Accounting Scandal Updates and Other Fraud Between March 31 and June 30 in the Year 2006
Bob Jensen at Trinity University

Bob Jensen's Main Fraud Document --- 

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

Bob Jensen's Enron Updates are at --- 

Other Documents

Many of the scandals are documented at 

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

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

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

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

I love Infectious Greed by Frank Partnoy --- 

Bob Jensen's American History of Fraud ---

Future of Auditing --- 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 ---

What Accountants Need to Know ---

Bob Jensen's threads on fraud are at

Beware of the So-Called Investor Education Programs (especially beware of infomercials)

"I don't see frankly much out there that really does the job, and that's partially because investors are their own worst enemy," says former SEC Chairman Arthur Levitt. "They refuse to invest skeptically, and are too easily seduced by all the purveyors of financial products that prey upon their worst instincts."
"Investor Education 101: How to Avoid Scams:  Outreach Programs Target Most-Vulnerable Americans, But Success Is Hard to Assess,"  By Lynn Cowan, The Wall Street Journal, May 9, 2006; Page D3 ---

An onslaught of investor education is being unleashed, thanks to an ever-growing stockpile of money set aside for this purpose by regulators.

Senior-citizen investors being preyed upon? The nonprofit Investor Protection Trust is financing a Florida state program that teaches retirees to identify and report suspected scams.

Military families feeling pressured into buying unnecessary financial products? The National Association of Securities Dealers' Investor Education Foundation has launched a specialized Web site:

Auto workers receiving lump-sum retirement buyouts in coming months? There is a new Securities and Exchange Commission publication that warns that they could be prime targets for fraud.

There seems to be no end to the list of publications, public-service announcements and seminars being funded in the wake of a landmark settlement in 2003 between regulators and Wall Street over stock analysts' conflicts of interest. The settlement provided $80 million in investor-education funds, and regulators add to that amount every year with more penalties for new securities-industry transgressions.

Unfortunately, there's also a seemingly infinite trove of outright hucksters and smooth marketing materials bombarding investors every day, say regulators and observers. And no one knows how effective investor-education programs are in combating them.

"I don't see frankly much out there that really does the job, and that's partially because investors are their own worst enemy," says former SEC Chairman Arthur Levitt. "They refuse to invest skeptically, and are too easily seduced by all the purveyors of financial products that prey upon their worst instincts."

There's also little information available about what kinds of programs really work to educate and protect investors. Regulators and investor-education specialists say they are working hard to expand their materials beyond brochures with basic information to encompass interactive games for students, television programs and in-person seminars.

But regulators add that they are also fighting against strong forces in their battle to educate and protect investors from scam artists, their own emotions and a legacy of conflicts of interest in the brokerage industry.

Scam artists are the most easily identified investor-protection issue: Often organized in pyramid, or "Ponzi," structures, the schemes promise outsized returns and can exist for years before collapsing. Investor-protection programs can easily focus on warning about this kind of threat because it has some obvious hallmarks.

Regulators' second villain is trickier: investors' own inertia and greed. Getting most people in the U.S. to learn the basics of a careful investing strategy is akin to asking them to read a legal footnote, but there is no shortage of people willing to sign up for the chance to earn 130% on ersatz securities.

Possibly the most innovative investor-education program in existence today targets investors who are drawn to these get-rich-quick scams. The SEC runs several Web sites that pose as can't-fail investment schemes. One,, outlines the business dealings of a fake construction-supply company, Growth Venture, which invites viewers to invest and receive returns of 350% a year. Anyone falling for the bait is linked to an SEC page that gently chides them and describes how to avoid scams.

But such educational tools aren't as easy to construct for one of the thorniest issues facing investor-education programs: teaching people about protecting themselves in daily interactions with the legitimate brokerage industry.

Although larger Ponzi scams, such as the Financial Advisory Consultants bust in California in 2004, are headlined for bilking investors out of as much as $300 million, industry wide brokerage scandals involving well-known firms have surpassed $1 billion apiece. From Prudential Securities' abusive sales of limited partnerships in the early 1990s to the conflicts of interest in analyst research in the late 1990s, major Wall Street firms appear to be struggling with improper systematic conduct every decade.

Yet investor educators often express concern about finding the right balance between warning investors and condemning a highly regulated industry that provides legitimate advice and services.

Continued in article

Jensen Comment
Also be careful what mutual fund or brokerage firm you deal with. My advice is to avoid high-commission brokerage firms. My advice is to also compare the mutual fund expense rates with benchmark rates of Vangaard and Fidelity.

Bob Jensen's threads on scams are at

Check the fraud rates of firms of better known firms. For example do a search on "Merrill" at

Something Teachers Might Paste on Their Office Doors
Forwarded by Aaron Konstam

Rule 01: Life is not fair - get used to it!

Rule 02: The world won't care about your self-esteem. The world will expect you to accomplish something BEFORE you feel good about yourself.

Rule 03: You will NOT make $60,000 a year right out of high school. You won't be a vice-president with backdated stock options until you earn both.

Rule 04: If you think your teacher is tough, wait till you get a boss.

Rule 05: Flipping burgers is not beneath your dignity. Your Grandparents had a different word for burger flipping: they called it opportunity.

Rule 06: If you mess up, it's not your parents' fault, so don't whine about your mistakes, learn from them.

Rule 07: Before you were born, your parents weren't as boring as they are now. They got that way from paying your bills, cleaning your clothes and listening to you talk about how cool you thought you were. So before you save the rain forest from the parasites of your parent's generation, try delousing the closet in your own room.

Rule 08: Your school may have done away with winners and losers, but life HAS NOT. In some schools, they have abolished failing grades and they'll give you as MANY TIMES as you want to get the right answer. This doesn't bear the slightest resemblance to ANYTHING in real life.

Rule 09: Life is not divided into semesters. You don't get summers off and very few employers are interested in helping you FIND YOURSELF. Do that on your own time.

Rule 10: Television is NOT real life. In real life, people actually have to leave the coffee shop and go to jobs.

Rule 11: Be nice to nerds. Chances are you'll end up working for one.

Added by Jensen
Rule 12:  Faking Disability is About as Low as It Gets
Don't fake disability in order to live out the rest of your life without working. Some who tried went to jail and paid heavy fines according to Michael Crowley, "Faking It:  We all pay the price when 'disabled' scam artists collect big benefit bucks," Readers Digest, October 2006, pp. 27-29. One of the scammers named Denise Hendersen conned the system for while becoming a winner the 2001 Mrs. International pageant which later entailed over 200 public appearances. She got caught toting heavy shopping bags and diving on a Hawaiian vacation. She not only had to repay the $190,000 of disability benefits collected, she received a 46-month prison sentence. She's now thinking she's not so clever.

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

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

Bob Jensen's threads on investment banking scandals are at

Bias in the News Media: Hizbollah's Phony Hizdollas
Major News Outlets Really Didn't Know the Hizbollah Distribution Money Was Counterfeit (Yeah Right!)

"Counterfeit News," by David Frum, Canadian National Post, August 26, 2006 --- Click Here

"A Lebanese man counts U.S dollar bills received from Hizbollah members in a school in Bourj el-Barajneh, a southern suburb of Beirut, August 19, 2006. Hizbollah handed out bundles of cash on Friday to people whose homes were wrecked by Israeli bombing, consolidating the Iranian-backed group's support among Lebanon's Shiites and embarrassing the Beirut government. REUTERS/Eric Gaillard (LEBANON)"

This scene and dozens more like it flashed around the planet. Only one thing was missing -- the thin wire security strip that runs from top to bottom of a genuine US$100 bill. The money Hezbollah was passing was counterfeit, as should have been evident to anybody who studied the photographs with due care.

Care was due because of Hezbollah's history of counterfeiting: In June, 2004, the U.S. Department of the Treasury publicly cited Hezbollah as one of the planet's leading forgers of U.S. currency.

But this knowledge was disregarded by the news organizations who queued up to publicize Hezbollah's pseudo-philanthropy. The passing of counterfeit bills was detected not by the reporters and photographers on the spot, but by bloggers thousands of miles away:, MyPetJawa and Charles Johnson's Little Green Footballs. These sites magnified photographs and showed them to currency experts and detected irregularity after irregularity in the bills. (Links to all the sites mentioned here can be found at  )

The FCC Scandal
Media policy-making, with its overwhelming bias toward corporate consolidation, dumbed-down content and bottom-line decision-making, has been properly described for some time as "scandalous." Now the quotation marks can be removed; the scandal is official. In September came revelations that Federal Communications Commission officials had, since 2003, blocked the release of major reports that showed the danger of allowing a handful of media conglomerates to control communications. The suppression of the reports dramatically illustrates how an agency charged with protecting the public interest instead does the bidding of the telecommunications corporations it should regulate. One report found that locally owned television stations provide 20 percent more local news than stations owned by the broadcast behemoths. Another detailed a 35 percent drop in the number of independently owned radio stations following the removal of most ownership caps by the 1996 Telecommunications Act. Taken together, the reports make a powerful argument against moves by the Bush Administration and the FCC's Republican majority to further undermine ownership limits.
John Nichols, "The FCC Scandal," The Nation, September 28, 2006 ---

As we approach another academic year, I want to remind professors of the following fraud that is somewhat commonplace in academe, fraud exacerbated by the need to pad annual performance reports and resumes.

Academic Conferences that Rip Off Colleges ---

I love it when jokesters intentionally submit utter nonsense, albeit clever nonsense, that passes through the pretense of having acceptance/rejection filters by some conference sponsors who in reality accept virtually every submission.

"Five Things Every Homeowner Needs To Know About The Mortgage Business; Help Wanted: Honest Mortgage Brokers/Lenders," PRWeb, May 30, 2006 ---

The average American consumer/homeowner has little to no chance of getting an honest or fairly priced mortgage in today's double standard, murky mortgage environment. That is if you are a consumer/homeowner attempting to discover what is fair from a mortgage fee/interst rate pricing standpoint and what is not. As a result The Homeowners Consumer Center & its partner The Mortgage Inspection Service are recruiting honest mortgage brokers/lenders who are ready to compete in their local markets with an honest approach in working with consumers/homeowners.

(PRWEB) May 31, 2006 -- The Homeowners Consumer Center (Http://www.HomeownersConsumerCenter.Com) along with its partner the Mortgage Inspection service (Http:// have called for a national consumer alert to all homeowners about the realities of the current US mortgage market, in the form of five critical consumer tips they need to know. At the same time the Homeowners Consumer Center is seeking information about locally owned mortgage firms/lenders that are tired of trying to compete against dishonest mortgage lenders. The targets of this campaign are as follow:

1. TV Pitchmen promising consumers/homeowners they will get numerous mortgage firms to compete for a mortgage deal, or that someone should have called so and so. The problem; the sales pitch does not always measure up to what the consumer actually gets ( a much higher than market interest rate, ridiculous fees or both).

These same types of ads often times say, or talk about a "no point" gimmick, which is not exactly "no fees", if you are a consumer. The actual translation is the consumer just got a higher interest rate and a higher monthly mortgage payment.

2. National Homebuilders in many to most cases exclude borrowers from getting a competitive quote from local mortgage lenders. Typically the homebuilder prices the home buyers mortgage products 25 to 125 basis points over par (par=the best available interest rate for the borrower) and frequently these transactions are loaded with junk mortgage fees. If the borrower wants to get a competitive quote he/she or they get told, " the house will cost more", or they will not get a "bonus". What the homebuilder failed to tell the consumer is that because they are a "mortgage banker", they are not required to disclose the "yield spread premium" to the borrower=higher monthly mortgage payment. Mortgage brokers are required to disclose yield spreads to consumers.

A second severe problem with homebuilders is that they frequently tell appraisers what they want their homes to sell for, rather than allow the appraiser/appraisal firm to their job. "Either hit our values", the homebuilder wants (real or not), or they find another appraiser/appraisal firm that will. If there is a real estate bubble burst this year, it will start with homebuilders slashing their in some cases false valuations. Inflating real estate appraisals/massive appraisal fraud is the ticking time bomb that could potentially crush the US economy/real estate markets nationwide. Once again Wall Street was asleep at the switch for a disaster that could be worse than the S&L crisis of the 1980's.

3. Mortgage Lead generation scams on the Internet.: Once again the consumer/homeowner can get taken for a ride, or ends up with a much more expensive mortgage product. Most Internet providers have gladly sold advertising space to just about any lender, honest or not. Do business with local or well known mortgage firms.

4. Real Estate firms that also want to be the consumer's mortgage lender. We feel it is the ultimate conflict of interest for a real estate agent/firm to also be wearing the hat of mortgage lender. We believe the functions of real estate sales & real estate financing need to be separate. Next to national homebuilders blackmailing appraisal firms into unrealistic valuations, are real estate agents acting as mortgage lenders doing the same thing. Consumers are advised to steer clear of real estate agents/brokers also acting as mortgage bankers.

5. If anyone is looking to the Bush Administration, HUD, or the US Senate or House Banking Committees for help, don't hold your breath. In light of the Abramoff & Duke Cunningham Congressional bribery scandals one would hope that a consumer/homeowner friendly environment might exist. Nothing could be further from the truth.

In reality banks and mortgage bankers are not held to the same standards as are mortgage brokers with respect to serious consumer disclosure issues. At the very top of this list are 'yield spread premiums" (a kick back for increasing the mortgage interest rate).

Many have concluded, unlike mortgage brokers, banks and mortgage bankers are not being required to disclose these kick-backs because, they are the number one contributer to US House & Senate Banking Committees. President Bush had his Gala re-election campaign party in part financed by a mortgage lender that has been ordered to pay $300 million+ back to consumers.

The Homeowners Consumer Center
(Http://HomeownersConsumerCenter.Com) and The Mortgage Inspection Service (Http://MortgageInspectionService.Com) want consumers/homeowners to understand these realities and at the same time they would like to partner with local, reputable mortgage firms/lenders that are interested in advancing educational campaigns in their communities so that consumers will be better educated when making application for mortgages or refinances. The goal of this campaign is to increase originations for participating mortgage firms/lenders & at the same time give the consumer an honest mortgage product/refinance.

The Homeowners Consumer Center also think it important that states and the federal government eliminate loop holes that prevent transparency in a mortgage transaction, regardless of a lenders status as broker, banker or the amount of money they contributed/paid to a politician.

Honest mortgage lenders/brokers who want to treat their customers with honesty are encouraged to contact the Homeowners Consumer Center
( Http://HomeownersConsumerCenter.Com ) for more information about a state by state campaign to get the word out about honest or hard working mortgage lenders. To join the Homeowners Consumer Center in this campaign, mortgage firms/ lenders will be required to agree to a realistic consumer disclosure agreement. A straight forward approach like this is long over due in todays mortgage world. Homeowners & consumers deserve better, and The Homeowners Consumer Center and its partner, The Mortgage Inspection Service think this is a very solid step to try to cure problems associated with an out of control mortgage industry.

Bob Jensen's threads on consumer frauds are at

Warning Video for Mutual Fund Investors: 
"The more mangers take, the less investors make"

From Jim Mahar's blog on June 9, 2006 ---

Video of Bogle's speech on the Mutual Fund Industry

I finally got around to watching Bogle's speech to Independent Mutual Fund Directors. It is available on the Bogle eblog.

My favorite quotes:
"...the more mangers take, the less investors make."

"If you do not believe we are we are in teh marketing business, consider rate of fund failure....there have been 30,000 funds in history, 11,000 of them are gone....Even in the last 5 years, 25%, actually 27% of all equity funds have vanished....I am afraid to say, it is largely a marketing business."
Well worth a listen!

Bob Jensen's threads on mutual fund frauds are at

Bob Jensen's investment helpers are at

Security threats and hoaxes ---

25 Hottest Urban Legends (hoaxes) --- 

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

Two on Bankruptcy and Credit Bankruptcy: Maxed out in American [Real Player] 

Credit Score, Reports, and Getting Ahead in America [pdf]

Informercial Scams (even those carried on the main TV networks)---

The 10 Most Faked Artists  ---


In a shocking rip-off of taxpayers, federal hurricane relief bought "Girls Gone Wild" videos, Caribbean vacations and French champagne, as thousands of brazen scam artists bilked the government out of $1.4 billion, a bombshell report reveals.

Although the aid was intended to shelter and clothe thousands of devastated families from hurricanes Katrina and Rita, the audit to be presented to Congress today shows a widespread criminal splurge of debauchery and excess while the feds were asleep at the switch.

One evacuee scammed a luxurious $1,000 vacation at Punta Cana, a resort area in the Dominican Republic.

Another spent $300 on "Girls Gone Wild" videos at a Santa Monica, Calif., store.

Some opted for live entertainment: An evacuee spent $600 at a "gentlemen's club" in Houston, and another doled out $400 on "adult erotica products" at a Houston store called The Pleasure Zone.

"This is an assault on the American taxpayer," said Rep. Michael McCaul (R-Texas), chairman of the House Homeland Security Committee's subcommittee on investigations. The panel will conduct the hearing today.

"Prosecutors from the federal level down should be looking at prosecuting these crimes and putting the criminals who committed them in jail for a long time."

CBS News reported last night that 7,000 people could be charged.

As much as 16 percent of the total aid was hijacked by con artists, the report concludes.

A copy of today's testimony about the audit was obtained last night by The Post.

One "victim" rode out the storm's aftermath by spending $300 at a San Antonio Hooters - and $200 for a bottle of Dom Perignon.

The feds also covered one person's three-month stay for a Honolulu hotel for $115 per night. The alleged scammer also collected $2,358 in rental assistance - despite residing in North Carolina, not New Orleans.

Anticipating the city's rebirth, another evacuee spent $2,000 on five New Orleans Saints season tickets.

But one evacuee was more practical, spending $1,000 to pay a divorce lawyer.

Closer to home, one rip-off artist double-dipped in Queens - collecting $31,000 to cover an extended $149 per night at the Ramada Plaza Hotel while also taking $2,358 in rental assistance.

Most of the hucksters used phony names and addresses to collect Katrina housing aid. Many listed post-office boxes, and some even used New Orleans cemeteries - but the hapless feds failed to check up on them.

Most fraud occurred because the Federal Emergency Management Agency "did not validate the identity of the registrant," according to investigators.

Incredibly, the feds handed out millions in emergency housing aid to 1,000 people who used the names and Social Security numbers of prison inmates in a half-dozen states across the south.

FEMA paid more than $20,000 to one prisoner who used a post-office box as the address of his "damaged property." It sent 13 payments to one person who filed claims at the same address using 13 Social Security numbers.

A federal investigator sniffing out mismanagement listed a vacant lot as a damaged address - and still got a $2,358 check.

"This is absolutely disgraceful," said Rep. Peter King (R-L.I.). FEMA "loses a billion in Katrina at the same time it's cutting 40 percent of [anti-terror] funding to New York City," he added.

"The Winding Road to Grasso's Huge Payday," by Landon Thomas, The New York Times, June 25, 2006 ---

In the spring of 2003, the chairman of the New York Stock Exchange, Richard A. Grasso, had his eyes on a very rich prize. Although Mr. Grasso's annual compensation at the time was about $12 million, on a par with the salaries of Wall Street titans whose companies the exchange helped regulate, he had accumulated $140 million in pension savings that he wanted to cash in — while still staying on the job.

Now Henry M. Paulson Jr., the chairman of Goldman Sachs and a member of the exchange's compensation committee, was grilling Mr. Grasso about the propriety of drawing down such an enormous amount and suggested that he seek legal advice. So Mr. Grasso said he would call Martin Lipton, a veteran Manhattan lawyer and the Big Board's chief counsel on governance matters. Would it be legal, Mr. Grasso subsequently asked Mr. Lipton, to just withdraw the $140 million if the exchange's board approved it? Mr. Grasso told Mr. Lipton that he worried that a less accommodating board might not support such a move, according to an account of the conversation that Mr. Lipton recently provided to New York State prosecutors. (Mr. Grasso has denied voicing that concern.) Mr. Lipton said he told Mr. Grasso not to worry; as long as directors used their best judgment, Mr. Grasso's request was appropriate.

Mr. Grasso continued to fret. What about possible public distaste for the move? Yes, there would be some resistance from corporate governance activists, Mr. Lipton recalled telling him, but given his unique standing in the business community he was "fully deserving of the compensation."

Then Mr. Lipton, a founding partner of Wachtell Lipton Rosen & Katz and a longtime adviser to chief executives on the hot seat, dangled another, hardball option in front of Mr. Grasso. If a new board resisted a payout, Mr. Lipton advised, Mr. Grasso could just sue the board to get his $140 million. The conversation represented a pivotal moment at the exchange, occurring when corporate governance and executive compensation were already areas of public concern. Mr. Grasso eventually secured his pension funds. But the particulars surrounding the payout later spurred Mr. Paulson to organize a highly publicized palace revolt against Mr. Grasso, leading to the Big Board's most glaring crisis since Richard Whitney, a previous president, went to jail on embezzlement charges in 1938.

An examination of thousands of pages of depositions from participants in the Big Board drama, as well as other recent court filings, highlights the financial spoils available to those in Wall Street's top tier. It also shines a light on deeply flawed governance practices and clashing egos at one of America's most august financial institutions, all of which came into sharp relief as Mr. Grasso jockeyed to secure his $140 million.

ELIOT SPITZER, the New York State attorney general, sued Mr. Grasso in 2004, contending that his Big Board compensation was "unreasonable" and a violation of New York's not-for-profit laws. With a trial looming this fall, prosecutors have closely questioned both Mr. Lipton and Mr. Grasso about their phone call. Prosecutors are likely to highlight Mr. Grasso's own doubts about the propriety of cashing in his pension; on two separate occasions Mr. Grasso withdrew his pension proposal from board consideration before finally going ahead with it.

The depositions paint a portrait of Mr. Grasso as a man who paid meticulous attention to every financial perk, from items like flowers and 99-cent bags of pretzels that he billed to the exchange, to his stubborn determination to corral his $140 million nest egg. While the board ultimately approved his deal, court documents also show a roster of all-star directors, including chief executives of all the major Wall Street firms, often at odds with one another or acting dysfunctionally.

A recent filing by Mr. Spitzer contended that Mr. Grasso's chief advocate, Kenneth G. Langone, a longtime friend and chairman of the Big Board's compensation committee, was less than forthcoming in keeping the exchange's 26-member board in the loop about how Mr. Grasso's rising pay was also inflating his retirement savings.

Continued in article

Bob Jensen's fraud updates are at

Bob Jensen's threads on corporate governance are at

Bob Jensen's threads on outrageous executive compensation are at

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

What is excessive compensation?

From Jim Mahar's blog on September 26, 2006 ---

Time to throw a penalty flag

First, the good part: Tuesday Morning QB does a great job of laying out the issue and demonstating one problem with boards setting pay .

From last week's TMQ which appeared on Page 2 : The five-month NFL forecast:
"Much news and sports commentary focuses on the ever-larger paychecks of professional athletes. But even Peyton Manning is a day laborer compared to the modern Fortune 500 CEO....Over his last five years at the helm, he got $162 million, even as Pfizer earnings faltered. Carol Hymowitz of the Wall Street Journal reported that the head of Pfizer's "compensation committee" defended McKinnell's windfall on grounds of market forces in executive pay -- which in this context appears to mean, "CEOs at other companies are picking shareholders' pockets, too."....McKinnell's pay for his tenure atop Pfizer equates to $130,000 per work day."
and slightly later:
"...consider that executive income usually is rubber-stamped by boards of directors whose members may be engaged in self-dealings with the firm, or who have a self-interest in rising CEO pay. As Julie Creswell noted in the New York Times, "Five of the six active Home Depot board members are current or former chief executives of public corporations … CEOs benefit from one another's pay increases, because compensation packages are often based on surveys detailing what their peers are making....The board members know the more they inflate CEO pay, the more they themselves will be able to pilfer from their own shareholders"
Ignoring the use of the word 'pilfer', this is a well-presented valid point. However, Easterbrook's next point deserves a yellow penalty flag and further review:
"Recently the Business Roundtable released a study purporting to show that CEO pay rose 9.6 percent annually from 1995-2005, while stockholder returns rose 9.9 percent in the same period. So things aren't so bad, eh? The Business Roundtable said the study 'sets the record straight.' The Business Roundtable is, by its own description, 'an association of chief executive officers of leading U.S. companies.' As Gretchen Morgenson, dean of Wall Street journalists, laid it out in the New York Times, the study systematically understated the income of CEOs... 'The study counts only the value of the options and restricted stock received by executives on the dates the awards were made.'"
Uh, wait, isn't that what we should be doing?

True, we should take into account the non normality of the stock distribution (induced both by rewriting underwater options and by the now famous back dating of options) which causes the Black-Scholes formula to understate the true value of the grant, BUT the value at grant is what we should consider. We can debate whether the Black-Scholes formula is correct or not, but theoretically the value at grant (again presuming a fair grant) is what matters.

Moreover, while it is true that the Business Roundtable is made up of CEOs, that should not be grounds for dismissal. The actual study does have several valid, and overlooked points. Notably that medians should be used, that the media "sometimes summarizes the pay practices for all CEOs from only the very largest companies", and the seemingly inarguable point that "pay statistics should be referenced accurately and applied responsibly".

Like other things, I will take the bad with the good. Overall
Tuesday Morning QB is still my favorite sports article. Its author is Gregg Easterbrook who is a former Buffalo School teacher and who wrote the
Progress Paradox, does a great job weaving many topics together in a funny, witty manner. That said, I guess I can no longer count TMQ as "finance reading". LOL.

Outrageous Executive Audacity

"That Other Guy From Omaha," by Gretchen Morgenson, The New York Times, August 29, 2006

Mr. Gupta is, shall we say, a piece of work. He often prevents large shareholders from asking questions on conference calls. He has received compensation that was not earned under the terms of the company’s executive compensation program, according to a lawsuit that Cardinal Value Equity Partners, infoUSA’s largest outside holder, filed against the company. And, the suit alleges, his board has given him free rein to dispense stock options to whomever he likes.

Related-party transactions are also routine at infoUSA. The Cardinal lawsuit contends that infoUSA paid a company owned by Mr. Gupta about $608,000 in 2003 to buy his interest in a skybox at the University of Nebraska’s Memorial Stadium. The university is Mr. Gupta’s alma mater and home of the Cornhuskers football team. In June 2005, the suit says, infoUSA paid $2.2 million for a long-term lease of his yacht. The yacht, named American Princess, is 80 feet long and has an all-female crew, according to a report in The Triton, a monthly publication for boat captains and crews.

Leases on an H2 Hummer, a gold Honda Odyssey, a Glacier Bay Catamaran, a Mini Cooper, a Lexus 330, a Mercedes SL500 ­ all used by the Gupta clan ­ as well as rent on a Gupta family condominium on Maui have also been financed by infoUSA shareholders, the suit said.

Shareholders also paid a company owned by Mr. Gupta’s wife $64,200 for consulting services in 2003 and 2004. Shareholders have also covered the Gupta family’s personal use of a corporate jet ­ leased by infoUSA from a company owned by the family ­ to have fun in the sun in Hawaii and the Bahamas. Mr. Gupta apparently wasn’t in a mood to return the favor: during a four-year period ending in 2004, infoUSA paid $13.5 million to Mr. Gupta’s private company for use of the aircraft.

What to make of all of this? The Cardinal lawsuit contends that the carnivalesque spending amounts to unregulated perquisites and evidence of a somnambulant board. Sleepy, perhaps, but always on the move. Some 15 directors have spun through infoUSA’s boardroom door over the last decade; five of them stayed less than a year.

It wasn’t until two years ago ­ November 2004 ­ that infoUSA’s board created guidelines for the approval of related-party transactions over $60,000. The Cardinal lawsuit alleges that some of infoUSA’s related-party dealings with certain board members “did not have a sufficient record to show authorizations and whether the services could be procured from other sources at comparable prices.”

None of the infoUSA board members returned phone calls seeking comment. Mr. Gupta did not return several phone calls, either.

But Mr. Gupta’s biggest faux pas occurred in June 2005, when infoUSA warned that its earnings would not be up to expectations. The stock fell from $11.94 a share to $9.85 the day after the announcement. Less than a week later, Mr. Gupta offered to acquire infoUSA for $11.75 a share, far less than the $18 a share he had said the company was worth just a few months earlier.

A special committee of the company’s board was set up to evaluate Mr. Gupta’s offer and to field bids from other possible partners in order to secure the highest possible price for infoUSA shareholders. Almost exactly a year ago, the committee concluded that the $11.75 offer was too low and that it should be subject to a “market check.”

At a board meeting on Aug. 26, 2005, Mr. Gupta said that he would not sell any of his shares to a third party in an alternative transaction, according to the lawsuit. Some directors might have used this opportunity to give Mr. Gupta a well-earned public rebuke. But a majority of the sleepwalkers at infoUSA just got into lockstep with their chief executive.

The directors responded by deciding that there was no need for infoUSA’s special committee to exist. They voted 5 to 3 (with one abstention) to abolish it. The only directors voting for the committee’s continuance were three of its four members; the fourth abstained from voting. The stock closed that day at $10.89.

The vote was the last straw for Cardinal Value Equity Partners. It filed suit in February against Mr. Gupta, some of infoUSA’s directors and the company itself.

“Our suit says that the special committee was prematurely terminated, that they didn’t get to finish their work and that was the wrong decision by the entire board,” said Robert B. Kirkpatrick, a managing director at Cardinal Capital Management. “We’re not asking for $100 billion; we ask that the special committee be reconstituted to be able to have the time to fulfill their original mandate as dictated by the board.”

In other words, to reopen the possibility of a buyout.

IN the meantime, all is right in Mr. Gupta’s gilded world. About three weeks ago, on Aug. 4, infoUSA announced that it was buying Opinion Research, a consulting services company, for $12 a share, an almost 100 percent premium to Opinion Research’s market price the day before the announcement.

Lo and behold, who owned Opinion Research shares the day the deal was announced? The Vinod Gupta Revocable Trust, according to a regulatory filing, owned 33,000 shares. The trust, controlled by Mr. Gupta, sold 22,000 of its shares after the merger announcement sent Opinion Research’s stock rocketing.

The trust’s shares don’t represent a huge stake, but it is worth asking: Did infoUSA’s directors know that the Gupta trust was an Opinion Research shareholder when they signed off on the premium-priced deal? And what gains did the trust record when it sold into the deal-jazzed market? For now, the answers are unclear.

In coming weeks, a judge in Delaware will rule on whether the Cardinal lawsuit can proceed. InfoUSA has asked the judge to dismiss the case, saying that it has no merit.

“Unfortunately, the system is broken in this case,” said Donald T. Netter, senior managing director at Dolphin Financial Partners, a private investment partnership in Stamford, Conn., that is an infoUSA shareholder. “The board has failed to protect the unaffiliated shareholders. When the system works properly, you shouldn’t get into these situations.”

No kidding.

Bob Jensen's threads on outrageous executive compensation schemes are at

Fake Invoice Fraud
The owner of the nation's largest computerized machine tool maker was arrested yesterday morning at his California home and charged with orchestrating a tax fraud that cost the government nearly $20 million as well as intimidating witnesses and a federal agent investigating the case.Gene F. Haas, 54, of Camarillo, Calif., the owner of Haas Automation and other companies, was accused in a 52-page indictment of running a bogus invoicing scheme to create fake tax deductions. Mr. Haas was held without bail after his arraignment in Federal District Court in Los Angeles.
David Cay Johnston, "Executive Accused of Tax Fraud and Witness Intimidation," The New York Times, June 20, 2006 ---


There's no fraud like U.S. Government fraud

"Limo letter is found at Homeland Security," by Dean Calbreath, The San Diego Union-Tribune, June 17, 2006 ---

A day after Homeland Security officials denied knowing about former Rep. Randy “Duke” Cunningham's attempts to gain a contract for a limousine service, Cunningham's letter praising the company surfaced in the department's files.

In the letter, Cunningham wrote of his “full support of (Shirlington Limousine's) wish to provide transportation services for the Department of Homeland Security,” or DHS.

FBI agents have been investigating whether the company – while working for Brent Wilkes, an unindicted co-conspirator in the Cunningham corruption case – helped Wilkes arrange for prostitutes for Cunningham while Wilkes was vying for federal contracts.

Wilkes and Shirlington founder Christopher Baker have denied any involvement with prostitutes. But Baker has said through his lawyer that he provided transportation for “entertainment” at Wilkes' hospitality suites in Washington from 1990 to the early part of the decade.

At a hearing of the House Homeland Security Committee on Thursday, it was revealed that Baker has been testifying before a grand jury. The committee is probing whether Cunningham pressured Homeland Security to give Shirlington a contract.

Although Baker is a convicted felon, Cunningham gave him a character reference Jan. 16, 2004.

“I have personally known Mr. Baker since the mid-1990s,” Cunningham wrote to Homeland Security. “He is dedicated to his work and has been of service to me and other Members of Congress over the years.”

At the time, the department had no plans to hire a limousine service. But within three months, the department gave Baker a $3.8 million contract. A year later, he got a contract worth up to $21.2 million.

Until recently, Homeland Security officials have denied that any legislators were involved in the contract. In May, department officials twice told Congress that they had no record of Cunningham's letter.

On Thursday, however, Baker gave Congress a sworn affidavit that he had sent the letter to the department. Homeland Security officials said they found an e-mail mentioning the letter but had no other evidence of its existence.

Yesterday the department produced the letter, saying it had been misfiled.

Continued in article

"Antipork Progress," The Wall Street Journal, September 26, 2006; Page A14 ---

As Republicans lurch toward November, they're trying to reclaim their birthright as fiscal conservatives. So far they're moved up to a D from an F, with a chance to still grab a gentleman's C.

In the small favors department, the House this month passed an "earmark" reform to bring more transparency to the runaway process of sticking pork into appropriations bills. Give House Majority Leader John Boehner credit for staring down his party's Appropriations Committee barons on this one; that's more than Tom DeLay or Roy Blunt ever did when they ran the majority.

Lawmakers will now have to sign their names to earmark requests, although the loopholes in this requirement are still large. The rule applies only to non-federal earmark recipients, which means that pet projects aimed at, say, the Department of Defense will still be secret. The definition of a "tax earmark" was also deliberately kept narrow, shielding many of those expensive giveaways.

It's also no accident that the new transparency rule won't apply to the 10 spending bills the House has already passed this year. Meanwhile, the Senate has yet to act, and the new House rule expires at the end of this Congress. GOP appropriators figure that they can block its renewal in January, when the election heat is off, assuming their bad spending habits haven't cost Republicans their majority.

In a better sign of progress, President Bush will today sign the "Federal Transparency Act," which will create a searchable public database of some $1 trillion worth of federal grants, contracts and loans. The brainchild of Senators Tom Coburn (R., Oklahoma) and Barack Obama (D., Illinois), the database will help the public identify the lawmakers who sponsor these provisions. The idea is to expose these favors to public scrutiny and force their authors to defend them.

The next test of GOP spending sincerity is whether the Senate will force an up-or-down vote on the "legislative" line-item veto. This would let a President strike out individual spending items from larger legislation, sending them back to Congress for an override vote within 14 legislative days. A simple majority vote would be enough to override, so this item veto isn't as powerful as the one that Republicans gave to Bill Clinton in the 1990s and was declared unconstitutional by the Supreme Court. But it would still give the President more leverage to kill the most egregious earmarks.

The House passed the item veto in June, but the Senate has failed to act. By our count, some 65 current Senators have voted for a version of the line-item veto at some point in the past. Eleven Democrats voted to give it to Mr. Clinton, and four more Democrats voted for a version of it while in the House.

Majority Leader Bill Frist should give Senators the opportunity to pass a bill designed to end the secret earmarking that has helped produce some of the corruption scandals in this Congress. Win or lose on the floor, Republicans would at least show they're trying to swear off their own worst spending excesses.

Interior Department suppressed auditing efforts
Four government auditors who monitor leases for oil and gas on federal property say the Interior Department suppressed their efforts to recover millions of dollars from companies they said were cheating the government. The accusations, many of them in four lawsuits that were unsealed last week by federal judges in Oklahoma, represent a rare rebellion by government investigators against their own agency. The auditors contend that they were blocked by their bosses from pursuing more than $30 million in fraudulent underpayments of royalties for oil produced in publicly owned waters in the Gulf of Mexico.
Edmund L. Andrews, "Suits Say U.S. Impeded Audits for Oil Leases," The New York Times, September 21, 2006 ---
Click Here

Why does the FDA flap come as no surprise? For decades most regulatory agencies have been overtaken by the industries that are supposed to be regulated.

The federal system for approving and regulating drugs is in serious disrepair, and a host of dramatic changes are needed to fix the problem, a blue-ribbon panel of government advisers concluded yesterday in a long-awaited report. The analysis by the Institute of Medicine shined an unsparing spotlight on the erosion of public confidence in the Food and Drug Administration, an agency that holds sway over a quarter of the U.S. economy. The report, requested by the FDA itself, found that Congress, agency officials and the pharmaceutical industry share responsibility for the problems -- and bear the burden for implementing solutions . . . "FDA's credibility is its most crucial asset, and recent concerns about the independence of advisory committee members . . . have cast a shadow on the trustworthiness of the scientific advice received by the agency," the report said. To reduce turnover and political interference, the institute said, the FDA commissioner should be appointed to a fixed six-year term. Currently, the commissioner serves at the pleasure of the president.
"FDA Told U.S. Drug System Is Broken Expert Panel Calls For Major Changes," by Shankar Vedantam, Washington Post, September 23, 2006; Page A01 --- Click Here

Why does the DEA flap come as no surprise? For decades most regulatory agencies have been overtaken by the industries that are supposed to be regulated.
Department of Education officials violated conflict of interest rules when awarding grants to states under President Bush’s billion-dollar reading initiative, and steered contracts to favored textbook publishers, the department’s inspector general said yesterday. In a searing report that concludes the first in a series of investigations into complaints of political favoritism in the reading initiative, known as Reading First, the report said officials improperly selected the members of review panels that awarded large grants to states, often failing to detect conflicts of interest. The money was used to buy reading textbooks and curriculum for public schools nationwide.
Sam Dillon, "Report Says Education Officials Violated Rules," The New York Times, September 23, 2006 --- Click Here

June 6, 2006 message from Ganesh M. Pandit [profgmp@HOTMAIL.COM]

An  article published in the March 2006 issue of the CPA Journal says "Accounting did not cause the recent corporate scandals such as Enron and WorldCom. Unreliable financial statements were the results of management decisions, fraudulent or otherwise. To blame management's misdeeds on fraudulent financial statements casts accountants as the scapegoats and misses the real issue....". The article can be accessed at 

Any thoughts from anybody??

Ganesh M. Pandit
Adelphi University

June 6, 2006 reply from Bob Jensen

Shame on the Lin and Wu!

Enron's Chief Accounting Officer, Rick Causey, now sits in prison after having admitted to falsifying accounts. He refused to testify in the Lay/Skilling trial unless granted immunity from other prosecution.

Other Enron executives, including some accountants, have confessed to accounting fraud.

Accounting fraud committed by accountants purportedly because their bosses ordered them to knowingly participate in the fraud does not make the fraud non-accounting fraud no matter what the NYSSCPA Society tries to tell us.

The NYSSCPA Society published this Lin and Wu article. Recall that the NYSSCPA Society only took CPA licenses away from CPAs convicted of drunk driving and overlooked CPA fraud for decades in New York. I don't place much stock in this NYSSCPA Society defense of accountants. I don't find the article that you mention even worth citing. The authors did not do their homework on the Enron or Worldcom scandals.

When Andersen auditor Carl Bass sniffed out both charge-off and derivatives accounting fraud, his boss David Duncan had him removed from the Enron audit.

The Worldcom fraud was Accounting 101 where over $1 billion in expenses were knowingly capitalized by the CFO and top accounting executives. The top accountant mainly involved confessed that he knew what he did was against the law but played along because of his need for the large paycheck. Only when Worldcom internal auditor Cynthia Cooper finally figured out what was going on and refused to play along was this enormous accounting fraud brought to light.

These were huge ACCOUNTANT frauds contrary to what the Lin and Wu would like to make you believe with a whitewash article that should be beneath the professional standards of a CPA society. CPAs are under tremendous pressure to lobby on behalf of clients to water down Section 404 of SOX. The NYSSCPA is simply playing along with defending accountants who knowingly committed felonies. Now if they also had DWI convictions they'd be in bigger trouble with the NYSSCPA Society.

Bob Jensen

June 6, 2006 reply from Ganesh M. Pandit [profgmp@HOTMAIL.COM]

I don't think that this article is trying establish that this is not an accounting fraud...regardless of the title of the article. It is only saying that there were several parties in addition to the accountants who helped this fraud! :)


June 6, 2006 reply from Roger Collins [rcollins@TRU.CA]


Let's think about this a minute...

It must be obvious from all the media reports that there were "parties in addition to the accountants". Lay was not an accountant; Skilling was not an accountant; Fastow never qualified as a CPA. So, if the Lin & Wu paper is merely stating the obvious, why publish it?

The only obvious answer is that the paper was approved for publication, not as a professional, but a political, statement. As Bob says,

"CPAs are under > tremendous pressure to lobby on behalf of clients to water down Section > 404 of SOX. The NYSSCPA is simply playing along with these clients and > their CPAs."

Think for a moment about how articles are read and interpreted. Most academic articles are published in so-called "academic" journals - to be read by other academics and thereafter consigned to the dust of history. A few establish new theories or lines of enquiry; rather more either mine an already existing line of enquiry or justify themselves in other ways such as maintaining or establishing academic reputations. Dr Johnson famously wrote "No man but a fool ever wrote, except for money" - and the money doesn't have to be a direct flow of cash. There are a few selfless souls who find academic accounting an end in itself, but they are thin on the ground.

Most professional articles are read far more widely. But they are often skimmed or "headlined", with summaries - or less - tossed around for any manner of reasons. Whether it was their intention or not, what L and W have done is to provide ammunition in the defence of a group - accountants - who, as the NYSSCPA and other professional groups, seek to deflect responsibility and accountability when they should be engaging in a much more profound examination of accounting policies, procedures and ethics. Articles such as that by L &W are harvested for sound bites by the profession's apologists and replayed ad infinitum for the benefit of any politician / lobbyist who will lend an ear.And, as Bob says, that comes down to yet more pressure to roll back the one major advance in accountability the accounting world has experienced in a very long time. All in all, its NOT "A Good Thing".



Roger Collins
TRU School of Business PS For anyone curious about the previously-mentioned Mandy Rice-Davis...

June 6, 2006 added reply from Roger Collins [rcollins@TRU.CA]

After my last note, I came across this article, reporting on a piece of acdemic research that's in stark contrast to the W & L article... 

A quote.... "Then came Sarbanes-Oxley, which required that option grants be reported within two business days. A new paper by Lie and Randall Heron of Indiana University, still unpublished, finds that evidence of backdating virtually disappears after Aug. 29, 2002, when the requirement took effect."

(My apologies if others have posted this previously).



Roger Collins
TRU School of Business

Bob Jensen's threads on proposed reforms are at

Bob Jensen's Enron Quiz is at

Bob Jensen's threads on the Enron, Worldcom, and Andersen meltdowns can be found at

I think Fastow's sentence should have been 60 years, one year for each million he stole
He was the worst of the worst corporate criminals and the least liked executive even within his own company.
But he's been clever enough to con the legal system into reducing his sentence to six years. Andy's still laughing at the system!

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

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

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

"All rise."

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

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

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

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

"Yes, your honor," Fastow replied.

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

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

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

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

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

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

"Yes, your honor."

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

Was someone asking about ZZZZ Best?

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

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


Scott Bonacker, CPA
Springfield, Missouri

You can read the following at

What set Andy Fastow and Michael Kopper apart from most of the other Enron executives prior to the illegal self declarations of bonuses from a secret bank account set up just before Enron declared bankruptcy?

Fastow and Kopper were the most dastardly criminals who repeatedly conspired to steal millions from Enron itself and got away with it due to amazing luck and/or cowardice of other executives, bankers, and auditors who suspected bad things were being engineered by Fastow but were afraid to ask.  In particular, Fastow openly promised Ken Lay, Jeff Skilling, and Enron's entire Board that he would not take fees for managing the SPEs they allowed him to set up for purposes of hedging and keeping debt off the books.  Subsequently, Fastow with the aid of Kopper managed to secretly skim off something over $60 million dollars into their hidden bank accounts.  And much of what they achieved while running the funds was obtained from insider information.  Having Fastow run these funds was a blatant conflict of interest that never should've been allowed by Enron's CEO, Enron's Board, or Enron's auditor (Andersen).

The charges against Fastow are outlined at

The SEC's complaint is at

Michael Kopper eventually confessed.  You can read part of his testimony summarized at

Long-time subscribers to the AECM may remember my quips (years ago) about Michael Kopper ---
These inspired AECMers to write their own quips about Enron and about accounting in general.
You can read some of these AECM originals at

And don't forget about the Enron home video starring some of the real players (including Jeff Skilling) befpre they got caught ---

Tales from the Enron trial got you down? Like Andrew Fastow's testimony of how he laundered $10,000 as a tax-free gift to his own sons? So after work you stumble home, seeking refuge from the workaday sludge in the stark competitive world of Sports Illustrated, which this week is awash in the details of the doping case against Barry Bonds, an Icarus, legend has it, who flew toward baseball heaven on wax wings made from human growth hormone. For perspective on the Bonds myth, I called Gary Wadler, a physician who has seen it all as a member of the World Anti-Doping Agency. "Bonds and Fastow were both into cooking," Dr. Wadler offered. "Bonds cooked the record books and Fastow cooked the financial books."
Daniel Henninger, "Barry Bonds, Meet Andrew Fastow, The Wall Street Journal, March 17, 2006 ---

At last we hear from the master criminal himself --- Andy Fastow
"Excerpts from Testimony By Former Enron CFO Fastow," The Wall Street Journal, March 8, 2006 --- 

Former Enron CFO Andy Fastow, the prosecution's star witness, testified at the Lay-Skilling trial that he ran financial partnerships designed to help Enron meet earnings targets and mask huge losses. Mr. Fastow, who hasn't spoken publicly since October 2001, is among the most highly anticipated witnesses in this trial. Following are excerpts from his testimony.

Wednesday, March 8 LAY KNEW: Fastow testified that former chairman Ken Lay was at a meeting in August 2001 in which he heard about a "hole in earnings" at Enron, just days before he gave a BusinessWeek interview claiming Enron was in its "best shape" ever. Fastow said of the Lay interview, "I think most of the statements in there are false."

* * * ON GREED: In a heated cross-examination by Skilling lawyer Daniel Petrocelli, Fastow admitted, "I believe I was extremely greedy, and that I lost my moral compass, and I've done terrible things that I very much regret."

INSIDE-OUT: Steady growth and bright prospects "was the outside view of Enron," Fastow testified. "The inside view of Enron was very different."

* * * RECURRING DREAM: Lay opted to characterize a loss on an investment in the third quarter of 2001 as "nonrecurring," even though a gain on the same holding was earlier characterized as "recurring," Fastow testified, adding, "I thought that was an incorrect accounting treatment."

* * * DEATH SPIRAL: By October 2001, Enron's suppliers refused to trade with the company and Fastow testified that he feared the company would collapse and that he and an aide went to Lay to warn him. "I said I thought this was a death spiral, a serious risk of bankruptcy. I said the majority of trades being done were to unwind positions."

* * * MORE HEROICS: "Within the culture of corruption Enron had, a culture that rewarded financial reporting rather than rewarding economic value, I believed I was being a hero. I was not. It was not a good thing. That's why I'm here today."

Tuesday, March 7 THE PROFIT PROBLEM: One of Enron's off-balance-sheet partnerships, LJM1, was designed to help the company "solve a problem," Fastow testified. "We were doing this to inflate our earnings, and I don't think we wanted to show people what we were doing.''

* * * MORE DEALS: Fastow quoted Skilling as saying, " 'Get me as much of that juice as you can,' '' after Fastow informed him that more money would need to be raised to continue making deals like LJM1. In such deals, these so-called outside entities would purchase underperforming assets from Enron to get debt off its balance sheet and boost earnings.

* * * RISKY BUSINESS: Fastow testified that partnerships like the LJMs were willing to do deals that Enron "just couldn't do with others" because they were too risky or didn't make economic sense.

* * * SKILLING'S WORD: Fastow testified about pressure from Skilling to have one of the LJMs buy a minority stake in a Brazilian power plant owned by Enron because Enron's South American unit was struggling to meet its earnings target. "I told him it was a piece of s--t, and no one would buy it,'' Fastow said, adding that he relented, in part, because Skilling assured him he wouldn't lose money on the deal. Fastow testified that there were many more "bear-hug" guarantees like this from Skilling in mid-2000.

* * * BREAKING THE LAW: Fastow testified that the LJMs were legal and did many legal deals, but "certain things I did as general partner of LJM were illegal."

* * * BELIEVE IT OR NOT: In his first day of testimony, Fastow repeatedly said that he thought he was "a hero for Enron," for coming up with these unique business deals to help the company meet Wall Street targets even when it was financially in trouble. "I thought the foundation was crumbling and we were doing everything we could to prop it up as long as we could … We were in pretty bad shape."

* * * WORRIES ABOUT PUBLICITY: Skilling was concerned, Fastow testified, that off-balance-sheet deals like the LJMs would "attract attention, and if dissected, people would see what the purpose of the partnership was, which was to mask potentially hundreds of millions of dollars of losses."

* * * FALSE TAX RETURN: Fastow tearfully admitted that he "misled" his wife about some of the money the couple earned from Enron-related deals. "She would not, in my opinion, have signed a fraudulent tax return," Fastow said. Lea Fastow served one year in federal prison for filing a false tax return.

* * * A FAMILY AFFAIR: Fastow also admitted that he had one of his top aides send $10,000 checks to each of his sons. The checks were portrayed as gifts to the boys, but really they were proceeds from a business deal. "I shouldn't have. It was the wrong thing to do."

Jensen Comment
It comes as some relief to accountants that Fastow has not yet mentioned collusion with the Andersen Auditors led by David Duncan. CFO Fastow worked in secrecy ripping off Enron itself. CAO Rick Causey worked more closely with Duncan to issue false financial statements. Rick Causey's fine for filing false Enron financial statements was $1,250,000.

Bob Jensen's Enron Updates are at


From The Wall Street Journal Accounting Weekly Review on September 29, 2006

TITLE: Fastow Gets 6 Years as Judge Cites Need for Mercy
REPORTER: John R. Emshwiller and John M. Biers
DATE: Sep 27, 2006
TOPICS: Accounting, Accounting Fraud, Auditing

SUMMARY: In a Houston federal court, Andrew Fastow received a sentence of 6 years in prison followed by two years of community service, "significantly less than the 10 years of imprisonment that had been envisioned in the 2004 plea agreement between Mr. Fastow and federal prosecutors....'I was very surprised,' said Leslie Caldwell, the original director of the special Justice Department task force that investigated the Enron scandal."

1.) Of what criminal actions did Andrew Fastow plead guilty? What impact did these actions have on shareholders and employees (including both current employment and retirement plans)?

2.) Access the 175 page declaration by Andrew Fastow linked through the on-line version of this article. What two accounting standards are specifically referred to on the bottom of page 2 of the declaration (page 5 of the pdf file itself)? Provide their titles and a brief statement of the topics covered by these standards.

3.) Again refer to Fastow's declaration. What financial ratios were specific targets at Enron? How might transactions that would be subject to the requirements of Statements of Financial Accounting Standards 125 and 140, as well as assistance of investment bankers, contribute to meeting those operational targets?

4.) One Enron employee, Sherron Watkins, initially wrote to Chairman and Chief Executive Kenneth Lay in protest of the financing transactions and financial reporting she observed. How difficult do you think it was for her to take an ethical action in the Enron environment at the time? What personal and professional well being did she face losing by taking her stance in the matter?

Reviewed By: Judy Beckman, University of Rhode Island


Bob Jensen's threads on the Enron, Worldcom, and Andersen meltdowns can be found at

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

Yet Another Executive Looting of a Corporation
The Securities and Exchange Commission has announced the filing of securities fraud charges against three former top officers of an operator of national restaurant chains in connection with their receipt of approximately one million dollars in undisclosed compensation, participation in undisclosed related party transactions, and financial statement fraud from 2000 to 2004. The SEC charges were filed against Buca, Inc.'s former CEO, Joseph Micatrotto, the company's former CFO, Greg Gadel, and its former Controller, Daniel J. Skrypek. Buca is a Minneapolis, Minn., company that operates the Buca di Beppo and Vinny T's of Boston national restaurant chains. "Buca's top officers created a tone at the top and a corporate culture that allowed them to loot the company and engage in a financial fraud," stated Linda Thomsen, the SEC's Director of Enforcement. "Such conduct is a fundamental violation of the trust placed in corporate officers by public shareholders and cannot be countenanced."

Jensen Comment
In 2005 the external auditor of Buca was Deloitte and Touche.

Bob Jensen's threads on Deloitte and Touche are at

University of California gets a settlement from Citigroup as part of its losses in the WorldCom accounting scandal
Citigroup has agreed to pay the University of California more than $13 million to settle a lawsuit over liability for the university’s investments in WorldCom, a company that collapsed in 2002. The university sued over inaccurate analyses of WorldCom, which led UC to pay more than it would have otherwise to buy stock in the company.
Inside Higher Ed, April 7, 2006 ---

Bob Jensen's fraud updates are at

You may be paying dearly for a placebo

"Countering Counterfeits," by Carlos Gutierrez et al., The Wall Street Journal, June 20, 2006; Page A20 ---

The global economy for illicit goods is massive, but by definition impossible to measure. What we do know is that it is getting bigger. The number of counterfeit items seized at European Union borders has increased by more than 1,000%, rising to over 103 million in 2004 from 10 million in 1998. At U.S. borders, seizures of counterfeit goods have more than doubled since 2001. Even allowing for improved detection rates, there is little doubt that the situation is getting worse.

Today the EU and the U.S. will launch a joint action strategy on the global enforcement of intellectual-property rights. The groundbreaking agreement between the EU and the U.S. envisages closer customs cooperation, including more data sharing. There are plans for joint border enforcement actions, including in third countries, and the creation of joint networks of EU and U.S. diplomats in third countries working on intellectual-property protection.

Twenty years ago, counterfeiting might have been regarded as a problem chiefly for the makers of expensive handbags. In the 1980s, 70% of firms affected by counterfeiting were in the luxury sector. But in 2004, more than 4.4 million items of fake foodstuffs and drinks were seized at EU borders, an increase of 196% over the previous year. In the U.S., seizures of counterfeit computers and hardware tripled from 2004 to 2005. There are also fake electrical appliances, car parts and toys. Even airplane parts are being pirated: The Concorde crash of 2000 appears to have been caused by a counterfeit part that had fallen off another aircraft.

Perhaps most worrying is the booming trade in counterfeit medicines, which were reckoned to account for almost 10% of world trade in medicines in 2004. A recent study in the Lancet concluded that up to 40% of products labeled as containing the antimalarial drug artusenate contain no active ingredients. Most of these fake drugs are headed for the world's poorest countries. The World Health Organization estimates that 60% of counterfeit medicine cases occur in developing countries.

The popular view is that buying a fake is a win-win game, so long as you know what you are paying for. Everyone enjoys a bargain. But it's far too easy -- and wrong -- to write off this kind of crime as not really harmful to anyone. Counterfeiting is big business for criminal organizations that can affect entire sectors of the international economy. And when pirates move into fake medicines and fake car-parts, we move from rip-offs to potential tragedy.

The scale of counterfeiting matters enormously for the EU and the U.S., who compete on their reserves of innovation, invention and high-quality design and production. Piracy strips that comparative advantage away. Our economies are adapting to low-cost competition from the developing world. We have a right to expect that our own comparative advantages be respected.

But it is not just the developed world that has a stake in this fight. Tolerating counterfeiting almost inevitably backfires. Developing countries that tolerate the existence of a parallel illicit economy in their market will quickly lose the confidence of foreign investors and services traders, and the technology transfer that these bring with them. They also undermine the development of innovative and creative businesses in their own economy. Although China is now taking steps to better enforce its intellectual-property laws, it has for too long turned a blind eye to these problems. Ironically, customs authorities are now intercepting increasing numbers of Beijing 2008 Olympic knockoffs.

It is time for a new global strategy and a much tougher global approach. All members of the World Trade Organization have signed agreements to fight counterfeiting. The new focus has to be on enforcing the rules we already have against counterfeiting and piracy in particular. Countries that have signed up to these rules should no longer expect an easy ride if they don't implement them.

Continued in article

Technology may change, but FCC subsidies are forever

"Bad Subsidy Call," The Wall Street Journal, June 23, 2006; Page A10 ---

On Wednesday, the Federal Communications Commission voted to require Internet telephone companies to contribute to the Universal Service Fund (USF). The move means higher phone bills for Internet telephone service as providers pass this new cost on to customers. But it also means that a Republican-run regulatory agency is expanding a federal subsidy that should have been phased out long ago.

The concept of "universal service" dates back more than 70 years to a time when stringing wires together to bring telephone service to loosely populated areas was expensive. The goal was to keep local phone rates low and increase subscribers. This policy long ago fulfilled its purpose: By the mid-1990s, nearly 95% of U.S. households had a telephone. A competitive telecom marketplace with proliferating wireless technologies and multiple service providers had developed.

Nevertheless, the USF lives on. What's worse, the FCC has now determined that Internet telephony should be roped in to this anachronistic regulatory framework. FCC Chairman Kevin Martin says this levy is necessary for parity purposes. But the best way to produce a level telecom playing field isn't by burdening new technologies with old regulations. It's by phasing out such regulations for everyone.

The USF has become a tool for redistributing wealth from urban phone customers to their rural counterparts, says Randolph May, a former FCC lawyer who now heads the Free State Foundation think tank. The irony, says Mr. May, "is that the subsidies tend to flow from more densely populated areas like New York or Baltimore to less densely populated areas. So, in effect, you've got many places where poor people are subsidizing rich people in Aspen." Given that near-universal service now exists, why not subsidize only those low-income customers who truly need it?

The main beneficiaries of the status quo are rural telephone companies, some of which receive as much as 70% of their revenue from the USF. More than a thousand such entities still exist nationwide, and they have powerful allies in Congress, especially Senate Commerce Chairman Ted Stevens of Alaska. We knew many in Washington were eager to classify the Internet as nothing more than a glorified telephone subject to the usual telecom taxes and rules. But we were hoping a Republican-controlled FCC wouldn't let that happen.

Savings Fees Are Almost Fraudulent for College Savings Plans

"Not Doing Homework Costs Parents Too," AccountingWeb, March 31, 2006 ---

Parents who forget to do their homework before choosing a state-sponsored college savings plan are being sold funds with the highest fees, according to a survey of state-sponsored 529 college savings plans just published in the Journal of American Taxation Association. The Securities and Exchange Commission (SEC) is investigating the sales practices of 529 plans and has reportedly requested a copy of the article. “Our results are consistent with the fact that it’s so difficult to choose the right plan that people ask investment brokers for advice, and brokers are selling investors the high-fee funds,” University of Kansas (KU) professor and co-author of the survey, Raquel Alexander said in a prepared statement announcing the results.

Taxpayers have currently invested more than $65 billion in 529 college Savings Plans, which allow investors to make after-tax contributions to the plans and withdraw funds, tax-free, to use for qualified college expenses. That amount is expected to climb to $300 billion by 2010, according to Investment News.

Continued in article

"25 Reasons Employees Lie, Cheat, and Steal," SmartPros, September 2006 ---

On-the-job theft goes beyond greed, according to authorities in white-collar crime (criminologists, sociologists, auditors, risk managers, etc.), who cite a large list of reasons for employee theft.

In fact, a new edition of Fraud Auditing and Forensic Accounting lists a long list of 25 reasons -- some of which are common knowledge, but others may surprise. They include:

  • The employee believes he can get away with it.
  • No one has ever been prosecuted for stealing from the organization.
  • Employees are not encouraged to discuss personal or financial problems at work or to seek management's advice and counsel on such matters.

Read the entire list and check out Book Corner for more details on the book.

White collar crime pays big even if you get caught ---

What Accountants Need to Know ---

Bob Jensen's threads on theft and fraud are at

Not following FAS 133 can be expensive

"Freddie Settles Shareholder Suits For $410 Million," by Damian Paletta, The Wall Street Journal, April 21, 2006; Page B5 ---

Freddie Mac said it will pay $410 million to settle securities class-action and shareholder derivative lawsuits stemming from its restatement of earnings from 2000 to 2002.

The announcement comes just two days after Freddie Mac announced a $3.8 million settlement with the Federal Election Commission to resolve allegations that the government-sponsored mortgage giant violated campaign-finance laws.

"Today's settlement, like the settlement announced earlier this week with the Federal Election Commission, enables this management team to resolve past issues so that we can focus squarely on meeting our important housing mission, running the business well and serving the needs of our customers," said Richard Syron, Freddie Mac's chief executive.

The $410 million payment will go into a fund that will repay several Ohio pension funds and other investors who purchased Freddie Mac stock between July 15, 1999, and Nov. 20, 2003.

Ohio Attorney General Jim Petro, who negotiated the settlement with Freddie Mac, alleged that Freddie "misrepresented its financial condition during that period."

Freddie Mac said, "the settlement is...based on corporate-governance reforms instituted by the company under its current management." It added that it didn't admit wrongdoing. Freddie Mac didn't admit wrongdoing in the Federal Election Commission case either.

Freddie Mac expects the settlement to lower its first-quarter 2005 net income by $220 million after taxes.

Bob Jensen's threads on FAS 133 accounting are at

One of the larger SEC civil penalties for accounting fraud
In one of the largest civil penalties the Securities and Exchange Commission has ever obtained against an individual in an accounting-fraud case, a federal judge has ordered Henry C. Yuen, former chief executive officer of Gemstar-TV Guide International Inc., to pay $22.3 million for his role in a fraud that led the company to overstate revenue by more than $225 million between 2000 and 2002. The ruling comes four years after the SEC launched its investigation of Gemstar, a once highflying Hollywood company that publishes TV Guide magazine and holds patents on technology used for cable- and satellite-television programming guides. Earlier this year following a three-week trial, U.S. District Judge Mariana Pfaelzer found Mr. Yuen liable for securities fraud, lying to auditors and falsifying Gemstar's books.
Jane Spencer and Kara Scannell, "Gemstar Ex-CEO Is Ordered To Pay $22.3 Million:  Henry Yuen's Civil Penalty Is Among Largest Sought By SEC Against Individual," The Wall Street Journal, May 9, 2006; Page A3 ---
Jensen Comment
The outside auditor was KPMG.

You can read more about KPMG at

"GM Chief Apologizes to Holders For Series of Accounting Errors," by Lee Hawkins Jr., The Wall Street Journal, April 28, 2006, Page A2 ---

General Motors Corp. Chairman and Chief Executive Rick Wagoner, in a letter to shareholders, apologized for a series of accounting errors and promised the auto maker is "working diligently to get things moving in the right direction -- quickly" following a huge loss last year.

In a letter to shareholders released Friday in conjunction with the firm's proxy statement, the CEO said GM has "a renewed commitment to excellence and transparency in our financial reporting." The proxy also disclosed that his 2005 compensation fell by nearly 50%.

GM faces six separate Securities and Exchange Commission investigations of accounting problems and has received a subpoena from a federal grand jury in connection with its accounting for payments received from suppliers.

"While I will not offer excuses, I do apologize on behalf of our management team, and assure that we will strive to deserve your trust," Mr. Wagoner wrote in the letter. "The fact is that errors were made, and we can't change that. What we have done is disclose our mistakes and work as diligently as we can to fix them."

The GM board's compensation committee expressed support for Mr. Wagoner despite the company's $10.6 billion loss last year.

"Recognizing that a large part of these losses resulted from GM's significant legacy cost burden and the difficulty of adjusting structural costs in line with falling revenues, we noted Mr. Wagoner's strong direction and steady leadership in systematically and aggressively implementing a plan to restore the Corporation and North American operations to profitability and positive cash flow," the committee said in the proxy.

GM reported that Mr. Wagoner received $5.48 million in total pay last year, down nearly 50% from his total 2004 pay. Mr. Wagoner's 2005 salary remained unchanged at $2.2 million, but he didn't receive a bonus for the year, while he received a $2.46 million bonus in 2004. GM previously announced that GM's top officers took pay cuts and received no bonuses for 2005.

Despite the compensation cuts, Mr. Wagoner received 400,000 options valued at $2.88 million in 2005. The year before, he got the same amount of options, which were valued at $5.14 million when they were granted. Neither Mr. Wagoner nor other top GM executives exercised options in 2005. Other GM executives took similar cuts in total pay.

Deloitte's Concept of Pricing Options is Legally and Ethically Questionable

"Inquiry Into Stock Option Pricing Casts a Wide Net," by Eric Dash, The New York Times, June 19, 2006 --- 

So when new hires began complaining that the company's volatile share price meant that colleagues who had arrived just days earlier were receiving stock options worth thousands of dollars more, Micrel executives moved to satisfy the troops. They raised with their auditor, Deloitte & Touche, the idea of adopting a new options pricing strategy similar to one that other tech companies, including Microsoft, used at the time.

Instead of granting options at the market price on a new employee's hire date, Micrel proposed setting the price at the lowest point in the 30 days from when the grant was approved.

It seemed like an ideal solution. The 30-day window could help Micrel attract and reward new hires on a more equal footing, while helping to retain existing employees. And if it were extended up the corporate ladder, the prospect of built-in gains and tax breaks, worth millions of dollars, could enrich senior executives.

But the 30-day pricing method, which Micrel adopted in mid-1996, was an aggressive move legally and financially. In hindsight, it was also a major misstep.

Nearly five years later, Deloitte reversed its opinion and urged Micrel to restate its financial reports. The Internal Revenue Service came banging on its door. And today, Micrel and Deloitte are passing blame back and forth in court.

Micrel is hardly the only firm ensnared in such a mess. What began as a creative solution among a handful of technology firms to address recruitment issues soon became common practice in Silicon Valley. It appears the practice also became a way to enrich chief executives and other top managers.

The result is a nationwide scandal with major accounting, corporate governance, tax and disclosure ramifications. Dozens, perhaps hundreds, of companies are caught up in a giant civil and criminal law enforcement sweep by the Justice Department, the I.R.S. and the Securities and Exchange Commission.

It is no coincidence that stock option abuses are once again taking center stage in an unfolding scandal. The easy money that options can rain down on recipients motivated many of the numbers games that companies played with their quarterly earnings during the stock market boom, leading to numerous accounting fraud prosecutions at Enron, WorldCom and others.

In the latest scandal, companies seem to have handed out stock options that were already "in the money" on the date of grant, undermining the idea of using options as a pay-for-performance tool. The practice appears to have been widespread from the early 1990's to 2002, and possibly beyond.

Handing out in-the-money options is not illegal as long as the grants are disclosed to shareholders. At the time, in-the-money options had to be counted as an expense on the company's books. (New rules now require companies to routinely deduct options as an expense.) Failure to disclose or to deduct in-the-money options from income could lead to securities fraud charges. And because such options do not qualify for tax breaks once they are exercised, such grants raise tax fraud issues, too.

The Micrel case and others raise troubling questions about how companies that were pushing the envelope of accounting and tax practice were able to get the blessings of auditors and lawyers. And the widening scandal reveals the extent to which boards of directors, especially the compensation committees that approve option grants, may have failed to do their jobs.

"It appears, from the S.E.C. and a number of reports that are coming up daily, that there was a systemic problem at a lot of companies," said Bradley E. Beckworth, a plaintiffs' attorney who has filed one of the first class-action lawsuits against Brocade Communications and KPMG, its auditor, for options backdating. "If these accounts turn out to be true, you have to ask the question, Who was the gatekeeper here?"

Micrel, by most accounts, is one of the last technology companies where one might expect to find problems. While the chip manufacturer was one of the high-flying growth businesses of the 1990's, it was different in several respects from most of the era's fledgling public companies.

Its founder and longtime chief executive, Raymond D. Zinn, a 68-year-old engineer, is a Mormon who calls honesty his guiding rule. And unlike many of its technology rivals, Micrel's own profits, not venture financing, fueled its growth until it went public in 1994.

But like many high-tech firms in the mid-1990's, Micrel went on a hiring binge. The Bay Area was booming with opportunities for ambitious people. Companies were growing at astronomical rates and desperately needed talent to fill new jobs. And instead of higher salaries, companies preferred to grant stock options to lure new employees.

Micrel, a company that had a few hundred employees but was adding two or three new people a week, began facing a fairness problem in its options awards in mid-1996.

Continued in article

Bob Jensen's threads on options controversies are at

Bob Jensen's threads on Deloitte are at

Once Again We Ask:  Where were the auditors?

"Union to Accounting Firms: Backdating?" SmartPros, September 13, 2006 ---

The AFL-CIO, one of the largest shareholders in public companies, is seeking to learn about the role that big accounting firms may have played in the burgeoning stock options timing affair.

In letters Friday, the labor federation asked the Big Four accounting firms -- Ernst & Young, PricewaterhouseCoopers, KPMG and Deloitte & Touche -- to provide information on their potential involvement as outside auditors for companies now under federal investigation for possible rigging of option grants to boost their value to the recipients.

"Given the potential damage to shareholders due to options backdating, I am concerned about what role (name of accounting firm) may or may not have had in the backdating ...," the AFL-CIO's secretary-treasurer, Richard Trumka, said in the letters to the chief executives of the four firms, which were made public Monday. "I urge you to describe what steps are being taken to determine (name of firm)'s involvement in stock option backdating where it has occurred."

In backdating, options are issued retroactively to coincide with low points in a company's share price, a practice that can fatten profits for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed to investors and properly approved by the company's board. In some cases, however, the practice can break federal accounting and tax laws.

Spokesmen for PricewaterhouseCoopers and KPMG had no immediate comment on the AFL-CIO request. Ernst & Young and Deloitte & Touche spokesmen didn't immediately return telephone calls seeking comment.

Last week, government officials said they want to know what roles corporate directors as well as outside attorneys, accounting firms and compensation consultants might have played in helping executives manipulate the timing of option grants to enrich themselves and their colleagues.

More than 100 public companies, many of them in the technology sector, are under scrutiny by the Securities and Exchange Commission in the affair. The Justice Department is investigating scores of companies for possible criminal violations. And the Internal Revenue Service is looking at possible tax-law violations in option grants by some companies.

The potential cost to shareholders escalated Friday, when computer chip supplier Broadcom Corp. said it may need to boost a charge it takes to $1.5 billion or more for option accounting flaws -- double what it had estimated in July.

On Monday, chip maker Nvidia Corp. and software maker Wind River Systems Inc. both warned that they will miss regulatory deadlines for filing their most recent quarterly reports, joining a long list of tardy tech companies scrambling to clean up a stock options mess. The delay will expose both Nvidia and Wind River to being dropped from trading on the Nasdaq Stock Market. But that process takes several months, giving the companies time to comply with the SEC's reporting rules before getting bounced from the Nasdaq.

The AFL-CIO has some $400 billion in assets and is a major investor in companies, including many of those that are under investigation.

"Backdating Woes Beg the Question Of Auditors' Role," by David Reilly, The Wall Street Journal, June 23, 2006; Page C1 ---

Where were the auditors?

That question, frequently heard during financial scandals earlier this decade, is being asked again as an increasing number of companies are being probed about the practice of backdating employee stock options, which in some cases allowed executives to profit by retroactively locking in low purchase prices for stock.

For the accounting industry, the question raises the possibility that the big audit firms didn't live up to their watchdog role, and presents the Public Company Accounting Oversight Board, the regulator created in response to the past scandals, its first big test.

"Whenever the audit firms get caught in a situation like this, their response is, 'It wasn't in the scope of our work to find out that these things are going on,' " said Damon Silvers, associate general counsel at the AFL-CIO and a member of PCAOB's advisory group. "But that logic leads an investor to say, 'What are we hiring them for?' "

Others, including accounting professionals, aren't so certain bookkeepers are part of the problem. "We're still trying to figure out what the auditors needed to be doing about this," said Ann Yerger, executive director of the Council of Institutional Investors, a trade group. "We're hearing lots of things about breakdowns all through the professional-advisor chains. But we can't expect audit firms to look at everything."

One pressing issue: Should an auditor have had reason to doubt the veracity of legal documents showing the grant date of an option? If not, it is tough for many observers to see how auditors could be held responsible for not spotting false grant dates.

"I don't blame the auditors for this," said Nell Minow, editor of The Corporate Library, a governance research company. "My question is, 'Where were the compensation committees?' "

To sort out the issue, the PCAOB advisory group -- comprising investor advocates, accounting experts and members of firms -- last week suggested the agency provide guidance to accounting firms on backdating of stock options. A spokeswoman for the board said, "We are looking to see what action they may be able to take."

To date, more than 40 companies have been put under the microscope by authorities over the timing of options issued to top executives. Federal authorities are investigating whether companies that retroactively applied the grant date of options violated securities laws, failed to properly disclose compensation and in some cases improperly stated financial results. A number of companies have said they will restate financial statements because compensation costs related to backdated options in questions weren't properly booked.

All of the Big Four accounting firms -- PricewaterhouseCoopers LLP, Deloitte & Touche LLP, KPMG LLP and Ernst & Young LLP -- have had clients implicated. None of these top accounting firms apparently spotted anything wrong at the companies involved. One firm, Deloitte & Touche, has been directly accused of wrongdoing in relation to options backdating. A former client, Micrel Inc., has sued the firm in state court in California for its alleged blessing of a variation of backdating. Deloitte is fighting that suit.

The big accounting firms haven't said whether they believe there was a problem on their end. Speaking at the PCAOB advisory group's recent meeting, Vincent P. Colman, U.S. national office professional practice leader at PricewaterhouseCoopers, said his firm was taking the issue "seriously," but more time is needed "to work this through" both "forensically" and to insure this is "not going to happen going forward."

Robert J. Kueppers, deputy chief executive at Deloitte, said in an interview: "It is one of the most challenging things, to sort out the difference in these [backdating] practices. At the end of the day, auditors are principally concerned that investors are getting financial statements that are not materially misstated, but we also have responsibilities in the event that there are potential illegal acts."

While the Securities and Exchange Commission has contacted the Big Four accounting firms about backdating at some companies, the inquiries have been of a fact-finding nature and are related to specific clients rather than firmwide auditing practices, according to people familiar with the matter. Class-action lawsuits filed against companies and directors involved in the scandal haven't yet targeted auditors.

Backdating of options appears to have largely stopped after the passage of the Sarbanes-Oxley corporate-reform law in 2002, which requires companies to disclose stock-option grants within two days of their occurrence.

Backdating practices from earlier years took a variety of forms and raised different potential issues for auditors. At UnitedHealth Group Inc., for example, executives repeatedly received grants at low points ahead of sharp run-ups in the company's stock. The insurer has said it may need to restate three years of financial results. Other companies, such as Microsoft Corp., used a monthly low share price as an exercise price for options and as a result may have failed to properly book an expense for them.

At the PCAOB advisory group meeting, Scott Taub, acting chief accountant at the Securities and Exchange Commission, said there is a "danger that we end up lumping together various issues that relate to a grant date of stock options." Backdating options so an executive can get a bigger paycheck is "an intentional lie," he said. In other instances where there might be, for example, a difference of a day or two in the date when a board approved a grant, there might not have been an intent to backdate, he added.

"The thing I think that is more problematic is there have been some allegations that auditors knew about this and counseled their clients to do it," said Joseph Carcello, director of research for the corporate-governance center at the University of Tennessee. "If that turns out to be true, they will have problems."

Suspected Fraud:  Attorneys, Auditors, Others Getting Attention In Options Timing Affair
"It's hard to believe ... that the executives did this all by themselves," Sen. Charles Grassley, R-Iowa, said at a hearing Wednesday. "And to be honest, the idea that all executives at different companies came up with this idea at the same time stretches the imagination." Grassley said he planned to write to "several major corporations" that have engaged in backdating of stock options, asking them to provide the minutes of board meetings in which directors discussed the matter as well as documents from attorneys, accountants and consultants who assisted. In backdating, options are issued retroactively to coincide with low points in a company's share price, a practice that can fatten profits for options recipients when they sell their shares at higher market prices. Backdating options can be legal as long as the practice is disclosed to investors and properly approved by the company's board. In some cases, however, the practice can run afoul of federal accounting and tax laws. "We need to understand and bring enforcement action against all the actors who were involved with this abusive scandal," Grassley declared.
"Attorneys, Auditors, Others Getting Attention In Options Timing Affair," SmartPros, September 11, 2006 ---

Bob Jensen's threads on abuses in accounting for employee stock options ---

Bob Jensen's threads on why "Incompetent and Corrupt Audits are Routine" are at

Doral Financial Settles Financial Fraud Charges
The Securities and Exchange Commission on September 19, 2006 filed financial fraud charges against Doral Financial Corporation, alleging that the NYSE-listed Puerto Rican bank holding company overstated income by 100 percent on a pre-tax, cumulative basis between 2000 and 2004. The Commission further alleges that by overstating its income by $921 million over the period, the company reported an apparent 28-quarter streak of “record earnings” that facilitated the placement of over $1 billion of debt and equity. Since Doral Financial’s accounting and disclosure problems began to surface in early 2005, the market price of the company’s common stock plummeted from almost $50 to under $10, reducing the company’s market value by over $4 billion. Without admitting or denying the Commission’s allegations, Doral Financial has consented to the entry of a court order enjoining it from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty. The settlement reflects the significant cooperation provided by Doral in the Commission’s investigation.

What is laddering in the IPO markets?

Definition of Laddering:
This practice artificially inflates the value of stocks. Laddering occurs when underwriters of IPOs obtain commitments from investors to purchase shares again (after they have begun trading publicly) at a specified, higher price.

"J.P. Morgan Agrees To Settle IPO Case For $425 Million," by Randall Smith and Robin Sidel, The Wall Street Journal, April 21, 2006; Page C4 ---

J.P. Morgan Chase & Co. agreed to pay $425 million to settle civil charges of improperly awarding hot new stock issues during the market bubble, indicating Wall Street's tab for the class-action case could hit $4 billion.

The financial-services company reached a memorandum of understanding with investor plaintiffs to settle the federal case, according to Melvyn Weiss, chairman of the executive committee of six law firms representing plaintiffs.

A J.P. Morgan spokesman confirmed the agreement in principle, which is subject to court approval. He said it would have "no material adverse affect on our financial results," indicating the bank has likely already set aside funds to cover it.

The lawsuit accused underwriters of improperly pumping extra air into the stock-market bubble in 1999 and 2000 by requiring investors who got shares of hot initial public offerings to buy more shares at higher prices once trading began.

The alleged practices by the 54 underwriter defendants could have worsened losses of investors who bought at the higher prices when the bubble burst, the plaintiffs charged. The practices at issue became known as "laddering."

Continued in article

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

"Charities Tied to Doctors Get Drug Industry Gifts," by Reed Abelson, The New York Times, June 28, 2006 ---
Click Here

Although outside researchers raised questions about the study's conclusions, the doctor betrayed little doubt. "We believe these results challenge current medical practice and recommendations," said Dr. Costanzo, who predicted many patients might benefit.

Dr. Costanzo did disclose to the audience that she was a paid consultant with stock in the device's maker, a Minnesota company called CHF Solutions. But she omitted another potentially important detail: CHF Solutions was also one of the largest donors to the nonprofit research foundation that had overseen the study. The company contributed about $180,000 in 2004, according to the foundation's federal filings.

Nor did she note that the nonprofit entity, the Midwest Heart Foundation, was in turn an arm of the thriving for-profit medical group outside of Chicago where Dr. Costanzo and more than 50 of her fellow doctors treat heart patients — in many cases using products and drugs made by CHF Solutions and other big donors to their charity. Although the CHF Solutions device has generally been slow to catch on, physicians at Dr. Costanzo's medical group have treated many patients with the company's filtration system.

The Midwest Heart Foundation, and the way it has become quietly interwoven into its doctors' professional lives, is far from unique. Around the country, doctors in private practice have set up tax-exempt charities into which drug companies and medical device makers are, with little fanfare, pouring donations — money that adds up to millions of dollars a year. And some medical experts see that as a big problem.

The charities are typically set up to engage in medical research or education, and the doctors involved defend those efforts as legitimate charitable activities that benefit the public. But because they operate mainly under the radar, the tax-exempt organizations represent what some other doctors, as well as regulators and industry consultants, say is a growing conduit for industry money. The payments, they say, can bias the treatment decisions of physicians, may lead to suspect research findings and at times may even risk running afoul of anti-kickback laws.

Federal officials are starting to take notice of such tax-exempt charities, which critics say are becoming increasingly popular as other forms of industry support to physicians — like lucrative consulting agreements that involve little actual work — have come under scrutiny from regulators and others worried about the potential conflicts.

The potential for abuse by these charities is clear, critics say. "It obviously sets a fertile ground for conflict of interest and misuse of funds," said Dr. Robert M. Califf, vice chancellor for clinical research at Duke University Medical Center.

The charities at issue are not philanthropies like the Bill and Melinda Gates Foundation that dispense grants for medical research but remain independent of any one group of doctors or medical practice. Instead, the charities drawing scrutiny are set up by doctors in private practice and are closely linked to those doctors' for-profit medical groups.

The Midwest Heart Foundation, which has received millions of dollars from medical industry donors, including the drug makers Amgen and AstraZeneca, and the Cordis and Scios units of Johnson & Johnson, says it stands behind its charitable work, which currently involves about 30 studies and dozens of doctor-education lectures each year.

Dr. Mark Goodwin, a managing partner for the Midwest Heart for-profit practice, said the foundation was created to help prevent potential conflicts by keeping the industry money separate from the doctors' private practice. Companies contribute to the foundation, he said, because they can rely on its research and the doctors involved can enroll large numbers of patients in studies. "We are able to deliver excellent research to our community in a timely fashion," Dr. Goodwin said, "and we are proud of it."

Continued in article

Bob Jensen's threads on Controversies in Higher Education ---

"How Corrupt Is the United Nations?" by Claudia Rosett, Commentary, April 1, 2006 --- 

Recent years have brought a cascade of scandals at the United Nations, of which the wholesale corruption of the Oil-for-Food relief program in Iraq has been only the most visible. We still do not know the full extent of these debacles—the more sensational ones include the disappearance of UN funds earmarked for tsunami relief in Indonesia and the exposure of a transnational network of pedophiliac rape by UN peacekeepers in Africa—and we may never know. What we do know is that an assortment of noble-sounding efforts has devolved into enterprises marked chiefly by abuse, self-dealing, and worse.

Seen by many, including many Americans, as the chief arbiter of legitimacy in global politics, the UN is understood by others to be the only institution standing between us and global anarchy. If that is so, the portents are not promising. The free world is grappling with threats from the spread of radical Islam to North Korea’s nuclear blackmail and Iran’s pursuit of nuclear bombs. The UN, despite its trophy case of Nobel prizes, has failed so far to curb any of these, just as it failed abysmally to run an honest or effective sanctions program in Saddam Hussein’s Iraq. Currently it is gridlocked over matters as seemingly straightforward as cleaning up its own management department.

In the effort to address the UN’s manifold problems, there have been audits, investigations, committees, reports, congressional hearings, action plans, and even a handful of arrests by U.S. federal prosecutors. There have been calls for Secretary-General Kofi Annan to step down before his second term expires at the end of this year. Solutions have been sought by way of better monitoring, whistleblower protection, the accretion of new oversight bodies, and another round of conditions attached to the payment of U.S. dues. On top of the broad reforms of the early 1990’s, the sweeping reforms of 1997, the further reforms of 2002, and the world summit for reform in 2005, still more plans for reform are in the works.1 To its external auditors, internal auditors, joint inspections unit, eminent-persons panels, executive boards, and many special consultants, the UN has recently added an Office of Ethics—now expected to introduce in May what will presumably become an annual event: “UN Ethics Day.”

Is any of this likely to help? Behind the specific scandals lies what one of the UN’s own internal auditors has termed a “culture of impunity.” A grand committee that reports to itself alone, the UN operates with great secrecy and is shielded by diplomatic immunity. One of its prime defenses, indeed, is the sheer impenetrability of its operations: after more than 60 years as a global collective, it has become a welter of so many overlapping programs, far-flung projects, quietly vested interests, nepotistic shenanigans, and interlocking directorates as to defy accurate or easy comprehension, let alone responsible supervision.

But let us try.

One clear sign of how badly things have gone with the UN is the difficulty of tallying even so basic a sum as the system’s real budget. Nowhere does the UN present a full and clear set of accounts, and statistics vary even within individual agencies and programs.

The UN’s current “core” annual budget is $1.9 billion—but the “core” is itself but a fraction of the actual budget. Around it are wrapped billions more in funding provided by “voluntary contributions” from private and corporate donors, foundations, and member states, including, to a large extent, the United States. These sums are shuffled around in various ways, with UN agencies in some instances paying or donating to each other. For instance, the UN Development Program (UNDP) operates with its own “core” budget of about $900 million a year but handles about $3 billion per year—or, depending on whom you ask and what you count, $4.5 billion per year.

According to Mark Malloch Brown, the UN chief of staff who has just been promoted to the post of Deputy Secretary-General, the total budget for all operations under direct control of the Secretariat comes to roughly $8-9 billion per year. Adding in just a few of the larger agencies like UNDP (at, let us say, $4 billion), UNICEF ($2 billion or so), and the World Food Program ($2-3 billion) already brings the grand total to somewhere between $16 and $18 billion, again depending on whom you listen to and what you count. On UN websites devoted to procurement, where the idea is not to minimize the official amount of UN spending but on the contrary to attract suppliers to a large and thriving operation, the estimate of money spent yearly on goods and services by the entire UN system comes to $30 billion, or more than 15 times the core budget of $1.9 billion on which reformers have focused.

Staff numbers are likewise a matter of mystery. The new ethics office proposes to offer its services to 29,000 UN employees worldwide. That number is well short of the total staff of the Secretariat plus the specialized agencies alone, which, according to Malloch Brown, consists of some 40,000 people. And that figure itself does not include local staffs—such as the 20,000 Palestinians who work for the UN Works and Relief Agency (UNWRA) or the many employees, some long-term, others transient, at hundreds of assorted UN offices, projects, and operations worldwide, or the more than 85,000 peacekeepers sent by member states but carrying out UN orders and eating UN-supplied rations bought via UN purchasing departments. Whereas the number of UN member states has almost quadrupled since 1945 (from 51 to 191), the number of personnel has swollen many times over, from a few thousand into somewhere in the six figures.

Little of this system is open to any real scrutiny even within the UN, and no single authority outside the UN has proved able to compel any genuine accounting. Moreover, even though there can no longer be any doubt that the scale of the rot is large, the UN’s top management continues to insist to the contrary. Take the central scandal of recent UN history—namely, Oil-for-Food. Last October, Paul Volcker’s UN-authorized probe into Oil-for-Food submitted its fifth and final report on that relief program, which in its seven years of operation had become a vehicle for billions in kickbacks, payoffs, and sanctions-busting arms traffic. By January of this year, after first having declared that he was taking responsibility for the debacle, Kofi Annan was spinning a different story, telling a London audience that “only one staff member was found to maybe have taken some $150,000 out of a $64-billion program.”

This was an artful lie. The staff member in question was Benon Sevan, whom Annan had appointed to run Oil-for-Food for six of its seven years. If indeed Sevan took no more than this relative pittance, then Saddam Hussein scored the biggest bargain in the history of kickbacks. According to Senator Norm Coleman’s independent investigation into Oil-for-Food, the real figure for Sevan’s take was $1.2 million. Clearing up this discrepancy is difficult, however, because Sevan, who was allowed by Annan to retire to his native Cyprus on full UN pension, is outside the reach of U.S. law and has denied taking anything.

In any case, the corruption hardly ended with Sevan. Instances that appear to have slipped the Secretary-General’s mind include another member of his inner circle, the French diplomat Jean-Bernard Merimée, who by his own admission took a payoff from Saddam while serving as Annan’s handpicked envoy to the European Union. Within the UN agencies working with Annan’s Secretariat on Oil-for-Food, Volcker confirmed “numerous [further] allegations of corrupt behavior and practices,” embracing “bid-rigging, conflicts of interest, bribery, theft, nepotism, and sexual harassment.” He also noted that the UN lacked controls on graft, failed to investigate many cases, and failed to act upon some of those it did explore. Finally, Volcker calculated that UN agencies had kept for themselves at least $50 million earmarked to buy relief for the people of Iraq.2

Nor do the sheer monetary amounts even begin to convey the extent of the damage done by UN labors in Iraq. Annan’s office had the mandate of the Security Council, plus a $1.4-billion budget, to check oil and relief contracts for price fiddles, to monitor oil exports in order to prevent smuggling, and to audit UN operations. In the event, Oil-for-Food spent far more money renovating its offices in New York than checking the terms of Saddam’s contracts, and ignored the smuggling even when Saddam in 2000 opened a pipeline to Syria. The result of what Annan now placidly describes as “instances of mismanagement”—as if someone forgot to reload the office printer—was that Saddam skimmed and smuggled anywhere from $12 billion (according to the incomplete numbers supplied by Volcker) to $17 billion or more (according to the more comprehensive totals provided by Senator Coleman’s staff).

And what did Saddam do with those profits?

Continued in this commentary.

Are lawyers padding expense billings?
The career of Matthew Farmer, a junior partner in the Chicago law offices of Holland & Knight LLP, was on the upswing in December 2004. He had just won a monthlong trial for Pinnacle Corp., a Midwestern home builder accused of copyright infringement, and gotten kudos from many of his partners. But weeks later, after reviewing billing records in the Pinnacle matter, he decided to leave the 1,200-lawyer firm. Mr. Farmer, 42 years old, believed his own hours on the case had been inflated by the partner in charge of billing, 62-year-old Edward Ryan. Fearing he would violate state ethics rules if he kept quiet, Mr. Farmer blew the whistle to Holland & Knight lawyers.
Nathan Koppel, "Lawyer's Charge Opens Window On Bill Padding," The Wall Street Journal, August 30, 2006; Page B1 ---
Jensen Comment
Large accounting firms previously got caught up in bill padding scandals, particularly inflated airline fare reimbursements ---

"Former Ernst & Young Clients Sue Over Tax Shelters," AccountingWeb, April 12, 2006 ---

Bob Jensen's threads on Ernst & Young are at

"Some CPAs Escape State Disciplinary Action," AccountingWeb, June 20, 2006 ---

There have been more than 50 accountants sanctioned over 2005 and 2006 for professional misconduct and few of them have compensated shareholders for their complicity or neglect. The Associated Press reports that although sanctioned not to practice public accounting for between one and ten years by the SEC, these accountants still prepare, audit or review financial statements for public companies.

They also remain able to perform these services for private companies. While firms such as Arthur Andersen and others have paid huge sums in accounting damages, the individual accountants have escaped their professional penance, according to the Associated Press.

The disconnect seems to be an established communication system that would allow the SEC to advise state accounting boards of federal sanctions against rogue accountants. Another aspect of the disconnect is that state accountancy boards do not have staff to handle the number or reach of financial scandals such as Cendant, Enron or WorldCom.

Texas is one of many states facing this situation. License renewals are not a verifiable method of finding out about SEC sanctions unless without the accountant completing the questions truthfully. A spokesman for the Georgia board told the Associated Press that a CPA recently renewed his license online without disclosing his disciplinary action by the SEC.

William Treacy, executive director of the Texas State Board of Public Accountancy, told the Associated Press, “We don’t have the staff on board to manage the extra workload that the profession has been confronted over the last few years, so we contracted with the attorney general’s office to provide extra prosecutorial power.”

One of the problems and potential fixes to this situation may be to fine accountants. After a landmark SEC settlement in which three partners at KPMG agreed to pay a combined fine totaling $400,000 for their complicity in the $1.2 billion fraud at Xerox, the Associated Press reports that one of the partners still holds his license in New York.

David Nolte of Fulcrum Financial Inquiry told the Associated Press, “The SEC has never sought serious money from errant CPAs. Unfortunately, the small fines in the Xerox case set a record of the amount paid, so everyone else has gotten off easy.”

With the heavy investment in internal controls and procedures by CPA firms, the human element of accounting and auditing helps even large CPA firms fail to identify accounting problems. Members of an audit team can identify insufficient knowledge, misrepresentation of information, sloppy accounting or even simple misrepresentation of information but must be able to see the warning signs of other risky behavior. The CPA Journal suggests a 360-degree assessment of members on an audit team. As a structured, systematic way to collect information, evaluators include the person’s boss, peers, direct reports, and even clients.

Continued in article

The Sad State of Professional Discipline in Public Accountancy

"SEC Accountant Fines Largely Go Unpaid," SmartPros, June 7, 2006 ---

The Securities and Exchange Commission has taken disciplinary action against more than 50 accountants in 2005 and 2006 for misconduct in scandals big and small. But few have paid a dime to compensate shareholders for their varying levels of neglect or complicity.

It also turns out that nearly half of them continue to hold valid state licenses to hang out their shingles as certified public accountants, based on an examination of public records by The Associated Press.

So while the SEC has forbidden these CPAs from preparing, auditing or reviewing financial statements for a public company, they remain free to perform those very same services for private companies and other organizations that may be unaware of their professional misdeeds.

Some would say the accounting profession has taken its fair share of lumps, particularly with the abrupt annihilation of Arthur Andersen LLP and the jobs of thousands of auditors who had nothing to do with the firm's Enron Corp. account. Meantime, the big auditing firms are paying hundreds of millions of dollars in damages - without admitting or denying wrongdoing - to settle assorted charges of professional malpractice.

Individual penance is another matter, however, and here the accountants aren't being held so accountable.

Part of the trouble is that there doesn't appear to be an established system of communication by which the SEC automatically notifies state accounting regulators of federal disciplinary actions. In several instances, state accounting boards were unaware a licensee had been disciplined by the SEC until it was brought to their attention in the reporting for this column. The SEC says it refers all disciplinary actions to the relevant state boards, so the cause of any breakdowns in these communications is unclear.

Another obstacle may be that some state boards do not have ample resources to tackle the sudden swell of financial scandals. It's not as if, for example, the Texas State Board of Public Accountancy had ever before dealt with an accounting fraud as vast as that perpetrated at Houston-based Enron.

"We don't have the staff on board to manage the extra workload that the profession has been confronted with over the last few years," said William Treacy, executive director of the Texas board. "So we contracted with the attorney general's office to provide extra prosecutorial power."

Treacy said his office is usually notified of SEC actions concerning Texas-licensed CPAs, but the process isn't automatic.

With other states, communications from the SEC appear less certain. If nothing else, many boards rely upon license renewals to learn about SEC actions, but that only works if the applicants respond truthfully to questions about whether they've been disciplined by any federal or state agency. A spokeswoman for Georgia's board said one CPA recently disciplined by the SEC had renewed his license online without disclosing it.

Ransom Jones, CPA-Investigator for the Mississippi State Board of Public Accountancy, said most of his leads come from other accountants, media reports and annual registrations.

"The SEC doesn't necessarily notify the board," said Jones, whose agency revoked the licenses of key players in the scandal at Mississippi-based WorldCom.

Some state boards appear more vigilant than others in policing their membership. The boards in California and Ohio have punished most of their licensees who have been disciplined by the SEC since the start of 2005.

New York regulators haven't yet penalized any locals targeted by the SEC in that timeframe, though they have taken action against two disciplined by the SEC's new Public Company Accounting Oversight Board. It is conceivable that cases are underway but not yet disclosed, or that some individuals have been cleared despite the SEC's findings. A spokesman for the New York State Education Department said all SEC referrals are probed, but not all forms of misconduct are punishable under local statute. New rules now under consideration would strengthen those disciplinary powers, he said.

Meanwhile, although the SEC deserves credit for de-penciling those CPAs who've breached their duties as gatekeepers of financial integrity, barely any of those individuals have been asked to make amends financially.

No doubt, except for those elevated to CEO or CFO, most accountants are not paid as handsomely as the corporate elite. That said, partners from top accounting firms are were [sic] paid well enough to cough up more than the SEC has sought, which in most cases has been zero.

Earlier this year, in what the SEC crowed about as a landmark settlement, three partners for KPMG LLP agreed to pay a combined $400,000 in fines regarding a $1.2 billion fraud at Xerox Corp. One of those fined still holds his license in New York.

"The SEC has never sought serious money from errant CPAs," said David Nolte of Fulcrum Financial Inquiry LLP. "Unfortunately, the small fines in the Xerox case set a record of the amount paid, so everyone else has also gotten off easy."

It's not that the CPAs found culpable in scandals don't deserve a right to redemption, or just to earn a living. Most of the bans against practicing before the SEC are temporary, spanning anywhere from a year to 10 years.

But the presumed deterrent of SEC action is weakened if federal and state regulators don't work together on a consistent message so bad actors don't get a free pass at the local level.

Bob Jensen's threads on auditor fraud and incompetence are at

Bob Jensen's thread on proposed reforms are at

Fraud Update
This appears to be one of those moral hazard situations in game theory where it is optimal to break the law and pay the fine.

The Federal government does not back the debt of Fannie Mae and Freddie Mac. However, since they own the lion's share of all home mortgages in the U.S., the general perception is that allowing Fannie and Freddie go bankrupt would bring the economy crashing down.

"Freddie's Friends on the Hill," The Wall Street Journal, April 27, 2006; Page A18 ---

It's well-known that Fannie Mae and Freddie Mac have good friends on Capitol Hill. But last week the Federal Election Commission shed some light on how Freddie Mac rewarded its friends. In a settlement with the FEC, Freddie admitted to illegally raising $1.7 million for candidates from both parties between 2000 and 2003. In 2001 alone, Freddie Mac's Senior Vice President for Government Affairs boasted of holding 40 fund-raisers for House Financial Services Committee Chairman Michael Oxley.

Unfortunately for Freddie, it is explicitly barred by law from political fund-raising. In the settlement, Freddie agreed to fork over $3.8 million in fines. Yet Freddie probably figures it also got its money's worth. Genuine reform of the two giant "government-sponsored enterprises" is now stalled on Capitol Hill, thanks in large part to Mr. Oxley's dutiful service.

Which means it's time for reformers to turn to Plan B. The Bush Administration could itself take the opportunity to rein in Freddie and Fannie. An overlooked provision of the laws that founded the two companies already gives the Treasury Secretary the power to restrict the duo's mortgage portfolios that now threaten the U.S. financial system.

First, some background. Fan and Fred have lower costs of capital than their competitors because of the market perception that the government stands behind their debt. This, in turn, is indispensable to their business model. Fannie and Freddie between them hold more than $1 trillion worth of mortgage-backed securities that they've bought with this cheaper credit.

To make it all work, Fannie and Freddie must carefully balance the risks that arise from interest-rate movements, mortgage prepayments and the different maturities of their debts and assets. The monumental accounting troubles that both companies have had in recent years centered around how they account for those risks and the hedges they use to mitigate them. The danger that those portfolios could melt down has led critics such as Alan Greenspan and his successor at the Federal Reserve, Ben Bernanke, to warn that Fan and Fred pose a "systemic risk" to the financial system if the size of their portfolios is not reduced.

It took Congress just weeks to pass Sarbanes-Oxley in 2002. But -- perhaps because Mr. Oxley has been spending so much time at Freddie's fund-raisers -- it can't seem to deal with the far larger financial problems at Fan and Fred. A watered-down reform bill has passed the House, but a stronger bill in the Senate shows no sign of being brought up for a vote anytime soon. Securities analysts have been telling investors they believe the drive to rein in the duo is losing momentum. Freddie Mac's president and COO recently concurred in public. He added that strict limits on retained portfolios would not be in the "best interest of the housing finance industry." By which he meant the best interest of Fannie and Freddie.

Portfolio limits are, however, in the interest of American taxpayers and the integrity of the financial system. The law requires that the bonds that Fannie and Freddie issue explicitly deny that they are backed by the federal government, but plainly no one believes that. Otherwise, who in their right mind would purchase the debt of Fannie Mae, a company with no financial statements and $11 billion in overstated profit?

This type of situation was foreseen when Fan and Fred were chartered. Which is why the same sections of the U.S. Code that require Fannie and Freddie to disavow any government backing of their debts also require the companies to get the approval of the Treasury Secretary before issuing any debt.

Specifically, the law pertaining to Fannie reads: "[T]he corporation is authorized to issue, upon the approval of the Secretary of the Treasury, and have outstanding at any one time obligations having such maturities and bearing such rate or rates of interest as may be determined by the corporation with the approval of the Secretary of the Treasury . . ." (our emphases). The section of the law dealing with Freddie Mac has similar language.

As we read that, Treasury already has the power to limit Fannie's and Freddie's borrowing. What's more, that authority appears to have been granted specifically out of concern that the debts of the pair might someday be laid at Treasury's doorstep. But without massive borrowing, neither Fannie nor Freddie could afford to hold the hundreds of billions of securities that they currently do. So limiting their borrowing would require them to decrease the size of their portfolios -- and hence the risk to the economy of a blow-up. Meanwhile, their regular business of securitizing mortgages and selling them would be unaffected. It is their repurchase of those mortgages with subsidized credit that needs to be limited.

The Bush Administration has been forceful in calling for Congress to reform how Fannie and Freddie are regulated and run. But if it wants its effort to succeed, it is going to have to show Fan and Fred and their friends on the Hill that Treasury will act if Congress doesn't..

The Federal government does back up the debts of Ginnie Mae. Ginnie's operations accordingly are much less risky than those of Fannie and Freddie ---

Bob Jensen's threads on accounting scandals in Fannie Mae and Freddie Mac are at

Banking Fraud Whistleblower:  Overcharging for Student Loans
A former U.S. Education Department researcher climbed out of the shadows Monday and identified himself as the whistle blower behind revelations in 2004 that some providers of student loans were taking advantage of a loophole in federal law that allowed them to continue to make loans for which they were guaranteed an interest rate return of 9.5 percent. At a news event Monday at the New America Foundation, Jon H. Oberg, a former chief fiscal officer for the State of Nebraska, aide to former Sen. J. James Exon (R-Neb.), and staff member at the Institute of Education Sciences, said he had done research on the practice before his superiors at the department reassigned him; he continued the work on his own time, providing information to Congress and to the department’s inspector general. The event came as the inspector general prepares to release an audit that is expected to show that Nelnet, a Nebraska-based lender, received many millions of dollars in overpayments of federal funds, charges that Nelnet disputes.
Inside Higher Ed, September 19, 2006 ---

What is disease-mongering by drug companies?

"Hey, You Don't Look So Good:  As diagnoses of once-rare illnesses soar, doctors say drugmakers are "disease-mongering" to boost sales," Business Week, May 8, 2006 --- Click Here 

If you have high blood pressure, you may be at risk for heart disease. And given that an estimated 65 million Americans have hypertension, it's not surprising that drugs to treat it are among the most prescribed medicines in the world. But why stop at prescribing drugs to people whose readings are 140/90 or higher, the standard definition of high blood pressure? In the Apr. 20 issue of The New England Journal of Medicine, a research team reported on "prehypertension," the condition of being in danger of developing hypertension.

Prehypertension was first identified in 2003, and some studies claim as many as 50 million U.S. adults have the condition, defined as blood pressure readings from 120/80 to 139/89. This risk of being at risk can be modified with diet and exercise, but the NEJM study reports that it can also be treated with Atacand, a drug from AstraZeneca Pharmaceuticals PLC (AZN ).

To a growing chorus of physicians and health-care specialists, the very idea of treating the risk of a risk is wrong. They have labeled the phenomenon "disease-mongering," defined as the corporate-sponsored creation or exaggeration of maladies for the purpose of selling more drugs. Prehypertension "is a classic case of a risk factor being turned into the disease," says Dr. Steven Woloshin of the Veterans Affairs Outcomes Group in White River Junction, Vt. "If you make a cut-off for blood pressure that's close to the normal range, then just about everyone can be diagnosed." An AstraZeneca spokesman responds that the trial was considered important enough to be published in the prestigious NEJM. "I think that speaks for itself."

DEMAND FOR A QUICK FIX According to critics, disease-mongering is on the rise. It starts when a drug is developed for some once-rare condition. Then heavily promoted disease-awareness campaigns kick into gear, leading to increasing numbers of diagnoses and prescriptions. The list of suspects includes restless legs syndrome, social anxiety disorder, premenstrual dystrophic disorder, irritable bowel syndrome, female sexual dysfunction, and more. "Of course, some people have these diseases very seriously," says Dr. Robert L. Klitzman, a psychiatrist and bioethicist at Columbia University. "The problem is that mild cases are being made to seem more serious than they are."

The other problem, say the anti-disease-mongerers, is that the vagaries of everyday life, such as sadness, shyness, forgetfulness, and the occasional upset stomach, are being turned into medical conditions. Before Pfizer Inc.'s (PFE ) Viagra was introduced, erectile dysfunction was a medical problem only when associated with an underlying biological cause, such as diabetes or prostate cancer. Now, Pfizer's Web site claims that half of all men over 40 have problems getting or maintaining an erection. Social anxiety disorder, defined as severe shyness, was rarely seen until GlaxoSmithKline PLC's (GSK ) Paxil was approved to treat it. A disease-awareness campaign by Glaxo in the late 1990s, with the tag line "imagine being allergic to people," was quickly followed by rising prevalence estimates.

Disease promotion is not just the purview of drug companies. "Doctors should set more boundaries," asserts Dr. David Henry, a pharmacology professor at the University of Newcastle in Australia and a leading critic of disease-mongering. Then there are patients seeking a quick fix for conditions that might better be treated through lifestyle changes. "Drug companies are playing off the desire we all have to get rid of things that bother us," says Klitzman. But ridding oneself of bothersome symptoms without changing the behaviors that contribute to them can mean taking a pill every day for years, a proposition that is both risky and costly.

YOUNGER AND YOUNGER Also of concern are efforts to expand the definition of serious diseases to cover more and more people. Loosened criteria for bipolar disorder, a dire psychological disease once thought to affect only 0.1% of the population, have led some experts to claim prevalence rates of anywhere from 5% to 10%. Dr. David Healy of Cardiff University in Wales says the higher estimates are based on ill-defined surveys that followed the introduction in the mid-1990s of mood stabilizer drugs, promising relief even for people with mild emotional swings. In the U.S., children as young as age 2 are being diagnosed as bipolar even though, in the classic definition of the illness, symptoms don't usually show up until the teens. "These young kids are started on two or three medicines when there isn't even any evidence that any of them work in children," says Dr. Jon McClellan at the University of Washington in Seattle.

Disease-mongering isn't new. The term was coined by Lynn Payer in her 1994 book Disease-Mongers: How Doctors, Drug Companies, and Insurers are Making You Feel Sick. But the advent of direct-to-consumer advertising in the U.S. in 1999 fanned the trend, say drug industry critics. Their complaints reached a critical mass this spring. The April issue of the journal PLoS Medicine ran 11 articles on disease-mongering to coincide with the first conference devoted to the topic, held Apr. 11-13 in Newcastle.

Drugmakers say they're only trying to educate patients who are struggling with serious illnesses. "We realize that not every medicine is for every person," says a spokeswoman for Glaxo, which makes drugs for restless legs syndrome, social anxiety disorder, and other diagnoses that are under fire. "The labels contain important information about whether it's appropriate, and we're confident that doctors consulting with patients will assess their health-care issues and the risks and rewards and make an appropriate decision."

The skeptics aren't convinced that doctors will be so discriminating, in part because many get their information about disease treatment from the drug industry. Pharmaceutical companies routinely subsidize continuing medical education courses for doctors. They fund research for diseases that then gets published in medical journals, and they underwrite patient advocate groups, which in turn promote the underwriter's drugs on their Web sites. Witness the Child & Adolescent Bipolar Foundation: It lists four pharmaceutical companies as major donors, including Eli Lilly & Co. and Janssen LP, makers of leading mood stabilizers.

All these factors come into play with restless legs syndrome, a case history detailed in PLoS Medicine. Defined as the urge to constantly move one's legs, the condition can be truly disruptive for people with severe symptoms, but such severity is considered rare. That didn't stop GlaxoSmithKline from launching a disease awareness campaign in 2003. The company kicked off the blitz with a press release stating that a "new survey reveals a common yet underrecognized disorder -- restless legs syndrome -- is keeping Americans awake at night." News articles proliferated, most stating that the condition affects up to 10% of adults in the U.S., based on the study Glaxo promoted.

In 2005, Glaxo's Requip, a treatment for Parkinson's disease, was approved for restless legs. At the same time the Restless Legs Syndrome Foundation, which receives funding from Glaxo, issued a press release about "a new national survey that shows [the] syndrome is largely underrecognized and poorly understood." A Glaxo spokeswoman says that most Requip prescriptions are written for Parkinson's.

The VA's Dr. Woloshin grants that some people are helped by Requip, Paxil, and Viagra. But he worries that overtreatment drains money from research into more serious illnesses. "None of these companies is coming up with a cure for TB," he notes. That's a disease no one is trying to monger.

Native Americans Are Suing for Billions of Dollars for Accounting Fraud and Mismanagement

"Counting Up What Indians Are Owed," SmartPros, May 8, 2006 ---

What is ground zero for an accounting that will take seven years and cost $335 million owes its existence to a bitter class-action lawsuit brought against the Interior Department a decade ago. Still, it's only a short version of the historical accounting that Indians demanded but no longer want, because they do not think it can be done properly.

The Indians say the government mismanaged a trust in their names for 120 years and now owes them tens of billions of dollars.

The dispute dates to 1887, when Congress made the Interior Department the trustee for 145 million acres of Indian lands. Indians were supposed to benefit, but the government gave most of the land to white settlers.

Today, the department manages 10 million acres of trust land for individual Indians and 46 million acres for tribes. In 1996, the Indians sued to reconcile their historical accounts. The Indians, and Congress, demanded an audit. The Indians may be owed a century's worth of grazing rents, oil and gas royalties and timber sales from the land, plus interest.

Both the Indians and the Interior Department agree $13 billion was collected between 1909 and 2001.

The Indians had claimed the unpaid interest could be more than $150 billion, but have offered to drop the whole thing if the government coughs up $27.5 billion. They would spread the money among individual Indian accountholders, about one-fifth of the 2.5 million Indians now living in the U.S., mainly in the West.

No way, the Bush administration replied, saying the government all along has forwarded most of the rents and royalties to tribes and individual Indians.

"It could be just $30 million that's owed to the Indians," said Ross Swimmer, the department's special trustee for Indians. He also is a member of Oklahoma's Cherokee Nation.

During a tour of the Kansas cave, Swimmer and other department officials were eager to show that many more Indian records exist than people realize. They also wanted to demonstrate their ability to check the accuracy of financial transactions with Indians.

"They're finally going to get their accounting," Swimmer said. "For once we've gotten something right for the Indians."

In an irony befitting an "Alice's Adventures in Wonderland" legal war, the government is relying on the Indian-demanded accounting - actually, it's a statistical sampling - to come up with figures that Indians claim low-ball what they are owed.

"It's a number in the m's, not the b's," said Fritz Scheuren, who oversees the department's sampling. Scheuren was president of the American Statistical Association last year.

The Indians who sued say now that too many records have been destroyed to come up with an accurate figure. Before 1990, the Treasury Department routinely destroyed the Indian trust's canceled checks, and court documents attest to numerous destroyed records.

"The documents that the government has preserved are a fraction of those that have been lost and destroyed," said Dennis Gingold, a lawyer for the Indians. "Massive hard copy and electronic destruction ... make the accounting legally and factually impossible."

The Indians' biggest ally is U.S. District Judge Royce Lamberth, a former Reagan administration official whose strongly worded rulings condemn the Interior Department.

After nine years presiding over the case, Lamberth concluded last July that the agency is a "pathetic outpost" that has bungled its fiduciary duty.

Continued in article

Investors in Hedge Funds Do So at Their Own Peril

Hedge Funds Are Growing: Is This Good or Bad?
When the ratings agencies downgraded General Motors debt to junk status in early May, a chill shot through the $1 trillion hedge fund industry. How many of these secretive investment pools for the rich and sophisticated would be caught on the wrong side of a GM bond bet? In the end, the GM bond bomb was a dud. Hedge funds were not as exposed as many had thought. But the scare did help fuel the growing debate about hedge funds. Are they a benefit to the financial markets, or a menace? Should they be allowed to continue operating in their free-wheeling style, or should they be reined in by new requirements, such as a move to make them register as investment advisors with the Securities and Exchange Commission?
"Hedge Funds Are Growing: Is This Good or Bad?" Knowledge@wharton,  June 2005 ---     

"Court Says S.E.C. Lacks Authority on Hedge Funds," by Floyd Norris, The New York Times, June 24, 2006 --- Click Here 

A federal appeals court ruled yesterday that the Securities and Exchange Commission lacks the authority to regulate hedge funds, dealing a possibly fatal blow to the commission's efforts to oversee a rapidly growing industry that now has $1.1 trillion in assets.

A three-judge panel of the United States Court of Appeals for the District of Columbia Circuit ruled unanimously that the commission exceeded its power by treating investors in a hedge fund as "clients" of the fund manager. The commission has authority over any manager with at least 15 clients, and it used that to require hedge fund managers to register.

The ruling, unless overturned on appeal, means that Congressional action would be required to grant the S.E.C. the authority to force hedge fund managers to register, or for the commission to impose any other rules on such funds.

The ruling does not leave such funds totally above the law since they are treated like any other investor in determining whether they violated securities laws. As a result, the decision will not affect an S.E.C. investigation into possible insider trading by a major hedge fund manager, Pequot Capital Management, which was disclosed in a New York Times article yesterday.

Christopher Cox, who became S.E.C. chairman after the rule was adopted, said the commission would review the issue, but stopped short of indicating that it would continue to seek authority over hedge funds.

"The S.E.C. takes seriously its responsibility to make rules in accordance with our governing laws," Mr. Cox said in a statement. "The court's finding, that despite the commission's investor protection objective its rule is arbitrary and in violation of law, requires that going forward we re-evaluate the agency's approach to hedge fund activity."

He said the commission would "use the court's decision as a spur to improvement in both our rule making process and the effectiveness of our programs to protect investors, maintain fair and orderly markets, and promote capital formation."

As hedge funds have grown, and as some have collapsed amid fraud or because they took excessive risks, pressures to regulate them have grown. But fund managers have protested that the vast majority have acted responsibly and should not be subjected to what James C. McCarroll, a lawyer with Reed Smith, a New York law firm, said yesterday were "regulatory overlays and burdens" approaching those faced by mutual funds.

The S.E.C. rule, adopted in December 2004 on a 3-to-2 vote, called for fund managers with more than $30 million in assets and at least 15 investors to register with the commission. Nearly 1,000 managers did so by the deadline of Feb. 1, 2006.

The S.E.C. rule exempted funds that imposed two-year lockups on investors' money, meaning the money could not be withdrawn for at least that long, leading a number of funds to impose such lockups. Some may choose to remove or ease those rules now.

Hedge funds, as the appeals court opinion written by Judge Arthur R. Randolph noted, "are notoriously difficult to define." But they generally are open only to wealthy investors and charge fees based on a percentage of the assets under management plus a portion of the profits.

The growth of hedge funds has made some managers incredibly wealthy, with incomes dwarfing even those of high-paid corporate chief executives. Alpha, a publication of Institutional Investor, reported that two hedge fund managers earned more than $1 billion each in 2005.

The pressure for more oversight of hedge funds grew after one fund, Long-Term Capital Management, almost collapsed in 1998. The Federal Reserve, fearful that such a collapse could cause systemic risk, encouraged Wall Street firms to mount a rescue, which they did.

The emergence of activist hedge funds, which sometimes act in concert with each other and can become the largest shareholders of some companies, has also increased calls for regulation, both here and in Europe. A German politician called such funds "locusts" that plundered German companies and then fired German workers. Some European governments have pushed for international regulation of such funds.

The decision to push for S.E.C. registration was made by Mr. Cox's immediate predecessor, William H. Donaldson. Mr. Donaldson argued that the funds had grown so large they could cause systemic risk to the financial markets, and that a gradual process of "retailization," through such trends as "fund of funds" that allow relatively small investments, had made it more important for regulators to have at least some knowledge of what was going on in the funds.

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

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

Bob Jensen's threads on proposed reforms are at

Warning to retirees: Beware of your families
Financial swindles are one of the fastest-growing forms of elder abuse. By some estimates, as many as five million senior citizens are victimized each year, says Sara Aravanis, director of the nonprofit National Center on Elder Abuse, which provides information to federal and state policy makers. Because of the problem's spread, "many states have laws authorizing financial institutions to report suspicions of elderly abuse," says Bruce Jay Baker, general counsel for the Illinois Bankers Association. Earlier this summer, the Securities and Exchange Commission hosted a Seniors Summit to highlight the issue, with SEC Chairman Christopher Cox noting that protecting seniors' pocketbooks "is one of the most important issues of our time."
Jeff D. Opdyke, "Intimate Betrayal: When the Elderly Are Robbed by Their Family Members," The Wall Street Journal, August 30, 2006; Page D1 ---

A Little Like Dirty Pooling Accounting
Tyco Undervalues Acquired Assets and Overvalues Acquired Liabilities: 

Tyco International Ltd. said Monday it has agreed to pay the Securities and Exchange Commission $50 million to settle charges related to allegations of accounting fraud by the high-tech conglomerate's prior management. The regulatory agency had accused Tyco of inflating operating earnings, undervaluing acquired assets, overvaluing acquired liabilities and using improper accounting rules, company spokeswoman Sheri Woodruff said. 'The accounting practices violated federal securities laws,'' she said.
"Tyco to Pay S.E.C. $50 Million on Accounting Charges," The New York Times, April 17, 2006 ---

April 17, 2006 reply from Saeed Roohani


Assuming improper accounting practices by Tyco negatively impacted investors and creditors in the capital markets, why SEC gets the $50 M? Shouldn't SEC give at least some of it back to the people potentially hurt by such practices? Or damage to investors should only come from auditors' pocket?

Saeed Roohani

April 18, 2006 reply from Bob Jensen

Hi Saeed,

In a case like this it is difficult to identify particular victims and the extent of the damage of this one small set of accounting misdeeds in the complex and interactive multivariate world of information.

The damage is also highly dispersed even if you confine the scope to just existing shareholders in Tyco at the particular time of the financial reports.

One has to look at motives. I'm guessing that one motive was to provide overstated future ROIs from acquisitions in order to justify the huge compensation packages that the CEO (Kozlowski) and the CFO (Schwarz) were requesting from Tyco's Board of Directors for superior acquisition performance. Suppose that they got $125 million extra in compensation. The amount of damage for to each shareholder for each share of stock is rather minor since there were so many shares outstanding.

Also, in spite of the illegal accounting, Kozlowski's acquisitions were and still are darn profitable for Tyco. I have a close friend (and neighbor) in New Hampshire, a former NH State Trooper, who became Koslowski's personal body guard. To this day my friend, Jack, swears that Kozlowski did a great job for Tyco in spite of possibly "stealing" some of Tyco's money. Many shareholders wish Kozlowski was still in command even if he did steal a small portion of the huge amount he made for Tyco. He had a skill at negotiating some great acquisition deals in spite of trying to take a bit more credit for the future ROIs than was justified under purchase accounting instead of virtual pooling accounting.

I actually think Dennis Kozlowski was simply trying to get a bit larger commission (than authorized by the Board) for some of his good acquisition deals.

Would you rather have a smart crook or an unimaginative bean counter managing your company? (Just kidding)

Bob Jensen

"Tyco Investors Get Ripped Off Again ... This Time by the SEC," by J. Edward Ketz, SmartPros, May 2006 ---

On April 17, 2006, the Securities and Exchange Commission issued Litigation Release No. 19657, which states that the SEC and Tyco have settled terms over this fraud. In its civil complaint, the SEC alleges that Tyco undervalued assets and overvalued liabilities acquired in business combinations, inflated operating income and cash flows from operating activities, and bribed foreign officials in Brazil. The SEC also contends that Tyco covered up these activities with false and misleading financial reports. In the usual fashion of these decrees, Tyco neither admits nor denies the charges; nevertheless, it consents to the judgment. In this case, Tyco must pay a $50 million penalty.

But, just a minute! Who is really paying this $50 million fine? It's not management, neither Kozlowski nor Schwartz (the SEC continues its investigation of them, and they may receive additional fines), nor Tyco's present management team. The board of directors is not paying the fine either. Given the firm itself is paying this ticket, it implies that the real payers are the investors of Tyco, who in effect must cough up $50,000,000. So this raises the question -- why should the investors get ripped off twice?

Let's go back to basics: civil penalties and criminal sentences serve two purposes in our society. First, they satisfy, however partially, our collective sense of justice. Kozlowski and Schwartz defrauded many investors, and these aggrieved investors seek justice, but they seek justice against the perpetrators of the conspirators, not the victims. Not themselves. Second, society issues civil penalties and criminal sentences to deter future crimes. The idea is that if the disincentives are sufficiently obnoxious and if the probably of enforcement is sufficiently high, then future managers are less likely to follow suit with their own crimes against investors. In this case too, the argument is persuasive as long as the courts levy fines and punishment against the malefactors and not against the victims.

The SEC has for a long time engaged in these civil judgments against firms that have experienced accounting and securities fraud. It would do well for the SEC to re-examine this policy, realize that its effects are pernicious and counterproductive, and then repeal the strategy. It is silly for the investors to suffer for the wrongdoing by corporate thieves masquerading as managers.

As an aside, the reader may remember the infamous committee headed by David Boies, on behalf of Tyco's board of directors, to examine the Tyco situation and determine whether Tyco had engaged in an accounting scam. Tyco issued this report in an 8-K filed on December 30, 2002. That committee kept its eyes closed and found that "there was no significant or systemic fraud." I wonder what excuse David Boies or the other members of the committee could provide today for their wanting analysis.

If the SEC really desires to deter future accounting frauds, it must align its punishment with the scoundrels who carry out these misdeeds. The SEC also must enforce the securities laws to the fullest extent possible. If today's managers see other managers hauled off to prison or paying huge fines, they will be less apt to steal from and cheat investors. If today's managers see the corporation fined and thus feel little or no impact themselves, well, the firm becomes one's personal piggy bank.

Bob Jensen's threads on the Tyco scandals are at

Just Another in a Long Line of Prudential Rip-Offs
Prudential to Cough Up $600 million to settle charges of Improper Mutual Fund Trading

"Brokerage unit admits criminal wrongdoing, DOJ says," by Alistair Barr & Robert Schroeder, MarketWatch, August 29, 2006 ---

Prudential Financial Inc.'s brokerage unit agreed on Monday to pay $600 million to settle charges that former employees defrauded mutual fund investors by helping clients rapidly trade funds.

The payment -- the largest market-timing settlement involving a single firm -- ends civil and criminal probes and allegations by the Department of Justice, the Securities and Exchange Commission and several other regulators including New York Attorney General Eliot Spitzer.

Prudential Equity Group, a subsidiary of Prudential Financial (PRU) admitted criminal wrongdoing as part of its agreement with the Justice Department. Prudential Equity Group was formerly known as Prudential Securities.

Prudential will pay $270 million to victims of the fraud, a $300 million criminal penalty to the U.S. government, a $25 million fine to the U.S. Postal Inspection Service and a $5 million civil penalty to the state of Massachusetts, according to the Justice Department.

"Prudential to Pay Fine in Trading," by Landen Thomas Jr., The New York Times, August 29, 2006 --- Click Here

Prudential Financial, the life insurance company, agreed yesterday to pay  with federal and state regulators that one of its units engaged in inappropriate mutual fund trading.

The payment, the second-largest levied against a financial institution over the practice, may bring to a close a three-year investigation into the improper trading of mutual funds that has ensnared some of the largest names on Wall Street and the mutual fund industry.

The settlement with the Justice Department, which covers trades totaling more than $2.5 billion made from 1999 to 2000, is also the first in the market timing scandal in which an institution has admitted to criminal wrongdoing.

Such a concession by Prudential, part of a deferred prosecution agreement that will last five years, underscores the extent to which the improper trading practices were not only widespread at Prudential Securities, but also condoned by its top executives, despite repeated complaints from the mutual fund companies.

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

Morgan Stanley Hit for Millions and Billions in Civil Suits

"Morgan Stanley Settles Email Case for $15 Million," by Judith Burns, Susanne Craig, and Jed Horowitz, The Wall Street Journal,  May 11, 2006; Page C3 ---

Morgan Stanley agreed to pay $15 million to settle a civil lawsuit with the Securities and Exchange Commission over failure to produce tens of thousands of emails during probes of conflicts of interest among Wall Street analysts and other issues between late 2000 and mid-2005.

New York-based Morgan Stanley neither admitted nor denied the SEC's charges, which have been previously reported by The Wall Street Journal. The SEC said $5 million of the fine will go to the New York Stock Exchange and the NASD, formerly the National Association of Securities Dealers, to settle separate related proceedings.

A Morgan spokesman said the firm is glad the matter is behind it. The firm continues to negotiate with regulators about failure to produce emails in probes of its retail brokerage unit.

It is appealing a much larger headache: Last May the firm was ordered to pay billionaire financier Ronald Perelman $1.45 billion over a lawsuit that, in the end, focused largely on the firm's inability to produce documents. In that case, the judge concluded that in many instances Morgan Stanley's actions "were done knowingly, deliberately and in bad faith." The firm is appealing the verdict. Oral arguments for the appeal are scheduled for June 28 in state court in West Palm Beach, Fla.

According to the SEC, Morgan Stanley failed to "diligently search" for backup tapes containing emails until 2005 and couldn't produce some emails because the company overwrote backup tapes. In addition, the SEC said Morgan made "numerous misstatements" about its email retention. The SEC charged the company with failing to provide records and documents in a timely manner, as required by U.S. securities laws.

According to the SEC complaint, it received an anonymous tip in the fall of 2004 that Morgan Stanley had destroyed some electronic documents and failed to produce others.

Morgan Stanley and nine other firms agreed in 2003 to pay $1.4 billion as part of a so-called global settlement over charges that they issued biased research to win investment banking business.

The fine won't reopen the global settlement, according to people familiar with the matter, and isn't likely to help the hundreds of investors who failed in their attempt to win damages against the firm, in part because Morgan Stanley was unable to produce emails.

The SEC also said Morgan Stanley was lax in searching for and delivering emails during its investigations of Wall Street's distribution of hot initial public offerings during the dot-com boom. Morgan Stanley paid $40 million in 2005 to settle SEC allegations of improper IPO allocation practices.

Continued in article

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

Did the GAO cover up fraud?

"Accountability Office Finds Itself Accused," by William J. Broad, The New York Times, April 2, 2006 --- Click Here

A senior Congressional investigator has accused his agency of covering up a scientific fraud among builders of a $26 billion system meant to shield the nation from nuclear attack. The disputed weapon is the centerpiece of the Bush administration's antimissile plan, which is expected to cost more than $250 billion over the next two decades.

The investigator, Subrata Ghoshroy of the Government Accountability Office, led technical analyses of a prototype warhead for the antimissile weapon in an 18-month study, winning awards for his "great care" and "tremendous skill and patience."

Mr. Ghoshroy now says his agency ignored evidence that the two main contractors had doctored data, skewed test results and made false statements in a 2002 report that credited the contractors with revealing the warhead's failings to the government.

The agency strongly denied his accusations, insisting that its antimissile report was impartial and that it was right to exonerate the contractors of a coverup.

The dispute is unusual. Rarely in the 85-year history of the G.A.O., an investigative arm of Congress with a reputation for nonpartisan accuracy, has a dissenter emerged publicly from its ranks.

Continued in article

"'Pretexting' is common in business world," by Peter Svensson, Yahoo News, September 13, 2006 --- Click Here

Although the boardroom scandal at Hewlett-Packard Co. made the practice more widely known, buying phone records or other personal information obtained by "pretext" calls appears to have been common in parts of the business world. ADVERTISEMENT

In a letter to the House Energy and Commerce committee, which was investigating the issue this year, data broker PDJ Investigative Services described its customers as "law offices, repossession companies, financial institutions, collection agencies, bail enforcement agencies, law enforcement agencies and various private investigation and research companies."

"Those businesses have a common need. That need is to be able to locate individuals, who do not wish to be found," another data broker, Universal Communications Co., wrote to the committee.

For example, banks sought to find debtors who defaulted on loan payments, and car finance companies traced people who stopped paying their auto loans and disappeared, Universal Communications said.

PDJ sold records of local and long-distance calls as well as non-published phone numbers and home addresses, according to an old price list submitted to the House committee.

In its letter, PDJ said it did not perform pretext calls itself, but paid independent vendors for the information, or searched public databases and the Internet.

Robert Douglas, a privacy consultant in Colorado who closely follows pretexting and other investigatory techniques, said such independent vendors use sophisticated methods to fool customer service representatives into giving out information.

However, the attention given to pretexting in the past two years — the HP scandal is just the latest in a series of revelations — has made data brokers restrict sales of certain kinds of information. Cell phone companies, one of the major targets of pretexters, also have fought back by launching lawsuits.

Continued in article

"Protect Yourself From Pretexting," by Kim Zetter, Wired News, September 13, 2006 --- Click Here

Pretexting has long been a tactic used by private investigators and others to obtain personal information and records about people. Also known as "social engineering" in the hacker realm, it involves using ploys to obtain data and documents.

The ploys range from the creative to the straightforward. In the Hewlett-Packard case, outside investigators hired by the company simply posed as the victims -- HP board members and journalists -- to obtain their phone records from phone companies.

On the more inventive side, Verizon Wireless last year accused online data brokers of making hundreds of thousands of calls to the company's customer service lines posing as fellow Verizon employees with the company's "special needs group," a nonexistent department. The callers obtained customer account information by claiming to be making the requests on behalf of voice-impaired customers.

Against that kind of initiative, it seems like there's little an ordinary consumer, Silicon Valley director or tech journalist can do. But there are some options.

Buy a TracFone. There's a reason law enforcement agencies hate disposable cell phones: They don't keep a call detail record. This solution isn't convenient or desirable for everyone, but if you're concerned about your phone records being obtained fraudulently by third parties, or subpoenaed by authorities, a prepaid phone service offers the best privacy.

Prepaid phones range in cost from $20 to $80 and usually come with a set number of minutes to start, which can be augmented by purchasing prepaid calling cards for $20 to $100.

Naturally, your prepaid phone number will still appear on the calling records of people you call, and who call you. But because the prepaid services don't require you to provide your name, the phone number alone will be of limited use to snoops. Be sure to pay for your phone and prepaid phone cards with cash, and only add minutes through the phone's built-in interface -- don't use the service provider's website, which could track your IP address.

Don't Tell on Yourself. A little bit of information can help scammers get a lot more; in the HP case, the investigators used the last four digits of their targets' Social Security numbers to authenticate themselves to the phone companies they tricked.

That's why the FTC advises consumers to guard personal information such as Social Security numbers, birth dates, account numbers and passwords to prevent someone from using the information to impersonate you and obtain your records. To that end, don't provide personal information over the phone, in an e-mail or in person to anyone unless you initiated the contact. Even then, be guarded about providing legitimate agencies with more information than they need.

Choose Your Own Passwords. Companies love using Social Security numbers and dates of birth as authentication, despite the fact that neither bit of info is very private. Insist that your health insurance provider and phone companies allow you to use a customer-designated password or a unique identifying number instead. Don't let them bully you into using your Social Security number, and use different passwords for different accounts.

Shred It. Cross-shred documents that contain personal information before discarding them, and do not leave such documents lying around where maintenance workers and visitors can see them.

Leave Your Vital Stats Offline. Do not publish your birth date or other personally identifiable information about you or your children on your MySpace or Facebook page. It's obvious, but worth repeating.

Don't Pay Bills Online. Yes, we know it's convenient, and we know that banks and utility companies pressure customers to establish online billing accounts to eliminate the cost of paper records. But resist the urge. Online accounts put you at risk no matter what businesses say.

Websites are seldom as secure as companies insist they are. Even when they are secure, smart people like you can sometimes still get tricked into using a spoof site that looks exactly like the real thing, or wind up with malicious software that records every keystroke on their computer and passes the info on to a hacker.

While we're on the subject, don't file your taxes online either. Yes, it's convenient. No, it's not secure. It's possible that hackers can obtain the same information by hacking a vulnerable data server or stealing an employee laptop, but that's out of your control. How you file is in your control.

See If You've Already Been Hit. In an internal investigation of pretexted records, AT&T identified about 2,500 of its customers as possible victims. And that's just one phone company. To find out if you've already been a victim of phone record pretexting, contact your telephone company in writing to determine if anyone has requested your records. If you've pissed off HP recently, do it today.

Lobby for Change. Pressure your congressional representatives and the FCC into forcing phone companies to improve the security of customer records. The Electronic Privacy Information Center offers a number of suggestions for boosting security, include forcing carriers to maintain an audit trail to track whenever a customer's records are accessed, and by whom.

EPIC also suggests that phone companies be required to notify customers when someone has breached their records. Phone companies, in recent lawsuits against pretexters, have admitted being duped hundreds of thousands of times into handing over customer records to unauthorized people. Yet current breach-notification laws don't cover these records, since they're not considered personally identifiable information.

Additionally, phone companies should be forced to notify customers of changes to their account, such as when someone establishes a new online billing account for their phone number. Many banks already send written verification to customers by mail if the customer or someone else requests a change to their account password or contact information. Had AT&T done this, HP board member Tom Perkins and others caught in the HP investigation would have been alerted back in January that someone was trying to access their records online.

Bob Jensen's helpers for preventing consumer fraud are at

The upside and downside of corruption.

"The Payola Game," by James Surowiecki, The New Yorker, April 24, 2006 ---

In the final years of Saddam Hussein’s dictatorship, he earned more than $1.8 billion in kickbacks as a result of the United Nations’ oil-for-food program. He brought in billions more by smuggling oil out to Jordan and Syria. Across the country, graft was a precondition of doing business. Saddam’s exit and the arrival of free-market reforms were supposed to change all this; Deputy Prime Minister Ahmad Chalabi spoke of an era of “transparency, accountability, and value for money.” Yet corruption remains ubiquitous. In the past couple of years, more than a billion dollars has gone missing from Iraq’s Defense Ministry. Hundreds of millions are being skimmed off the country’s oil sales. Banks, utility companies, and passport offices routinely require baksheesh to get things done. Transparency International, in its latest survey of perceived global corruption, labelled Iraq the most corrupt country in the Middle East.

This is hardly surprising. Corruption usually flourishes in the wake of an authoritarian regime’s collapse. The fall of the Soviet Union gave rise to an epidemic of graft in Russia and other former Soviet republics. When it’s unclear who’s in charge, rules become open to manipulation, and bureaucrats, uncertain about their jobs, tend to put their own short-term interests first. In Iraq, these problems have been exacerbated by other factors. The intense competition to control the nation’s oil reserves creates ample opportunities for skimming—indeed, economies that depend heavily on natural resources are generally more corrupt, as are wartime economies.

Corruption may be ethically unsavory, but, according to some economists, it may also be economically beneficial. In a country where elaborate bureaucracies make it hard to start companies, import or export goods, or simply get a passport, bribes can cut through red tape, serving as what’s called “speed money.” Bribes can also motivate bureaucrats who would otherwise shirk their duties; in the Russia of Peter the Great, for instance, most officials received small salaries and made up the difference with bribes. And corruption isn’t necessarily an obstacle to economic growth. In the postwar years, countries like South Korea and Indonesia were bastions of cronyism and graft but saw their economies boom; today, China and India are two of the world’s fastest-growing economies, and both receive poor grades from Transparency International. So perhaps Iraq’s Commission on Public Integrity should simply accept that corruption provides the grease to keep the wheels of commerce turning.

It would be comforting to think so. And there are conditions under which bribes seem to work well. When power is in the hands of an authoritarian government that keeps bureaucrats under firm control, the state is able to act like a smart monopolist: its employees charge prices that are high but not too high, and are able to deliver what they promise. So bribe-takers collect what amounts to an unofficial tax and bribers get what they pay for. In a country like Iraq, though, where the state is weakened, corruption tends to be more anarchic and less effective. Instead of monopolistic corruption—a single bribe-taker representing the government—you get competitive corruption: everyone has his hand out. A study of what it took to open a business in Russia in 1991, for instance, found that bribes had to be paid to local and national officials, fire inspectors, the water department, and so on. Apart from the sheer expense, in a situation like this it’s unclear whether a bribe will have any effect. As a result, people either decide against doing business in the first place or are driven underground, into the so-called “shadow economy.”

Furthermore, even if corruption can be a useful means of bypassing inefficiencies in the short term, in the long term it tends to create inefficiencies of its own. Bribing, it turns out, doesn’t always speed things up: in a vast study of twenty-four hundred companies in fifty-eight countries, Daniel Kaufmann, of the World Bank, and Shang-Jin Wei, of the I.M.F., found that the more a company had to bribe, the more time it spent tied up in negotiations with bureaucrats. Graft also encourages government officials to keep complicated procedures in place, since that insures that the bribes keep coming. So corruption isn’t just a product of bad institutions and policies; it also helps cause them. Almost every study done in the past ten years has found that, on the whole, corrupt countries grow more slowly and have a much harder time attracting foreign investment. And work by Wei suggests that even the exceptions, like China, have probably succeeded more in spite of corruption than because of it.

Fighting corruption, then, is not only an ethical issue but an economic one. The problem is that most anti-corruption campaigns fail. In part, that’s because the task is absurdly hard. But it may also be because anti-corruption campaigns tend to target low-level corruption rather than attacking what economists call “grand corruption.” Relying on a variant of the “broken windows” theory, these campaigns have assumed that cleaning up day-to-day graft will make all corruption less acceptable. Yet a study by the economist Eric Uslaner shows that it’s high-level graft that really shapes citizens’ perceptions of how corrupt their society is. Corruption fighters in Iraq, in other words, should ignore the greedy bureaucrats at the electric company and concentrate, instead, on holding high-level officials accountable for the billion dollars missing from the Defense Ministry. Granted, this is probably an unrealistic goal. But in Iraq today what isn’t?

How does the U.N. fend off fraud investigations?

"U.N. Best Practices," The Wall Street Journal, May 5, 2006; Page A16 ---

Deep in the weeds of Turtle Bay, U.S. Ambassador John Bolton has been hacking a path toward United Nations reform -- an effort about as fraught as Marlow's quest for Captain Kurtz in Conrad's "Heart of Darkness," and no less horrifying.

But here's the good news: Two reports, released late last month by Congress's Government Accountability Office, are shedding light on how the U.N. mismanages its procurement and auditing functions. U.N. bureaucrats may be trying to downplay the findings, but the rest of us should pay attention.

Consider procurement. Thanks to various Oil for Food investigations, we learned that Alexander Yakovlev, a middle-ranking U.N. procurement officer, siphoned $1 million in bribes from $79 million worth of U.N. contract work. Mr. Yakovlev pleaded guilty in a U.S. court to three counts of fraud and money laundering last August.

But that's just the beginning. In January, Secretary General Kofi Annan placed eight top procurement officials on special leave, pending investigations by the U.N. and U.S. One of these officials is Sanjaya Bahel, former head of the U.N.'s Commercial Activities Services as well as its Post Office. Among other charges, Mr. Bahel, who also worked for the Indian Defense Ministry while at the U.N., is alleged to have improperly steered U.N. peacekeeping contracts to several Indian companies, one of them government-owned.

Also in January, the U.N.'s Office of Internal Oversight Services conducted an audit of U.N. peacekeeping procurement, the value of which has quadrupled over the last decade to $1.6 billion. The Office found that $110 million worth of expenditures had "insufficient" justification; another $61 million bypassed U.N. procedures; $82 million had been lost to various kinds of mismanagement; close to $50 million in contracts had shown indications of "bid rigging"; and $7 million were squandered through overpayment. That's a total of more than $300 million.

Senior U.N. management has responded with denial: "Not a penny was lost from the organization," insists Deputy Secretary General Mark Malloch Brown. But that point is hard to credit in light of the GAO's findings. Among them: The U.N. has set no training requirements for its procurement staff; has no independent process to address vendor protests; and has no internal mechanisms either to monitor procurement or identify areas prone to fraud or mismanagement.

On auditing, too, corruption starts at the top: Along with Mr. Yakovlev, the other U.N. official to have been recently indicted in the U.S. for bribery is Vladimir Kuznetsov, formerly head of the U.N.'s budget oversight committee. In theory, the oversight office is supposed to be an independent agency. In practice, it relies for its funding on the very U.N. agencies it is supposed to monitor and investigate.

The result, the GAO notes, is that "by denying OIOS [oversight office] funding, U.N. entities could avoid OIOS audits or investigations." A case in point was Benon Sevan's refusal to fund an audit of the $100 billion Oil for Food program, which he administered and from which he is alleged to have personally profited. That behavior is only symptomatic of ongoing U.N. practices: Oversight officials tell GAO investigators that they have "no authority to enforce payment for services rendered and there is no appeal process, no supporting administrative structure, and no adverse impact on an agency that does not pay or pays only a portion of the bill."

There's more of this, and we urge readers to see for themselves at Meantime, it would help if the Bush Administration paid more than lip service to holding the world body to account, not least by holding up its U.N. dues until meaningful reform is achieved. Until that happens, the world body will continue to breed corruption without remedy or consequence, in plain sight.

I hope there's a special place in hell for Bruce D. Hopfengardner

"Ex-officer admits kickbacks in Iraq,", August 26, 2006 ---

A former U.S. Army Reserve officer from Spotsylvania County admitted yesterday that he steered millions of dollars in Iraq-reconstruction contracts in trade for jewelry, computers, cigars and sexual favors.

Bruce D. Hopfengardner, 46, pleaded guilty to conspiracy to commit money laundering and wire fraud.

Hopfengardner served as a special adviser to the U.S.-led occupation, recommending funding for projects on law-enforcement facilities in Iraq.

He admitted conspiring with Philip H. Bloom, a U.S. citizen with businesses in Romania, Robert J. Stein Jr., a former Defense Department contract official, and others to create a corrupt bidding process that included the theft of $2 million in reconstruction money.

Hopfengardner is the first military officer to plead guilty in the conspiracy. Bloom and Stein already have pleaded guilty to charges stemming from the scheme.

Hopfengardner's role was to recommend that the Coalition Provisional Authority fund projects to demolish the Ba'ath Party headquarters, rebuild a police academy and construct various other facilities.

Bloom, who controlled companies in Iraq and Romania, bid on projects using dummy corporations. Stein ensured that one of the firms was awarded the contract, according to court documents.

The businessman allegedly showered Hopfengardner and Stein with cash, cars, premium airline seats, jewelry, alcohol and even sexual favors from women at his Baghdad villa.

"A lieutenant colonel in the U.S. Army today admits to a disturbing abuse of his position, in scheming with others to defraud the government for their own personal and financial gain," Assistant Attorney General Alice S. Fisher said in a statement.

Court papers said Hopfengardner demanded that Bloom pay for a white 2004 GMC Yukon Denali with a sandstone interior. At Hopfengardner's request, Bloom also allegedly paid the air fare for Hopfengardner and his wife to travel from San Francisco to Fort Lauderdale, Fla., while he was on leave in January 2004.

E-mails that prosecutors made public in April show that Bloom told his employees to spare no expense in satisfying the officials who controlled contracts in the CPA's regional office in Hillah, about 50 miles south of Baghdad.

As part of the plea agreement, Hopfengardner surrendered a car, a Harley-Davidson motorcycle, camera equipment, a Breitling watch valued at $5,700 and a computer. He also agreed to forfeit $144,500, prosecutors said.

Executives Are Betting On Yesterday's Horse Races

As an aside, once again this shows that finance and accounting go hand in hand as Collins, Gong, and Li are accounting professors!

From Jim Mahar's blog on May 23, 2006 ---

Do managers backdate options?

Do managers backdate options? It sure seems that way.

A U.S. government probe into stock option grants for executives widened on Tuesday with more technology companies being called on to explain the way these grants are awarded.

The investigation focuses on whether companies are giving executives backdated options after a run-up in the stock. Backdated securities are priced at a value before a rally, which boosts their returns.

From NPR:

The Securities and Exchange Commission (SEC) is reportedly examining the timing of stock option awards by corporations." (BTW this is included to you can listen to it--has several professors speaking on it.)

From the LA Times:

""The stock-option game is supposed to confer the potential for profit, but also some risk," said John Freeman, a professor of business ethics at the University of South Carolina Law School who was a special counsel to the SEC during the 1970s. "When in essence the executives are betting on yesterday's horse races, knowing the outcome, there's no risk whatever.""

What does past academic research have to say on this? Most of the evidence suggests that backdating probably does occur.

For years there have been papers showing that managers tend to announce bad news prior to option grants and even time the grants prior to price run ups (see Yermack 1997) it has only been more recently that researchers have noticed that the price appreciation was not merely due to firm specific factors (which managers may be able to control and time) but also market wide factors (i.e. the stock market goes up after option grants).

Last year a paper by Narayanan and Seyhun suggested that this may be the result of backdating the option grants. More recently two papers by Collins, Gong, and Li (a) and (b) find further evidence that backdating is (or at least was) happening and that unscheduled grant dates (where this can occur) tend to be found more commonly at firms whose management has relatively more control over their board of directors.
Stay tuned!!

* A quick comment to any manager who may have done this: Why bother? Why risk it all cheating for a few extra dollars? (Indeed it reminds me of the Adelphia case where the firm outsourced snow plowing to a Rigas owned firm. It just doesn't seem worth it.)

*As an aside, once again this shows that finance and accounting go hand in hand as Collins, Gong, and Li are accounting professors!

It appears that thousands of CEOs were allowed by their boards to bet on yesterday's horse race
In theory, directors are supposed to help keep wayward practices like options backdating in check at most companies, but at Mercury it was the directors themselves — who received a final seal of approval from the company’s compensation committee — who kept the backdating ball rolling. Now, as federal investigations of possible regulatory and accounting violations related to options backdating have expanded to include more than 80 companies. Mercury’s pay practices — and the actions of the three outside directors on its compensation and audit committees — have come under scrutiny. In late June, the Securities and Exchange Commission advised the three men that it was considering filing a civil complaint against them in connection with dozens of manipulated options grants.
Eric Dash, "Who Signed Off on Those Options?" The New York Times, August 27, 2006 ---

Bob Jensen's threads on executive options compensation scandals are at

Bob Jensen's threads on outrageous executive compensation are at

Is any CEO really entitled to over $6  billion in gains on employee stock options?

"Calpers Puts Pressure on Board of UnitedHealth: Holder Demands a Meeting Over Option-Grant Timing; A Threat to Withhold Votes," by Vanessa Fuhrmans, The Wall Street Journal, April 26, 2006; Page A3 ---

The California Public Employees' Retirement System is demanding a conference call with the compensation committee of the board of UnitedHealth Group Inc. over its disclosure practices, and is threatening to withhold votes for board directors seeking re-election.

In a letter sent to James A. Johnson, chairman of the UnitedHealth board's compensation committee, Calpers board President Rob Feckner demanded a conference call ahead of Tuesday's UnitedHealth shareholders meeting to discuss what he called "serious threats to the credibility, governance and performance of UnitedHealth." Specifically, the letter criticized the company's failure to explain how it determined stock option grant dates for Chief Executive William McGuire and a handful of other executives in past years, and its "inconsistent" disclosure of its option-granting program.

The move by Calpers increases the scrutiny of the process by which Dr. McGuire received some of the $1.6 billion in unrealized gains he holds in company stock options. Calpers holds 6.55 million shares, or 0.5%, of UnitedHealth's outstanding stock. The pension fund, known for its strong stances on corporate governance, could spur other investors to join in its criticism. The move also increases pressure on UnitedHealth's board to more fully explain its past option-award practices soon, even though its board only launched a probe into them earlier this month.

Continued in article

Which brings us to Congress, the villain of this tale that the rest of the press corps wants to ignore. Executive greed is an easier story to sell, we suppose. But the same Members of Congress who most deplore big CEO paydays are the same ones who created the incentive for companies to overuse options as compensation.

"Backdate Backlash," The Wall Street Journal, May 27, 2006; Page A6 --- Click Here

These columns have never joined the media pack deploring executive pay, since wages are best determined by directors and shareholders. But that doesn't mean every pay practice is kosher, especially if it's done on the sly. That's where the recent news over the "backdating" of stock options is cause for some concern -- and for more aggressive director supervision.

CEO pay has been going up, in part because the market is putting a premium on the skills necessary to navigate today's legal and competitive minefields. Some of the increases also flow from the greater use of stock options, which came into their own in the 1990s thanks in part to Congress (more on that below). Options are supposed to align the interests of management with those of shareholders, but they can also be abused.

This appears to be the case with "backdating," which is the practice of moving the strike date for option grants to ensure lower exercise prices and thus a bigger payday. Companies grant options according to shareholder-approved plans, most of which require a grant to carry the stock price on the day it was awarded. If it turns out the grant carries a different day's price, those who do the "backdating" could be guilty of false disclosure and securities fraud.

The number of companies doing this isn't clear, though the SEC is investigating at least 20 and prosecutors have launched criminal probes into a half-dozen. In the least savory instances, executives may have been trying to pull a fast one by altering option dates without the approval of directors. Vitesse Semiconductor Corp. recently fired three top managers, including its CEO, because of what it called "issues related to the integrity of documents relating to Vitesse's stock option grant process." Never a good sign.

But some boards may also have been asleep at the option switch. Affiliated Computer Services recently announced it will take a charge against earnings of as much as $40 million due to accounting problems related to option grants. Why? Well, ACS explained that its board compensation committee has typically approved grants over the phone -- making them effective that day -- with official written consent coming later. ACS says it believes this practice was "permitted" under law, but shareholders might ask why they are now getting stuck with the $40 million surprise tab.

Then there's UnitedHealth Group CEO William McGuire, who is being pilloried for his $1.8 billion in unrealized option gains. The health insurer has said it may have to restate three years of results due to a "significant deficiency" in how it administered option grants, which would suggest backdating.

But what especially caught investor eyes was the news that the company's board had allowed Mr. McGuire to choose his own grant dates. Directors may well have meant this as an added perk for a CEO whose tenure has seen a 50-fold rise in UnitedHealth's share price. Yet the practice still looks like an abdication by the board, which represents shareholders and is supposed to guard against needless equity dilution.

Some companies have insisted that their boards consciously pegged option grants to coincide with relatively low stock prices. But this would seem to contradict the alleged purpose of options, which is to give management an incentive to raise the stock price and thus the return to shareholders. Granting options at a very low price amounts to additional guaranteed compensation, and ought to be labeled as such.

Especially since shareholders will end up paying for this executive privilege. UnitedHealth has lost more than $17 billion of its market value since the backdating story broke. Several companies are restating results, facing enormous back taxes and are already grappling with the usual opportunistic lawsuits. * * *

Which brings us to Congress, the villain of this tale that the rest of the press corps wants to ignore. Executive greed is an easier story to sell, we suppose. But the same Members of Congress who most deplore big CEO paydays are the same ones who created the incentive for companies to overuse options as compensation.

In 1993, amid another wave of envy over CEO pay, Congress capped the tax deductibility of salaries at $1 million. To no one's surprise except apparently the Members who passed this law, most CEO salaries have since had a way of staying just below $1 million year after year. But because companies still need to compete for and retain top talent, they have found other forms of compensation -- notably stock options.

And one of the problems with options is that they give executives every incentive to capitalize all company profits back into the stock price -- thus contributing to their own pay -- rather than paying out dividends to shareholders. As SEC Chairman Chris Cox has noted, the 1993 law deserves "pride of place in the museum of unintended consequences."

In a better world -- one in which Congress kept its nose out of wage decisions -- corporate directors could pay the salaries they wanted and wouldn't rely so much on options to motivate executives. This, in turn, would reduce the incentive for companies to stoop to such dubious pay practices as option backdating. But as long-time observers of Washington, we can say with certainty that backdating will cease as a corporate practice long before Congress admits its mistake.

What are the accounting and tax implications of backdating employee stock options?

The stock-options backdating scandal continued to intensify, with the announcement by a Silicon Valley chip maker that its chairman and its chief financial officer had abruptly resigned. That brought to eight the number of officials at various companies to leave their posts amid scrutiny of how companies grant stock options.
"Backdating Probe Widens as 2 Quit Silicon Valley Firm:  Power Integrations Officials Leave Amid Options Scandal; 10 Companies Involved So Far," by Charles Forelle and James Bandler, The Wall Street Journal, May 6, 2006; Page A1 ---

More on Accounting Fraud Via Backdating Options

"ACS Says Some Options Carried Dates That Preceded Approvals," by Charles Forelle and James Bandler, The Wall Street Journal, May 11, 2006; Page A2 ---

Affiliated Computer Services Inc. acknowledged that it issued executive stock options that carried "effective dates" preceding the written approval of the grants, saying it plans a charge of as much as $40 million to rectify its accounting related to the grants.

The announcement followed a preliminary internal probe at ACS, a Dallas technology outsourcer that is also under scrutiny by the Securities and Exchange Commission for its options practices. Between 1995 and 2002, the company granted stock options to Jeffrey Rich, its chief executive for part of that time, that were routinely dated just before sharp run-ups in the company's share price, and often at the nadir of big dips.

Mr. Rich left the company last year. A rising share price helped him reap more than $60 million from options during his tenure at the company. The timing of his grants helped, too. If his six grants had come at the stock's average closing price during the year they were dated, he'd have made about 15% less.

Continued in article

Is any CEO really entitled to over $ 6  billion in gains on employee stock options?
"Calpers Puts Pressure on Board of UnitedHealth: Holder Demands a Meeting Over Option-Grant Timing; A Threat to Withhold Votes," by Vanessa Fuhrmans, The Wall Street Journal, April 26, 2006; Page A3 ---

The California Public Employees' Retirement System is demanding a conference call with the compensation committee of the board of UnitedHealth Group Inc. over its disclosure practices, and is threatening to withhold votes for board directors seeking re-election.

In a letter sent to James A. Johnson, chairman of the UnitedHealth board's compensation committee, Calpers board President Rob Feckner demanded a conference call ahead of Tuesday's UnitedHealth shareholders meeting to discuss what he called "serious threats to the credibility, governance and performance of UnitedHealth." Specifically, the letter criticized the company's failure to explain how it determined stock option grant dates for Chief Executive William McGuire and a handful of other executives in past years, and its "inconsistent" disclosure of its option-granting program.

The move by Calpers increases the scrutiny of the process by which Dr. McGuire received some of the $1.6 billion in unrealized gains he holds in company stock options. Calpers holds 6.55 million shares, or 0.5%, of UnitedHealth's outstanding stock. The pension fund, known for its strong stances on corporate governance, could spur other investors to join in its criticism. The move also increases pressure on UnitedHealth's board to more fully explain its past option-award practices soon, even though its board only launched a probe into them earlier this month.

Continued in article

After the Horse is Out of the Barn:  UnitedHealth Halts Executive Options
The UnitedHealth Group, under fire for the timing of lucrative options grants to executives, said Monday that it had discontinued equity-based awards to its two most senior managers and that it would cease other perks like paying for personal use of corporate aircraft. UnitedHealth’s board said it had discontinued equity-based awards for the chief executive, William W. McGuire, who has some $1.6 billion in unrealized gains from earlier options grants, and for the president and chief operating officer, Stephen J. Helmsley.
"UnitedHealth Halts Executive Options," The New York Times, May 2, 2006 ---

From The Wall Street Journal Accounting Weekly Review on May 19, 2006

TITLE: UnitedHealth Cites 'Deficiency' in Options Grants
REPORTER: James Bandler and Charles Forelle
DATE: May 12, 2006
TOPICS: Financial Accounting, Income Taxes, Materiality, Securities and Exchange Commission, Stock Options, Taxation, Accounting Changes and Error Corrections, Audit Quality, Auditing

SUMMARY: UnitedHealth Group Inc. disclosed on May 11 that "...a 'significant deficiency' in how it administered [stock option] grants could force it to restate results ...[and cut] net income by as much as $286 million over that period." The company also disclosed that the SEC is "conducting an informal inquiry into its options-granting practices"...UnitedHealth...said its internal review had indicated it had uncovered 'significant deficiency' in the way it administered, accounted for and disclosed past option grants and that it may be required to take certain accounting adjustments for 'stock-based compensation expense.' It said that could reduce operating earnings by up to $393 million in the past three years, adding that the company's management believes that any adjustments would not be 'material'."

1.) Summarize the issue regarding accounting for stock options that was uncovered in a March 18, 2006, Wall Street Journal article and that has subsequently been the subject of SEC scrutiny.

2.) The summary description for this review quotes a paragraph in the article describing the financial statement effects of potential adjustments the deficiencies in UnitedHealth's option granting practices. The paragraph begins "In its filing, UnitedHealth, which reported $3.3 billion in net income last year..." Identify all of the terms in that paragraph with specific meaning for accounting and/or auditing purposes. Define each of those terms, explain why it has specific meaning in its use in accounting or auditing, and, if it is a relevant point, explain why understanding that meaning helps to analyze the impact of these options issues on UnitedHealth.

3.) Refer again to the paragraph described in question 1. The concluding sentence states that the company management believes that adjustments resulting from their review of options granting practices will not be material. Contrast this point to the comments by Professor James Cox of Duke University that "this isn't just a little material...for this kind of issue." Construct arguments to support one of these positions, being sure to refute arguments potentially in favor of your opposing side. In your answers to this and the preceding question, be sure to address the two components of materiality in an audit engagement.

4.) Refer to the list of companies in the table entitled "Key Companies in Options Probes." In what industry do most of these companies operate? Why is there industry concentration amongst this sample of firms?

5.) What are the potential issues facing UnitedHealth's auditors, Deloitte and Touche, regarding these matters? What basic audit steps do you think should be carried out in relation to any company's accounting for stock options?

6.) Do you think the situation with UnitedHealth necessarily indicates an audit failure on the part of Deloitte and Touche? In your answer, define the terms "audit risk", "business risk" in relation to audits, and "audit quality."

7.) Summarize the tax implications described in the article regarding these matters. How might adjustments to the tax accounting for these stock options exacerbate or reduce the impact of the adjustments to the accounting for stock based compensation expense?

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: The Perfect Payday
REPORTER: Charles Forelle and James Bandler
ISSUE: Mar 18, 2006

TITLE: How the Journal Analyzed Stock-Option Grants
REPORTER: Charles Forelle
ISSUE: Mar 18, 2006

From The Wall Street Journal Accounting Weekly Review on May 5, 2006

TITLE: As Options Cloud Looms, Companies May Get Tax Bill
REPORTER: Charles Forelle and James Bandler
DATE: Apr 28, 2006
TOPICS: Accounting, Financial Accounting, Securities and Exchange Commission, Stock Options, Taxation

SUMMARY: Tax implications of the developing issues in stock options, covered also in a recent Weekly Review, are discussed.

1.) What is the recently-developing concern with dating of executive stock options? In your answer, comment on the Securities and Exchange Commission investigation into the issue. You may refer to the related article for your answer.

2.) Define the terms "compensatory stock options"; "incentive stock options";"option grant date"; and "option exercise price".

3.) Summarize the tax implications to both executives receiving stock options and to companies issuing stock options if option grant dates are changed to a point when the stock price is higher than on the originally reported date, but the exercise price is not changed.

4.) The author quotes Mr. Brian Foley as saying that one company under SEC and IRS scrutiny for this issue, UnitedHealth, would have a "serious and incurable problem" if options were "backdated" and they have been exercised. What could be the difference between options that were exercised and options that have not been?

5.) What are the financial reporting implications of the problems highlighted in this article? How do the tax issues exacerbate the financial reporting problems?

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: The Perfect Payday
REPORTER: Charles Forelle and James Bandler
PAGE: A1 ISSUE: Mar 18, 2006

"As Options Cloud Looms, Companies May Get Tax Bill," by Charles Forelle and James Bandler, April 28, 2006; Page C1 ---

Companies that backdated stock-option grants to top executives could face a costly reckoning with the Internal Revenue Service, with some potentially owing large sums in back taxes, legal experts say.

The tax problems, which could affect the personal tax filings of hundreds of individual employees, are the latest wrinkle in widening inquiries into stock-option awards.

A half-dozen companies, including insurance titan UnitedHealth Group Inc., have said their boards, or the Securities and Exchange Commission, are examining their past option grants amid concerns that some may have been backdated to take advantage of lower exercise prices. Backdating could have resulted in millions of dollars in extra compensation for insiders, at the expense of shareholders. Most of the probes are preliminary, and so far the SEC hasn't charged anyone.

If the investigations turn up backdated grants, the companies face a host of issues, including the prospect of earnings restatements and delistings. Such options offer the right to buy a stock at a fixed, or exercise, price, allowing the holder to profit by later selling the underlying shares at a higher price than the exercise price.

One company that has acknowledged "misdating" options, Mercury Interactive Corp., a Mountain View, Calif., software company, has had its stock delisted by the Nasdaq Stock Market and has said it will have to restate financial results. Vitesse Semiconductor Corp. last week suspended its chief executive and two other top officials, saying the move was related to the "integrity of documents" in its stock-option program. Late Wednesday, Vitesse said its board had discovered additional accounting issues and had hired a turnaround firm.

Granting an option at a price below the current market value, while not illegal in itself, could result in problems of wrongful disclosure under securities laws. Companies' shareholder-approved option plans and SEC filings often say options will carry the stock price of the day the company awards them or the day before.

Favorable tax treatment was one reason that options gained popularity in the 1990s as a way to compensate employees, particularly executives. When an option is exercised, the company typically can take any gain pocketed by the employee as a deduction on its tax return, because the IRS views the option profit as akin to extra compensation paid to the employee. The employee reports the gain on his or her personal tax return.

Tax experts say that options backdated to a day with a lower market price don't qualify for a deduction -- although the disqualification only affects options exercised by the chief executive or any of the next four most highly compensated executives. And $1 million of each of the executives' total compensation always can be deducted. As a result, they say, companies with backdated options could face the prospect of shelling out cash to revise prior years' tax returns -- and could be ineligible for the deductions they planned to take in the future on executive option gains.

A Wall Street Journal analysis, published in March, described a pattern of unusual stock-option grants to a handful of chief executives, including William McGuire, UnitedHealth's chief executive. Twelve grants to Mr. McGuire between 1994 and 2002 were each dated in advance of a substantial run-up in the company's share price, and three of them fell on yearly lows. Last week, Mr. McGuire told investors on a conference call that, "to my knowledge, every member of management in this company believes that at the time we collectively followed appropriate practices."

The potential tax issues could be big, particularly for companies whose stocks have greatly increased since the grants. UnitedHealth, Minnetonka, Minn., reported $346 million in realized option gains among its five best-paid executives from 2003 to 2005. At the end of last year, it said its five best-paid executives had another $2.4 billion in unrealized, exercisable options gains. UnitedHealth's stock has soared since the 1990s, when many of the options were granted. A board committee investigating options granting at the company hasn't completed its work, and it isn't known whether any option grants were backdated at all.

"If they had a backdating problem, and that's a big if, the tax consequences could certainly be ugly," says Brian Foley, a compensation consultant and tax lawyer in White Plains, N.Y. With respect to the already-exercised options, he added, "they would have an obvious and serious and incurable problem."

UnitedHealth had a corporate-tax rate ranging between 34.9% and 35.7% in the past three years. Although the company's actual payments likely were lower, that suggests the tax savings to UnitedHealth from exercised executive options could have been as much as $120 million from 2003 to 2005. As of end of 2005, the value of the future tax savings was as much as $800 million.

"That's a huge number," says Robert Willens, a tax and accounting expert at Lehman Brothers Holdings Inc.

UnitedHealth has reported substantial tax benefits from deducting its employees' stock option gains. Until recently, the company said in its proxy statements that it believed its executive option grants qualify for the tax deduction. Starting in a proxy filed in April 2005, it said some options might not qualify, but that the amounts involved were immaterial. Ruth Pachman, an outside spokeswoman for UnitedHealth, said in a statement that the company "continues to believe" that its proxy statements were accurate and remain accurate. She said the company "declined to speculate about hypothetical scenarios."

Executives at other companies reporting options investigations, including Vitesse and Affiliated Computer Services Inc., reported substantial options gains to top executives. ACS, which reported about $44 million in realized options gains by its top five executives in the most recent three fiscal years, didn't return calls. Vitesse officials didn't return several messages seeking comment.

S. James DiBernardo, a partner at Morgan, Lewis & Bockius LLP who specializes in tax issues, says there is no easy way to make grants comply with the terms of the tax code retroactively. A company could reprice the options, he says, but it would have to reprice them at the current share value, effectively erasing all of an executive's past gains. Another route is for the top executives to wait until after retirement to exercise the options -- when they are no longer executive officers.

Ethan Yale, an associate professor at Georgetown University Law Center who was retained by UnitedHealth to look into this matter, agreed that the issue could pose tax problems. He said this is largely uncharted territory and ambiguities in tax rules might allow a company to get back in compliance retroactively by repricing the options to the actual grant-date prices.

Continued in article

"Guidance on fair value measurements under FAS 123(R)," IAS Plus, May 8, 2006 ---

Deloitte & Touche (USA) has updated its book of guidance on FASB Statement No. 123(R) Share-Based Payment: A Roadmap to Applying the Fair Value Guidance to Share-Based Payment Awards (PDF 2220k). This second edition reflects all authoritative guidance on FAS 123(R) issued as of 28 April 2006. It includes over 60 new questions and answers, particularly in the areas of earnings per share, income tax accounting, and liability classification. Our interpretations incorporate the views in SEC Staff Accounting Bulletin Topic 14 "Share-Based Payment" (SAB 107), as well as subsequent clarifications of EITF Topic No. D-98 "Classification and Measurement of Redeemable Securities" (dealing with mezzanine equity treatment). The publication contains other resource materials, including a GAAP accounting and disclosure checklist. Note that while FAS 123 is similar to IFRS 2 Share-based Payment, there are some measurement differences that are Described Here.

Bob Jensen's threads on employee stock options are at

Bob Jensen's threads on fair value accounting are at

Bob Jensen's threads on valuation are at

Message on May 11, 2006 from Andrew Priest [a.priest@ECU.EDU.AU]

By Jonathan Soble 551 words 10 May 2006 03:57 Reuters News English (c) 2006 Reuters Limited

(Adds establishment of new PWC affiliate in Japan)

TOKYO, May 10 (Reuters) - Japan's financial regulator imposed a two-month business suspension on accounting firm Chuo Aoyama PricewaterhouseCoopers on Wednesday over its role in a book-keeping fraud at cosmetics and textiles maker Kanebo Ltd.

In the unprecedented sanction, the Financial Services Agency (FSA) barred Chuo Aoyama, part of global accounting firm PricewaterhouseCoopers, from auditing corporate accounts under Japan's securities and commercial laws for two months beginning July 1.

Three Chuo Aoyama accountants charged in connection with the Kanebo fraud have admitted helping the firm hide losses as part of a nine-year effort to disguise its financial decline. Kanebo has since been broken up in a state-led restructuring, and rival Kao Corp. bought its cosmetics business earlier this year.

In imposing the penalty, the FSA's first against one of Japan's "big four" accounting houses, the agency said the firm's failure to prevent the fraud was a result of "serious deficiencies" in its internal controls.

The suspension will not disrupt earnings reporting by Chuo Aoyama clients for the business year that ended in March, which some firms have not completed. Auditing of certain companies, such as those that close their books later than the normal March 31 cut-off, will also be allowed during the suspension, the FSA said.

But the auditors' clients -- a group that includes some of Japan's biggest companies -- could abandon it for rivals in coming reporting periods.

In a statement PWC said it would assist ChuoAoyama in its reform efforts but at the same time establish a new independent affiliated firm in Japan that would "adopt international best practices in accounting and auditing."

Toray Industries Inc., Japan's top synthetic-fibre maker, said at an earnings briefing held before the FSA's announcement that it would consider dropping Chuo Aoyama if the authorities penalised the firm.

Nippon Mining Holdings Inc., another client, said it was happy with Chuo Aoyama's work but might consider switching if a sanction impaired its ability to function.

The punishment comes as legislators consider proposed legal changes that would make auditors criminally responsible for fraud at client firms.

Accounting problems became an issue in Japan during the long bad-debt mess at the nation's banks. Book-keeping scandals at Kanebo and more recently at Internet firm Livedoor Co. have brought auditors under further scrutiny.

Kanebo, which sought restructuring help from the government-backed Industrial Revitalisation Corp. last year, declared about $2 billion in non-existent profits between the 1995/96 and 2003/04 business years, a period when it fell into negative net worth.

Kanebo said in April 2005 it had inflated profits by exaggerating sales numbers, under-reporting business costs and improperly removing unprofitable subsidiaries from its balance sheet.

Unable to sustain the fiction, Kanebo finally declared a net loss of 358 billion yen ($3.22 billion) in 2003/04.

Its actual loss that year was in fact only 142 billion yen, Kanebo said later in admitting the long-running fraud. The remaining 216 billion yen in red ink represented undeclared losses from previous years. (Additional reporting by Yoshiyasu Shida)


From The Wall Street Journal Accounting Weekly Review on May 19, 2006

TITLE: Japan Adds to Corporate Crackdown
REPORTER: Andrew Morse
DATE: May 12, 2006
TOPICS: Accounting, Audit Quality, Auditing, Auditor Changes, Auditor Independence, Fraudulent Financial Reporting, Internal Controls, International Auditing

SUMMARY: Japan's Financial Services Agency suspended a PriceWaterhouseCoopers junior affiliate, ChuoAoyama PriceWaterhouseCoopers, from performing audit work for two months. This firm audits 2,000 big Japanese firms including Toyota Motor Corp. and Sony Corp. The action was taken after "finding that ChuoAoyama PwC accountants had certified fraudulent annual reports at cosmetics make Kanebo Ltd. for at least five years."

1.) Define the terms "corporate governance" and "transparency." Why are these qualities important contributors to efficient capital markets? In your answer, also define the term "market efficiency."

2.) Why is Japan's regulatory agency taking this stringent action with an auditing firm? What global factors likely are influencing the agency's actions?

3.) What does the May 1 enactment of a law requiring internal control systems implementation accomplish in terms of transparency and corporate governance?

4.) Many critics of Sarbanes-Oxley have argued that listing on U.S. stock exchanges is now less attractive because of costliness of this law's requirements. How might these developments in Japan influence the perception of our U.S. laws?

5.) Refer to the related article. What is PriceWaterhouseCoopers's strategy in coping with these problems at its Japanese affiliate? In your answer, comment on auditor changes and on the legal structure for organization of public accounting firms.

Reviewed By: Judy Beckman, University of Rhode Island

TITLE: PwC's Japanese Affiliate Loses Audit Client Following Sanction
REPORTERS: Andrew Morse and David Reilly
PAGE: B5 ISSUE: May 13, 2006

Bob Jensen's threads on the legal woes of PwC are at

Why it's easy to hate tort lawyers having questionable ethics

"Litigosis," The Wall Street Journal, April 26, 2006; Page A16 ---

The federal government recently signed a deal with respirator manufacturers to stockpile 60 million disposable masks, in case of a terrorist attack or global pandemic. But Americans should know why the feds may not be getting the hundreds of millions of additional masks they need to be fully prepared: the silicosis tort scam.

Most recent silicosis news has been good, as courts have begun to expose phony claims ginned up as a payday by unethical doctors and lawyers. Yet thousands of bogus silicosis suits are still in court, and they are now threatening to inflict the same sort of economic and financial damage as did their precursor asbestos suits. This time the litigation targets are companies vital to public safety.

They include companies making N95 masks -- inexpensive, disposable respirators that are a mainstay of emergency first responders, as well as industrial and health-care workers. Tort attorneys are now claiming the masks had defective designs or warnings and are responsible for a near epidemic of silicosis, a dust-related disease. Not coincidentally, this new flood of silicosis litigation began at precisely the time Congress began talking about cutting off the asbestos cash cow with tort reform.

The Coalition for Breathing Safety, an industry group, reports that between 2000 and 2004 plaintiffs attorneys filed more than 326,000 claims against its five members. Some of these are asbestos-related, although the recent deluge has been all silicosis. One manufacturer (which prefers not to be named lest it become a bigger target) says that prior to 2002 it faced about 200 silicosis claims a year. In 2003-4, it got hit with 29,000.

Medical statistics alone suggest that the vast majority of these suits are phony. According to the Centers for Disease Control, silicosis deaths nationwide declined 93% from 1968 to 2002 and today account for fewer than 200 average deaths annually in the U.S.

Respirators are also the only safety equipment fully regulated by the government. The National Institute for Occupational Safety and Health sets the design standards for masks. It tests the products in its own lab, a standard that is higher than even that applied to the drug industry, which conducts its own medical trials. The regulators also approve the warning-label language attached to the devices.

This explains why respirator makers have yet to lose a case in court. Yet this matters little to plaintiffs attorneys, whose strategy is to assault companies with so many claims that they can no longer afford to defend themselves and thus must settle. The industry coalition estimates its members have spent the equivalent of 90% of their 2004 net income fighting suits in recent years. One company, Mine Safety Appliances of Pittsburgh, has dropped out of the industrial disposable market. The rest are choosing not to invest more to meet rising demand, unable to see the point of making more low-margin products amid high-margin litigation risks.

Continued in article

"Boeing Parts and Rules Bent, Whistle-Blowers Say," by Florence Graves and Sara Kehaulani Goo, The Washington Post, April 17, 2006 --- Click Here

Whether questionable parts ended up in hundreds of Boeing 737s is the subject of a bitter dispute between the aerospace company and Prewitt and two other whistle-blowers. The two sides also have enormously different views on what that could mean for the safety of the jets.

The whistle-blower lawsuit is in U.S. District Court in Wichita. No matter how it is resolved, it has exposed gaps in the way government regulators investigated the alleged problems in aircraft manufacturing, according to documents and interviews.

Boeing said that the lawsuit is without merit and that there is no safety issue. Even if faulty parts landed on the assembly line, the company said, none could have slipped through Boeing's controls and gotten into the jetliners. The whistle-blowers "are not intimately familiar with Boeing's quality management system," said Cindy Wall, a company spokeswoman. "Our planes are safe."

Continued in article

The Big Internet Pipelines Want to Rip Off Consumers

Forwarded by David Spener

"War On The Web Robert B. Reich," May 11, 2006

Robert Reich is professor of public policy at the Richard and Rhoda Goldman School of Public Policy at the University of California, Berkeley. He was secretary of labor in the Clinton administration. 

This week, the House is expected to vote on something termed, in perfect Orwellian prose, the "Communications Opportunity, Promotion and Enhancement Act of 2006." It will be the first real battle in the coming War of Internet Democracy.

On one side are the companies that pipe the Internet into our homes and businesses. These include telecom giants like AT&T and Verizon and cable companies like Comcast. Call them the pipe companies.

On the other side are the people and businesses that send Internet content through the pipes. Some are big outfits like Yahoo, Google and Amazon, big financial institutions like Bank of America and Citigroup and giant media companies soon to pump lots of movies and TV shows on to the Internet.

But most content providers are little guys. They’re mom-and-pop operations specializing in, say, antique egg-beaters or Brooklyn Dodgers memorabilia. They’re anarchists, kooks and zealots peddling all sorts of crank ideas They’re personal publishers and small-time investigators. They include my son’s comedy troupe—streaming new videos on the Internet every week. They also include gazillions of bloggers—including my humble little blog and maybe even yours.

Until now, a basic principle of the Internet has been that the pipe companies can’t discriminate among content providers. Everyone who puts stuff up on the Internet is treated exactly the same. The net is neutral.

But now the pipe companies want to charge the content providers, depending on how fast and reliably the pipes deliver the content. Presumably, the biggest content providers would pay the most money, leaving the little content people in the slowest and least-reliable parts of the pipe. (It will take you five minutes to download my blog.)

The pipe companies claim unless they start charge for speed and reliability, they won’t have enough money to invest in the next generation of networks. This is an absurd argument. The pipes are already making lots of money off consumers who pay them for being connected to the Internet.

The pipes figure they can make even more money discriminating between big and small content providers because the big guys have deep pockets and will pay a lot to travel first class. The small guys who pay little or nothing will just have to settle for what’s left.

The House bill to be voted on this week would in effect give the pipes the green light to go ahead with their plan.
Price discrimination is as old as capitalism. Instead of charging everyone the same for the same product or service, sellers divide things up according to grade or quality. Buyers willing to pay the most can get the best, while other buyers get lesser quality, according to how much they pay. Theoretically, this is efficient. Sellers who also have something of a monopoly (as do the Internet pipe companies) can make a killing.

But even if it’s efficient, it’s not democratic. And here’s the rub. The Internet has been the place where Davids can take on Goliaths, where someone without resources but with brains and guts and information can skewer the high and mighty. At a time in our nation’s history when wealth and power are becoming more and more concentrated in fewer and fewer hands, it’s been the one forum in which all voices are equal.

Will the pipe companies be able to end Internet democracy? Perhaps if enough of the small guys make enough of a fuss, Congress may listen. But don’t bet on it. This Congress is not in the habit of listening to small guys. The best hope is that big content providers will use their formidable lobbying clout to demand net neutrality. The financial services sector, for example, is already spending billions on information technology, including online banking. Why would they want to spend billions more paying the pipe companies for the Internet access they already have?

The pipe companies are busily trying to persuade big content providers that it’s in their interest to pay for faster and more reliable Internet deliveries. Verizon’s chief Washington lobbyist recently warned the financial services industry that if it supports net neutrality, it won’t get the sophisticated data links it will need in the future. The pipes are also quietly reassuring the big content providers that they can pass along the fees to their customers.

Will the big content providers fall for it? Stay tuned for the next episode of Internet democracy versus monopoly capitalism.

The World's Largest Charity That Isn't

May 20, 2006 message from Miklos A. Vasarhelyi []


"Flat-pack accounting" May 11th 2006 From The Economist print edition

Forget about the Gates Foundation. The world's biggest charity owns IKEA­and is devoted to interior design

FEW tasks are more exasperating than trying to assemble flat-pack furniture from IKEA. But even that is simple compared with piecing together the accounts of the world's largest home-furnishing retailer. Much has been written about IKEA's remarkably effective retail formula. The Economist has investigated the group's no less astonishing finances.

What emerges is an outfit that ingeniously exploits the quirks of different jurisdictions to create a charity, dedicated to a somewhat banal cause, that is not only the world's richest foundation, but is at the moment also one of its least generous. The overall set-up of IKEA minimises tax and disclosure, handsomely rewards the founding Kamprad family and makes IKEA immune to a takeover. And if that seems too good to be true, it is: these arrangements are extremely hard to undo. The benefits from all this ingenuity come at the price of a huge constraint on the successors to Ingvar Kamprad, the store's founder (pictured above), to do with IKEA as they see fit.

Although IKEA is one of Sweden's best-known exports, it has not in a strict legal sense been Swedish since the early 1980s. The store has made its name by supplying Scandinavian designs at Asian prices. Unusually among retailers, it has managed its international expansion without stumbling. Indeed, its brand­which stands for clean, green and attractive design and value for money­is as potent today as it has been at any time in more than 50 years in business.

The parent for all IKEA companies­the operator of 207 of the 235 worldwide IKEA stores­is Ingka Holding, a private Dutch-registered company. Ingka Holding, in turn, belongs entirely to Stichting Ingka Foundation. This is a Dutch-registered, tax-exempt, non-profit-making legal entity, which was given the shares of Mr Kamprad in 1982. Stichtingen, or foundations, are the most common form of not-for-profit organisation in the Netherlands; tens of thousands of them are registered.

Most Dutch stichtingen are tiny, but if Stichting Ingka Foundation were listed it would be one of the Netherlands' ten largest companies by market value. Its main asset is the Ingka Holding group, which is conservatively financed and highly profitable: post-tax profits were €1.4 billion ($1.7 billion) ­ an impressive margin of nearly 11% on sales of €12.8 billion ­ in the year to August 31st 2004, the latest year for which the group has filed accounts.

Valuing the Inkga Holding group is awkward, because IKEA has no direct competitors that operate globally. Shares in Target, a large, successful chain of stores in the United States that makes a fifth of its sales from home furnishings, are priced at 20 times the store's latest full-year earnings. Using that price/earnings ratio, the Ingka Holding group is worth €28 billion ($36 billion).

This is probably conservative, given IKEA's growth prospects. Sales ­ the only financial information that IKEA releases­for the year to August 31st 2005 were €14.8 billion, 15.6% up on a year earlier. And there is plenty of scope for more stores. Ingka Holding has only 26 outlets in America. By contrast, in Europe, a market of comparable size, it has over 160, accounting for more than 80% of its total turnover. In April IKEA opened its first store in Japan.

If Stichting Ingka Foundation has net worth of at least $36 billion it would be the world's wealthiest charity. Its value easily exceeds the $26.9 billion shown in the latest published accounts of the Bill & Melinda Gates Foundation, which is commonly awarded that accolade.

Measured by good works, however, the Gates Foundation wins hands down. It devotes most of its resources to curing the diseases of the world's poor. By contrast the Kamprad billions are dedicated to “innovation in the field of architectural and interior design”. The articles of association of Stichting Ingka Foundation, a public record in the Netherlands, state that this object cannot be amended. Even a Dutch court can make only minor changes to the stichting's aims.

If Stichting Ingka Foundation has net worth of at least $36 billion it would be the world's wealthiest charity

The Kamprad foundations compare poorly with the Gates Foundation in other ways, too. The American charity operates transparently, publishing, for instance, details of every grant it makes. But Dutch foundations are very loosely regulated and are subject to little or no third-party oversight. They are not, for instance, legally obliged to publish their accounts.

Under its articles, Stichting Ingka Foundation channels its funds to Stichting IKEA Foundation, another Dutch-registered foundation with identical aims, and which actually doles out money for worthy interior-design ideas. But the second foundation does not publish any information either. So just how ­ or whether ­ Stichting Ingka Foundation has spent the €1.6 billion that it collected in dividends from Ingka Holding in 1998-2003 remains hidden from view.

IKEA says only that this money is used for charitable purposes and “for investing long-term in order to build a reserve for securing the IKEA group, in case of any future capital requirements.” IKEA adds that in the past two years donations have been concentrated on the Lund Institute of Technology in Sweden. The Lund Institute says it has recently received SKr12.5m ($1.7m) a year from Stichting Ikea (which also gave the institute a lump sum of SKr55m in the late 1990s). That is barely a rounding error in the foundation's assets. Clearly, the world of interior design is being tragically deprived, as the foundation devotes itself to building its own reserves in case IKEA needs capital.

Although Mr Kamprad has given up ownership of IKEA, the stichting means that his control over the group is absolutely secure. A five-person executive committee, chaired by Mr Kamprad, runs the foundation. This committee appoints the boards of Ingka Holding, approves any changes to the company's statutes, and has pre-emption rights on new share issues.

Mr Kamprad's wife and a Swiss lawyer have also been members of this committee, which takes most of its decisions by simple majority, since the foundation was set up. When one member of the committee quits or dies, the remaining four appoint his replacement. In other words, Mr Kamprad is able to exercise control of Ingka Holding as if he were still its owner. In theory, nothing can happen at IKEA without the committee's agreement.

That control is so tight that not even Mr Kamprad's heirs can loosen it after his death. The foundation's objects require it to “obtain and manage” shares in the Ingka Holding group. Other clauses of its articles require the foundation to manage its shareholding in a way to ensure “the continuity and growth” of the IKEA group. The shares can be sold only to another foundation with the same objects and executive committee, and the foundation can be dissolved only through insolvency.

Yet, though control over IKEA is locked up, the money is not. Mr Kamprad left a trapdoor for getting funds out of the business, even if its ownership and control cannot change. The IKEA trademark and concept is owned by Inter IKEA Systems, another private Dutch company, but not part of the Ingka Holding group. Its parent company is Inter IKEA Holding, registered in Luxembourg. This, in turn, belongs to an identically named company in the Netherlands Antilles, run by a trust company in Curaçao. Although the beneficial owners remain hidden from view­IKEA refuses to identify them­they are almost certain to be members of the Kamprad family.

Clearly, the Kamprad family pays the same meticulous attention to tax avoidance as IKEA does to low prices in its stores

Inter IKEA earns its money from the franchise agreements it has with each IKEA store. These are extremely lucrative: IKEA says that all franchisees pay 3% of sales. The Ingka Holding group, the company owned by the Kamprad foundation, is the biggest franchisee, with its 207 stores; other franchisees run the remaining 28 stores, which are mainly in the Middle East and Asia.

How much money does Inter IKEA Systems make? Its results are included in its parent company's accounts filed in Luxembourg. These show that in 2004 the Inter IKEA group collected €631m in franchise fees and made pre-tax profits of €225m. This profit is after deducting €590m of “other operating charges”.

Although IKEA would not explain these charges, because its policy is not to comment on the accounts of a private group of companies, Inter IKEA appears to make large payments to I.I. Holding, another Luxembourg-registered group that is almost certain to be controlled by the Kamprad family and which made a profit of €328m in 2004.

Together these companies had nearly €11.9 billion in cash and securities at the end of 2004, even after I.I. Holding paid out a dividend of nearly €800m during the year. Most of this money has undoubtedly come from the collection of franchise fees. In total, these two groups suffered tax bills of a mere €19m in 2004 on their combined profits of €553m. Clearly, the Kamprad family pays the same meticulous attention to tax avoidance as IKEA does to low prices in its stores.

The IKEA financial system of stichtingen and holding companies is extremely efficient. Even so, next time you wonder how anyone could have come up with the fiendish plans for a Hensvik storage unit or a Bjursta sideboard, spare a thought for the Kamprads' accountants.

"Scrushy Is Convicted in Bribery Case:   Prosecutors Savor Victory Over HealthSouth Ex-CEO After '05 Fraud Acquittal," by Valerie Bauerlein, The Wall Street Journal, June 30, 2006; Page A3 ---

HealthSouth Corp. founder Richard M. Scrushy was convicted of paying $500,000 in bribes in return for a spot on a state regulatory panel, a victory for the federal government a year and a day after it failed to pin a massive accounting fraud at the health-care company on him.

The guilty verdict on all six charges against the 53-year-old Mr. Scrushy, including bribery, conspiracy and mail fraud, could put him behind bars for as long as 20 years, though the judge has wide discretion on sentencing. Prosecutors and defense lawyers are likely to argue over how to weigh factors such as Mr. Scrushy's background and the size of the contributions for which he was convicted. Sentencing isn't expected until this fall at the earliest.

The Montgomery, Ala., jury also convicted former Alabama Gov. Don Siegelman on 10 political-corruption-related counts, six of them linked to Mr. Scrushy. During the two-month trial, prosecutors alleged that Mr. Scrushy arranged two hidden $250,000 payments to a lottery campaign backed by Mr. Siegelman, who put the then-chief executive of HealthSouth on a board that approves hospital-construction projects. The charges weren't related to the accounting fraud.

It wasn't clear what swayed jurors after 11 days of deliberation, or ended a deadlock that emerged last week. Mr. Scrushy's defense team clearly failed to win over the jury with its strategy of comparing him to civil-rights icons who suffered injustice. In his closing argument, Fred D. Gray, who represented Rosa Parks when she was arrested in 1955 for refusing to give up her seat on a Montgomery bus, quoted a favorite Biblical passage of Martin Luther King Jr., adding that an acquittal of Mr. Scrushy would mean that "justice will run down like water and righteousness as a mighty stream."

Federal prosecutors denounced the rhetoric as a racially motivated attempt to influence the jury of seven African-Americans and five whites, the same composition as the jury that acquitted Mr. Scrushy last year. They alleged that Mr. Scrushy had used his money and power to gain political influence that helped fuel HealthSouth's growth. Mr. Scrushy was forced out at HealthSouth when the accounting fraud surfaced in 2003.

Charlie Russell, a spokesman for Mr. Scrushy, said the former HealthSouth CEO was "shocked" by his conviction. "He maintains that he is absolutely innocent, and he intends to appeal." Before the trial, Mr. Scrushy's lawyers fought unsuccessfully to have him tried separately and objected to the makeup of the jury pool.

In a statement, Louis V. Franklin Sr., criminal-division chief of the U.S. attorney's office in Montgomery, said the verdict "sends a clear message that the integrity of Alabama's government is not for sale." HealthSouth said Mr. Scrushy's conviction "has no impact on the company," which continues to pursue a turnaround strategy under new management. HealthSouth has filed a lawsuit against him in connection with the fraud, while Mr. Scrushy has sued the company for wrongful termination and breach of contract, citing his acquittal in last year's trial. Mr. Scrushy also faces fraud-related civil lawsuits filed by shareholders and the Securities and Exchange Commission.

Doug Jones, a former U.S. attorney now representing HealthSouth shareholders in a suit against Mr. Scrushy, said the verdict could help plaintiffs in the remaining cases because Mr. Scrushy likely will be forced to answer questions about his conviction. Sean Coffey, a lawyer representing bondholders, added, "Even though it's not directly related, the folks we represent can't see enough hurt get on that guy."

Jurors acquitted the two other defendants, Paul Hamrick, a onetime chief of staff to the former governor, and Gary Roberts, former head of the Alabama transportation department.

Bob Jensen's threads on the HealthSouth scandals are at

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