of any region.

The fraud is also unsettling because investors are already uneasy about emerging markets. Add to that Citi's long history of finding itself at the center of financial mishaps.

So while fraud can strike any bank, Citi has to prove to investors that this incident is an aberration and not a sign of some deeper malaise.

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

USA States With the Most Fraud Complaints ---
http://247wallst.com/special-report/2014/03/07/ten-states-with-the-most-fraud-complaints/?utm_source=247WallStDailyNewsletter&utm_medium=email&utm_content=MAR072014A&utm_campaign=DailyNewsletter

Jensen Comment
I can't remember where, but I read that about 80% if the Medicare frauds are conducted in Florida, especially among the Cuban immigrants who have become notoriously skilled at scamming Medicare.

"Registered Nurse Pleads Guilty in Connection with Detroit ($24 Million) Medicare Fraud Scheme," FBI, March 22, 2013 ---
http://www.fbi.gov/detroit/press-releases/2013/registered-nurse-pleads-guilty-in-connection-with-detroit-medicare-fraud-scheme

A registered nurse who fabricated nursing visit forms in connection with a $24 million home health care fraud conspiracy in Detroit pleaded guilty today for her role in the scheme, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; U.S. Attorney for the Eastern District of Michigan Barbara L. McQuade; Special Agent in Charge Robert D. Foley, III of the FBI’s Detroit Field Office; and Special Agent in Charge Lamont Pugh, III of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG), Chicago Regional Office.

Beverly Cooper, 59, of Detroit, pleaded guilty before U.S. District Judge Victoria A. Roberts in the Eastern District of Michigan to one count of conspiracy to commit health care fraud.

Cooper admitted that she and others conspired to defraud Medicare through home health care companies operating in the Detroit area, including Reliance Home Care LLC, First Choice Home Health Care Services Inc., and Accessible Home Care Inc. According to court documents, Cooper fabricated nursing visit notes and other documents to give Medicare the impression that she had provided home health care services, when, in fact, home health care was not needed and/or was not being provided. Cooper also admitted that while at these companies, she signed nursing visit notes for home visits made by other unlicensed individuals to give Medicare the false impression that she had provided home health care. Court documents reveal that Cooper understood that the documents she created would be used by these companies to submit claims to Medicare for home health services that were not medically necessary and/or not provided.

Court documents show that when home health companies were inspected by state regulatory agencies, Cooper and her co-conspirators participated in staged home health visits, posing as employees of these companies and treating fake patients, all to give inspectors the false impression that these companies’ operations were legitimate and that home health services were in fact being provided.

Court documents allege that between 2006 and May 2012, Cooper’s conduct caused Reliance, First Choice, and Accessible to submit claims to Medicare for services that were not medically necessary and/or not provided, causing Medicare to pay these companies approximately $5,403,703.

At sentencing, scheduled for July 23, 2013, Cooper faces a maximum penalty of 10 years in prison and a $250,000 fine.

This case is being prosecuted by Trial Attorney William G. Kanellis and Assistant Chief Gejaa Gobena of the Criminal Division’s Fraud Section. It was investigated by the FBI and HHS-OIG, and it was brought as part of the Medicare Fraud Strike Force, supervised by the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Eastern District of Michigan.

Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged more than 1,480 defendants who have collectively billed the Medicare program for more than $4.8 billion. In addition, HHS’s Centers for Medicare and Medicaid Services, working in conjunction with HHS-OIG, is taking steps to increase accountability and decrease the presence of fraudulent providers.

To learn more about the Health Care Fraud Prevention and Enforcement Action Team (HEAT), go to www.stopmedicarefraud.gov.

"How Monsanto outfoxed the Obama administration The inside story of how the government let one company squash biotech innovation, and dominate an entire industry," by Lina Khan, Salon, March 15, 2013 ---
http://www.salon.com/2013/03/15/how_did_monsanto_outfox_the_obama_administration/

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

From the CFO.com Morning Ledger on March 19, 2013

Ex-CEO of Calpers charged. The former head of Calpers was charged with concocting fraudulent documents to help a friend collect millions of dollars in fees from Apollo Global Management. The grand jury indictment of Federico R. Buenrostro Jr., who was chief executive of the Calpers until 2008, and his friend, Alfred J. Villalobos, are the first criminal charges in a “pay-to-play” case involving the $257 billion retirement system, the WSJ reports. The indictment alleges that Messrs. Buenrostro and Villalobos fabricated letters in 2008 that duped Apollo into paying $14 million in fees to Mr. Villalobos’s firm.

"Former California Public Employee System CEO and Former Placement Agent Indicted for Conspiracy and Fraud," FBI, March 18, 2013 --- Click Here
http://www.fbi.gov/sanfrancisco/press-releases/2013/former-california-public-employee-system-ceo-and-former-placement-agent-indicted-for-conspiracy-and-fraud

SAN FRANCISCO—A federal grand jury in San Francisco indicted Alfred J. Villalobos, of Reno, Nevada, and Federico R. Buenrostro, Jr., aka Fred Buenrostro, of Sacramento, California, on charges of conspiracy to defraud the United States, engaging in a false scheme against the United States, and conspiracy to commit mail fraud and wire fraud, U.S. Attorney Melinda Haag announced. Mr. Buenrostro was also charged in the same indictment with making a false statement to the United States and obstruction of justice.

According to the indictment, Mr. Villalobos, 69 and Mr. Buenrostro, 64, conspired to create and transmit fraudulent documents in connection with a $3 billion investment by the California Public Employee Retirement System (CalPERS) into funds managed by Apollo Global Management, a private equity firm based in New York City.

ARVCO Capital Research LLC, a financial services firm founded and managed by Mr. Villalobos, allegedly acted as a placement agent in helping Apollo to secure these investments by CalPERS. In each instance, Apollo required ARVCO to obtain an investor disclosure letter from CalPERS prior to paying ARVCO any fees for its efforts in securing CalPERS’ investments into Apollo-managed funds, citing, among other reasons, Apollo’s obligations under the securities laws.

After CalPERS’ legal and investment offices declined to sign a certain investor disclosure letter documenting ARVCO’s legal relationship with Apollo, Mr. Villalobos and Mr. Buenrostro allegedly conspired to create a series of fraudulent investor disclosure letters that were transmitted to Apollo. Apollo paid ARVCO a total of approximately $14 million dollars in fees after receiving the fraudulent letters.

ARVCO transmitted the last fraudulent investor disclosure letter in June 2008, a few weeks before Mr. Buenrostro retired from CalPERS. On July 1, 2008, Mr. Villalobos hired Mr. Buenrostro to work for ARVCO. When civil and later criminal investigations were opened into the operations of ARVCO and its role as a placement agent in connection with CalPERS’ investments in Apollo-managed funds, both defendants made false statements to and concealed information from the SEC, the USPIS, and the FBI about the authenticity of the investor disclosure letters in order to defeat and obstruct the lawful functions of those agencies.

Mr. Villalobos and Mr. Buenrostro made their initial appearance in federal court in San Francisco on March 18, 2013, and are currently out on bond. Mr. Buenrostro’s next scheduled appearance is Monday, March 25, 2013, at 9:30 a.m. for identification of counsel and review of the terms of his bond. Mr. Villalobos’ next scheduled appearance is April 9, 2013, at 9:30 a.m. for review of the terms of his bond. Both defendants are scheduled to appear before in district court on May 8, 2013, at 2:00 p.m. before Judge Breyer.

The maximum statutory penalty for conspiracy to commit mail fraud and wire fraud is 20 years in prison; $250,000 fine or twice the amount of gain or loss, whichever is greater; three years of supervised release; and a $100 special assessment. The maximum penalty for each count of conspiracy to defraud the United States, false scheme against the United States, false statement to the United States, and obstruction of justice is five years in prison; $250,000 fine or twice the amount of gain or loss, whichever is greater; three years of supervised release; and a $100 special assessment. Restitution may also be ordered as to each of the five counts. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines a the federal statute governing the imposition of a sentence.

Timothy J. Lucey is the Assistant U.S. Attorney who is prosecuting the case with the assistance of Laurie Worthen and Maryam Beros. The prosecution is the result of a two-and-a half-year investigation by the U.S. Postal Inspection Service and FBI, with substantial assistance from the Los Angeles Regional Office of the Securities and Exchange Commission as well as the U.S. Secret Service.

"Check Fraud Persists; Card Fraud Growing: Finance departments say check fraud was the most prevalent kind of payment fraud in 2012. But attacks on corporate cards and electronic forms are rising, too," by Vincent Ryan, CFO.com, March 19, 2013 ---
http://www3.cfo.com/article/2013/3/cash-management_payments-fraud-check-corporate-card-purchasing-ach-positive-pay-afp

"New Report Shows Changing Fraud Environment," by Curtis C. Verschoor, AccountingWeb, March 18, 2013 ---
http://www.accountingweb.com/article/new-report-shows-changing-fraud-environment/221374

"Former Manager of Virginia Beach Mortgage Brokerage Firm Pleads Guilty to Fraud," FBI, March 18, 2013
http://www.fbi.gov/norfolk/press-releases/2013/former-manager-of-virginia-beach-mortgage-brokerage-firm-pleads-guilty-to-fraud

"Jury convicts former Detroit mayor Kilpatrick on corruption charges," Fox News, March 11, 2013 ---
http://www.foxnews.com/us/2013/03/11/jury-convicts-former-detroit-mayor-kilpatrick-on-corruption-charges/?test=latestnews

Former Detroit Mayor Kwame Kilpatrick was convicted Monday of corruption charges, ensuring a return to prison for a man once among the nation's youngest big-city leaders.

Jurors convicted Kilpatrick of a raft of crimes, including a racketeering conspiracy charge. He was portrayed during a five-month trial as an unscrupulous politician who took bribes, rigged contracts and lived far beyond his means while in office until fall 2008.

Prosecutors said Kilpatrick ran a "private profit machine" out of Detroit's City Hall. The government presented evidence to show he got a share of the spoils after ensuring that Bobby Ferguson's excavating company was awarded millions in work from the water department.

Business owners said they were forced to hire Ferguson as a subcontractor or risk losing city contracts. Separately, fundraiser Emma Bell said she gave Kilpatrick more than $200,000 as his personal cut of political donations, pulling cash from her bra during private meetings. A high-ranking aide, Derrick Miller, told jurors that he often was the middle man, passing bribes from others.

Internal Revenue Service agents said Kilpatrick spent $840,000 beyond his mayoral salary.

Ferguson, Kilpatrick's pal, was also convicted of a racketeering conspiracy charge. The jury could not reach a verdict on the same charge for Kilpatrick's father, Bernard Kilpatrick, but convicted him of submitting a false tax return.

Kwame Kilpatrick, who now lives near Dallas, declined to testify. He has long denied any wrongdoing, and defense attorney James Thomas told jurors that his client often was showered with cash gifts from city workers and political supporters during holidays and birthdays.

The government said Kilpatrick abused the Civic Fund, a nonprofit fund he created to help distressed Detroit residents. There was evidence that it was used for yoga lessons, camps for his kids, golf clubs and travel.

Kilpatrick, 42, was elected in 2001 at age 31. He resigned in 2008 and pleaded guilty to obstruction of justice in a different scandal involving sexually explicit text messages and an extramarital affair with his chief of staff.

The Democrat spent 14 months in prison for violating probation in that case after a judge said he failed to report assets that could be put toward his $1 million restitution to Detroit.

Voters booted his mother, Carolyn Cheeks Kilpatrick, from Congress in 2010, partly because of a negative perception of her due to her son's troubles.

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

"Does Everyone Lie? Are we a Culture of Liars?" by accounting professor Steven Mintz, Ethics Sage, February 1, 2013 ---
http://www.ethicssage.com/2013/02/does-everyone-lie.html

From time to time, it is good to stop and assess one's progress in life. Such an evaluation helps people to figure out how they are doing and to make strategic decisions to take advantage of upcoming opportunities and to meet future challenges. When we do this for the accounting profession, we shake our heads because accounting shenanigans remain abundant and the seeds for further scandals are sown, watered, and fertilized.

The kernel of this problem is simple: company managers and their advisers are liars. Ok, not all of them, but so many are liars that the business community is in danger of falling on its own petard. Maybe this is because American society has a problem with the truth, as exemplified by our political, military, bureaucratic, sports, and entertainment leaders. We often hear the mantra, “the truth shall make you free,” but our leaders apparently desire to enslave others through their destructively self-serving, lying behaviors.

One obvious current example is the toxic assets still held by banks in the wake of the financial crisis of 2008. These investments have real values lower than their carrying values, but banks refuse to write them down, citing mush about earnings volatility and the adverse effects of mark-to-market accounting. They reject fair value accounting because it would reveal the precarious position of the banking industry. In short, banks are lying about asset values and really are not well capitalized.

Continued in article

Billionaire Ex-Convicts Should Lie Low
"Martha Stewart Takes the Stand to Save Her Company," by Jeff Macke, Yahoo, March 5, 2013 --- Click Here
http://finance.yahoo.com/blogs/breakout/martha-stewart-takes-stand-save-her-company-155500326.html;_ylt=Agbbzidr5xzzYViIg1xYfDOiuYdG;_ylu=X3oDMTNyNHEyaDR0BG1pdANGUCBUb3AgU3RvcnkgTGVmdARwa2cDMDNhNjdlMjItN2M3NS0zNDg3LTk4NmUtMzI2NGI5ZGY2ODJiBHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyAzM1MmZlYjAzLTg1YWYtMTFlMi1iZmZmLWEyNjkwMjhhMjg0YQ--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

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

So what's new?
UK judge who issued extreme ruling for Samsung against Apple hired by... Samsung! ---
http://www.fosspatents.com/2013/02/uk-judge-who-issued-extreme-ruling-for.html

Dilbert Cartoons on Market Manipulations
"Scott Adams Discovers Market Manipulation," by Barry Ritholtz, Ritholtz Blog, March 2013 ---
http://www.ritholtz.com/blog/2013/03/scott-adams-manipulators/

Regular readers know I am a fan of Scott Adams, creator of the comic Dilbert and occasional commentator on a variety of matters.

He has a somewhat odd blog post up, titled, Here Come the Market Manipulators. In it, he makes two interesting suggestions: The first is to decry “market manipulators,” who do what they do for fun and profit to the detriment of the rest of us. The second is to say that these manipulators are likely to cause “a 20% correction in 2013.”

Let’s quickly address both of these issues: First off, have a look at the frequency of 20% corrections in markets. According to Fidelity (citing research from Capital Research and Management Company), over the period encompassing 1900-2010, has seen the following corrections occur:

Corrections During 1900 – 2010

5%:  3 times per year

10%:  Once per year

20%:  Once every 3.5 years

Note that Fido does not specify which market, but given the dates we can assume it is the Dow Industrials. (I’ll check on that later).

Note that US market’s have not had a 20% correction since the lows in March 2009. I’ll pull up the relevant data in the office, but a prior corrective action of 19% is the closest we’ve come, followed by a ~16% and ~11%.

As to the manipulators of the market, I can only say: Dude, where have you been the past 100 years or so?

Yes, the market gets manipulated. Whether its tax cuts or interest rate cuts or federal spending or wars or QE or legislative rule changes to FASB or even the creation of IRAs and 401ks, manipulation abounds.

In terms of the larger investors who attract followers — I do not see the same evidence that Adams sees. Sure, the market is often driven by large investors. Yes, many of these people have others who follow them. We need only look at what Buffet, Soros, Dalio, Icahn, Ackman, Einhorn and others have done to see widely imitated stock trades. But that has shown itself to be a bad idea, and I doubt anyone is making much money attempting to do so. And, it hardly leads to the conclusion that any more than the usual manipulation is going on.

Will be have a 20% correction? I guarantee that eventually, we will. Indeed, we are even overdue for it, postponed as it is by the Fed’s manipulation.

But I have strong doubts it is going to be caused by a cabal manipulating markets for fun & profit. It will occur because that’s what markets do . . .

 

 

Previously:
Dilbert’s Unified Theory of Everything Financial’  (October 15th, 2006)

7 Suggestions for Scott Adams (November 27th, 2007)

Don’t Follow Wealthy Investors, Part 14 (February 17th, 2008)

"What’s Wrong with the Financial Services Industry?" by Barry Ritholtz, Ritholtz Blog, February 21, 2013 ---
http://www.ritholtz.com/blog/2013/02/whats-wrong-with-the-financial-services-industry/

Jensen Comment
You can also see a Dilbert cartoon about making up data ---
http://www.trinity.edu/rjensen/Theory01.htm

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

HSBC --- http://en.wikipedia.org/wiki/HSBC

Jensen Question
Did KPMG shift its entire Fannie Mae auditing team to HSBC?

Question
What was the largest audit client lost by KPMG in the USA?

Answer
I did not research this, but the leading contender has to be when KPMG was fired from the Fannie Mae scandal in what was one of the largest earnings management frauds in history coupled with incompetent auditing of financial derivative financial instruments ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

From the CFO.com Morning Ledger on March 7, 2013

KPMG audit contract with HSBC at risk. KPMG could lose the biggest audit contract in Britain after HSBC decided to consider bringing in a fresh pair of eyes to vet its accounts, the FT reports. The bank said it would put its audit contract out to tender for the first time in more than two decades in the most striking sign yet that regulatory pressure is starting to break down the ties that bind many big companies to their auditor. The tender could give KPMG rival Ernst & Young an opportunity to pick up a big British bank as an audit client. HSBC said it wanted the winner of the tender to be in place by 2015.

"Gangster Bankers: Too Big to Jail:  How HSBC hooked up with drug traffickers and terrorists. And got away with it," by Matt Taibbi, Rolling Stone, February 14, 2013 ---
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

March 4, 2013 message from Roger Collins

From

http://www.bbc.co.uk/news/business-21653131 

Some quotes

"HSBC paid out $4.2bn (£2.8bn) last year to cover the cost of past wrongdoing. As well as $1.9bn in fines for money laundering, the bank also set aside another $2.3bn for mis-selling financial products in the UK. The figures came as HSBC reported rising underlying profitability and revenue in 2012, and an overall profit before tax of $20.6bn

Chief executive Stuart Gulliver's total remuneration for 2012 was some $7m, compared with $6.7m the year before. And after taking account of the deferral of pay this year and in more highly-remunerated years previously, Mr Gulliver actually received $14.1m in 2012, up from $10.6m in 2011.

The company's 16 top executives received an average of $4.9m each."

"During a conference call to present the results, Mr Gulliver told investors that the bank was not reconsidering whether to relocate its headquarters from London back to Hong Kong, in order to avoid a recently agreed worldwide cap on bonuses of all employees of banks based in the EU."

"HSBC's underlying profits - which ignore one-time accounting effects as well as the impact of changes in the bank's creditworthiness - rose 18%."

"The bank's results were heavily affected by a negative "fair value adjustment" to its own debt of $5.2bn in 2012, compared with a positive adjustment of $3.9bn the year before. The adjustment is an accounting requirement that takes account of the price at which HSBC could buy back its own debts from the markets. It has the perverse effect of flattering a bank's profits at a time when markets are more worried about its ability to repay its debts, and vice versa."

More in article.

Regards,
Roger Roger Collins
Associate Professor
OM1275 TRU School of Business & Economics

Jensen Question
Did KPMG shift its entire Fannie Mae auditing team to HSBC?

The Lawsuits are "Boundless"
"Free-Textbook Company Rewrites Its Content Following Publishers’ Lawsuit," by Jake New, Chronicle of Higher Education, March 8, 2013 --- Click Here
http://chronicle.com/blogs/wiredcampus/free-textbook-company-rewrites-its-content-following-publishers-lawsuit/42809?cid=wc&utm_source=wc&utm_medium=en

A free-textbook company that was sued last year by three major textbook publishers has now rewritten the content it was accused of stealing.

Pearson, Cengage Learning, and Macmillan Higher Education filed a joint complaint in March 2012 against the company, known as Boundless. The publishers asserted that the way Boundless creates its textbooks violates their copyrights. In a process called “alignment,” students select the traditional text they need, and Boundless pulls together open content to create free versions of the books.

The publishers say the resulting products too closely mirror the original texts, specifically the way the new books are organized. Matt Oppenheim, a lawyer representing the publishers, said Boundless was simply stealing the substance of his clients’ textbooks.

“They were stripping out the entirety of a book’s structure and organization, topic by topic, subtopic by subtopic, and using it to create a skeleton that they then told the world was a version of a publisher’s book,” he said.

The lawsuit, he said, would continue.

Ariel Diaz, chief executive of Boundless, said the rewritten versions were just part of a continuing process of improving the company’s products, and were not a response to the lawsuit. The company stands by the original versions of its textbooks and its defense, he said.

Continued in article

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

"Gangster Bankers: Too Big to Jail:  How HSBC hooked up with drug traffickers and terrorists. And got away with it," by Matt Taibbi, Rolling Stone, February 14, 2013 ---
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.

People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching­ sort-of crime, committed by geeks in ties, normally associated­ with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.

Daily Beast: HSBC Report Should Result in Prosecutions, Not Just Fines, Say Critics

For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. "They took every imaginable form of illegal and illicit business."

That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. "Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."

It was the dawn of a new era. In the years just after 9/11, even being breathed on by a suspected terrorist could land you in extralegal detention for the rest of your life. But now, when you're Too Big to Jail, you can cop to laundering terrorist cash and violating the Trading With the Enemy Act, and not only will you not be prosecuted for it, but the government will go out of its way to make sure you won't lose your license. Some on the Hill put it to me this way: OK, fine, no jail time, but they can't even pull their charter? Are you kidding?

But the Justice Department wasn't finished handing out Christmas goodies. A little over a week later, Breuer was back in front of the press, giving a cushy deal to another huge international firm, the Swiss bank UBS, which had just admitted to a key role in perhaps the biggest antitrust/price-fixing case in history, the so-called LIBOR scandal, a massive interest-rate­rigging conspiracy involving hundreds of trillions ("trillions," with a "t") of dollars in financial products. While two minor players did face charges, Breuer and the Justice Department worried aloud about global stability as they explained why no criminal charges were being filed against the parent company.

"Our goal here," Breuer said, "is not to destroy a major financial institution."

A reporter at the UBS presser pointed out to Breuer that UBS had already been busted in 2009 in a major tax-evasion case, and asked a sensible question. "This is a bank that has broken the law before," the reporter said. "So why not be tougher?"

"I don't know what tougher means," answered the assistant attorney general.

Also known as the Hong Kong and Shanghai Banking Corporation, HSBC has always been associated with drugs. Founded in 1865, HSBC became the major commercial bank in colonial China after the conclusion of the Second Opium War. If you're rusty in your history of Britain's various wars of Imperial Rape, the Second Opium War was the one where Britain and other European powers basically slaughtered lots of Chinese people until they agreed to legalize the dope trade (much like they had done in the First Opium War, which ended in 1842).

A century and a half later, it appears not much has changed. With its strong on-the-ground presence in many of the various ex-colonial territories in Asia and Africa, and its rich history of cross-cultural moral flexibility, HSBC has a very different international footprint than other Too Big to Fail banks like Wells Fargo or Bank of America. While the American banking behemoths mainly gorged themselves on the toxic residential-mortgage trade that caused the 2008 financial bubble, HSBC took a slightly different path, turning itself into the destination bank for domestic and international scoundrels of every possible persuasion.

Three-time losers doing life in California prisons for street felonies might be surprised to learn that the no-jail settlement Lanny Breuer worked out for HSBC was already the bank's third strike. In fact, as a mortifying 334-page report issued by the Senate Permanent Subcommittee on Investigations last summer made plain, HSBC ignored a truly awesome quantity of official warnings.

In April 2003, with 9/11 still fresh in the minds of American regulators, the Federal Reserve sent HSBC's American subsidiary a cease-and-desist­ letter, ordering it to clean up its act and make a better effort to keep criminals and terrorists from opening accounts at its bank. One of the bank's bigger customers, for instance, was Saudi Arabia's Al Rajhi bank, which had been linked by the CIA and other government agencies to terrorism. According to a document cited in a Senate report, one of the bank's founders, Sulaiman bin Abdul Aziz Al Rajhi, was among 20 early financiers of Al Qaeda, a member of what Osama bin Laden himself apparently called the "Golden Chain." In 2003, the CIA wrote a confidential report about the bank, describing Al Rajhi as a "conduit for extremist finance." In the report, details of which leaked to the public by 2007, the agency noted that Sulaiman Al Rajhi consciously worked to help Islamic "charities" hide their true nature, ordering the bank's board to "explore financial instruments that would allow the bank's charitable contributions to avoid official Saudi scrutiny." (The bank has denied any role in financing extremists.)

Continued in a long article

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

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

Definition of Screwed:
avg mkt return ~12%, avg mutual fund ret ~9%, average investor ret ~ 2.6%. Timing, selection, and costs destroy
Finance Professor Jim Mahar

"Romancing Alpha (α), Breaking Up with Beta (β)," by Barry Ritholtz, Ritholtz, February 15, 2013 --- |
http://www.ritholtz.com/blog/2013/02/alpha-beta/

Since it is a Friday (following Valentine’s Day), I want to step back from the usual market gyrations to discuss a broader topic: The pursuit of Alpha, where it goes wrong, and the actual cost in Beta.
 

For those of you unfamiliar with the Wall Street’s Greek nomenclature, a quick (and oversimplified) primer: When we refer to Beta (β), we are referencing a portfolio’s correlation to its benchmark returns, both directionally and in terms of magnitude.
 

We use a scale of 0-1. Let’s say your benchmark is the S&P500 — it has a β = 1. Something uncorrelated does what it does regardless of what the SPX does, and its Beta is = 0. We can also use negative numbers, so a Beta of minus 1 (-1) does the exact opposite of the benchmark.
 

Beta measures how closely your investments perform relative to your benchmark. If you were to do nothing else but buy that benchmark index (i.e., S&P500), you will have captured Beta (for these purposes, I am ignoring volatility).

The other Greek letter we want to mention is Alpha (α). Alpha is the risk-adjusted return of active management for any investment. The goal of active management is through a combination of stock/sector selection, market timing, hedging, leverage, etc. is to beat the market. This can be described as generating Alpha.

To oversimplify: Alpha is a measure of out-performance over Beta.

Why bring this up today?

Over the past few months, I have been looking at an inordinate number of portfolios and 401(k) plans that have all done pretty poorly. I am not referring to any one quarter of even year, but rather, over the long haul. There is an inherent selection bias built into this group — well performing portfolios don’t have owners considering switching asset managers. But even accounting for that bias, a hefty increase in the sheer number of reviews leads me to wonder about just how widespread the under-performance is.
 

One of the things that has become so obvious to me over the past few years is how unsuccessful various players in the markets have been in their pursuit of Alpha. We know that 80% or so of mutual fund managers underperform their benchmarks each year. We have seen Morningstar studies that show of the remaining 20%, factor in fees, and that number drops to 1%.
 

The overall performance of the highest compensated group of managers, the 2%+20% Hedge Fund community, has been similarly awful, as they have underperformed for a decade or more.

Continued in article

Bob Jensen's threads on how brokers and security analysts are rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

SEC Will Debut New Software for Discovering Accounting Anomalies
"SEC developing new fraud detection technology," by Dina ElBoghdady, The Washington Post, February 15, 2013 --- Click Here
http://www.washingtonpost.com/business/economy/sec-developing-new-fraud-detection-technology/2013/02/15/ffb5f686-771c-11e2-aa12-e6cf1d31106b_story.html

The Securities and Exchange Commission plans to launch computer software this year to spot accounting anomalies, including potential fraud, in the financial statements that companies file with the agency.

The software would scan a firm’s financial disclosures, assess risk factors and generate a score based on a model developed by the agency, Craig Lewis, the SEC’s chief economist, said in a recent speech. The score would be used to identify outliers within a peer group.

“It is a model that allows us to discern whether a registrant’s financial statements stick out from the pack,” said Lewis, who also heads the agency’s risk, strategy and financial innovation division.

The software is scheduled to be available in nine months.

The effort is the most recent sign of the agency’s commitment to beef up its technological prowess as it tries to better police Wall Street and avoid oversight lapses such as the ones that allowed Bernard Madoff’s Ponzi scheme to go undetected for years.

The SEC has acknowledged that it lags behind the industries it regulates when it comes to technology, in part because of a tight budget that is subject to the whims of Congress. While nearly all financial regulators operate on fees collected from the industries they oversee, the SEC’s funding is decided by lawmakers on a year-to-year basis. Uncertainty about the budget makes it difficult to commit to technology or upgrade it.

The SEC took that into account when it embarked on its most ambitious technological endeavor in recent history — a software package that will stream real-time trade data from the exchanges into the agency’s headquarters. Rather than build the technology from scratch at great expense, the agency purchased it from a New Jersey firm called Tradeworx. The project, called Market Information Data Analytics, or MIDAS, is in the final testing phases.

The new software is based on a model that the SEC has used to evaluate hedge fund returns and identify fraud, mostly by looking for performance that was inconsistent with a fund’s investment strategy. The agency has brought seven cases based on information culled from that project since 2011.

“This success has only fed our ambition for what we can do with sophisticated data-driven monitoring programs,” Lewis said. The goal is to make use of the “veritable treasure trove of information” that the SEC regularly receives from companies.

The new software would focus on accounting anomalies.

Under the 2002 Sarbanes-Oxley law, the SEC must examine the financial filings from public companies every three years. But only recently have all companies been required to file those forms in a digital format with computer-readable tags that make it easy to search for and compare items of data, either for a single firm over time or across companies.

The new software would search for unusual accounting by looking at various risk factors such as frequent changes in auditors or delays in the release of earnings. But it would not be used solely to detect fraud. It could also pinpoint areas in which companies can improve the quality of their financial disclosures, Lewis said.

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

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

"CREDIT RATING AGENCIES: USELESS TO INVESTORS," by Anthony H. Catanch Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, June 6, 2011 --- http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/113

The Advantage of a Shredded Paper Trail
From the CFO Morning Ledger Newsletter on February 11, 2012

S&P left paper trail, but not Moody’s. The reason the DOJ may be going after Standard & Poor’s and not rival Moody’s may be because S&P left a paper trail and Moody’s didn’t. Former Moody’s employees tell the WSJ that Moody’s took careful steps to avoid creating a trove of potentially embarrassing employee messages like those that came back to haunt S&P in the U.S.’s lawsuit. Moody’s analysts had limited access to instant-message programs and were directed by executives to discuss sensitive matters face to face. The crackdown on communications came after a 2005 investigation by then-New York Attorney General Eliot Spitzer into Moody’s ratings on some mortgage-backed deals.

Bob Jensen's threads on the credit rating agency scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Credit Rating Firms --- http://en.wikipedia.org/wiki/Credit_rating_firms
Credit Rating Firms were rotten to the core --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

In 2008 it became evident that credit rating firms were giving AAA ratings to bonds that they knew were worthless, especially CDO bonds of their big Wall Street clients like Bear Stearns, Merrill Lynch, Lehman Bros., JP Morgan, Goldman, etc. ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

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

"CREDIT RATING AGENCIES: USELESS TO INVESTORS," by Anthony H. Catanch Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, June 6, 2011 --- http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/113

"DOJ vs. Rating Firms,"  by David Hall, CFO.com Morning Ledger, February 5, 2013

The government is taking its get-tough-on-Wall-Street stance to the next level with the DOJ’s lawsuit against Standard & Poor’s. The suit alleges that S&P from September 2004 through October 2007 “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in” CDOs and securities backed by residential mortgages, the WSJ reports at the top of A1 today. The two sides have been discussing a possible settlement for months, but the penalties the DOJ was targeting – more than $1 billion – made S&P squeamish. The firm was also worried that if it admitted wrongdoing, as the DOJ wanted, that could leave it vulnerable to other lawsuits.

S&P and other rating firms have argued in the past that their opinions are protected by the First Amendment — and judges have thrown out dozens of suits based on that argument, the Journal says. This case will test that argument against the Justice Department’s view that the First Amendment wouldn’t protect a ratings firm if it defrauded investors by ignoring its own standards.

Neil Barofsky, the former inspector general for the Troubled Asset Relief Program, said the DOJ move looks like an effort to get “some measure of accountability” for the financial crisis, which was “something that’s been really lacking across the board.” And Jeffrey Manns, a law professor at George Washington University, tells Reuters that the suit sends a message to “the rating industry at large that the government is serious about holding rating agencies responsible, and that they must be much more careful.”

http://online.wsj.com/public/page/cfo-journal.html

Jensen Comment
The DOJ actions do not worry the credit rating firms nearly so much as the hundreds of billions of potential tort lawsuits awaiting in the wings, lawsuits by damaged investors who relied on those phony credit ratings.

The credit rating firms, in turn, will blame CPA audit firms who gave clean audit opinions on junk.

Bob Jensen's threads on the credit rating agency scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

Question
Is Apple's iWatch for real or a phony stock price "pump and dump" ploy?

"Dick Tracy Alert, The iWatch," by Accounting Professor Dennis Elam's Blog, February 12, 2013 ---
http://professorelam.typepad.com/my_weblog/2013/02/dick-tracy-alert-the-iwatch.html

"Who's Manipulating Apple Stock With This iWatch Story?" by Dan Lyons, ReadWriteWeb, February 11, 2013 ---
http://readwrite.com/2013/02/11/whos-manipulating-apple-stock-with-this-iwatch-story

That was the cry from Apple fanbloggers last month when the Wall Street Journal reported that Apple had reduced component orders, a possible sign of softening demand for Apple products. That story broke nine days before Apple was to report its earnings, and sent the stock reeling downward.

But if that was the case, then who’s manipulating Apple stock now, with this sudden barrage of “leaks” about the iWatch?

Does no one else think it’s kind of remarkable that this unreleased product suddenly starts showing up in dozens of blog posts and press stories? And that these leaks happened, coincidentally, right after Apple’s stock endured a brutal slide from just above $700 in September to a low of $435 in January?

The last stock plunge took place after Apple reported disappointing earnings for the holiday quarter, and ended up treading water in the $450 range. That was Jan. 28.

Note what happens next. On Feb. 5, the Wall Street Journal reports that after taking a beating on Wall Street, Apple has been “subtly increasing some of its PR,” doing things like sending reporters “more favorable third-party reports on the company.”

In other words: Apple wanted to get the stock back up, and so its flacks were reaching out to reporters and briefing them on background, trying to convince them that things at Apple were better than what Wall Street believed.

Anatomy Of A Pump

Meanwhile, just as Apple’s flacks have started working the phones, we start to hear drumbeats about a miraculous new product. Wow! What a coincidence.

And what is this product? Why, it's an amazing, life-changing, paradigm-shifting, stolen-from-the-future gorgeously designed product, a product that you've always wanted and needed though you never thought about it before, a product that will once again put Apple ahead of everyone else: The iWatch.

Bits and pieces about Apple doing a watch have been floating around since at least last year. But suddenly, in the past few weeks, just as Apple has started briefing reporters, this story starts heating up.

It begins with things like this post on Jan. 30 by MG Siegler of TechCrunch. Siegler, who basically operates as an unpaid Apple PR guy, says he’s getting a Pebble smartwatch, and then on goes for a couple thousand words about how huge this whole smartwatch thing could be and boy does he want one and man wouldn’t a smartwatch just change everything and wow, I bet Apple and Google are looking at this space, don’t you?

Then on Feb. 5 comes this even more incredibly overlong piece by Bruce Tognazzini, a former Apple interface designer, who suddenly, for no apparent reason, feels prompted to wax on for thousands and thousands of words about all the amazing things that Apple’s iWatch (he’s already given it a name and says it “will fill a gaping hole in the Apple ecosystem”) might do.

The Story Goes Mainstream

Then, on Sunday, the drumbeats turned into something more, when two major newspapers both ran iWatch stories.

One scoop came from Jessica Lessin at the Wall Street Journal, the same reporter who wrote about Apple doing more briefings with reporters. (Weird, right?) Another scoop came from Nick Bilton at the New York Times, whose story ran online on Sunday and then had a nice big spot on the front of Monday morning’s Times business section.

A big section-front story on a Monday morning in the New York Times! What fortuitous timing! You’d almost think it had been planned. Bilton’s story cited as sources “people familiar with the company’s explorations, who spoke on condition that they not be named because they are not allowed to publicly discuss unannounced products.” Wonder who that could be?

Continued in article

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

Question
How many recent fraudsters were just horsing around?

Hint:
Nothing can probably top horse breeder Rita Grundwell in Dixon Illionois
"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/

Now we have a former hot tempered NFL heavy hitter covered with Tax Court horse manure. Some of the players he hurt violently probably think this is sweet-smelling justice.

Answer
"Former NFL Tough Guy Bill Romanowski Gets Laid Out By Tax Court," by Tony Nitti, Forbes, February 20, 2013 --- Click Here
http://www.forbes.com/sites/anthonynitti/2013/02/20/former-nfl-pro-bowler-bill-romanowski-sacked-by-tax-court-yes-i-know-romanowski-played-defense-puns-are-hard/

During his 16-year NFL career, former 49ers/Eagles/Broncos/Raiders linebacker Bill Romanowski was no stranger to controversy. Whether he was breaking QB Kerry Collins’ jaw in a preseason game, spitting in the face of opposing wide receiver J.J. Stokes, or ending the career of a teammate with a punch to the eye during a training camp scuffle.

Romanowski had a habit of making news for all the wrong reasons; his propensity for poor decisions often overshadowing his consistently solid play.

It would appear Romanowski’s decision-making didn’t improve with retirement, because earlier today it was revealed that immediately after Romanowski stopped playing on Sundays, he got caught up in a tax shelter. As a result, the Tax Court denied $13 million worth of losses taken on the Romanowskis’ 2003 tax return from a purported horse-breeding business, holding the footballer liable for approximately $4.6 million in additional tax.

In 2003, Romanowski got hooked up with a Denver attorney who immediate began singing the praises of ClassicStar, a horse-breeding business. In short, the program involved leasing mares owned by ClassicStar, which in turn would provide boarding and care for the mares and breed the mares to stallions. Any foals produced from the breeding would belong to the Romanowskis.

In October 2003, an accountant of ClassicStar worked up an “NOL illustration,” indicating that in order to offset their taxable income from 1998 through 2002, the Romanowskis would need to generate a loss of $13,092,732 from their horse-breeding activity. Thus, it was decided that the Romanowskis would invest that amount in the program to produce foals.  (As an aside, let it be noted that basing an investment on the amount of loss necessary to wipe out previous tax liabilities, rather than a motivation for profits, will never be viewed favorably by the IRS.)

Soon after joining the program, things began to turn sour for the Romanowskis, and they were partly to blame. When they signed the mare lease agreement, the Romanowskis  had not negotiated or seen a list of the horse pairings they would receive for their breeding program. Rather, they relied on ClassicStar to pick the horse pairings they would receive.

This reliance on ClassicStar was clearly misplaced, because despite the fact that the Romanowskis were promised 68 pairings of thoroughbreds, the horses actually received were more Mr. Ed than Secretariat. In fact, only four of the 68 listed pairings were thoroughbred horses; the remaining pairings were quarter horses.

Even though over 90% of the horses on the schedule were not delivered as promised, the Romanowskis chose to continue with the program, explaining to the court that they had reached an oral agreement from ClassicStar under which it would substitute an unknown number of thoroughbred pairings in for the listed quarter horse pairings.

The Romanowskis received an income and expense summary for 2003 from ClassicStar which showed no income and total expenses of $13,092,732. The resulting loss offset their 2003 income, and net operating losses were carried back to 1998, 1999, 2000, 2001, and 2002, resulting in a federal tax refund of nearly $4 million.

The IRS denied the loss in full, arguing that the Romanowskis’ horse-breeding activity was not entered into for profit and was thus governed by the hobby-loss rules of Section 183.

As a reminder, if an activity constitutes a for-profit trade or business, expenses may generally be deducted in full under Section 162. To the contrary, if an activity is not entered into for profit, it is a hobby, and expenses can only be deducted to the extent of any income generated by the activity.

To help taxpayers and the IRS decide if an activity is entered into for profit or a hobby, the regulations under Section 183 (the so-called ”hobby loss rules”), provide  nine factors, which if answered in the affirmative, are indicative of a for-profit business.

1. The manner in which the taxpayer carries on the activity. Does he complete accurate books? Were records used to improve performance?

2. The expertise of the taxpayer or his advisers. Did the taxpayer study the activities business practices? Did he consult with experts?

3. The time and effort expended by the taxpayer in carrying on the activity. Does he devote much of his personal time and effort?

4. The expectation that the assets used in the activity may appreciate in value. Is the plan to generate profits through asset appreciation?

5. The success of the taxpayer in carrying on similar or dissimilar activities. Has he converted other activities from unprofitable to profitable?

6. The taxpayer’s history of income or losses with respect to the activity.  Has the taxpayer become profitable in a reasonable amount of time?

7. The amount of occasional profits. Even a single year of profits can be a strong indication that an activity is not a hobby.

8. The financial status of the taxpayer. Does the taxpayer have other income sources that are being offset by the losses of the activity?

9.  Does the activity lack elements of personal pleasure or recreation? If the activity has large personal elements it is indicative of a hobby.

In Romanowski, the Tax Court analyzed these factors and overwhelmingly concluded that the Romanowskis did not enter into the breeding arrangement with ClassicStar with the intent to make a profit. They Romanowskis kept no records; rather, they relied on ClassicStar to do everything. They neglected to fight for their bargained-for number of thoroughbreds, a clear indication, in the court’s eyes, that they were not carrying on the activity in a businesslike manner.

Continued in article

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

"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/

Jensen Comment
Since she will be in a Federal Club Fed she can't look forward to early parole. She also faces a number of state court trials that will heap pain on to misery.

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

.Was Ernst & Young a corporate spy?
From the CFO Morning Ledger newsletter on February 19, 2013

Express Scripts sues E&Y. Express Scripts has filed a lawsuit against Ernst & Young and a former employee for allegedly stealing at least 20,000 pages containing confidential information and trade secrets, the WSJ’s Jon Kamp and Michael Rapoport report. Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. The pharmacy-benefit company accused E&Y of taking “competitively sensitive cost and pricing information” and “highly proprietary” documents involving business and integration strategies, projections and performance metrics. E&Y confirmed there was a violation of company policies, and that the individual “at the center of these allegations”–who the Express Scripts lawsuit said was a Health Care IT Partner named Donald Gravlin–”is no longer with the firm.” But E&Y also said it will “vigorously contest the claims” in the lawsuit

Teaching Case from The Wall Street Journal Accounting Weekly Review on February 23, 2013

Express Scripts Sues Ernst & Young Alleging Document Theft
by: Jon Kamp and Michael Rapoport
Feb 19, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Auditing, Big Four Firms, Consulting, Ernst & Young, Litigation, Trade Secrets, Accounting

SUMMARY: Pharmacy-benefit giant Express Scripts Holding Co. has filed a lawsuit against accounting firm Ernst & Young LLP and a former employee for allegedly stealing at least 20,000 pages of data containing confidential information and trade secrets. St. Louis-based Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. The lawsuit seeks "substantial punitive damages," and to stop E&Y from using or disclosing the information at issue. E&Y confirmed there was a violation of company policies, and that the individual "at the center of these allegations is no longer with the firm." But E&Y also said it will "vigorously contest the claims" in the lawsuit. The accounting firm noted it "immediately took all necessary steps" to secure the data at issue once it became aware of the matter, and that it's not aware of any instance where the data was used inappropriately or transmitted to a third party. Express Scripts uses PricewaterhouseCoopers for auditing work and Deloitte for tax accounting.

CLASSROOM APPLICATION: This is an interesting peak into the Big 4 world. This case shows an accounting firm's potential for liability for employee actions. It also mentions that the client, Express Scripts, employs three Big 4 accounting firms for three different types of work provided by those firms: auditing, tax, and consulting.

QUESTIONS: 
1. (Introductory) What are the facts of this lawsuit? Who is the plaintiff and who are the defendants? What is the issue in the case?

2. (Advanced) What is a "Big Four" accounting firm? What firms are in the Big Four? What are all the various services offered by Big Four accounting firms? How are Big Four firms different from other accounting firms? How are they similar?

3. (Advanced) How can companies protect themselves from accountants and consultants stealing confidential information and using it for other purposes? In what ways can accountants and accounting firms be sanctioned for such behavior?

4. (Advanced) The article states that Express Scripts uses three different firms to do auditing work, tax, and consulting. Why would a company use different CPA firms for different tasks? On the other hand, why would a company use one firm for several tasks? With these factors in mind, how should firms market their array of services?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Express Scripts Sues Ernst & Young Alleging Document Theft," by Jon Kamp and Michael Rapoport, The Wall Street Journal, February 19, 2013 ---
http://professional.wsj.com/article/SB10001424127887324616604578306650614568108.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Pharmacy-benefit giant Express Scripts Holding Co. ESRX -1.14% has filed a lawsuit against accounting firm Ernst & Young LLP and a former employee for allegedly stealing at least 20,000 pages of data containing confidential information and trade secrets.

St. Louis-based Express Scripts hired E&Y to provide consulting services while combining its business with Medco Health Solutions. Express Scripts bought Medco last year to form the largest pharmacy-benefit manager by prescriptions handled.

These firms, known as PBMs, managed drug benefits for health plans and corporate clients, using their buying clout to secure rebates from drug manufacturers. Express Scripts said in the lawsuit that its investigation did not show E&Y's actions affecting any patient or protected health information.

“Express Scripts hired Ernst to provide consulting services in last year's Medco deal.”

But Express Scripts did accuse the big-four accounting giant of taking "competitively sensitive cost and pricing information" and "highly proprietary" documents involving business and integration strategies, projections and performance metrics.

Express Scripts didn't have a comment on the matter beyond the content of the court filing, which seeks "substantial punitive damages," and to stop E&Y from using or disclosing the information at issue. The lawsuit was filed Thursday in the Circuit Court in St. Louis County, Mo., and reviewed by Dow Jones Newswires.

E&Y in a statement Friday confirmed there was a violation of company policies, and that the individual "at the center of these allegations"--who the Express Scripts lawsuit said was a Health Care IT Partner named Donald Gravlin--"is no longer with the firm."

But E&Y also said it will "vigorously contest the claims" in the lawsuit. The accounting firm noted it "immediately took all necessary steps" to secure the data at issue once it became aware of the matter, and that it's not aware of any instance where the data was used inappropriately or transmitted to a third party.

According to Express Scripts' allegations, an investigation launched last August determined Mr. Gravlin was sending confidential information from another E&Y employee's Express Scripts email account to an outside email account. The company accused him of "sneaking into Express Scripts' headquarters and stealing confidential and proprietary information" for months.

The PBM also alleged that E&Y was motivated to facilitate this activity because it stood to gain from the confidential information, which could be used to grow and develop additional business both with Express Scripts and competitors.

Continued in article

Bob Jensen's threads on the legal entanglements of Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm

"Ex-Jenkens & Gilchrist Lawyer Gets 8 Years in Tax Case," by Patricia Hurtado, Bloomberg Businessweek, March 1, 2013 ---
http://www.businessweek.com/news/2013-03-01/ex-lawyer-donna-guerin-gets-8-year-sentence-in-tax-shelter-case#p1

Former Jenkens & Gilchrist lawyer Donna Guerin was sentenced to eight years in prison and ordered to pay $190 million for her role in what the U.S. called the largest criminal tax fraud in history.

Guerin, 52, pleaded guilty in September 2012 just as she was set to be retried with three other defendants for running a 10-year scheme that created $7 billion in fraudulent tax deductions, more than $1.5 billion in phony losses and $92 million in actual losses to the U.S. Treasury.

U.S. District Judge William Pauley in New York, who presided over the case, said that as both a lawyer and a certified public accountant, Guerin had violated her oaths to uphold the law by helping her clients avoid paying their taxes through shelters.

“It’s the modern-day equivalent of Hawthorne’s story of Midas,” Pauley said yesterday. “Everything she touched turned to gold with tragic consequences. Her fall has been Faustian.” Guerin was “the embodiment of the American dream, but then her lust for money turned her dream into a nightmare,” he said.

Pauley ordered Guerin to report to prison on May 14. The judge also directed her to pay $200,000 before she surrenders to U.S. prison authorities and said she must turn over 20 percent of her gross income after she’s released from prison. Guerin and her lawyer declined to comment after the hearing.

‘Breathtaking’ Conspiracy

“When an attorney violates her oath to uphold the law, she undermines our entire system of justice,” Pauley said. “This tax shelter fraud conspiracy was breathtaking in its scope and in the damage it caused our nation.”

Mark Rotert, Guerin’s lawyer, argued that his client’s culpability in the conspiracy was “relatively minor” and said she had merely followed others at her firm who were willing to “push the envelope” on an aggressive tax shelter strategy.

Her lawyers had sought something shorter than the 10-year term calculated by U.S. probation officials and said their client was merely a “junior” law partner when it came to implementing the tax shelters.

Pauley rejected his argument, saying Guerin hadn’t been satisfied earning hundreds of thousands of dollars as a partner and instead had earned millions that were generated through the tax-shelter scheme. Pauley said Guerin had been a “leader” and had even instructed young associates at her now-defunct law firm how to conduct a “hide the ball tax strategy.”

‘Willing Tools’

“Lawyers and accountants became willing tools for their ultra-wealthy clients to avoid their fair share of taxes. These professionals violated their oaths to line their pockets. Ms. Guerin played a central role, she was not a mindless automaton,” the judge said. “She became a criminal for two reasons: the lure of the money and because she believed that she was never going to be brought to justice.”

Guerin told the judge said her crimes had caused her to abandon efforts to adopt a child. She said she regretted relying on her superiors and not asking more questions or challenging the tax-fraud scheme.

“I am here as a defeated person,” she said. “I never wanted to be a famous attorney, nor an infamous one.”

Guerin was initially convicted by a federal jury in Manhattan in May 2011 with her three co-defendants. Those convictions were overturned after Pauley found that a juror had lied about her past, including that she was an alcoholic and a suspended attorney.

‘Significant’ Term

Assistant U.S. Attorneys Stanley Okula and Nanette Davis said in court papers that Guerin deserved a “significant” prison term of at least 10 years.

“This was a species or a subset of activity that was so flagrant and knowingly wrong, any first-year law student would know was wrong,” Okula told Pauley yesterday. He argued that Guerin had given tutorials to young associates at the firm, teaching them how to evade taxes.

Okula disputed Rotert’s claim that Guerin’s co-defendants had merely followed others at the firm.

Continued in article

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

"Manhattan U.S. Attorney Announces Agreement With Ernst & Young LLP To Pay $123 Million To Resolve Federal Tax Shelter Fraud Investigation," New York State's Attorney's Office, March 1, 2013 ---
http://www.justice.gov/usao/nys/pressreleases/March13/EYNPAPR.php

Bob Jensen's threads on the legal  troubles of Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm

"CEO in fraud case needs more than seven days prison: court," by Jonathan Stempel, Reuters, February 15, 2013 ---
http://www.reuters.com/article/2013/02/15/us-ceo-sentencing-decision-idUSBRE91E0W320130215

A former chief executive who pleaded guilty to wrongdoing in a scheme that ultimately helped drive his company into bankruptcy could have been sent to prison for 10 years. The trial judge thought seven days was fair.

Not long enough, a federal appeals court said on Friday.

The 6th U.S. Circuit Court of Appeals said Michael Peppel, the former chief executive of the audio-visual technology company MCSi Inc, must be resentenced for his 2010 guilty plea to charges of conspiracy to commit fraud, false certification of a financial report, and money laundering.

U.S. District Judge Sandra Beckwith in Cincinnati abused her discretion in sentencing Peppel to an "unreasonably low" week behind bars based almost solely on her belief that the defendant was "a remarkably good man," the appeals court said.

Prosecutors had charged Peppel in December 2006 over an alleged fraud they said had begun six years earlier, amid financial difficulties at his publicly traded, Dayton, Ohio-based company.

Peppel was accused of working with his chief financial officer to inflate results through sham transactions with a firm called Mercatum Ltd, and companies such as FedEx Corp (FDX.N) that were not implicated in wrongdoing. Prosecutors said he also sold $6.8 million of MCSi stock during this time.

By the end of 2003, MSCI was bankrupt, and a reported 1,300 people had lost their jobs.

Citing the need to punish Peppel and deter others, the government asked Beckwith at his October 2011 sentencing to impose a 97- to 121-month prison term. This was the length recommended, but not required, under federal guidelines.

But the judge said the five years since the indictment had been "punishing, literally and figuratively" for Peppel, who had begun working for an online pharmacy to support his five children. He also had a brother with multiple sclerosis.

"Michael's mistakes do not define him," Beckwith said. "I see it to be wasteful for the government to spend taxpayers' money to incarcerate someone that has the ability to create so much for this country and economy."

She also imposed a $5 million fine and the maximum three years of supervised release.

Circuit Judge Karen Nelson Moore, however, wrote for a unanimous three-judge appeals court panel that Beckwith was wrong to rely on "unremarkable aspects" of Peppel's life in imposing a "99.9975% reduction" to the recommended prison term.

"There is nothing to indicate that the support provided by Peppel to his family, friends, business associates, and community is in any way unique or more substantial than any other defendant who faces a custodial sentence," Moore wrote.

Beckwith was not immediately available for comment.

Ralph Kohnen, a lawyer for Peppel, on Friday said: "We expect that the judge will exercise the same common sense and fairness in imposing a similar sentence on remand."

Continued in article

Bob Jensen's threads on how White Collar Crime Pays Even if You Know You're Going to Get Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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

"FBI, IRS investigate account connected to Pittsburgh police chief's office," by Jonathan D. Silver and Liz Navratil, by Pittsburgh Post-Gazette, February 15, 2013 ---
http://www.post-gazette.com/stories/local/neighborhoods-city/fbi-irs-investigate-account-connected-to-pittsburgh-police-chiefs-office-675523/
Thank you Caleb Newquist for the heads up.

FBI, IRS investigate account connected to Pittsburgh police chief's office February 15, 2013 3:02 pm Larry Roberts/Post-Gazette file Pittsburgh Police Chief Nate Harper.

Pittsburgh Police Chief Nate Harper.

Click image to enlarge Share with others: 0 inShare Related Media:

FBI removes Pittsburgh police credit union files Feb. 13: FBI seizure of Pittsburgh police files linked to probe into use of funds

Investigators with both the FBI and IRS have been removing documents from the Greater Pittsburgh Police Federal Credit Union for the past week in connection with an account opened by the office of Pittsburgh police Chief Nate Harper, the president of the credit union's board of directors said this morning.

Frank Amity, a retired city homicide detective, said there have been multiple subpoenas served on credit union CEO Karen Janoski.

Ms. Janoski could not be reached for comment Thursday evening. This morning, a woman who appeared to be a credit union employee at the West End institution told a reporter that Ms. Janoski did not wish to be interviewed.

Mr. Amity said he has not seen the subpoenas.

"They're looking at an account that the chief's office opened up. What they're looking for, they don't tell us. There's just one account, as far as I know," Mr. Amity said. "It's opened by the chief's office, so I don't know what kind of an account they have there. It's not a personal account. There's other names on it."

Asked how he knew the account was connected to Chief Harper's office, Mr. Amity said, "Because it's opened by the people in the chief's office."

When asked about the FBI's visit to the credit union, Deputy police Chief Paul Donaldson said through spokeswoman Diane Richard, "I have no statement to make. It is our position that when a matter/incident is under investigation that no statement will come from the bureau."

Mr. Amity declined to say whether the account in question was active or closed, how much was in it, whose names are on it or who could withdraw money from it. He said he believes it was opened in the past five years. Mr. Amity said multiple people had access to the funds, which he characterized as "not a whole hell of a lot of money, I'll tell you that...It's not tens of thousands."

The 78-year-old financial institution on Chartiers Avenue in the city's Elliott neighborhood functions similarly to a bank with a clientele that includes active police officers.

A source familiar with the investigation told the Pittsburgh Post-Gazette that the visit by federal agents is connected to a subpoena served Monday on the City of Pittsburgh Law Department.

The law department arranged to have federal agents guided Tuesday around Pittsburgh police headquarters on the North Side, where the FBI removed boxes of documents from the bureau's special events and personnel and finance offices. Deputy Chief Paul Donaldson said he believes the FBI is investigating allegations of internal misappropriation of funds involving the police bureau's special events and personnel and finance offices.

Special events handles the coordination of officers' moonlighting. Private employers send the office checks typically made out to the police bureau or the city treasurer. The money includes payment for the officers, which is handled through their payroll department, and a surcharge known as a "cost recovery fee." That surcharge totaled nearly $800,000 last year. The checks are sent to the bureau's personnel and finance office. They are then supposed to be deposited in city accounts.

"We don't know anything. We complied with the subpoena, that's all. They've been in for about a week on and off. They're just giving us different subpoenas for different things," Mr. Amity said. "I don't know what the heck the account was used for."

Mr. Amity said there was a credit or debit card associated with the account.

Continued in article

Bob Jensen's threads on how White Collar Crime Pays Even if You Know You're Going to Get Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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

"Doubt Is Cast on Firms Hired to Help Banks," by Jessica Silver-Greenberg and Ben Protess, The New York Times, January 31, 2013 ---
http://dealbook.nytimes.com/2013/01/31/doubt-is-cast-on-firms-hired-to-help-banks/
Thank you Eliot Kamlet for the heads up.

Federal authorities are scrutinizing private consultants hired to clean up financial misdeeds like money laundering and foreclosure abuses, taking aim at an industry that is paid billions of dollars by the same banks it is expected to police.

The consultants operate with scant supervision and produce mixed results, according to government documents and interviews with prosecutors and regulators. In one case, the consulting firms enabled the wrongdoing. The deficiencies, officials say, can leave consumers vulnerable and allow tainted money to flow through the financial system.

“How can you be independent if you’re hired by the entity you’re reviewing?” Senator Jack Reed, Democrat of Rhode Island, who sits on the Senate Banking Committee, said.

The pitfalls were exposed last month when federal regulators halted a broad effort to help millions of homeowners in foreclosure. The regulators reached an $8.5 billion settlement with banks, scuttling a flawed foreclosure review run by eight consulting firms. In the end, borrowers hurt by shoddy practices are likely to receive less money than they deserve, regulators said.

On Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Elijah Cummings, Democrat of Maryland, announced that they would open an investigation into the foreclosure review, seeking “additional information about the scope of the harms found.”

Critics concede that regulators have little choice but to hire outsiders for certain responsibilities after they find problems at the banks. The government does not have the resources to ensure that banks follow the rules. Still, consultants like Deloitte & Touche and the Promontory Financial Group can add to regulators’ headaches, the government documents and interviews indicate. Some banks that work with consultants continue to run afoul of the law. At other times, consultants underestimate the extent of the misdeeds or facilitate them, preventing regulators from holding institutions accountable.

Now, regulators and lawmakers are rethinking their relationship with the consultants. Officials at the Federal Reserve, which oversees many large banks, are questioning the prudence of relying on consultants so heavily, said two people with direct knowledge of the matter.

When the Office of the Comptroller of the Currency penalized JPMorgan Chase last month for breakdowns in money-laundering controls, it imposed stricter requirements, ordering the bank to hire a consultant with “specialized experience” in money laundering and to ensure that the firm “not be subject to any conflict of interest.” In a separate action against the bank related to a $6 billion trading loss last year, the agency opted not to mandate an outside consultant at all.

Continued in article

Question
What is "force-placed" insurance?

"GSE Investigation Into Force-Placed Insurance (finally)," by Barry Ritholtz, March 26, 2013 ---
http://www.ritholtz.com/blog/2013/03/force-placed-insurance-investigated/

Fannie & Freddie have finally begun to investigate the self-dealing and often fraudulent practice of Force-Placed Insurance. Both the New York State Insurance Regulator and the Consumer Financial Protection Bureau have been way ahead of the GSEs on this.

For those of you who may be unfamiliar with Force-Placed Insurance, it is an optional bank insurance product that sometimes gets forcibly jammed down the throats of home owners and mortgage investors at grossly inflated prices. As Jeff Horowitz detailed in 2010 (Losses from Force-Placed Insurance Are Beginning to Rankle Investors), most of the fees, commissions and revenues from this “product” went straight back to the banks holding the related mortgage, typically to wholly owned subsidiaries.

It was an abusive practice, and in quite a few instances, the additional costs actually tipped homeowners into foreclosure.

Here’s the WSJ:

“The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called force-placed insurance . . .

Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a force-placed policy with one of their own choosing.”

The Consumer Financial Protection Bureau has issued new rules on this, but the real action seems to be the variety of civil suits from investors; additionally, New York State just reached a settlement with forced-placed insurer Assurant, including a $14 million penalty, and a long list of practice changes (after the jump). If it were up to me, I would have insisted on profit disgorgement and jail time for the CEO (But I am “unreasonable”).

Hopefully, this is the first of many . . .

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

"IRS Warns on ‘Dirty Dozen’ Tax Scams for 2012," by Laura Saunders, The Wall Street Journal, February 12, 2012 ---
http://blogs.wsj.com/totalreturn/2012/02/17/irs-warns-on-dirty-dozen-tax-scams-for-2012/?mod=google_news_blog

Every year during tax season the Internal Revenue Service releases a list of its least-favorite tax scams. “Scam artists will tempt people in-person, on-line and by email with misleading promises about lost refunds and free money. Don’t be fooled by these,” warns Commissioner Douglas Stives.

The list changes from year to year. Here’s what the IRS is warning about for this tax season. For more information, click here, or watch a video here.

1. Identity theft

“An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name may be the first tipoff the individual receives that he or she has been victimized.”

2. Phishing

“If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, report it by sending it to phishing@irs.gov.”

3. Tax-preparer fraud

“In 2012 every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.”

4. Hiding income offshore

“Since 2009, 30,000 individuals have come forward voluntarily to disclose [undeclared] foreign financial accounts. . . With new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly  more difficult.”

5. ‘Free money’ from the IRS and tax scams involving Social Security

“Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing at community churches around the country.”

6. False/inflated income and expenses

“Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions…. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.”

7. False Form 1099 refund claims

“In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.”

8. Frivolous arguments

“Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid.”

9. Falsely claiming zero wages

“Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a ‘corrected’ Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. ”

10. Abuse of charitable organizations and deductions

“The IRS is investigating schemes that involve the donation of non-cash assets – including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor.”

11. Disguised corporate ownership

“Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business…. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.”

12. Misuse of trusts

“IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.”

 

FTC Identity Theft Center --- http://www.ftc.gov/bcp/edu/microsites/idtheft/

Identity Theft Resource Center --- http://www.idtheftcenter.org/
Note the tab for State and Local Resources

IRS Identity Protection Specialized Unit at 800-908-4490

How Income Taxes Work (including history) --- http://money.howstuffworks.com/income-tax.htm

Why not start with the IRS? (The best government agency web site on the Internet) http://www.irs.gov/ 

IRS Site Map --- http://www.irs.gov/sitemap/index.html

FAQs and answers --- http://www.irs.gov/faqs/index.html

Taxpayer Advocate Service --- http://www.irs.gov/advocate/index.html

Forms and Publications, click on Forms and Publications

IRS Free File Options for Taxpayers Having Less Than $57,000 Adjusted Gross Income (AGI) ---
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=104

Free File Fillable Forms FAQs ---
http://www.irs.gov/efile/article/0,,id=226829,00.html

Visualizing Economics
Comparing Income, Corporate, Capital Gains Tax Rates: 1916-2011 and Other Graphics --- Click Here
http://visualizingeconomics.com/2012/01/24/comparing-tax-rates/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+VisualizingEconomics+%28Visualizing+Economics%29&utm_content=Google+Reader

Tax Foundation Facts & Figures (Free) ---
http://taxfoundation.org/files/ff2012.pdf

Bob Jensen's tax filing helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

"Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?" by Ben W. Heineman, Jr., Harvard Business Review Blog,  January 10, 2013 --- Click Here
http://blogs.hbr.org/cs/2013/01/scandals_plague_sectors_not_ju.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

The trouble with crony capitalism isn't capitalism. It's the cronies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#CronyCapitalism

Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

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

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

"Internal Audit At JPMorgan Chase: Not High Profile Enough Yet," by Francene McKenna, re:TheAuditors, January 31, 2013 ---
http://retheauditors.com/2013/01/31/internal-audit-at-jpmorgan-chase-not-high-profile-enough-yet/

Earlier this week I wrote a column at Forbes.com about the new Chief Auditor, or CAE, at JPMorgan Chase. Silly me, I thought after all that had happened at the bank last year – for example, billions in losses from the “whale” trade, investigations into Libor and AML illegal acts, multiple lawsuits including by the New York Attorney General for foreclosure fraud – it was time to take a close look at the function and maybe make some changes.

The “Task Force Report”, a bank internal investigation into the “whale” trade losses says the bank did shake things up.

The Firm has put in place a new CIO leadership team. Matthew Zames, who had served as co-Head of Fixed Income in the Investment Bank, replaced Ms. Drew as the Firm’s Chief Investment Officer. He occupied that role from May 14, 2012 through September 6, 2012. Mr. Zames is now the co-Chief Operating Officer of the Firm and oversees, among other things, both the CIO and Treasury functions. Craig Delany replaced Mr. Zames as Chief Investment Officer and currently reports to him. Other key appointments include Marie Nourie (CFO for CIO); Chetan Bhargiri (Chief Risk Officer for CIO, Treasury and Corporate); Brendan McGovern (CIO Global Controller, a position that had been open since January 2012); Diane Genova (General Counsel for CIO and General Counsel for Markets in the Corporate and Investment Bank); Pat Hurst (Chief Auditor); and Ellen Yormack (Senior Audit Manager).

I thought the bank had replaced their Chief Audit Executive. I asked two different JPM spokespersons, in writing over the course of five days including a weekend, about the change, including questions about the fate of Lauren Tyler, the current CAE. They did not correct my mis-impression nor provide any further information about Hurst or a comment on my story.

I published the story after getting no response – and no further information about Hurst’s qualifications to be Chief Auditor – from the two spokespersons. That got the bank’s attention finally and I had to make a quick correction. (It seems people instantly flooded Lauren Tyler with calls thinking she had stepped down. Testament to the power of the pen, and Forbes.com, I guess.)

(Correction: I pursued a comment from two JPM spokespersons since Friday, Jennifer Zuccarelli and Mark Kornblau. They did not correct my impression, based on the Task Force Report, that Pat Hurst got a promotion to overall Chief Auditor.  Joe Evangelisti, chief bank spokesman, has now informed me, after this was published, that Pat Hurst is General Auditor for the Corporate division only, not the whole bank. Lauren Tyler is still Chief Auditor of the whole bank. I apologize for the error.)

My first thought was that I’d been “punked” – deliberately allowed to print incorrect information by the bank so they could undermine my credibility with a correction. The alternative – that two senior corporate communications folks would not immediately know who the bank’s General Auditor was and spot my erroneous impression that a change had been made – was too incredible to imagine.

You be the judge. I corrected the column and although it looks a bit messy, I think the rest of the information there on the bank’s lack of information about the CAE and the internal audit function and as well as what its Audit Committee charter says about the board’s lack of authority over the CAE speaks volumes.

There’s also a good quote from IIA CEO Richard Chambers about how things should be.

Do a little experiment. See if you can easily find the name of the Chief Audit Executive for each of the systemically important US banks on the banks websites.  (No peeking at the annual report.)

I dare you.

That quick test should tell you how much work banks still need to do to put internal audit in its proper place, as well as comply with new Fed rules about its structure, role and responsibilities in large banks.

JP Morgan Chase’s Audit Committee Charter says it, “shall review and concur in the appointment, replacement, reassignment, or dismissal of the General Auditor.” It’s not apparent to whom JPMorgan Chase’s Chief Auditor reports. But it’s clear from the charter that the Audit Committee does not approve the hiring, firing or reassignment of a Chief Auditor but merely reviews and concurs. That doesn’t sound tight enough to me.

Read the rest at Forbes.com.

Update: JPMorgan Chase did replace its Chief Compliance Officer Martha Gallo and its Chief Risk Officer, John Hogan.  According to New York Times DealBook:

Continued in article

Bob Jensen's threads on professionalism and ethics in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm

"How Much Admission Misreporting?" by Scott Jaschik, Inside Higher Ed, January 28, 2013 ---
http://www.insidehighered.com/news/2013/01/28/bucknells-admission-raises-questions-about-how-many-colleges-are-reporting-false

 This month, responding to four instances in which colleges admitted to having provided false information for its rankings, U.S. News & World Report published an FAQ on the issue. One of the questions: "Do you believe that there are other schools that have misreported data to U.S. News but have not come forward?" The magazine's answer: "We have no reason to believe that other schools have misreported data — and we therefore have no reason to believe that the misreporting is widespread."

Less than three weeks later, another college -- Bucknell University -- came forward to admit that it had misreported SAT averages from 2006 through 2012, and ACT averages during some of those years.

The news from Bucknell left many admissions experts wondering whether there are larger lessons to be learned by colleges as report seems to follow report with regard to inaccurate information being submitted by colleges.

David Hawkins, director of public policy and research for the National Association for College Admission Counseling, said via e-mail that "these actions are the result and responsibility of both individuals and the institutions for which they work," but that there was also a broader context behind all of these incidents.

"The emphasis placed on an institution's 'selectivity,' particularly as defined by standardized test scores, has gone beyond the rational and become something of an obsession. NACAC believes it is time for all stakeholders, including institutions, rankings, bond rating companies, merit scholarships, boards of trustees, alumni, and many others, to reassess the emphasis that is placed on 'input' factors like standardized test scores, and focus on the value colleges add to students' postsecondary experiences once they are on campus, regardless of the supposed 'selectivity' of the campus."

Leaving Students Out of the Average

At Bucknell, the inaccurate data resulted from the college leaving some students' scores out of test averages. In a few cases, the omitted students had scores higher than those reported. But most of the excluded students had lower scores, so the result of leaving them out was to inflate Bucknell's averages. "[D]uring each of those seven years, the scores of 13 to 47 students were omitted from the SAT calculation, with the result being that our mean scores were reported to be 7 to 25 points higher than they actually were on the 1600-point scale," said a letter sent to the campus from John C. Bravman, the president. "During those seven years of misreported data, on average 32 students per year were omitted from the reports and our mean SAT scores were on average reported to be 16 points higher than they actually were."

The ACT scores were inaccurate only for some of those years, but for several of the years resulted in real averages one point lower than those reported.

Even though the inaccuracies were "relatively small," Bravman wrote that they were significant. Reporting false information "violated the trust of every student, faculty member, staff member and Bucknellian they reached. What matters is that important information conveyed on behalf of our university was inaccurate. On behalf of the entire university, I offer my sincerest apology to all Bucknellians for these violations of the integrity of Bucknell."

Bravman's letter said he was concerned that due to "national discussions about college admissions," some people "may reach the incorrect conclusion that the scores omitted were from some single cohort that people typically cite – such as student-athletes, students from underrepresented communities, children of substantial donors, legacies and so on. All such speculation would be in error. The students came from multiple cohorts, and of course the university will not disclose their identity."

The false data were discovered after Bill Conley, a new vice president for enrollment management, noted that the mean SAT score for incoming students this year was about 20 points below last year's reported average. He then investigated, and found the pattern of false reporting.

In an interview Saturday, Bravman said that he believed a single person had been responsible for the false data. SAT and ACT scores were reported to the institutional research office in aggregate form, he said. So the institutional research officials relied on those aggregate data and never had the raw data that might have raised questions.

Bravman said that he has had discussions -- which he described as unsatisfactory -- with the person who was responsible for the reporting, and whom Bravman declined to identify. Bravman said that this person denied trying to make the university's admissions process look better either for internal or external audiences, and never offered a real explanation for what had happened.

"I'm very frustrated," Bravman said of these discussions. He said that it appeared to him to be "ignorance at best" or "incompetence at worst" in recognizing the importance of reporting accurate data.

Data on the Bucknell website have been corrected, and U.S. News & World Report, which was given inaccurate data for rankings purposes, has been informed of the problem, and given correct information, Bravman said.

In 2012, Claremont McKenna College, Emory University and George Washington University all submitted false data to U.S. News about undergraduate admissions, as did Tulane University's business school with regard to M.B.A. admissions.

Explaining the Pattern

Many admissions experts say that they are no longer surprised by these reports. (Inside Higher Ed's survey of admissions directors last year found that 91 percent believed that some institutions besides those that had been identified at the time had reported false scores or other data.) But these officials say that they are concerned about the underlying causes of these incidents, and about the impact of these scandals on the public perception of college admissions.

One longtime senior official in admissions who asked not to be identified said that the false reporting flows from the false impression that very few students get into college, and that a college's quality relates to its competitiveness. "The fact is," he said, "that there is just as much competition among colleges for students as among students for colleges." But market share and prestige are "tied to selectivity," which just adds to the pressure to be selective. This admissions official said that he suspected "that the misreporting ... is less due to deliberate deception, and more to self-rationalizing why certain students or groups of students ought not be included in a profile."

He added, however, that "there is no question that internal and external pressures to attract more applicants, accept fewer of them, and enroll more with ever-increasing scores have contributed to the angst felt by college admissions deans."

Lloyd Thacker, executive director of the Education Conservancy and a longtime critic of rankings, said via e-mail that "as long as commercial rankings are considered as part of an institution's identity, there will be pressure on college personnel to falsify ranking data. An effective way to curb such unethical and harmful behavior is for presidents and trustees to stop supporting the ranking enterprise and start promoting more meaningful measurements of educational quality."

Jerome A. Lucido, executive director of the University of Southern California Center for Enrollment Research, Policy and Practice, said that it was important to remember that outright falsifying reports was "only one way to manipulate" the rankings, and that many others are used as well. "They can also be manipulated by recruiting students who will not be admitted, by deferring to future semesters students who were not admitted for fall, and by counting faculty as teaching resources who only teach nominally or tangentially," Lucido said.

While many say that all kinds of manipulation are just "the way the game is played," Lucido said that it was "long past time to provide truly accurate public information and to concentrate on indicators of our results rather than our inputs."

Tulane M.B.A. Program Becomes 'Unranked'

Robert Morse, who leads the rankings process at U.S. News, did not respond to e-mail messages seeking his reaction to the news about Bucknell. In the past, he has said that the magazine relies on colleges to provide accurate information. The magazine has also been responding to the reports of data fabrication on a case-by-case basis.

Continued in article

Bob Jensen's threads about ranking controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

 Are Herbalife's financial statements nutritious?

Grumpy Old Accountants
Tony promised he would notify the AECM about his new postings.
I think he's forgetting his promise.
the Grumpy Old Accountants Blog carries on in the style of Abe Briloff. For decades Abe grubbed around the details of financial statements to find violations of accounting standards, auditing standards, and reporting integrity in general. Tony is trying to carry on alone with this blog --- which is a huge job because it's not easy to pour over financial statements at a professional level.

"What Do Herbalife's Financials Tell Us?," Anthony H. Catanach Jr., Grumpy Old Accountants, January 30, 2013 ---
http://grumpyoldaccountants.com/blog/2013/1/30/what-do-herbalifes-financials-tell-us 

Once again I'm asking Tony to let us know when he posts a new tidbit on the GOA Blog.

"Three Accounting Frauds Most Chinese Companies Use To Cheat Foreign Investors," by Paul Gillis, China Money Podcast, February 5, 2013 ---
http://www.chinamoneypodcast.com/2013/02/05/paul-gillis-three-accounting-frauds-most-chinese-companies-use-to-cheat-foreign-investors

In this episode of China Money Podcast, guest Paul Gillis, professor of accounting at the Guanghua School of Management at Peking University in Beijing, discusses Caterpillar's $580 million write-down in its acquisition of Zhengzhou Siwei. Prof. Gillis explains the three most common accounting tactics Chinese companies use to cheat and defraud foreign investors, and what can foreign investors do to prevent themselves from being duped.

Listen to the full interview in the audio podcast, or read an excerpt.

Q: Caterpillar is taking a $580 million write-down on its acquisition of Chinese mining company, Zhengzhou Siwei, after discovering a "deliberate, multi-year, coordinated accounting misconduct."

Key background: 1, What Caterpillar bought for roughly $700 million was Hong Kong-listed ERA Mining Machinery, which is a shell company that owns Zhengzhou Siwei, a Henan province-based mining equipment maker. 2, Zhengzhou Siwei was absorbed by ERA through a reverse merger in 2010 and never went through a formal IPO process.

So Paul, can you use your imagination and picture what you think happened when Caterpillar's CFO told the CEO about this massive loss in their C-suit?

A: I imagine that was a pretty awkward situation. It's very embarrassing for anyone at Caterpillar to be involved in a deal like this. I'm sure there is a search for the guilty parties on the way.

Q: Here is what Caterpillar disclosed about how they found out about the accounting misconduct:

"Caterpillar first became concerned about…discrepancies…in November 2012 between the inventory recorded in Siwei’s accounting records and the company's actual physical inventory…Caterpillar promptly launched a comprehensive review and investigation (that) identified inappropriate accounting practices involving improper cost allocation that resulted in overstated profit. The review further identified improper revenue recognition practices involving early and, at times unsupported, revenue recognition."

From the above statement, what accounting fraud can you infer that Siwei has done?

A: The first thing they pointed to are problems with inventory. After counting the inventory in Siwei's factories, Caterpillar discovered Siwei didn't have as much inventory as recorded on their books. That means Siwei was capitalizing these costs and carrying it as inventory costs, as supposed to expensing it in the current period, which could lead to their profits significantly lower.

The more serious allegations in my mind are revenues being recognized too early or inappropriately. So some sales were recorded before they were actually completed. But this is a very common practice in China.

Western accounting standards are very detailed about when you can recognize revenue. For example, you must have signed contracts; you can't have rights of return; or obligations to do more things in the future. But in China, businesses are done more on relationships. The contracts are less important than the handshake. So I would not be surprised if management at Siwei didn't think they were involved in any kind of fraud relating to revenue recognition.

Q: But it does sound like that Caterpillar didn't check out Siwei's books and didn't examine physical inventories. Do you think it's likely?

A: It's hard to know. Caterpillar did say that they hired two Big Four accounting firms: Ernest & Young and Deloitte Touche Tohmatsu. It is unusual to hire two Big Four firms. But the due diligence is a customized process. Did the accounting firms miss what were right there in their face? Or did Caterpillar tell them not to look at certain things? We don't know.

The other thing is that you need to have access to get to the records and the people to conduct due diligence. But in some situations, you might not get as much as you'd like.

Q: One obvious red flag here seemed to be the fact that Siwei become part of ERA through a reverse merger. Wouldn't that already alarm auditors and buyers?

A: Everyone should have learned lessons on reverse mergers. The lack of scrutiny of reverse mergers deals is very dangerous. The number of accounting fraud associated with reverse mergers is huge. Most are U.S.-listed Chinese companies. Caterpillar is the first case involving a multinational strategic buyer and a Hong Kong-listed Chinese company through reverse merger.

The U.S. stock exchanges have effectively stopped reverse mergers by new rules that require reverse merger targets to be "seasoned" before listing. Hong Kong and other markets should probably look at potentially implementing the same rule.

Q: Who are legally liable relating to Caterpillar's massive losses?

A: Let me first give some clarifications about this goodwill write-down. Caterpillar paid significantly more than Siwei's book value. That excess was put into goodwill. Every year, a company has to determine whether it can continue to justify carrying that goodwill balance on the balance sheet. In this case, after learning all the accounting practices at Siwei, Caterpillar decided that Siwei will not be as profitable in the future as originally anticipated. What this means is essentially Caterpillar paid too much for Siwei.

When you pay too much for a company, who's at fault? Clearly, there will be a lot of focus on the management of Siwei. I understand that some of the purchase price is to be paid in notes. Surely Caterpillar's lawyers are looking at whether or not to pay those additional balances. The auditors of Caterpillar and the accounting firms that did the due diligence will also be looked at. Lastly, shareholders will also look at the management and board of Caterpillar. I think a lot of questions will be answered in the next couple of years.

Q: Do you expect anyone will be arrested and face criminal charges?

A: Not in China. I'm not aware of any criminal charges on an accounting fraud in China. Chinese government does not seem to consider accounting frauds as crimes in China.

Q: Looking at the broader Chinese accounting landscape, what are some of the most commonly used tactics by Chinese companies to cheat investors?

A: The most common is probably inappropriate revenue recognition or fake revenue. That's the simplest way to increase profits.

Relating to that are ways to fake cash balances. Once you record a sale, you need to find some place for it on the asset of the balance sheet. If you put it on receivables, the auditors will ask troublesome questions. So many companies record fake cash and convince banks to lie to auditors.

For example, a Chinese company created a fake online banking website to cheat auditors last year. The auditors found that an interest rate on the bank statement did not match Chinese Central Bank's official rates. The company promptly replied that it was a bank error and it was fixed in half an hour. The auditors became suspicious and clicked on some other buttons of the website, and found out the whole website is a fake.

Another example is putting deposits with contract manufacturers. If you use contract manufacturers, you usually have to give them some funds up front. That's a very hard number to audit. In some cases last year, auditors have decided to resign after determining that they can't verify those numbers.

A third tactic is the use of Variable Interest Entity (VIE) structure. It's been prone to accounting fraud (in a similar way like reverse merger).

Q: Lastly, what should overseas investors do to prevent a repeat of Caterpillar's sad fate?

A: If a foreign company is buying a Chinese company, it needs to go through a due diligence process

Continued in article

Interest-Rate Swaps Scream "Buyer Beware"
The Financial Services Authority found that some U.K. banks misled corporate customers in the sales of interest-rate swaps, but the problem is not confined to one country.
by Vincent Ryan
CFO.com, February 1, 2013
http://www3.cfo.com/article/2013/2/credit_interest-rate-swaps-fsa-otc-overhedging-break-cost-cftc-sec

Jensen Comment
FAS 133 and IAS 39 generally assume that interest rate swaps have no front-end costs or coercion. That appears to be no longer the case. Banks have such a penchant for ruining good things.

Anti-Fraud Collaboration Launches Website with Access to Anti-Fraud Tools
Center for Audit Quality
January 24, 2013
News Release --- http://www.thecaq.org/newsroom/release_01242013.htm

Anti-Fraud Collaboration Site --- http://www.antifraudcollaboration.org/

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

There is a long history of questions about university sponsorship of credit and/or debit cards with alumni and students, sponsorships with kickbacks such as a percentage kickback on purchases

"Questions on Debit Cards," by Libby A. Nelson, Inside Higher Ed, February 1, 2013 ---
http://www.insidehighered.com/news/2013/02/01/cfpb-opens-wide-ranging-inquiry-campus-debit-cards

WASHINGTON -- The Consumer Financial Protection Bureau announced Thursday that it was beginning an inquiry into the arrangements between colleges, banks and debit card companies. The announcement is the latest indication that federal agencies and Congress are taking an increased interest in how debit cards are used to access federal financial aid.

The bureau is asking for input on a few separate topics: debit cards supplied by companies like Higher One, which give students the money left over from grants and loans after paying tuition; arrangements between colleges and banks that allow student identification cards to be used as debit cards; and college-affiliated bank accounts.

College business officers say those products are quite different from one another. Preloaded debit cards have caught on in recent years as a method of giving college students access to federal grants and loans for living expenses. While they have come under scrutiny for high fees, they are a way to give money to students without using paper checks, and do not require a bank account. Critics say students would be better off opening a bank account than relying on preloaded cards.

Higher One has dominated the debit card market for years, and has come in for much of the criticism for swipe fees, ATM fees and other charges that can chip away at students’ financial aid. As the cards have grown more popular, other banks, including Sallie Mae, have entered the market place.

Agreements between colleges and banks are more common at larger universities, unlike the debit cards, which are more popular at community colleges, said Anne Gross, vice president for regulatory affairs at the National Association of College and University Business Officers. Under the agreements, banks offer benefits to colleges, such as additional scholarship money. In exchange, the colleges offer students the option of using their ID cards as a debit card, encouraging them to use that bank for their checking accounts. 

The consumer protection agency appears concerned that those arrangements can stop students from shopping around for bank accounts that might offer a better deal. Past investigations, including one by New York Attorney General (now Governor) Andrew Cuomo in 2007, found that "preferred lender" arrangements between colleges and student lenders (until the conversion away from bank-based lending in 2010) sometimes led to deals that included benefits for colleges but weren't the best option for students.

Continued in article

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

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

"Peregrine Founder Hit With 50 Years ," by Jacob Bunge, The Wall Street Journal, January 31, 2013 --- Click Here
http://professional.wsj.com/article/SB10001424127887324610504578276021147076476.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj

CEDAR RAPIDS, Iowa—Russell Wasendorf Sr., was sentenced to the maximum 50 years in jail after admitting to orchestrating a fraud at his futures brokerage and misleading regulators for almost 20 years.

Mr. Wasendorf, 64 years old, pleaded guilty last September to the fraud at Peregrine Financial Group Inc. that federal prosecutors said had cost clients $215.5 million and masked a business that never was profitable. He also was ordered to pay the full amount of missing funds in restitution.

In court Thursday, Mr. Wasendorf sat hunched over a table, wearing a baggy orange hooded sweatshirt. He appeared gaunt, having lost more than 30 pounds during his seven months in jail, according to his pastor, Linda Livingston. [image] The Gazette/Associated Press

Assistant United States Attorney Peter Deegan after the sentencing.

Ms. Livingston told the court earlier that Mr. Wasendorf last week had been diagnosed with a tumor on his pancreas. She noted that his mother had died of pancreatic cancer.

In a brief statement to the court, Mr. Wasendorf said, "My guilt is such that I accept my sentence, no matter what it is." He said the personal fallout from the uncovering of his fraud was worse than any punishment the court could hand down.

"I have lost the love of my son, and I will never see my grandchildren again," Mr. Wasendorf said, his voice breaking. He added that he was "very sorry" for damage to investors, staff and the futures industry.

Russell Wasendorf Jr., who served as Peregrine's president and chief operating officer, said in a statement that the "poor choices" of his father have been "devastating." "It has shattered my family, ruined my reputation, fractured my marriage, separated me from my oldest son and close friends," the younger Mr. Wasendorf said.

Mr. Wasendorf Sr. falsified financial records provided to regulators, allowing him to dip into client funds to sustain his firm and underpin a luxurious lifestyle. Delivering Mr. Wasendorf's sentence, Judge Linda Reade lambasted his use of stolen money to live as a "big shot" in Peregrine's base of Cedar Falls, Iowa, hiring a "four-star chef" to run Peregrine's cafeteria, building an expansive house with a swimming pool and sinking investor money into ventures like an Italian restaurant—the staff of which he once flew to Italy for a vacation.

The scandal broke when Mr. Wasendorf was found unconscious in his car outside the firm's $20 million headquarters after a suicide attempt. He detailed his fraud in a note and signed confession, according to prosecutors.

While Mr. Wasendorf hasn't seen his son since July, he has been visited in jail by Nancy Paladino, with whom Mr. Wasendorf secretly eloped days before his suicide attempt. A lawyer for Ms. Paladino, who is now aiming to have the marriage annulled, said she had no comment.

Continued in article

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

"Armstrong Becomes ‘Madoff on a Bike’ as Cheating Shatters Lives," By Mason Levinson, Bloomberg, January 21, 2013 ---
http://www.bloomberg.com/news/2013-01-21/armstrong-becomes-madoff-on-a-bike-as-cheating-shatters-lives.html

Jensen Comment
Mason Levinson phoned me twice before writing this article. He did not, however, quote any of my comments. One point that I made was that there are many similarities between the Madoff's Ponzi fraud and the Lance Armstrong's doping fraud. There is, however, one major difference. Lance Armstrong could've easily stopped doping at any time. He might have no longer won his races, but he may have gained enough respect from insiders such that his previous frauds would've remained a secret to the world forever. It seems that insiders just got fed up with his continued doping combined with his mean control over protecting his secrets.

Bernie Madoff, like all Ponzi schemers, reached a point of no return. All Ponzi fraudsters reach a point of no return --- that point where quitting means getting caught and facing both public embarrassments and real penalties for earlier crimes ---
http://en.wikipedia.org/wiki/Ponzi

Another type of fraud that reaches a point of no return is collections kiting ---
http://en.wikipedia.org/wiki/Check_kiting

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

"CPA convicted for role in $40 million Ponzi scheme," WCNC.com, February 11, 2013 ---
http://www.wcnc.com/news/business/CPA-convicted-for-role-in-40-million-Ponzi-scheme--190747591.html

CHARLOTTE, N.C. (AP) -- An accountant has been convicted for his role in a $40 million Ponzi scheme that defrauded investors in North Carolina, Virginia and Ohio.

A federal jury in Charlotte convicted Jonathan D. Davey of Newark, Ohio, on four counts of investment fraud conspiracy and tax evasion. Prosecutors say Davey administered several hedge funds in the Black Diamond Ponzi scheme, soliciting more than $11 million from victims in the case.

The 48-year-old accountant, who was convicted Friday, is the 11th defendant convicted in the 2007 fraud, which prosecutors say deprived about 400 victims of more than $40 million. Prosecutors say Davey used a shell company in Belize to funnel money toward construction of his mansion in Ohio.

Davey faces a maximum sentence of 50 years in prison and $1 million in fines.

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

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

2012 Harvard Cheating Scandal --- http://en.wikipedia.org/wiki/2012_Harvard_cheating_scandal

"Dozens of students withdraw in Harvard cheating scandal." Reuters, February 1, 2013 ---
http://www.reuters.com/assets/print?aid=USBRE9101AF20130201

As many as 60 students have been forced to withdraw from Harvard University after cheating on a final exam last year in what has become the largest academic scandal to hit the Ivy League school in recent memory.

Michael Smith, Harvard's Dean of the Faculty of Arts and Sciences, sent an email on Friday saying that more than half of the students who faced the school's Administrative Board have been suspended for a time.

Roughly 125 undergraduates were involved in the scandal, which came to light at the end of the spring semester after a professor noticed similarities on a take-home exam that showed students worked together, even though they were instructed to work alone.

The school's student newspaper, The Harvard Crimson, has reported that the government class, Introduction to Congress, had 279 students enrolled.

"Somewhat more than half of the Administrative Board cases this past fall required a student to withdraw from the College for a period of time," Smith wrote. "Of the remaining cases, roughly half the students received disciplinary probation, while the balance ended in no disciplinary action."

The cases were resolved during the fall semester, which ended in December, Smith said. Suspensions depend on the student, but traditionally last two semesters and as much as four semesters.

In the last few months, the university has also worked to be clearer about the academic integrity it expects from students.

"While all the fall cases are complete, our work on academic integrity is far from done," Smith added.

"Half of students in Harvard cheating scandal required to withdraw from the college," by Katherin Landergan, Boston.com, February 1, 2013 ---
http://www.boston.com/yourcampus/news/harvard/2013/02/half_of_students_in_harvard_cheating_scandal_required_to_withdraw_from_the_college.html

In an apparent disclosure about the Harvard cheating scandal, a top university official said Friday that more than half of the Harvard students investigated by a college board have been ordered to withdraw from the school.

In an e-mail to the Harvard community, Dean of the Faculty of Arts and Sciences Michael D. Smith wrote that more than half of the students who were brought before the university's Administration Board this fall were required to withdraw from for a period of time.

Of the remaining cases, approximately half the students received disciplinary probation, while the rest of the cases were dismissed.

Smith's e-mail does not explicitly address the cheating scandal that implicated about 125 Harvard students. But a Harvard official confirmed Friday that the cases in the email solely referred to one course.

In August, Harvard disclosed the cheating scandal in a Spring 2012 class. It was widely reported to be "Government 1310: Introduction to Congress."

“Consistent with the Faculty’s rules and our obligations to our students, we do not report individual outcomes of Administrative Board cases, but only report aggregate statistics,” the e-mail said. "In that tradition, the College reports that somewhat more than half of the Administrative Board cases this past fall required a student to withdraw from the College for a period of time. Of the remaining cases, roughly half the students received disciplinary probation, while the balance ended in no disciplinary action.''

Smith wrote that the first set of cases were decided in late September, and the remainder were resolved in December.

The e-mail said that "The time span of the resolutions in this set had an undesirable interaction with our established schedule for tuition refunds. To create a greater amount of financial equity for all students who ultimately withdrew sometime in this period, we are treating, for the purpose of calculating tuition refunds, all these students as having received a requirement to withdraw on September 30, 2012."

In a statement released when the cheating scandal became public, Harvard president Drew Faust said that the allegations, “if proven, represent totally unacceptable behavior that betrays the trust upon which intellectual inquiry at Harvard depends. . . . There is work to be done to ensure that every student at Harvard understands and embraces the values that are fundamental to its community of scholars.”

As Harvard students returned to classes for the current semester, professsors included explicit instructions about collaboration on the class syllabus.

On campus Friday afternoon, students reacted to the news.

Michael Constant, 19, said he thinks the college wanted to make a statement with its decision. But when over half of the students in a class cheat, not punishing them is the same as condoning the behavior.

“I think it’s fair,” Constant said of the board’s disciplinary action. “They made the choice to cheat.”

Georgina Parfitt, 22, said the punishment for these students was too harsh, and that many students in the class could have been confused about the policy.

Parfitt said she does not know what the college is trying to achieve by forcing students to leave.

Continued in article

Jensen Question
The question is why cheat at Harvard since almost everybody who tries in a Harvard course receives an A. We're left with the feeling that those 125 or so students who cheated just did not want to try?

The investigation revealed that 91 percent of Harvard's students graduated cum laude.
Thomas Bartlett and Paula Wasley, "Just Say 'A': Grade Inflation Undergoes Reality Check:  The notion of a decline in standards draws crusaders and skeptics," Chronicle of Higher Education, September 5, 2008 --- http://chronicle.com/weekly/v55/i02/02a00104.htm?utm_source=wb&utm_medium=en

Bob Jensen's threads on cheating ---
http://www.trinity.edu/rjensen/Plagiarism.htm

"Dishonest Educators," by Walter E. Williams, Townhall, January 9, 2013 --- Click Here
http://townhall.com/columnists/walterewilliams/2013/01/09/dishonest-educators-n1482294?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Nearly two years ago, U.S. News & World Report came out with a story titled "Educators Implicated in Atlanta Cheating Scandal." It reported that "for 10 years, hundreds of Atlanta public school teachers and principals changed answers on state tests in one of the largest cheating scandals in U.S. history." More than three-quarters of the 56 Atlanta schools investigated had cheated on the National Assessment of Educational Progress test, sometimes called the national report card. Cheating orders came from school administrators and included brazen acts such as teachers reading answers aloud during the test and erasing incorrect answers. One teacher told a colleague, "I had to give your kids, or your students, the answers because they're dumb as hell." Atlanta's not alone. There have been investigations, reports and charges of teacher-assisted cheating in other cities, such as Philadelphia, Houston, New York, Detroit, Baltimore, Los Angeles and Washington.

Recently, The Atlanta Journal-Constitution's blog carried a story titled "A new cheating scandal: Aspiring teachers hiring ringers." According to the story, for at least 15 years, teachers in Arkansas, Mississippi and Tennessee paid Clarence Mumford, who's now under indictment, between $1,500 and $3,000 to send someone else to take their Praxis exam, which is used for K-12 teacher certification in 40 states. Sandra Stotsky, an education professor at the University of Arkansas, said, "(Praxis I) is an easy test for anyone who has completed high school but has nothing to do with college-level ability or scores." She added, "The test is far too undemanding for a prospective teacher. ... The fact that these people hired somebody to take an easy test of their skills suggests that these prospective teachers were probably so academically weak it is questionable whether they would have been suitable teachers."

Here's a practice Praxis I math question: Which of the following is equal to a quarter-million -- 40,000, 250,000, 2,500,000, 1/4,000,000 or 4/1,000,000? The test taker is asked to click on the correct answer. A practice writing skills question is to identify the error in the following sentence: "The club members agreed that each would contribute ten days of voluntary work annually each year at the local hospital." The test taker is supposed to point out that "annually each year" is redundant.

CNN broke this cheating story last July, but the story hasn't gotten much national press since then. In an article for NewsBusters, titled "Months-Old, Three-State Teacher Certification Test Cheating Scandal Gets Major AP Story -- on a Slow News Weekend" (11/25/12), Tom Blumer quotes speculation by the blog "educationrealist": "I will be extremely surprised if it does not turn out that most if not all of the teachers who bought themselves a test grade are black. (I am also betting that the actual testers are white, but am not as certain. It just seems that if black people were taking the test and guaranteeing passage, the fees would be higher.)"

There's some basis in fact for the speculation that it's mostly black teachers buying grades, and that includes former Steelers wide receiver Cedrick Wilson, who's been indicted for fraud. According to a study titled "Differences in Passing Rates on Praxis I Tests by Race/Ethnicity Group" (March 2011), the percentages of blacks who passed the Praxis I reading, writing and mathematics tests on their first try were 41, 44 and 37, respectively. For white test takers, the respective percentages were 82, 80 and 78.

Continued in article

"In a Memphis Cheating Ring, the Teachers Are the Accused," by Motoko Rich, The New York Times, February 2, 2013 ---
http://www.nytimes.com/2013/02/02/education/in-memphis-cheating-ring-teachers-are-the-accused.html?hpw&_r=0

In the end, it was a pink baseball cap that revealed an audacious test-cheating scheme in three Southern states that spanned at least 15 years.

Test proctors at Arkansas State University spotted a woman wearing the cap while taking a national teacher certification exam under one name on a morning in June 2009 and then under another name that afternoon. A supervisor soon discovered that at least two other impersonators had registered for tests that day.

Ensuing investigations ultimately led to Clarence D. Mumford Sr., 59, who pleaded guilty on Friday to charges that accused him of being the cheating ring’s mastermind during a 23-year career in Memphis as a teacher, assistant principal and guidance counselor.

Federal prosecutors had indicted him on 63 counts, including mail and wire fraud and identify theft. They said he doctored driver’s licenses, pressured teachers to lie to the authorities and collected at least $125,000 from teachers and prospective teachers in Arkansas, Mississippi and Tennessee who feared that they could not pass the certification exams on their own.

Mr. Mumford pleaded guilty to two counts of the indictment, just a week after he rejected a settlement offer. At the time, he said that its recommended sentence of 9 to 11 years was “too long a time and too severe”; the new settlement carries a maximum sentence of 7 years.

Mr. Mumford appeared in Federal District Court here on Friday wearing a dark suit and a matching yellow tie and pocket handkerchief. He said little more than “Yes, sir” in answer to questions from Judge John T. Fowlkes.

Another 36 people, most of them teachers from Arkansas, Mississippi and Tennessee, have been swept up in the federal dragnet, including Clarence Mumford Jr., Mr. Mumford’s son, and Cedrick Wilson, a former wide receiver for the Pittsburgh Steelers. (Mr. Wilson paid $2,500 for someone to take a certification exam for physical education teachers, according to court documents.)

In addition to the senior Mr. Mumford, eight people have pleaded guilty to charges stemming from the investigation into the ring, and on Friday, a federal prosecutor, John Fabian, announced that 18 people who confessed to paying Mr. Mumford to arrange test-takers for them had been barred from teaching for five years.

The case has rattled Memphis at a tumultuous time. The city’s schools are merging with the suburban district in surrounding Shelby County, exposing simmering tensions over race and economic disparity. The state has also designated 68 schools in the city as among the lowest-performing campuses in Tennessee, and is gradually handing control of some of them to charter operators and other groups. And with a $90 million grant from the Bill and Melinda Gates Foundation, the district is overhauling how it recruits, evaluates and pays teachers.

District officials say that the test scandal does not reflect broader problems, and that none of the indicted teachers still work in the Memphis schools. (At least one teacher is working in Mississippi.) “It would be unfair to let what may be 50, 60 or 100 teachers who did some wrong stain the good work of the large number of teachers and administrators who get up every day and go by the book,” said Dorsey Hopson, the general counsel for Memphis City Schools who this week was named the district’s interim superintendent.

“A teacher’s job is very hard. I know it is,” said Threeshea Robinson, a mother who waited last week to pick up her son, a fourth grader at Raleigh-Bartlett Meadows Elementary School, where a teacher who has pleaded guilty taught until last fall. “But I would not want a doctor who did not pass all his tests operating on me.”

The tests involved are known as Praxis exams, and more than 300,000 were administered last year by the nonprofit Educational Testing Service for people pursuing teaching licenses or new credentials in specific subjects like biology or history.

By and large, they are considered easy hurdles to clear. In Tennessee, for example, 97 percent of those who took the exams in the 2010-11 school year passed.

Robert Schaeffer, the public education director of FairTest, the National Center for Fair and Open Testing, said that the testing service had had problems with cheating before.

Ray Nicosia, the executive director of the testing service’s Office of Testing Integrity, said episodes of impersonation were rare.

Continued in article

Jensen Commentary
It should be noted that the author of this article is an African American economics professor at George Mason University.. He's also conservative. This makes him an endangered species in academe.

"Why Students Gripe About Grades," by Cathy Davidson, Inside Higher Ed, January 7, 2013 --- 
http://www.insidehighered.com/views/2013/01/07/essay-how-end-student-complaints-grades

The biggest scandal in education is nearly universal grade inflation ---
http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

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

"10 Worst Corporate Accounting Scandals," by Barry Ritholtz, Ritholtz Blog, March 7, 2013 ---
http://www.ritholtz.com/blog/2013/03/worst-corp-scandals/#more-90147

Jensen Comment
Barry is a financial analyst with a political science background. As an accounting professor I claim that he missed some of the biggest accounting scandals even if we leave out the really big scandals before 1950 (e.g, leave out the South Sea Scandal of monumental proportion).

There are really two tacks that one can take in the definition of "Corporate Accounting Scandals." One is the size of the "theft" resulting from accountant and/or auditor negligence. Barry probably had this in mind, but he missed a few such as the Franklin Raines earnings management scandal at Fannie Mae.

The other tack is gross accountant and/or audit negligence even when the size of the theft is somewhat smaller for a worse crime. For example, there was enormous accountant and/or auditor negligence when pilfered $53 million from Dixon, Illinois ---
"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/
There are many such thefts by accountants that are bad as it gets even if the amounts they stole is are not in the record books.

Here are some examples of accounting examples Barry should've also considered::

Wikipedia has a listing of major accounting scandals that I don't think Barry looked at when listing his "10 Worst Corporate Accounting Scandals" ---
http://en.wikipedia.org/wiki/Accounting_fraud#List_of_major_accounting_scandals

And if we move beyond accounting per se, the recent LIBOR scandals are bigger than all of his "10 Worst" combined ---
http://www.trinity.edu/rjensen/FraudRotten.htm

"Two (KPMG) Auditors Charged Over Bank Failure," by Michael Rapoport, The Wall Street Journal, January 9, 2013 --- Click Here
http://professional.wsj.com/article/SB10001424127887324442304578231963265786232.html?mod=ITP_moneyandinvesting_1&mg=reno64-wsj

The Securities and Exchange Commission charged two KPMG LLP employees with failing to uncover problems at a Nebraska bank that later failed, marking the first time the agency has taken action against auditors related to the financial crisis.

The two KPMG auditors, John J. Aesoph and Darren M. Bennett, didn't do enough to scrutinize bad-loan reserves at TierOne Bank of Lincoln, Neb., the SEC said in an administrative proceeding filed Wednesday. The action could result in the two auditors losing their right to audit public companies.

TierOne hid millions of dollars in losses on troubled loans made during the height of the financial crisis before the bank eventually failed in 2010, according to the commission, which filed suit against three TierOne executives last year.

The SEC case against the auditors, more than four years after the crisis, revives lingering questions about whether auditors did enough to prevent questionable practices and whether authorities have done enough to hold them to account.

While auditors weren't involved in financial institutions' bad lending and risk-management decisions that helped prompt the crisis, all of the Big Four accounting firms had major clients which collapsed or required huge government bailouts, without any warning from the auditors.

"I think it is about time [the SEC] took action against the gatekeepers," said John Coffee, a Columbia University securities-law professor. The SEC has been "somewhat egregious and far less than aggressive" in taking action against auditors, attorneys and other outside professionals who may have abetted the conduct that led to the crisis, he said.

"This is an area where there ought to be a lot more cases," added Barbara Roper, director of investor protection for the Consumer Federation of America. "It does suggest a pretty significant problem with the auditors, and with audits of financial institutions a lot bigger and more central to the financial system than this bank in Nebraska."

An SEC spokesman, said "the criticisms are misinformed and belied by our unmatched record of achievement in financial crisis cases." KPMG, which wasn't charged in the TierOne case, said in a statement that its auditors "look forward to presenting the facts in support of the work that was performed under the circumstances at TierOne." Attorneys for Mr. Aesoph and Mr. Bennett couldn't be reached for comment.

Other authorities have filed only a handful of crisis-related cases against auditors. The New York attorney's general office has sued Ernst & Young LLP, alleging the firm turned a blind eye to accounting fraud at its client Lehman Brothers Holdings Inc. before Lehman collapsed. Last fall, the Federal Deposit Insurance Corp. sued PricewaterhouseCoopers LLP and Crowe Horwath LLP, alleging they failed to prevent a fraud scheme that led to the failure of Alabama's Colonial Bank. The accounting firms have denied any wrongdoing in those cases.

In the TierOne case, the SEC alleges that Mr. Aesoph, a KPMG partner, and Mr. Bennett, a senior manager, ignored red flags and relied on outdated appraisals of the collateral backing TierOne's loans when their 2008 audit gave the bank a clean bill of health. In fact, according to the SEC, the bank had expanded into riskier types of lending in Las Vegas, Arizona and Florida, and its top executives misled investors and regulators about the losses TierOne was experiencing.

Continued in article

"Finally, the SEC Goes After a Failed Bank’s Auditors," by Jonathan Weil, Bloomberg, January 9, 2013 ---
http://www.bloomberg.com/news/2013-01-09/finally-the-sec-goes-after-a-failed-bank-s-auditors.html

The Securities and Exchange Commission is finally doing something that desperately needed to be done: Suing the auditors of a failed bank that got caught cooking its books.

Today the SEC’s enforcement division accused two accountants at KPMG LLP of engaging in unprofessional conduct during their 2008 audit of TierOne Corp., a Lincoln, Nebraska- based lender that had about $3 billion in assets when it collapsed in 2010. The agency hasn’t reached settlements with either of the men, John Aesoph, 40, and Darren Bennett, 35, and their lawyers didn’t immediately return phone calls.

The SEC’s administrative order accuses the pair of “failing to subject TierOne’s loan loss estimates -- one of the highest risk areas of the audit -- to appropriate scrutiny.” It also said they “violated numerous PCAOB audit standards, failed to obtain sufficient competent evidential matter to support their audit conclusions, and failed to exercise due professional care and appropriate professional skepticism.” (PCAOB stands for Public Company Accounting Oversight Board.)

The SEC already had filed accounting-fraud claims against three former TierOne executives, two of whom reached settlements and paid fines last September. As I asked at the time: When will the SEC finally go after the auditors? At least in these particular auditors’ instance, the answer is today.

It was TierOne’s regulator, the U.S. Office of Thrift Supervision, that caught the bank’s accounting manipulations -- not KPMG, which continually blessed TierOne’s financial statements and resigned as auditor only weeks before the bank failed in 2010. Last year TierOne’s Chapter 7 bankruptcy trustee sued KPMG, accusing it of negligence and breaches of fiduciary duty. The SEC didn’t file claims against KPMG itself today.

It has been frustrating to look at the SEC’s own highlights of the lawsuits it has filed in connection with the financial crisis -- and to see that none of them had been against an auditor. Now the SEC will have one case to cite, albeit against a couple of small fries. It also should be stressed that the agency hasn’t proved any of its allegations against these two accountants. Surely the SEC can find some bigger targets out there in the auditing world if it wants to.

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

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

The Federal Trade Commission is trying to shut down an operation called the Tax Club, which the agency says tricked people into buying bogus business services
"'Useless' Business Help: Inside a $200 Million Fraud," by John Tozzi, Bloomberg Business Week, January 23, 2013 ---
http://www.businessweek.com/articles/2013-01-23/useless-business-help-inside-a-200-million-fraud-case

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

Scum Bags Fraud Department in the Age of Social Networking

"Woman Posed as Aunt of Newtown Victim to Commit Fraud, the F.B.I. Says," by Marc Santora, The New York Times, December 27, 2012 ---
http://www.nytimes.com/2012/12/28/nyregion/woman-posed-as-newtown-victims-aunt-in-fraud-scheme-fbi-says.html?_r=0

A Bronx woman who the police say posed as a relative of a boy killed in the mass shooting at Sandy Hook Elementary School in order to solicit donations was arrested on Thursday and charged with lying to federal agents.

The woman, Nouel Alba, 37, claimed to be an aunt of a 6-year-old victim and used her Facebook account, telephone calls and text messages to solicit money for a “funeral fund,” according to a criminal complaint filed in Federal District Court in Connecticut.

When contacted by federal agents investigating fraud schemes related to the shootings in Newtown, Conn., law enforcement officials said Ms. Alba denied that she had posted any messages on Facebook soliciting donations.

“It is unconscionable to think that the families of the victims in Newtown, and a sympathetic community looking to provide them some sort of financial support and comfort, have become the targets of criminals,” said Kimberly K. Mertz, the special agent in charge of the New Haven division of the Federal Bureau of Investigation. “Today’s arrest is a stern message that the F.B.I. will investigate and bring to justice those who perpetrate Internet fund-raising scams, especially those scams that exploit the most vulnerable in their time of shared sorrow.”

If convicted, Ms. Alba faces a maximum of five years in prison and $250,000 fine.

Ms. Alba, who was released on $50,000 bond at her arraignment on Thursday in Hartford, was represented by a federal public defender, Deirdre Murray, who did not immediately return a call.

Continued in article

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

Jensen Comment
When I first reported this theft I envisioned ten tractor trailers loaded by hooded thieves in the dead of night.
It turns out that things may not be what they seem when you deal with a cartel monopolist wannabe.
Warning --- this is a four page article that should have been reduced to the editor to a single page..

Being a quality control sampler in this industry is almost as sweet as being a quality control sampler on the Mustang Ranch.

This smells like a trap by the cartel to frame those who oppose it.
Adi Wijaya, 01/03/2013 01:02 AM

"The Great Canadian Maple Syrup Heist," by Brendan Borrell, Bloomberg Business Week, January 2, 2013 ---
http://www.businessweek.com/articles/2013-01-02/the-great-canadian-maple-syrup-heist#p4

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

"Accountant pleads guilty to stealing $432,000 from employer, using it to build lake house," by Ed Stych, Minneapolis St. Paul Business Journal, January 16, 2013 ---
http://www.bizjournals.com/twincities/news/2013/01/16/accountant-guilty-stealing-lake-house.html

An accountant pleaded guilty Wednesday to stealing more than $432,000 from his employer and using the money to build a lake house, the U.S. Attorney's Office said.

Ronald Leo Schaeffer, 39, of Faribault, faces up to 30 years in prison at a future sentencing hearing, the government said.

The government said Schaeffer wrote 127 false checks to himself while working as an accountant for Environmental Tillage Systems Inc. from August 2008 to April 2012. The amounts on the checks ranged from $400 to $12,000, the government said.

Schaeffer allegedly forged the signatures of the agricultural manufacturing company's CEO or chief financial officer on some of the checks, prosecutors said.

Continued in article

Jensen Comment
How can an accountant fail to realize that detection is inevitable in these types of accounting fraud? You might be able to fool the IRS for a lifetime, but certainly your employer is going to detect check forgeries unless the employer is not of sound mind.

I wonder if Mr. Schaeffer reported these 127 false checks on his IRS 1040. Oops!

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

CDO --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Countrywide Financial --- http://en.wikipedia.org/wiki/Countrywide_Financial

Those Poisoned CDOs
"Bank of America Ordered to Unseal Documents in MBIA Case," by Dan Freed, The Street, June 4, 2013 ---
http://www.thestreet.com/story/11804771/1/bank-of-america-ordered-to-unseal-documents-in-mbia-case.html

Jensen Comment
Arguably the worst decision in the 2008 economic bailout was Bank of America's decision to buy the bankrupt Countrywide Financial. BofA then CEO Lewis claims to this day that Treasury Secretary Hank Paulsen held a gun to his head and said buy Countrywide Financial or else. Countrywide has been nothing but a cash flow hemorrhage for BofA ever since.

Bob Jensen's threads on the bailout ---
http://www.trinity.edu/rjensen/2008Bailout.htm

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

"How Economics Journals Have Evolved," Inside Higer Ed,  January 7, 2013 ---
http://www.insidehighered.com/quicktakes/2013/01/07/how-economics-journals-have-evolved

A new analysis released by the National Bureau of Economic Research (abstract available here) tracks the changes among the five leading economics journals from 1970 to 2012. Among the trends over that time span:

• Annual submissions to the top-5 journals nearly doubled.
• The total number of articles published declined from 400 per year to 300 per year.
• One journal, American Economic Review, now accounts for 40 percent of publications among these five publications, up from 25 percent.
• Papers are on average three times longer.
  
  http://papers.nber.org/papers/w18665?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Jensen Comment
I think the reason that most academic disciplines, including accounting, experienced an explosion in the number of journals is is that increasingly publication in refereed journals became a necessary condition for both tenure and annual performance-pay evaluations. As the odds decreased in getting a hit in a top-tier journal declined (for reasons mentioned above) faculty became increasingly desperate for publication in refereed journals not quite in the top tier. At the same time large commercial oligopoly publishers drooled over charging hundreds of dollars (often rip-offs) to college libraries for new journals ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

Most of these new journals tried to justify their existence by asserting that they were publishing articles that were too specialized for top-tier journals. This is certainly true in some instances, but the fact of the matter is that top-tier journals in most instances are still publishing some well-chosen articles in those specialties.

The bottom line is that when it comes to tenure decisions and performance evaluation in general, having some refereed journal hits beats having no journal publications.

If college libraries were not willing to pay rip-off prices for specialized (not always inferior) journals a significant number of professors would have virtually no publications in seriously refereed journals ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

"Publish or perish? Not at these prices, UC says," by Matt Krupnick, Contra Costa Times, June 10, 2010 ---
http://www.contracostatimes.com/top-stories/ci_15270766?nclick_check=1

University of California librarians are urging professors not to submit research to Nature or 66 related journals to protest a 400 percent increase in the publisher's prices.

A new contract with Nature Publishing Group would raise the university's subscription costs by more than $1 million, library and faculty leaders wrote in a letter this week to professors throughout the 10-campus system. With recent budget cuts, UC libraries simply can't handle the higher price, which would take effect in 2011, the letter said.

Boycotting the Nature group would be a huge step for a university that, according to UC estimates, has provided 5,300 articles to the 67 journals in the past six years. Nearly 640 of those articles went to Nature itself, one of the world's premier scientific journals.

"We understand that it's an important journal," said Laine Farley, executive director of UC's California Digital Library, which manages most systemwide journal subscriptions. "But we can't simply wipe out our savings on one publisher."

In a written response to the university, London-based Nature Publishing Group criticized UC's "sensationalist use of data out of context" and said the negotiations were supposed to be confidential. The pricing dispute is rooted in confusion over whether UC is one institution or many, Nature's response said. that (UC) is paying an unfair rate."

This week's volleys represented an escalation of a long-simmering battle between universities and journal publishers, who have been criticized for charging thousands of dollars for annual subscriptions to some publications. Many titles have been consolidated under a handful of major publishers, including Nature, making it more difficult for universities to negotiate lower prices.

Several UC professors have fought back against publishers, refusing to contribute work to highly priced journals. But a widespread boycott of one of the most prestigious journals would present a dilemma for faculty members under pressure to publish research in order to gain promotions.

The so-called publish-or-perish structure is fundamentally unfair to professors, said Michael Eisen, a UC Berkeley biology professor who refuses to publish his research group's work in Nature's journals.

"The university is forced to give away information for free and then to buy it back at a huge markup," he said. "The whole thing is just completely screwed up. The only alternative the university has is to strike back at what Nature really values."

A boycott of the Nature group would not hurt UC professors' careers, said Lawrence Pitts, the university's provost.

"The reality is that there is a number of quality publications," said Pitts, UC's chief academic officer. "Nature Publishing Group isn't the only game in town."

Some journals, recognizing that universities are struggling to afford them, have cut prices in recent years. Others have invented ways to give away their articles for free.

The Proceedings of the National Academy of Sciences, for example, makes its contributions available for free six months after publication, said its editor-in-chief, UC Berkeley biologist Randy Schekman.

"Nature's just being tone-deaf," said Schekman, who is considering writing an article for Nature. "They have to know that California is in a perilous financial state. They can't win this one."

Bob Jensen's threads on Commercial Scholarly and Academic Journals and Oligopoly Textbook Publishers Are Ripping Off Libraries, Scholars, and Students ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals

"Oldest Swiss bank to close after US tax evasion fine," by Dan Jones, Investment Week, January 4, 2013 ---
http://www.investmentweek.co.uk/investment-week/news/2233843/oldest-swiss-bank-to-close-after-us-tax-evasion-fine 

Wegelin, Switzerland's oldest private bank, is to close permanently after pleading guilty to helping US citizens pay taxes on money held in offshore accounts.

The bank agreed to pay $57.8m in fines to US authorities in a New York court yesterday, and said it would "cease to operate" following the ruling.

It admitted it had allowed over 100 American citizens to hide $1.2bn from the Internal Revenue Service over the past decade.

Wegelin, founded in 1741, is the first overseas bank to plead guilty to tax evasion charges in the US.

The ruling could have implications for a number of other, larger Swiss banks currently under investigation by US authorities.

That process began in earnest in a 2009 deal with UBS, wherein the bank admitted helping US citizens avoid paying taxes - though it did not plead guilty to any charges - and agreed to pay a $780m fine and turn over client names to US authorities.

US attorney Preet Bharara said the Wegelin ruling represents "a watershed moment in our efforts to hold to account both the individuals and the banks - wherever they may be in the world - who are engaging in unlawful conduct that deprives the US Treasury of billions of dollars of tax revenue".

"The bank wilfully and aggressively jumped in to fill a void that was left when other Swiss banks abandoned the practice due to pressure from US law enforcement," he added.

Read more: http://www.investmentweek.co.uk/investment-week/news/2233843/oldest-swiss-bank-to-close-after-us-tax-evasion-fine#ixzz2HJSLbvST Investment Week - News and analysis for investment advisors and wealth managers. Claim your free subscription today.

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