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

Identity Theft Information and Tools from the AICPA and IRS ---
http://www.aicpa.org/interestareas/tax/resources/irspracticeprocedure/pages/idtheftinformationandtools.aspx

Tax practitioners and their clients are concerned about the growing epidemic of tax-related identity theft in America - both refund theft and employment theft. At the end of fiscal 2013, the IRS had almost 600,000 identity theft cases in its inventory, according tothe IRS National Taxpayer Advocate. 

The AICPA shares members' concerns about the impact of identity theft and offers the resources below to help them learn more about this issue and advise clients. We have provided recommendations to Congress and the IRS Oversight Board on ways to further protect taxpayers and preparers.

IRS Identity Protection Specialized Unit at 800-908-4490

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

The IRS has an Identity Theft Web Page at
http://www.irs.gov/uac/Identity-Protection

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

"IRS is overwhelmed by identity theft fraud:   Billions wrongly paid out as scammers find agency an easy target," by Michael Kranish, Boston Globe, February 16, 2014 ---
http://www.bostonglobe.com/news/nation/2014/02/16/identity-theft-taxpayer-information-major-problem-for-irs/7SC0BarZMDvy07bbhDXwvN/story.html

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

Jensen Comment
2008 TurboTax Boycott
Tax Software Boycott of TurboTax Begins:  I'll Bet You Can't Find the Hidden Fees Disclosed on the TurboTax Website
Note that this was back in the time when most taxpayers mailed in hard copy printouts of their tax returns. It was common to by one copy of TurboTax and then file returns for other members of the family such as when a married couple filed separate returns.

Users are not complaining about the functionality of TurboTax. The problem, as they see it, is with pricing changes. For the first time, TurboTax producer Intuit started charging users an additional $9.95 for each additional return whether they print or e-file. Also, readers complain that the 2008 software costs more at checkout, jumping from $44.95 to $59.95. (However, when AccountingWEB went on Amazon, the software could be had at the discounted price of $54.99.) . . . One reviewer seemed to be issuing a battle cry by writing, "Time to start the boycott." Another reviewer had criticism of a more personal nature: "You should fire the person who came up with pay to print!" Of the 182 product reviews as of the evening of December 9, 2008, 171 of them were one-star reviews and only five were five-stars, the highest rating. Of the five five-star ratings, one user named Fernando Ortega said TurboTax is still the best, pointing out that he doesn't have to enter all of his personal information and previous returns manually.
"TurboTax turmoil: Online reviews pan the top selling software," AccountingWeb, December 2008 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=106620

Dr. Oz Should Be Ashamed
Dr. Oz:  Is this the miracle weight loss solution without exercise that the world is waiting for?
http://everyday.news-2014.net/diet/tips/

Warning: 
Research studies conclude that this "miracle weight loss solution" is no better than a placebo. Dr. Oz should be ashamed ---
http://en.wikipedia.org/wiki/Garcinia_Cambogia#Weight_loss

"Cheating Scandals at the Navy and Air Force bring Integrity into Question:  Ethics Failures can be attributed to the Culture of the Military Services," by Steven Mintz, Ethics Sage, February  11, 2014 ---
http://www.ethicssage.com/2014/02/cheating-scandals-at-the-navy-and-air-force-bring-integrity-into-question.html

"Culture of Corruption Postscript: The Hilda Solis Files," by  Michelle Malkin, Townhall, February 12, 2014 ---
http://townhall.com/columnists/michellemalkin/2014/02/12/culture-of-corruption-postscript-the-hilda-solis-files-n1793543?utm_source=thdaily&utm_medium=email&utm_campaign=nl 

Put on your super-shocked faces, everyone: Former Obama administration official Hilda Solis, who is now running for yet another government position in Los Angeles, is embroiled in yet another union corruptocracy scandal. The Hope and Change hits just keep on coming.

Solis served as President No More Business As Usual's first secretary of labor. Remember waaaay back then, when "most transparent administration in history" had not yet become an automatic punchline? Well before Solis' confirmation, it was already clear she was a poster child for left-wing sleazeball politics:

--Solis' husband's businesses failed to pay thousands of dollars in tax liens, which were 16 years old, until she was nominated.

--While she was in Congress, Solis served as director and treasurer of a union-promoting lobbying group, American Rights at Work, which was pushing her Big Labor "card check" legislation to eliminate the secret ballot, undermine worker choice and obliterate privacy protections.

--Solis failed to disclose those interest-conflicted positions to the House on her financial disclosure forms. In effect, she was lobbying herself -- while the group she worked for raked in at least $1 million in contributions from labor unions and spent thousands of dollars on television spots described by the group in its report to the FEC as "electioneering communications." The scheme circumvented vaunted McCain-Feingold campaign finance reforms barring so-called soft money donations from unions and corporations alike. Despite apparent violations of both basic disclosure and campaign finance rules, Solis skated.

--Upon winning confirmation, Solis quickly went to work doling out plum political appointments at the Labor Department and fat pay raises to a half-dozen of her former Capital Hill staffers. Americans for Limited Government found that "the appointees had significant pay increases averaging 50 percent upon changing jobs; one employee's salary nearly doubled." Cha-cha-cha-ching!

After stepping down from her Obama cabinet position last year, Solis is back in the political spotlight. With massive union backing of some $500,000, she's running for the powerful Los Angeles County Board of Supervisors.

Question: Why did she step down from her cushy White House post? Inquiring local reporters in Los Angeles wanted to know.

Last week, the Los Angeles Times reported that her resignation coincided with an FBI inquiry into her role at an Obama reelection campaign fundraiser in 2012. When the paper asked the Solis campaign whether she had informed Obama of the FBI probe, a spokesman responded tersely: "It is inappropriate for a cabinet official to (discuss) private communications with the president."

Oh, now we care about what's appropriate? LOL.

It also turns out that for the entire last year she served as President Obama's labor secretary, Solis had retained a high-priced Washington, D.C., law firm "to address legal issues" involving the fundraiser and possible violations of the federal Hatch Act -- which prevents cabinet members from directly grubbing for campaign cash. Solis had incurred a debt of between $50,000 and $100,000 for the legal bills. Her campaign says it's almost "all" paid off, but won't specify by how much.

On Monday, the latest eruption of corruptocracy shook the Solis machine. Hews Media Group-Community News obtained a lawsuit filed in California's Central U.S. District Court claiming that Solis "was provided thousands of dollars worth of free private jet travel without declaring the trips on the federal government required forms, paid for by the powerful International Union of Operating Engineers based in Pasadena during the same period she was undergoing confirmation hearings to become part of Obama's cabinet." IUOE Local 12 owns a Cessna Citation XL jet, which ferried Solis back and forth between the coasts. IUOE First Vice President William Waggoner, a defendant in the suit, reportedly bragged to fellow union officials that he was providing her transportation.

Put on your super-duper shocked faces: Solis, the serial disclosure dodger, failed to report the in-kind donation to the Federal Election Commission as required by law.

Birds of a dirty feather flock together. Solis' pal Waggoner and his fellow IUOE brass have been accused by rank-and-file union members of systemic embezzlement, kickbacks, shakedowns, nepotism and intimidation. According to federal class-action litigation, the IUOE's former national leader made death threats against dissenting members; officials allegedly took kickbacks from employers who shortchanged pension and training funds. The L.A. Times detailed more charges, including that "one former local official siphoned off union money for entertainment and his girlfriend's breast enhancement; and another flew to auto races and family get-togethers on an $8.6-million jet ostensibly purchased for union business."

Courthouse News reported on another lawsuit against IUOE officials exposing how Waggoner's alleged "nepotism and a bad investment vehicle led to the evaporation of $50 million in IUOE pension funds." Union members are accusing Waggoner of pressuring local branches "to invest their pension funds in Amalgamated Bank's product line, which were sold by Waggoner's wife, Patricia, one of the bank's vice presidents."

Jet-setting union crony Solis has the gall to brag about her record fighting income inequality and defending Big Labor rights. Maybe she should focus less on closing the wage gap and more on closing her truth and ethics gap.

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

"HealthSouth, Inc.: An Instructional Case Examining Auditors' Legal Liability (for fraud detection)," by Ronald J. Daigle, Timothy J. Louwers, and Jan Taylor Morris, Issues in Accounting Education, November 2013 ---
http://aaajournals.org/doi/abs/10.2308/iace-50530

This instructional case explores auditors' legal liability under the Securities Exchange Act of 1934 by asking students to assume the role of either the plaintiffs' (investors') or defendants' (Ernst & Young's) legal counsel. By using publicly available documents and testimony (provided on a dedicated website for this instructional case) in their arguments, students not only explore in depth one of the more egregious accounting scandals of the new millennium, but also are exposed to the plaintiff's burden of proof and the defendant's defenses in a Rule 10b-5 action. Additionally, by understanding the root causes of the fraud and why it took so long to uncover, students can better understand a number of the provisions set forth by the Sarbanes-Oxley Act of 2002. Results of a student survey after completion of the case indicate that case objectives were met. Students also report enjoying the case materials and welcoming other cases using similar types of materials.

Difficult times for auditors to claim financial statement audits should not uncover massive fraud
HealthSouth Corp. has filed suit accusing its former outside auditor, Ernst & Young, of intentionally or negligently failing to uncover a massive accounting fraud at the medical services chain.
"HealthSouth Sues Ernst & Young for Fraud," SmartPros, April 6, 2005 --- http://accounting.smartpros.com/x47712.xml
Bob Jensen's threads on E&Y's legal woes are at http://www.trinity.edu/rjensen/fraud001.htm#Ernst

Bob Jensen's threads on HealthSouth
http://www.trinity.edu/rjensen/Fraud001.htm
Conduct a word search for "HealthSouth" in the above link.

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

Bob Jensen's threads on case teaching and research ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases

Grant Thornton Partner Obtains Full Membership in Club Fed
A former partner at Grant Thornton was sentenced to 4-1/2 years in prison on Wednesday for stealing nearly $4 million from the accounting firm. Craig Haber, 60, had pleaded guilty in August to a charge of mail fraud stemming from what prosecutors say was an eight-year scheme to divert client payments to a personal bank account ---
http://in.reuters.com/article/2014/03/12/grantthornton-theft-idINL2N0M92EV20140312

Bob Jensen's threads on Grant Thornton ---
http://www.trinity.edu/rjensen/FraudUpdates.htm

"To Settle Suit, TIAA-CREF Agrees to Pay $19.5 Million," Inside Higher Ed, March 19, 2014 ---
http://www.insidehighered.com/quicktakes/2014/03/19/settle-suit-tiaa-cref-agrees-pay-195-million

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

SEC Charges Three California Residents Behind Movie Investment Scam ---
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540815507#.UwpWOIXXvae

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

After a CPA Firm Audit
The District of Columbia's Tuition Assistance Grant (TAG) program, intended to help students and families pay for college, providing up to $50,000 a year to students who attend eligible schools, has failed to account for millions of taxpayer dollars ---
http://townhall.com/tipsheet/cortneyobrien/2014/02/24/millions-of-dollars-unaccounted-for-in-dc-scholarship-program-n1799764?utm_source=thdailypm&utm_medium=email&utm_campaign=nl_pm

Jensen Comment
Why doesn't this come as a big surprise since so many government programs with fabulous intentions become fraudster piñatas due to lack of internal controls?

Court Tosses Out $1.2 Billion Judgment Against Johnson & Johnson:   Arkansas Had Sued Over Janssen Pharmaceuticals Unit's Antipsychotic Drug Risperdal ---
WSJ March 20, 2014
http://online.wsj.com/news/articles/SB10001424052702304256404579451162380919936?mod=djemCFO_h&mg=reno64-wsj

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

This is a sensational tax crime by European standards --- not so sensational because there was a crime, but sensational because a wealthy German sports team owneris going to prison

Uli Hoeness, the president of the European champion soccer club Bayern Munich, was convicted Thursday of tax evasion and sentenced to three and a half years in prison after a four-day trial that had consumed the country.
"Bayern Munich’s Hoeness Sentenced to Prison for Tax Evasion," by Alison Smale, The New York Times, March  14, 2014 ---
http://www.nytimes.com/2014/03/14/sports/soccer/bayern-munichs-hoeness-sentenced-to-prison-for-tax-evasion.html?_r=0

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

"SEC Charges KPMG With Violating Auditor Independence Rules," SEC Press Release, January 24, 2014 ---
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540667080#.UuKm27ROlQx

FOR IMMEDIATE RELEASE
2014-12

Washington D.C., Jan. 24, 2014 —

The Securities and Exchange Commission today charged public accounting firm KPMG with violating rules that require auditors to remain independent from the public companies they’re auditing to ensure they maintain their objectivity and impartiality. 

 

The SEC issued a separate report about the scope of the independence rules, cautioning audit firms that they’re not permitted to loan their staff to audit clients in a manner that results in the staff acting as employees of those companies.

An SEC investigation found that KPMG broke auditor independence rules by providing prohibited non-audit services such as bookkeeping and expert services to affiliates of companies whose books they were auditing.  Some KPMG personnel also owned stock in companies or affiliates of companies that were KPMG audit clients, further violating auditor independence rules.

KPMG agreed to pay $8.2 million to settle the SEC’s charges.

“Auditors are vital to the integrity of financial reporting, and the mere appearance that they may be conflicted in exercising independent judgment can undermine public confidence in our markets,” said John T. Dugan, associate director for enforcement in the SEC’s Boston Regional Office.  “KPMG compromised its role as an independent audit firm by providing prohibited non-audit services to companies that it was supposed to be auditing without any potential conflicts.”

According to the SEC’s order instituting settled administrative proceedings, KPMG repeatedly represented in audit reports that it was “independent” despite providing services to three audit clients that impaired KPMG’s independence.  The violations occurred at various times from 2007 to 2011.

According to the SEC’s order, KPMG provided various non-audit services – including restructuring, corporate finance, and expert services – to an affiliate of one company that was an audit client.  KPMG provided such prohibited non-audit services as bookkeeping and payroll to affiliates of another audit client.  In a separate instance, KPMG hired an individual who had recently retired from a senior position at an affiliate of an audit client.  KPMG then loaned him back to that affiliate to do the same work he had done as an employee of that affiliate, which resulted in the professional acting as a manager, employee, and advocate for the audit client.  These services were prohibited by Rule 2-01 of Regulation S-X of the Securities Exchange Act of 1934. 

The SEC’s order finds that KPMG’s actions violated Rule 2-02(b) of Regulation S-X and Rule 10A-2 of the Exchange Act, and caused violations of Section 13(a) of the Exchange Act and Rule 13a-1.  The order further finds that KPMG engaged in improper professional conduct as defined by Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice.  Without admitting or denying the findings, KPMG agreed to pay $5,266,347 in disgorgement of fees received from the three clients plus prejudgment interest of $1,185,002.  KPMG additionally agreed to pay a penalty of $1,775,000 and implement internal changes to educate firm personnel and monitor the firm’s compliance with auditor independence requirements for non-audit services.  KPMG will engage an independent consultant to evaluate such changes.

The SEC’s investigation separately considered whether KPMG’s independence was impaired by the firm’s practice of loaning non-manager tax professionals to assist audit clients on-site with tax compliance work performed under the direction and supervision of the clients’ management.  While the SEC did not bring an enforcement action against KPMG on this basis, it has issued a report of investigation noting that by their very nature, so-called “loaned staff arrangements” between auditors and audit clients appear inconsistent with Rule 2-01 of Regulation S-X, which prohibits auditors from acting as employees of their audit clients.

The report also emphasized:

• An auditor may not provide otherwise permissible non-audit services (such as permissible tax services) to an audit client in a manner that is inconsistent with other provisions of the independence rules.
• An arrangement that results in an auditor acting as an employee of the audit client implicates Rule 2-01 regardless of whether the accountant also acts as an officer or director, or performs any decision-making, supervisory, or ongoing monitoring functions, for the audit client. 
• Audit firms and audit committees must carefully consider whether any proposed service may cause the auditors to resemble employees of the audit client in function or appearance even on a temporary basis.

The SEC’s Office of the Chief Accountant has a Professional Practice Group that is devoted to addressing questions about auditor independence among other matters.  Auditors and audit committees are encouraged to consult the SEC staff with questions about the application of the auditor independence rules, including the permissibility of a contemplated service.

“The accounting profession must carefully consider whether engagements are consistent with the requirements to be independent of audit clients,” said Paul A. Beswick, the SEC’s chief accountant.  “Resolving questions about permissibility of non-audit services is always best done before commencing the services.”

The SEC’s investigation was conducted by Britt K. Collins, Dawn A. Edick, Michael Foster, Heidi M. Mitza, and Kathleen Shields.  The SEC appreciates the assistance of the Public Company Accounting Oversight Board.

LIBOR Rate --- http://en.wikipedia.org/wiki/Libor

The LIBOR Scandal Was Huge:  What took the FDIC so long?
Among other things LIBOR was the underlying for over a trillion dollars worth of interest rate swaps

"F.D.I.C. Sues 16 Big Banks Over Rigging of a Key Rate," The New York Times, March 14, 2014 ---
http://www.nytimes.com/2014/03/15/business/fdic-sues-16-big-banks-over-rate-rigging.html?smid=tw-share&_r=1

The Federal Deposit Insurance Corporation has sued 16 big banks that set a crucial global interest rate, accusing them of fraud and conspiring to keep the rate low to enrich themselves.

The banks, which include Bank of America, Citigroup and JPMorgan Chase in the United States, are among the world’s largest.

The F.D.I.C. said it sought to recover losses that the rate manipulation caused to 10 United States banks that failed during the financial crisis and were taken over by the agency. The lawsuit was filed on Friday in Federal District Court in Manhattan.

The banks are accused of rigging the London interbank offered rate, known as Libor, from August 2007 to at least mid-2011. The F.D.I.C. also sued a trade group, the British Bankers’ Association, that helps set Libor.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment on the suit. Spokesmen for Bank of America and JPMorgan didn’t immediately return requests for comment.

Four of the banks, Britain’s Barclays and Royal Bank of Scotland; Switzerland’s biggest bank, UBS; and Rabobank of the Netherlands, have paid about $2.6 billion to settle regulators’ charges of rigging Libor. The banks signed agreements with the Justice Department that allow them to avoid criminal prosecution if they meet certain conditions.

The process of setting Libor came under scrutiny after Barclays admitted in June 2012 that it had submitted false information to keep the rate low. A number of cities and municipal agencies in the United States have also filed suits.

"Dutch Rabobank fined $1 billion over Libor scandal," by Sara Web, Reuters, October 29, 2013 ---
http://www.reuters.com/article/2013/10/29/us-rabobank-libor-idUSBRE99S0L520131029

"Hundreds of US soldiers pocketed ‘tens of millions’ of dollars in fraud scandal," by Jim Young, Reuters, February 4, 2014 ---
http://rt.com/usa/us-soldiers-fraud-investigation-624/

Hundreds of US soldiers are under investigation in the US for allegedly embezzling “tens of millions” of dollars using a National Guard fund. Lawmakers have called the investigation one of the largest in US army history.

An Army audit revealed that American soldiers had been pocketing millions of dollars from a National Guard fund, which gives bonuses to troops that recruit their friends into the Army. The audit found that at least 1,200 recruiters had lined their pockets with potentially fraudulent pay outs, while another 2000 had received “questionable payments."

As part of the investigation, 800 soldiers are currently being screened to ascertain whether they committed fraud, reports USA Today.

Senator Claire McCaskill said that the fraudulent payments total “tens of millions” of dollars with one soldier reportedly embezzling $275,000.

"This is discouraging and depressing," said McCaskill in an interview with CBS News. "Clearly, we're talking about one of the largest criminal investigations in the history of the Army."

She went on to say that one of the main flaws in the system was the complete lack of controls to safeguard the funds.

“At the end of the day if you’re going to set up a system where you’re going to give people thousands of dollars for helping sign someone who’s willing to become a member of the National Guard, you’ve got to make sure you’ve got basic controls in place,” said McCaskill who will take part in a Senate Homeland Security hearing on Tuesday to deal with the issue.

The Army National Guard Recruiting Assistance Program was created in 2005, with the aim of filling out the thinning ranks of soldiers to meet demands for more manpower in conflict zones in Afghanistan and Iraq. The initiative rewarded soldiers who succeeded in persuading their peers to sign up with bonuses from $2,000 to $7,500.

Although the program succeeded in its principle aim of boosting troop numbers, authorities began registering cases of fraud in 2007. As a result, the program administrator called for an initiative-wide audit by the Army’s Criminal Investigative Command (CID).

Continued in article

"Fraud and the Detroit Bankruptcy Equation," by Mike Shedlock, Townhall, February 9, 2014 ---
http://finance.townhall.com/columnists/mikeshedlock/2014/02/09/fraud-and-the-detroit-bankruptcy-equation-n1791944?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Jensen Comment
This article has a little of everything, including interest rate swap speculation and hedging. It's about cheats (Corrupt Detroit leaders) cheating cheats (Wall Street Banks) and vice versa. It's about using casino profits as collateral on pension fund loans and issues of legality. It's about who knew what was legal versus not legal.

The bottom line of all this is how difficult it is to be a Bankruptcy Judge who ends up with this complete mess to sort out.

In the end this is going to cost Michigan taxpayers billions to get Detroit back on its feet. It's also a matter of fairness where cities in Michigan must pay for their own pension deals versus Detroit which is foisting its corruption costs on the State of Michigan.

'The Hidden Danger in Public Pension Funds:  Their investments expose government budgets and taxpayers to 10 times more risk than in 1975," Andrew G. Biggs, The Wall Street Journal, December 15, 2013 ---
http://online.wsj.com/news/articles/SB10001424052702303789604579196100329273892?mod=djemEditorialPage_h

The threat that public-employee pensions pose to state and local government finances is well known—witness the federal ruling earlier this month that Detroit's pension obligations are not sacrosanct in a municipal bankruptcy. Less well known is that pensions are larger and their investments riskier than at any point since public employees began unionizing in earnest nearly half a century ago.

Public pensions have long been advertised as offering generous, guaranteed benefits for public employees while collecting low and stable contributions from taxpayers. But with Detroit's bankruptcy filing, citing $3.5 billion in unfunded pension liabilities, and with four of the five largest municipal bankruptcies in U.S. history occurring in the past two years, reality tells us otherwise.

How much riskier are public pensions now? According to my research, public pensions pose roughly 10 times more risk to taxpayers and government budgets than in 1975. And while elected officials—a few Democratic mayors included—are now pushing for reforms, even they may not realize the danger.

In 1975, state and local pension assets were equal to 49% of annual government expenditures, according to my analysis of Federal Reserve data. Pension assets have nearly tripled to 143% of government outlays today. That's not because plans are better funded—today's plans are no better funded than in 1980—but mostly because pension plans have grown as public workforces have aged.

The ratio of active public employees to retirees has fallen drastically, according to the State Budget Crisis Task Force. Today it is 1.75 to 1; in 1950, it was 7 to 1. This means that a loss in pension investments has three times the impact on state and local budgets than 40 years ago. Enlarge Image

"Undisclosed Pension Extras Cost Detroit Billions," by Mary Williams Walsch, The New York Times, September 25, 2013 ---
http://dealbook.nytimes.com/2013/09/25/undisclosed-payments-cost-detroit-pension-plan-billions/?_r=0

Detroit’s municipal pension fund made undisclosed payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars, according to an outside actuary hired to examine the payments.

The payments included bonuses to retirees, supplements to workers not yet retired and cash to the families of workers who died too young to get a pension, according to a report by the outside actuary and other sources.

How much each person received is not known because payments were not disclosed in the annual reports of the fund.

Detroit has nearly 12,000 retired general workers, who last year received pensions of $19,213 a year on average — hardly enough to drive a great American city into bankruptcy. But the total excess payments in some years ran to more than $100 million, a crushing expense for a city in steep decline. In some years, the outside actuary found, Detroit poured more than twice the amount into the pension fund that it would have had to contribute had it only paid the specified pension benefits.

And even then, the city’s contributions were not enough. So much money had been drained from the pension fund that by 2005, Detroit could no longer replenish it from its dwindling tax revenues. Instead, the city turned to the public bond markets, borrowed $1.44 billion and used that to fill the hole.

Even that didn’t work. Last June, Detroit failed to make a $39.7 million interest payment on that borrowing — the first default of what was soon to become the biggest municipal bankruptcy case in American history.

Detroit said that making the interest payment would have consumed more than 90 percent of its available cash. And besides, the hole in its pension fund was growing again, and it needed yet another $200 million for that.

When Detroit turned to the bond market in 2005, it acknowledged that it needed cash for its pension fund but did not explain its long history of paying out more than the plan’s legitimate benefits, including the bonuses, known as “13th checks,” which were reported earlier this month by The Detroit Free Press. Nor did the city describe the pension fund’s distributions to active workers, or that a 1998 shift to a 401(k)-style plan had been blocked and turned instead into a death benefit. In its most recent annual valuation of the fund, the plan’s actuary said it was still trying to determine the “effect of future retroactive transfers to the 1998 defined contribution plan,” without mentioning that it had not been carried out.

All of these things eroded the financial health of the pension system, but neither the magnitude of the harm, nor its effect on the city’s own finances, were disclosed to investors. German banks were big buyers of Detroit’s pension debt; now, they are complaining that they were told it was sovereign debt.

Finally, in 2011, the city hired the outside actuary to get a handle on where all the money was going. The pension system’s regular actuaries, with the firm of Gabriel Roeder Smith, would not provide the information because they worked for the plan trustees, not the city.

The outside actuary, Joseph Esuchanko, concluded that the various nonpension payments had cost the struggling city nearly $2 billion from 1985 to 2008 because the city had to constantly replenish the money, with interest. The trustees began making the payments even before 1985, but it appears that Mr. Esuchanko could not get data for earlier years.

His calculations included only the extra payments by Detroit’s pension fund for general workers. Detroit has a second pension fund, for police officers and firefighters, which also made excess payments in the past. But Mr. Esuchanko could not get the data he needed to calculate those, either.

When Mr. Esuchanko reported his findings, Detroit’s city council voted to halt all payments except legitimate pensions, as described in plan documents. The police and firefighters’ plan trustees appear to have discontinued the practice earlier.

Detroit’s pension trustees, and their lawyers, were unavailable on Wednesday to comment on the extra payments.

Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005, said the payments were approved by the pension board of trustees, and it would have been useless for the city to have tried to stop them during his term.

“It was like dandelions,” he said. “You just accept them. They were there, something you’ve seen all your life.”

Continued in article

"Speed Traders Play Defense Against Michael Lewis’s Flash Boys," by Matthew Philips, Bloomberg Businessweek, March 31, 2014 ---
http://www.businessweek.com/articles/2014-03-31/speed-traders-play-defense-to-michael-lewiss-flash-boys?campaign_id=DN033114 

In Sunday night’s 60 Minutes interview about his new book on high-frequency trading—Flash Boys—author Michael Lewis got right to the point. After a brief lead-in reminding us that despite the strongest bull market in years, American stock ownership is at a record low, reporter Steve Kroft asked Lewis for the headline: “Stock market’s rigged,” Lewis said nonchalantly. By whom? “A combination of stock exchanges, big Wall Street banks, and high-frequency traders.”

Flash Boys was published today. Digital versions went live at midnight, so presumably thousands of speed traders and industry players spent the night plowing through it. Although the book was announced last year, it’s been shrouded in secrecy. Its publisher, W. W. Norton, posted some excerpts briefly online before taking them down.

Despite a lack of concrete details, word started getting around a few months ago that Lewis had spent a lot of time with some of the HFT industry’s most vehement critics, such as Joe Saluzzi at Themis Trading. The 60 Minutes interview only confirmed what many people had suspected for months: Flash Boys is an unequivocal attack on computerized speed trading.

In the interview, Lewis adhered to the usual assaults: High-frequency traders have an unfair advantage; they manipulate markets; they get in front of bigger, slower investors and drive up the prices they pay to buy a stock. They are, in Lewis’s view, the consummate middlemen extracting unnecessary rents from a class of everyday investors who have never been at a bigger disadvantage. This has essentially been the nut of the HFT debate over the past five years.

Continued article

The Flash Boys book ---
http://www.amazon.com/s/ref=nb_sb_ss_i_1_7?url=search-alias%3Dstripbooks&field-keywords=flash%20boys%20michael%20lewis&sprefix=Flash+B%2Cstripbooks%2C236
The Kindle Edition is only $9.18

The three segments on the March 30, 2014 hour of CBS Sixty Minutes were exceptional. The most important to me was an interview with Michael Lewis on how the big banks and other operators physically laid very high speed cable between stock exchanges to skim the cream off purchase an sales of individuals, mutual funds, and pension funds. The sad part is that the trading laws have a loop hole allowing this type of ripoff.

The fascinating features of this show and a new book by Michael Lewis include how the skimming operation was detected and how a new stock exchange was formed to block the skimmers.

"Credit Suisse Settlement with U.S. Could Top $800 Million:  Credit Suisse, Justice Department Discussions in Early Stages," by John Letzing, Francesco Guerrera and David Enrich, The Wall Street Journal, January 23, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304632204579336671237500260

Talks between Credit Suisse Group AG CS -0.42% and U.S. authorities on settling allegations the Swiss bank helped Americans evade taxes have intensified, and a settlement of more than $800 million could be struck in the first half of the year, people familiar with the situation said.

If the deal goes through, it would represent the biggest fine in the U.S. government's crackdown on offshore tax evasion in Switzerland.

The discussions between Zurich-based Credit Suisse and the Justice Department are in early stages, one of the people familiar with the situation said. Both people said any settlement would likely top the $780 million UBS AG UBS +0.25% agreed to pay in 2009 to settle with the U.S.

Representatives for Credit Suisse, the Justice Department and the Internal Revenue Service declined to comment.

Credit Suisse is one of about a dozen Swiss banks that are under criminal investigation by the U.S. for allegedly helping Americans evade taxes by using Switzerland's bank-secrecy laws to hide assets. In 2011, Credit Suisse set aside 295 million Swiss francs ($324 million) to deal with the issue, which has also dogged a large portion of the Alpine country's roughly 300 lenders.

Credit Suisse, the second-largest Swiss bank by assets behind UBS, reported a profit of 454 million francs for the third quarter of last year.

Like other Swiss banks, Credit Suisse has stopped accepting American private-banking clients as U.S. authorities have increased efforts to hunt down offshore tax cheats. The lender has long been expected to settle its tax issue with U.S. authorities, though it is only one player in a legal battle that has ensnared a significant portion of Switzerland's financial sector.

Jeffrey Neiman, a former prosecutor at the Justice Department now in private practice in Fort Lauderdale, Fla., said the possible deal shows that the U.S. isn't letting up its campaign against pursuing offshore tax evaders and those that enable it. But he said, "The real question is, will Credit Suisse and other banks be required to turn over client data directly to the U.S., as UBS was?"

Credit Suisse has been seen as eager to resolve the tax-evasion issue with the U.S., which has lingered for years. Chief Executive Brady Dougan noted during a conference call with analysts in October that settling with the U.S. is among the biggest items on the bank's "litigation docket."

Mr. Dougan has declined to comment about the timing of a settlement.

As part of a restructuring unveiled in October, Credit Suisse created a nonstrategic unit for its private-banking business designed to absorb litigation costs, including those related to the U.S. tax issue.

Credit Suisse and the other lenders under investigation by U.S. authorities aren't eligible to participate in a program unveiled by the Justice Department last year.

The program invites other Swiss banks to step forward and disclose any undeclared U.S. assets on their books. Banks participating in the program face the possibility of significant fines but may also receive assurances that they won't be prosecuted.

The Justice Department program has proved controversial in Switzerland, because it potentially exposes Swiss bankers and wealth advisers to legal risk in the U.S. even though their activities were allowed under Swiss law, which has protected banking secrecy since it was codified in the 1930s.

As of mid-December, more than half of Switzerland's government-backed banks said they would participate in the program, such as Valiant Bank, Migros Bank, Bank Coop and PostFinance, which is backed by the Swiss postal system.

In addition to Credit Suisse, other Swiss banks under investigation by the Justice Department and expected to reach settlements with the U.S. include Julius Baer Group AG JBAXY -0.05% and the Swiss unit of HSBC Holdings HSBC +1.02% PLC.

The U.S. crackdown on the use of Swiss accounts to evade taxes intensified with the prosecution of UBS, which reached a deferred-prosecution agreement with the Justice Department in 2009.

Under that agreement, UBS acknowledged helping Americans hide money abroad. The bank paid $780 million and turned over more than 4,000 names to U.S. authorities in order to avoid criminal charges.

Continued in article

"Schoolteacher Cheating," Walter E. Williams, Townhall, February 5, 2014 ---
http://townhall.com/columnists/walterewilliams/2014/02/05/schoolteacher-cheating-n1788915?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Philadelphia's public school system has joined several other big-city school systems, such as those in Atlanta, Detroit and Washington, D.C., in widespread teacher-led cheating on standardized academic achievement tests. So far, the city has fired three school principals, and The Wall Street Journal reports, "Nearly 140 teachers and administrators in Philadelphia public schools have been implicated in one of the nation's largest cheating scandals." (1/23/14) (http://tinyurl.com/q5makm3). Investigators found that teachers got together after tests to erase the students' incorrect answers and replace them with correct answers. In some cases, they went as far as to give or show students answers during the test.

Jerry Jordan, president of the Philadelphia Federation of Teachers, identifies the problem as district officials focusing too heavily on test scores to judge teacher performance, and they've converted low-performing schools to charters run by independent groups that typically hire nonunion teachers. But William Hite, superintendent of the School District of Philadelphia, said cheating by adults harms students because schools use test scores to determine which students need remedial help, saying, "There is no circumstance, no matter how pressured the cooker, that adults should be cheating students."

While there's widespread teacher test cheating to conceal education failure, most notably among black children, it's just the tip of the iceberg. The National Assessment of Educational Progress, published by the U.S. Department of Education's National Center for Education Statistics and sometimes referred to as the Nation's Report Card, measures student performance in the fourth and eighth grades. In 2013, 46 percent of Philadelphia eighth-graders scored below basic, and 35 percent scored basic. Below basic is a score meaning that a student is unable to demonstrate even partial mastery of knowledge and skills fundamental for proficient work at his grade level. Basic indicates only partial mastery. It's a similar story in reading, with 42 percent below basic and 41 percent basic. With this kind of performance, no one should be surprised that of the state of Pennsylvania's 27 most poorly performing schools on the SAT, 25 are in Philadelphia.

Continued in article

"California Kids Go to Court to Demand a Good Education The state has 275,000 teachers. On average, two are fired annually for poor performance," by Theodore J. Boutrous Jr., The Wall Street Journal, January 28, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702303553204579347014002418436?mod=djemMER_h

The trial began this week in a lawsuit in Los Angeles Superior Court aimed at bringing meaningful and badly needed change to California's public schools. The suit could have far-reaching effects in American education—in particular on teacher-tenure policies that too often work to the detriment of students.

I am among the lawyers representing nine brave schoolchildren, ages 7 to 17, in Vergara v. California. Our arguments are premised on what the California Supreme Court said more than 40 years ago: that education is "the lifeline of both the individual and society," serving the "distinctive and priceless function" as "the bright hope for entry of poor and oppressed into the mainstream of American society." Every child, the court held in Serrano v. Priest, has a fundamental right under the California Constitution to equal educational opportunities.

We will introduce evidence and testimony that the California school system is violating the rights of students across the state. While most teachers are working hard and doing a good job, California law compels officials to leave some teachers in the classroom who are known to be grossly ineffective.

Because of existing laws, some of the state's best teachers—including "teachers of the year"—are routinely laid off because they lack seniority. In other cases, teachers convicted of heinous crimes receive generous payoffs to go away because school districts know that there is slim hope of dismissing them. California law makes such firings virtually impossible. The system is so irrational that it compels administrators to bestow "permanent employment"—lifetime tenure—on individuals before they even finish their new-teacher training program or receive teaching credentials.

As a result of this nonsensical regime, certain students get stuck with utterly incompetent or indifferent teachers, resulting in serious harm from which the students may never recover. Such arbitrary, counterproductive rules would never be tolerated in any other business. They should especially not be tolerated where children's futures are at stake.

But in California, as in other states, outdated laws, entrenched political interests, and policy gridlock have thwarted legislative solutions meant to protect public-school students, who are not old enough to vote and are in essence locked out of the political process. That is why our plaintiffs decided to take a stand and bring this lawsuit asserting their state constitutional rights.

Through this lawsuit, we are seeking to strike down five state laws:

• The "last-in, first-out" or LIFO law, which demoralizes teachers by reducing them to numbers based on their start date, and forces schools to lay off the most junior teachers no matter how passionate and successful they are at teaching students.

• The "permanent employment" law, which forces school districts to make an irreversible commitment to keep teachers until retirement a mere 18 months after the teachers' first day on the job—long before the districts can possibly make such an informed decision.

• Three "dismissal" laws that together erect unnecessary and costly barriers to terminating a teacher based on poor performance or misconduct. Out of 275,000 teachers statewide, only two teachers are dismissed each year on average for poor performance. In Los Angeles, it costs an average of between $250,000 and $450,000 in legal and other costs, and takes more than four years to dismiss a single teacher. Even without these laws, ample protections exist for protecting public employees—including teachers—from improper dismissal.

By forcing some students into classrooms with teachers unable or unwilling to teach, these laws are imposing substantial harm. One of our experts, Harvard economist Raj Chetty, recently analyzed the school district data and anonymous tax records of more than 2.5 million students in a large urban school district in the Northeast over a 20-year period.

He found that students taught by a single highly ineffective teacher experience a nearly 3% reduction in expected lifetime earnings. They also have a lower likelihood of attending college and an increased risk of teenage pregnancy compared with students taught by average teachers. He also conducted a study showing that laying off the least effective instead of the least experienced teachers would increase the total lifetime earnings of a single classroom of Los Angeles students by approximately $2.1 million.

Even worse, the data show that many of the least effective teachers tend to end up in schools serving predominantly low-income and minority communities. Thus these laws are exacerbating the very achievement gap that education is supposed to ameliorate. For example, a recent study of the Los Angeles Unified School District found that African-American and Hispanic students are 43% and 68% more likely, respectively, than white students to be taught by a highly ineffective teacher. This disparity is the equivalent of losing a month or more of school every year.

The California teachers unions are opposed to the goals of our lawsuit and have intervened to help the state of California defend these harmful laws. But the unions do not speak for all teachers. We have heard from hundreds of teachers since we filed the case in May 2012. These are teachers who don't want to be treated like a faceless seniority number, and who don't want to be laid off just because they started teaching three days after the ineffective, tenured teacher next door. Some of them will testify during the trial.

Continued in article

Regulators are investigating Bank of America for front running its clients' large trading orders, according to documents reviewed by Reuters reporters Karen Brettell and Aruna Viswanatha.

Front running is a pretty simple trick. You (the bank) know your client is going to place a big order for a security. Since you know the price of the security will go up after that big buy, you place the bank's order ahead of your client's order.

Sometimes this results in the price of the security going up for your client.

In this case, according to Reuters, that client was Fannie Mae and Freddie Mac.

This was disclosed in a BrokerCheck filing on regulator FINRA's website. BrokerCheck allows anyone to look at a specific trader's professional background, and this report was filed with a former Bank of America trader named Eric Beckwith based in NYC. A bank spokesperson said the trader left the bank in July 2013. The filing dates back to June 2013.

Here's a screenshot of the section of Beckwith's report explaining the investigation:

Continued in article

"25 Charged in Largest Medicaid Fraud Bust in D.C. History," CBS News, February 20, 2014 ---
http://washington.cbslocal.com/2014/02/20/feds-to-announce-arrests-in-d-c-health-care-fraud-case/

Federal authorities say 25 people have been charged in a wide-ranging scheme to obtain millions of dollars in fraudulent Medicaid payments from the District of Columbia government.

U.S. Attorney Ronald Machen calls it the largest health-care fraud case in the city’s history. It involved bogus claims for home care services, a category of Medicaid claim that has grown dramatically in the city over the past eight years. Machen says fraud is largely responsible for the increase in those claims. The uptick in billings for home care — from $40 million in 2006 to $280 million last year — was part of what tipped off authorities to illegal activity, U.S. Attorney Ronald Machen said.

“We concluded that much of the growth was due to aggressive networks of fraudsters paying kickbacks to beneficiaries to manufacture false claims for nonexistent services,” Machen said, later adding: “Medicaid fraud in the District of Columbia is at epidemic levels.”

Among those charged Thursday was Florence Bikundi, 51, of Bowie, Md., the owner of a home care agency in suburban Maryland who had lost her nursing license and was ineligible to receive Medicaid payments. Authorities say that by using different names, she was able to bill the city for $75 million in Medicaid payments.

Prosecutors say many of the defendants persuaded patients to fake illness or injury so they could bill Medicaid for home care they didn’t receive. Some of those patients received kickbacks, authorities said, although no patients have been charged.

Machen said it wasn’t clear whether any of those payments went to legitimate home care services, but Bikundi was able to amass significant personal wealth, authorities said. Among the property seized from her were millions of dollars from 46 bank accounts, a 7,300-square-foot home valued at $927,000 and five luxury vehicles.

No attorney was listed in court records for Bikundi, who is in custody, and no one answered a call to her home Thursday afternoon.

Machen said there wasn’t any particular weakness in the district’s Medicaid program that made it vulnerable to bogus claims, and he noted that similar schemes have been perpetrated in other cities, including Detroit and Miami. The investigation is ongoing, and authorities said it was impossible to put a dollar amount on the fraudulent billings, although the indictments not involving Bikundi outlined schemes valued at less than $500,000.

“These numbers could likely grow. This is what we know so far,” Machen said.

A dozen people were charged in five federal indictments that were unsealed Thursday. Thirteen others were charged with fraud in D.C. Superior Court. All but three were in custody Thursday afternoon, authorities said.

Many of those charged are immigrants from Cameroon in west Africa, but authorities did not go into detail about their nationalities.

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

Glass-Steagall Act --- http://en.wikipedia.org/wiki/Glass-Steagall_Act

"JPMorgan's Madoff Settlement Could Prove Elizabeth Warren Right," by Linette Lopez, Business Insider, January 7, 2014 ---
http://www.businessinsider.com/jpm-settlement-proves-warrens-point-2014-1

Another day, another $1.7 billion in fines for JP Morgan. This time, it's for failing to catch Ponzi schemer Bernie Madoff as it managed his ill gotten gains. Now the bank has to admit that it didn't have the systems in place to catch Madoff and implement them under a deferred criminal prosecution agreement.

You could call this a case of "too big to manage," one of anti-Wall Street crusader Senator Elizabeth Warren's (D-MA) favorite catchphrases.

Back in November, she used it to talk about reinstating Glass-Steagall, the regulation that once split commercial and investment banks.

"The new Glass-Steagall Act would attack both 'too big' and 'to fail,'" Warren said..."It would reduce failures of the big banks by making banking boring, protecting deposits, and providing stability to the system even in bad times. And it would reduce 'too big' by dismantling the behemoths, so that big banks would still be big—but not too big to fail or, for that matter, too big to manage, too big to regulate, too big for trial, or too big for jail."

In terms of management, the Madoff case is a catastrophe arguably worse than the London Whale.

Sure, the London Whale ended up costing JP Morgan $6 billion, and it was born in the bank's own Chief Investment Office, but that failing trade was only hidden from JPM's execs for about half a year. Madoff managed to fool everyone for decades.

Well, almost everyone. There were people at JP Morgan who sounded the alarm, according to Iriving Picard, the trustee appointed by New York's bankruptcy trustee to review Madoff's case for his "clients".

Picard's 2011 report indicates that two JPM executives knew something was wrong with Madoff, Risk Chairman John Hogan and COO Matt Zames.

Here's a quote from Hogan back in 2007 (From Picard's report, via CNN Money):

Continued in article

Jensen Comment
For its inception I've never been a cheerleader for repeal the Glass-Steagall Act.

"How Bank of America and Others Schemed to Exploit You," SmartPros, January 14, 2014 ---
http://accounting.smartpros.com/x75726.xml

Jensen Note:  For some reason (probably unintended) this article appears in my browser as one huge paragraph

In the middle of 2011, Bank of America settled an otherwise nondescript lawsuit with the City of San Francisco for the paltry sum of $5 million. The case involved allegations that the bank colluded with competitors to force customers into arbitrating credit card disputes before the National Arbitration Forum, a private mediation company claiming to be a "fair, efficient, and effective system for the resolution of commercial and civil disputes in America and worldwide." What was the city's beef? Virtually every case heard by the NAF was decided in favor of the bank and its brethren, who, not coincidentally, also financed the mediator's highly profitable operations. While few people would deny that appearing to rig an arbitration forum like this violates deep-seated notions of fair play and substantial justice, what makes this case even worse is that it's merely one in a vast series of systematic business practices employed by the nation's largest lenders over the years to unjustly tilt the financial system in their favor. A laundry list of systematic deceit Few practices illustrate the systematic nature of deceit that prevails at the top of the banking industry better than the "credit protection" services thrust upon unwitting customers until federal regulators and private lawsuits led banks to effectively do away with the vacuous services. The structure of the scheme was simple. Banks used aggressive marketing techniques to persuade customers into paying monthly fees akin to insurance, covering the customer's minimum credit card payments in the event of an illness, death, disability, or job loss. Sounds pretty good, right? The problem is that banks including Capital One Financial , Citigroup , and Bank of America, among others, are alleged to have involuntarily enrolled customers in the programs while, at the same time, systematically refusing to honor the commitments based on indecipherable legalese in the service contracts. According to legal filings in a case against Bank of America, one man paid the bank more than $700 for the service even though he never knowingly enrolled in it. When he called to terminate the charges and request his money back, the customer representative wouldn't approve a refund. The estate of a Korean War veteran who passed away from lung cancer was denied coverage because his death wasn't "accidental." And a woman who lost her job as a medical transcriptionist was denied benefits because her unemployment was not caused "exclusively by business bankruptcy, failure or loss of required equipment to conduct business, or damage to the business premises caused by fire, theft, or natural disaster." Just to reiterate, assuming the allegations made by innumerable bank customers in myriad court filings and cases are to be believed, which isn't unreasonable given the hundreds of millions of dollars paid by the industry to resolve the claims, then these were officially sanctioned programs replete with salespeople and customer service representatives. And if the allegations are to be believed, the practices were intentionally designed to mislead customers into enrolling in the programs, whether they ultimately consented to do so or not, and then to deny benefits when ostensibly qualifying calamities occurred. Another example of how the nation's biggest banks have systematically exploited their customers over the years involves the way debit-card overdraft fees were assessed until the industry succumbed yet again to pressure from federal regulators and private legal action. Starting around 2001, the nation's biggest banks implemented automated overdraft programs that allowed customers' charges to go through even if they didn't have sufficient funds in their accounts. The catch was that customers would be assessed a fee ranging from $10 to $38, with a median of $27, each time an overdraft occurred. Fair enough, right? If you're not able to keep track of your account balance, then your bank should have every right to exact a fee in the event that it's required to cover the overage with its own capital. But here's the thing: The automated systems were programmed to reorder daily transactions from largest to smallest, and not, as fairness and common sense seem to dictate, chronologically. For example, say a customer had an account with a $50 balance and made four transactions of $10 in the morning and one later transaction of $100 in the evening of the same day. In this case, the bank's automated program would debit the $100 transaction first, despite the fact that it actually occurred last, and by doing so subject the customer to five overdraft fees instead of one. The net result of this practice was that overdraft charges were commonly assessed at times when, but for the chronological manipulation, there would have been funds in the account, and thus no overdraft would have occurred. I could go on and on with examples.

Continued in one huge paragraph

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

Teaching Case
From The Wall Street Journal Accounting Weekly Review on January 17, 2014

Rubbing Tax Salt in J.P. Morgan's Settlement Wound
by: David Reilly
Jan 09, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Income Taxes

SUMMARY: JP Morgan Chase's securities filing Tuesday discussing the deferred-prosecution agreement related to criminal violations involving work for convicted Ponzi schemer Bernard Madoff. The company has mostly accrued already for the penalties from this case but added $400 million to its liabilities. The interesting analysis in this article finds that the company showed an $850 million earnings reduction from this accounting and guesses that JPMorgan may not have anticipated this payment as a penalty which would never be tax deductible.

CLASSROOM APPLICATION: This is an interesting article to discuss a permanent difference between book and tax income for JPMorgan in relation to another accounting issue-the Bernard Madoff Ponzi scheme.

QUESTIONS: 
1. (Introductory) Why was JP Morgan Chase required to pay $1.7 billion to the U.S. government in relation to the Bernard Madoff Ponzi scheme?

2. (Advanced) Define the term "permanent difference" between book income and taxable income.

3. (Advanced) According to the article, how does a $400 million increase in liabilities for penalties to be paid to the U.S. government result in an $850 million increase in expenses/decrease in profits? Relate your answer to the notion of a permanent difference that you defined above.
 

Reviewed By: Judy Beckman, University of Rhode Island

"Rubbing Tax Salt in J.P. Morgan's Settlement Wound," by David Reilly, The Wall Street Journal, January 9, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702303754404579308580666896714?mod=djem_jiewr_AC_domainid

J.P. Morgan Chase's JPM -0.83% $1.7 billion Madoff payout was painful enough for investors. But it came with a sting in the tail.

The bank's securities filing Tuesday discussing the deferred-prosecution agreement related to criminal violations involving work for convicted Ponzi schemer Bernard Madoff contained an interesting disclosure. The agreement, along with other payments J.P. Morgan would make to regulators, would result in a $400 million increase in litigation reserves for the fourth quarter of 2013.

That likely reflects a $350 million settlement with the Office of the Comptroller of the Currency, for which J.P. Morgan doesn't appear to have previously reserved and which was above and beyond the $1.7 billion. Aside from that, the bank said it was substantially reserved for the agreements announced Tuesday, which included private litigation as well as the government actions and totaled $2.6 billion.

Yet J.P. Morgan quantifies the "total impact" on fourth-quarter net income at about $850 million. How does a $400 million expense translate into an $850 million earnings hit?

That is due to the nature of litigation reserves and a particular provision of the agreement. The bank appears to have anticipated the $1.7 billion included as part of the deferred-prosecution agreement, meant to compensate victims of Mr. Madoff's fraud. At least, its statement that it was already substantially reserved for the agreements implies this.

Reserves are an expense, though, and create a tax benefit. Indeed, when the bank agreed last fall to a $13 billion settlement with federal and state agencies over sales of mortgage bonds, $7 billion of that was considered a compensatory payment. So that portion was deductible for tax purposes, J.P. Morgan finance chief Marianne Lake said on a conference call at the time.

The government took heat for that back then. So this time, the $1.7 billion will be treated "as a penalty paid to the United States government," according to the Justice Department. As such, this wouldn't be tax-deductible, both the bank and the government said. J.P. Morgan doesn't appear to have expected that when it initially reserved for the deal.

The upshot? J.P. Morgan will have to go back and adjust its litigation reserve to reverse the tax benefit it would have accrued. This explains the higher, $850 million earnings hit.

The bottom-line impact isn't grave: J.P. Morgan is still forecast to have earned about $5 billion in the last quarter. It is a reminder, though, that in deciphering bank results, investors need to keep a close eye on the vagaries of litigation expenses.

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

"Former NYC workers charged in disability scam," by Jennifer Peltz and Collen Long, Associated Press, January 7, 2013 ---
http://hosted.ap.org/dynamic/stories/U/US_POLICE_DISABILITY_FRAUD?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2014-01-07-14-39-55

One retired police officer who said he couldn't work taught martial arts, prosecutors said. Another who claimed he was incapable of social interactions manned a cannoli stand at a street festival, they said. A third who said his depression was so crippling that it kept him house-bound was photographed aboard a Sea-Doo watercraft.

All were wrongly receiving thousands in federal disability benefits, prosecutors said Tuesday in announcing a sweeping fraud case involving scores of retired officers, as well as former firefighters and jail guards. The retirees faked psychiatric problems, authorities said, and some falsely claimed their conditions arose after the Sept. 11 attacks.

"The brazenness is shocking," said Manhattan District Attorney Cyrus R. Vance Jr.

Four ringleaders coached the former workers on how to feign depression and other mental health problems that allowed them to get payouts high as $500,000 over years, Vance said. The ringleaders made tens of thousands of dollars in secret kickbacks, Vance said.

The four - retired officer Joseph Esposito, 64; John Minerva, 61, a disability consultant with the detective's union; lawyer Raymond LaVallee, 83; and a benefits consultant Thomas Hale, 89 - sat stolidly as they pleaded not guilty Tuesday to high-level grand larceny charges. All were released on bail, ranging from $250,000 to $1 million.

Their lawyers said all four staunchly denied the accusations, and some noted that their clients had legitimate jobs helping people seek benefits. Minerva did "what he thought was being done in the correct fashion," said his lawyer, Glenn Hardy. "I don't think he was steering people or telling people what to say when they applied for those benefits."

Hale's lawyer, Brian Griffin noted that according to prosecutors, many of the benefit-seekers had been found eligible for city disability pensions before they got federal benefits.

But prosecutors argued that eligibility for Social Security disability benefits is a higher bar - complete inability to work - than qualifying for a city worker disability pension. And they said the applicants strategically lied, with the ringleaders' guidance, to make themselves appear to meet it.

They were taught how to fail memory tests and how to act like a person suffering from depression or post-traumatic stress disorder, prosecutors said. If they were claiming to be traumatized by 9/11, "they were instructed to say that they were afraid of planes or they were afraid of tall buildings," Assistant District Attorney Christopher Santora told a judge.

More than 100 were arrested, including 72 city police officers, eight firefighters, five corrections officers and one Nassau County Police Department officer.

Police Commissioner William Bratton said the arrests were an effort to ensure "the memories of those who did in fact contribute their lives or their physical well-being to dealing with 9/11 are not sullied."

Former police officer Louis Hurtado taught martial arts in Odessa, Fla., according to the studio's website. Online photos showed onetime cop Joseph Morrone smiling at the cannoli stand during a TV interview during the San Gennaro Festival in 2009. In another photo, a smiling, tanned Glen Lieberman, a retired officer, gestures obscenely at the camera from aboard a watercraft.

Morrone pleaded not guilty and was released without bail. There was no answer at Hurtado's listed number in Florida. The Associated Press couldn't locate a home phone number for Lieberman.

Many of the defendants said they could not use a computer but had Facebook pages, Twitter handles and YouTube channels, prosecutors said.

Patrick Lynch, president of the Patrolmen's Benevolent Association, said the union didn't condone the filing of false claims, but "we caution everyone to recognize that there are serious psychological illnesses resulting from the devastating work performed by first responders following the attack on the World Trade Center and in performing the dangerous and difficult work of police officers."

Continued in article

Jensen Comment
The only surprise is that more city employees did not jump on the gravy train like disability recipients in Florida.

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

From the CFO Journal's Morning Ledger on January 10, 2014

"Former University of North Carolina professor faces fraud charge in academic scandal," Fox News, December 2, 2013 ---
http://www.foxnews.com/sports/2013/12/02/former-university-north-carolina-professor-faces-fraud-charge-in-academic/

A former professor at the center of an academic scandal involving athletes at the University of North Carolina at Chapel Hill has been charged with a felony, accused of receiving $12,000 in payment for a lecture course in which he held no classes.

A grand jury on Monday indicted Julius Nyang'Oro with a single felony count of obtaining property by false pretenses.

Nyang'Oro was chairman of the Department of African and Afro-American Studies. He resigned from that post in 2011 during a campus investigation that found certain classes in the department that instructors did not teach, undocumented grade changes and faked faculty signatures on some grade reports.

The scandal contributed to the departure of football coach Butch Davis and the resignation of a former chancellor, Holden Thorp.

Nyang'Oro, who retired in 2012, could face up to 10 months in prison if convicted. The university said it recouped the $12,000 from his final paycheck.

Calls to two numbers listed for Nyang'Oro rang busy. A man answering a call to a third number for Nyang'Oro on indictment documents hung up without comment and follow-up messages weren't returned.

Orange County District Attorney James Woodall said the professor's 2011 summer course was supposed to have had regular class meetings. But he said Nyang'oro instead ran an independent study class that required students to write papers but not show up. The school found that the course, a late addition to the schedule, had an enrollment of 18 football players and one former football player.

A campus investigation into academic fraud released last year blamed the scandal solely on Nyang'oro and a department administrator who also has since retired. The probe led by former Gov. Jim Martin concluded that alleged fraud didn't involve other faculty or members of the athletic department.

Martin, a former college chemistry professor, was aided by consultants with experience in academic investigations. After shortcomings of the report's method were highlighted, Martin and university officials said they lacked the subpoena powers of State Bureau of Investigation, or SBI, to force people to answer questions and produce evidence.

"Both the university and Mr. Woodall relied on the SBI to help determine whether any criminal acts had occurred, since the SBI had broad investigative powers not available to the university," said Tom Ross, president of the state university system.

He added in his statement Monday that the university's ongoing cooperation with the criminal process will continue to its conclusion.

Martin said there was no evidence the university's athletics department pushed students into courses with known irregularities that would allow athletes to remain eligible for competition. Unauthorized grade changes in the African studies department were not limited to student-athletes, Martin said, and athletes generally didn't flock to problematic African studies courses.

The NCAA sanctioned the university's football program in March 2012 with a one-year bowl ban and scholarship reductions for previously discovered improper benefits including cash and travel accommodations. The NCAA reviewed irregularities in the African studies department after an earlier campus probe found 54 problem classes between 2007 and 2011. The collegiate sports oversight body told university officials it had found no new rules violations.

The school's chancellor issued her own statement Monday on the indictment.

"The action described in today's indictment is completely inconsistent with the standards and aspirations of this great institution," Chancellor Carol Folt said in a statement. "This has been a difficult chapter in the university's history, and we have learned many lessons."