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

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

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

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

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

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

The Heroes of Financial Fraud, The Atlantic, April 2009 --- http://meganmcardle.theatlantic.com/archives/2009/04/the_heroes_of_financial_fraud.php

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

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

PBS Video on Multinational Illegal Payments
FRONTLINE: Black Money --- http://www.pbs.org/wgbh/pages/frontline/blackmoney/

Importance of Internal Controls Even Among the "Good Folks"
April 3, 2011 Message from Jim McKinney

On today’s NPR Program, This American Life, there was an interesting story today about how a young untrained person was put in-charge of The Kennedy Center gift shop and learned the importance of internal controls. The shrinkage was in the 40% range initially. The main point was, here are these basically good people volunteering time, and yet many of them were stealing cash and merchandise because there were no internal controls.

http://www.thisamericanlife.org/radio-archives/episode/431/see-no-evil

Jim McKinney, Ph.D., C.P.A.
Tyser Teaching Fellow
Accounting and Information Assurance
Robert H. Smith School of Business
4333G Van Munching Hall
University of Maryland
College Park, MD 20742-1815
http://www.rhsmith.umd.edu

"How a big US bank laundered billions from Mexico's murderous drug gangs," by Ed Vulliamy, The Guardian, April 3, 2011 ---
http://www.guardian.co.uk/world/2011/apr/03/us-bank-mexico-drug-gangs
|Thank you Robert Walker for the heads up.

As the violence spread, billions of dollars of cartel cash began to seep into the global financial system. But a special investigation by the Observer reveals how the increasingly frantic warnings of one London whistleblower were ignored

On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of Mexico, as the sun was setting. Mexican soldiers, waiting to intercept it, found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But something else – more important and far-reaching – was discovered in the paper trail behind the purchase of the plane by the Sinaloa narco-trafficking cartel.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States: Wachovia, now part of the giant Wells Fargo.

The authorities uncovered billions of dollars in wire transfers, traveller's cheques and cash shipments through Mexican exchanges into Wachovia accounts. Wachovia was put under immediate investigation for failing to maintain an effective anti-money laundering programme. Of special significance was that the period concerned began in 2004, which coincided with the first escalation of violence along the US-Mexico border that ignited the current drugs war.

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year's "deferred prosecution" has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico's gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

"Wachovia's blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

Continued in article

Bob Jensen's threads on how the big banks and brokerages are often Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.
David Warsh, "A Recent Exercise in Nation-Building by Some Harvard Boys," EconomicPrincipals.com, March 27, 2011 ---
http://www.economicprincipals.com/issues/2011.03.27/1248.html
Thank you Robert Walker for the heads up.

It was worth a smile at breakfast that morning in February 2006, a scrap of social currency to take out into the world. Michael Porter, the Harvard Business School management guru, had grown famous offering competitive strategies to firms, regions, whole nations.  Earlier he had taken on the problems of inner cities, health care and climate change.  Now he was about to tackle perhaps the hardest problem of all (that is, after the United States’ wars in Afghanistan and Iraq).

He had become adviser to Moammar Khadafy’s Libya.

There at the bottom of the front page of the Financial Times was a story that no one else had that day, or any other – a scoop. It turned out that Porter and his friend Daniel Yergin and the consulting firms which they had respectively co-founded and founded, Monitor Group and Cambridge Energy Research Associates, had been working for a year on a plan to diversify the Libyan economy away from its heavy dependence on oil. Their teams had conducted more than 2,000 interviews with “small- and medium-scale entrepreneurs as well as Libyan and foreign business leaders.” (Both men are better-known as celebrated authors:  Porter for Competitive Strategy: Techniques for Analyzing Industries and Competitors and The Competitive Advantage of Nations, Yergin for The Prize: the Epic Quest for Oil, Money and Power and The Commanding Heights: the Battle for the World Economy.)

The next day Porter would present the 200-page document they had prepared in a ceremony in Tripoli. Khadafy himself might attend. The FT had seen a copy of the report, which envisaged a glorious future under the consultants’ plan. If all went well, it said, then by 2019 – the 50th anniversary of the military coup that brought Col. Khadafy to power – Libya would have “one of the fastest rates of business formation in the world,” making it a regional leader contributing to the “wealth and stability of surrounding nations.”

. . .

We now know that Khadafy’s son bribed his way into his PhD from the London School of Economics (LSE); that Monitor Group had been paid to help him write his dissertation there (much of which apparently turns out to have been plagiarized, anyway); that the Libyan government was paying Monitor $250,000 a month for its services; that, according to The New York Times, Libya’s sovereign wealth fund today owns a portion of Pearson PLC, the conglomerate that publishes the Financial Times and The Economist; that the whole deal quietly fell apart two years later.

Sir Howard Davies resigned earlier this month as director of the LSE after it was disclosed he had accepted a ₤1.5 million donation in 2009 from a charity controlled by Saif Khadafy.

It turns out that Monitor also proposed to write a book boosting Khadafy as “one of the most recognizable individuals on the planet,” promised to generate positive press, and to bring still more prominent academics, policymakers and journalists  to Libya, according to Farah Stockman of The Boston Globe. She did a banner job of pursuing the details she found in A Proposal For Expanding the Dialogue Surrounding the Ideas of Moammar Khadafy, a proposal from Mark Fuller in 2007 that a Libyan opposition group posted on the Web.

Among those enlisted were Sir Anthony Giddens, former director of the LSE; Francis Fukuyama, then of Johns Hopkins University; Benjamin Barber, of Rutgers University (emeritus); Nicholas Negroponte, founder of MIT’s Media Lab; Robert Putnam and Joseph Nye, both former deans of Harvard’s Kennedy School of Government.  Nye received a fee and wrote a broadly sympathetic account of his three-hour visit with Khadafy for The New Republic. He also told the Globe’s Stockman he had commented on a chapter of Saif’s doctoral dissertation. (When The New Republic scolded Nye earlier this month, after Mother Jones magazine disclosed the fee, Nye replied that his original manuscript implied that he had been employed as a consultant by Monitor, but that the phrase had been edited out).

. . .

I’m not going to hold my breath waiting for Porter to give some evidence of contrition about his mission to Tripoli. Sir Howard Davies may have resigned as director of the LSE (“The short point is that I am responsible for the school’s reputation and that has suffered”), but being a Harvard professor apparently means never having to say you’re sorry. Perhaps instead the university will find some way to rein in on its professors’ more self-serving ambitions.

New Book --- Yeah Right!
Harvard Business Review on Making Smart Decisions --- Click Here
http://hbr.org/product/harvard-business-review-on-making-smart-decisions/an/10323-PDF-ENG?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date New Book --- Yeah Right!

Jensen Comment
In Chile the Chicago Boys rebuilt a nation with honor. I Libya the Harvard Boys were apparently less honorable.

And look what a desert swamp we're mired in now!

. . . being a Harvard professor apparently means never having to say you’re sorry

"A Brief History of the Corporation: 1600 to 2100," by Venkat, RibbonFarm, June 8, 2011 ---
http://www.ribbonfarm.com/2011/06/08/a-brief-history-of-the-corporation-1600-to-2100/

June 23, 2011 reply from Rick Lilly

Hi Bob,

I am reading an interesting book titled Life Inc., How Corporatism Conquered the World, and How We Can Take It Back, by Douglas Ruskhoff (ISBN-13: 978-0812978506).  Below is the URL link to the Amazon.com web page.

Link:  http://www.amazon.com/Life-Inc-Corporatism-Conquered-World/dp/0812978501/ref=sr_1_3?s=books&ie=UTF8&qid=1308848737&sr=1-3

Rick Lillie, MAS, Ed.D., CPA
Assistant Professor of Accounting
Coordinator, Master of Science in Accountancy
CSUSB, CBPA, Department of Accounting & Finance
5500 University Parkway, JB-547
San Bernardino, CA.  92407-2397

June 23, 2011 reply from Bob Jensen

June 23, 2011 reply from Jagdish Gangolly

Bob,

The years 1770-72 were also infamous for another reason. The East India Company which had earlier used the grant given to it by the Mughal emperor Akbar to the city of Calcutta had established its control over Bengal. Its disastrous tax and other policies, compounded by drought, led to the death by starvation of 10 million people.

Warren Hastings, who was the Governor General, was later impeached (for corruption) and later acquitted by the British Parliament. He was later made a Privy Councillor, a rather strange honour for one who stood like a Greek hero, counting the British tax revenues (which multiplied), while 10 million human beings died of starvation.

Venkat's lament about Alexander Fordyce's absconding for half a million pounds debt is a petty matter relative to the death of 10 million people caused by Hastings and his cohorts at the same British East India Company.

Sen asks a profound rhetorical question why there have been no famines in India since the British left. Democracy does not permit it.

Edmund Burke's speech in the British Parliament in the impeachment proceedings is, in my opinion, one of the finest pieces of writing in the English language. Here is a snippet:

_________________________________________________

My Lords, the East India Company have not arbitrary power to give him; the King has no arbitrary power to give him; your Lordships have not; nor the Commons, nor the whole Legislature. We have no arbitrary power to give, because arbitrary power is a thing which neither any man can hold nor any man can give. No man can lawfully govern himself according to his own will; much less can one person be governed by the will of another. We are all born in subjection -- all born equally, high and low, governors and governed, in subjection to one great, immutable, pre-existent law, prior to all our devices and prior to all our contrivances, paramount to all our ideas and all our sensations, antecedent to our very existence, by which we are knit and connected in the eternal frame of the universe, out of which we cannot stir.

This great law does not arise from our conventions or compacts; on the contrary, it gives to our conventions and compacts all the force and sanction they can have. It does not arise from our vain institutions. Every good gift is of God; all power is of God; and He who has given the power, and from Whom alone it originates, will never suffer the exercise of it to be practised upon any less solid foundation than the power itself. If, then, all dominion of man over man is the effect of the Divine disposition, it is bound by the eternal laws of Him that give it, with which no human authority can dispense neither he that exercises it, nor even those who are subject to it; and if they were mad enough to make an express compact that should release their magistrate from his duty, and should declare their lives, liberties, and properties dependent upon, not rules and laws, but his mere capricious will, that covenant would be void. The acceptor of it has not his authority increased, but he has his crime doubled. Therefore can it be imagined, if this be true, that He will suffer this great gift of government, the great, the best, that was ever given by God to mankind, to be the plaything and the sport of the feeble will of a man, who, by a blasphemous, absurd, and petulant usurpation, would place his own feeble, comtemptible, ridiculous will in the place of the Divine wisdom and justice?

The title of conquest makes no difference at all. No conquest can give such a right; for conquest, that is force, cannot convert its own injustice into a just title by which it may rule others at its pleasure. By conquest, which is a more immediate designation of the hand of God, the conqueror succeeds to all the painful duties and subordination to the power of God which belonged to the sovereign whom he has displaced, just as if he had come in by the positive law of some descent or some election. To this at least he is strictly bound: he ought to govern them as he governs his own subjects. But every wise conqueror has gone much further than he was bound to go. It has been his ambition and his policy to reconcile the vanquished to his fortune, to show that they had gained by the change, to convert their momentary suffering into a long benefit, and to draw from the humiliation of his enemies an accession to his own glory. This has been so constant a practice, that it is to repeat the histories of all politic conquerors in all nations and in all times; and I will not so much distrust your Lordships' enlightened and discriminating studies and correct memories as to allude to any one of them. I will only show you that the Court of Directors, under whom he served, has adopted that idea that they constantly inculcated it to him, and to all the servants that they run a parallel between their own and the native government, and, supposing it to be very evil, did not hold it up as an example to be followed, but as an abuse to be corrected that they never made it a question, whether India is to be improved by English law and liberty, or English law and liberty vitiated by Indian corruption. ... ...

Source: http://www.ourcivilisation.com/smartboard/shop/burkee/extracts/chap12.htm  ________________________________________________________________________

How profound and timely, in the context of all recent corruption scandals.

Jagdish -- Jagdish S. Gangolly, (j.gangolly@albany.edu) Vincent O'Leary Professor Emeritus of Informatics, Director, PhD Program in Information Science, Department of Informatics, College of Computing & Information 7A Harriman Campus Road, Suite 220 State University of New York at Albany, Albany, NY 12206. Phone: (518) 956-8251, Fax: (518) 956-8247 URL: http://www.albany.edu/acc/gangolly

 

Bob Jensen's accounting history threads ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

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

Ethics Case:  Lawyers at Work Siphoning Off Settlements

"Justice in Kentucky:  The bar disciplines Stanley Chesley. Calling Mike DeWine," The Wall Street Journal, June 16, 2011 ---
http://online.wsj.com/article/SB10001424052702304186404576387901327162050.html#mod=djemEditorialPage_t

It isn't often that a professional legal organization disciplines one of its own, but that's what happened Tuesday to plaintiffs bar legend Stanley Chesley. Now let's see if Mr. Chesley's business partner, Ohio Attorney General Mike DeWine, keeps him employed.

The Kentucky Bar Association voted to disbar Mr. Chesley, a Cincinnati-based attorney who was one of several lawyers involved in a $200 million 2001 settlement with a company that made the diet drug fen-phen. The attorneys were later accused of taking a significant portion of the settlement that should have gone to their clients. Three attorneys have already been stripped of their law licenses, and two of those were convicted of defrauding clients.

Mr. Chesley was brought to the bar on charges of violating nine ethics rules, including taking unreasonable fees, sanctioning misconduct by other lawyers, and failing to fully inform clients. The trial commissioner who investigated, Judge William Graham, called Mr. Chesley's actions "shocking and reprehensible" and recommended that he lose his license and be forced to return $7.6 million of the $20 million he took in the case. The bar association on Tuesday accepted both recommendations, although the Kentucky Supreme Court will review the case.

All of this puts the spotlight on Mr. DeWine, a former Republican Senator who made a political comeback as AG in 2010. Ohio's government has become an engine of dubious shareholder lawsuits on behalf of its public pension funds, in hopes of landing legal jackpots to fill the state's budget hole. The state retained Mr. Chesley for its suit against Fannie Mae, and Mr. DeWine has kept Mr. Chesley on the job despite the Kentucky ethics case and evidence that the lawsuit king was less than honest with the federal judge overseeing the Fannie litigation. (See "Republicans for Lawsuits," May 31, 2011.)

Continued in article

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

From the Scout Report on May 6, 2011

The recent seizure of the assets of online poker sites raises a number
of questions
Poker players protest government seizure
http://www.cnn.com/2011/US/04/27/online.poker.protest/

Poker websites' actions were risky, experts say
http://www.lasvegassun.com/news/2011/apr/29/poker-websites-actions-were-
risky-experts-say/

Poker Black Friday: An online poker ponders how he'll make a living
http://www.slate.com/id/2292417/

Time to legalize, tax online gambling
http://www.chron.com/disp/story.mpl/editorial/outlook/7545171.html

The official rules of card games: Hoyle up-to-date
http://books.google.com/books?id=C5eIAAAAMAAJ&dq=card%20games&pg=PP1#v=onepage&q&f=false

Frontier Gamblers
http://www.frontiergamblers.com/

Jensen Comment
Of course the U.S government lacks authority for some of the largest and most abusive gambling sites that are rooted in Canadian Native American lands (which in turn are suspected fronts for organized crime)

"India's Powerful Can't Escape Jail:  A scandal over a telecom spectrum sale snares members of the elite," by Mehul Srivastava, Business Week, June 8, 2011 ---
http://www.businessweek.com/magazine/content/11_25/b4233013968530.htm?link_position=link2
(And jails in India are far worse that our Club Feds in the U.S.)

Jensen Comment
Jailing the rich and powerful is not as common in the United States where white collar crime generally pays even if you get caught. There are of course a few exceptions such as Bernie Madoff  and Bernie Ebbers. But those that spend a few years in Club Fed generally emerge to enjoy their stashed offshore loot or loot hidden by friends and family. Other rich and famous like Michael Milken, Martha Stewart, and Leona Helmsley legally remained billionaires after their vacations in Club Fed. White collar crime generally pays in the United States ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

June 4, 2011 message from Roger Collins about a prison where inmates prefer to be incarcerated (for the sex and drugs and protection)

Video of Club Fed in Venezuela
http://video.nytimes.com/video/2011/06/03/world/americas/100000000849275/venezuelas-prison-paradise.html?nl=todaysheadlines&emc=thab1 

Roger

Roger Collins
TRU School of Business & Economics

"Why People Pay Income Taxes," by Casey B. Mulligan, The New York Times (Economix), April 6, 2011 ---
http://economix.blogs.nytimes.com/2011/04/06/why-people-pay-income-taxes/?ref=business

Millions of taxpayers are filling out their tax returns over the next several days. Economists are still not sure whether taxpayer honesty or fear of the Internal Revenue Service explains why taxpayers’ income reporting is pretty accurate.

¶But with the Treasury spending more than ever, it’s important to know why people pay their taxes and what will continue to motivate them to pay in the future.

¶It’s difficult to get exact numbers on income tax cheating, but I.R.S. studies (read about them and other tax-evasion analysis in Prof. Joel Slemrod’s paper) suggest that reporting of wages and salaries is so high that the Treasury receives 99 percent of what it would if all taxpayers were honest about that income (see Page 2 of this I.R.S. report).

You might think that people pay taxes merely to stay out of trouble with the I.R.S. But 99 percent of people are not audited by the I.R.S., and even the remaining 1 percent are penalized only about 10 percent of the amount underpaid. (The I.R.S. is, however, increasing its audits of the wealthy.)

From a financial point of view, underpaying taxes looks like a high expected return investment: a 99 percent chance of keeping the, say, $10,000 that you underpaid the Treasury and a 1 percent chance of having to pay the $10,000 plus a $1,000 penalty (on average, you get $9,790 for every $10,000 you hold back from the Treasury).

Some economists have tried to reconcile low penalties with high compliance, arguing that people obey the tax laws for non-economic reasons – people want to be honest and pay their share. Or perhaps individuals don’t understand that any one person’s tax payment is not critical to the functioning of our government, while the aggregate of millions of tax payments are.

To the extent that much of the Treasury’s revenue arrives because taxpayers are honest, public policy might not want to take honesty for granted. For example, the Treasury may receive less revenue over time if taxpayers increasingly distrust government because they perceive their tax dollars are wasted.

There’s some truth to the honesty theory (I’ll write next week about a study of integrity and tax compliance), but tax compliance still responds to incentives. When the probability of audit falls, compliance falls.

It’s difficult for the I.R.S. to verify many types of business income: as a result the amount of proprietor, rent and royalty income that is reported is actually less than the amount unreported.

Nanny taxes -– self-employment taxes paid for household employees -– are another type of tax on which many people cheat, and enforcement on this front is weak. Though on this and other tax issues, high-profile people –- like political appointees –- should beware.

Among those whose failure to pay various taxes were widely publicized were Tom Daschle, President Obama’s nominee as secretary of health and human services; Treasury Secretary Timothy Geithner, and Zoe Baird, President Clinton’s nominee for attorney general.

Continued in article

"Who Cheats on Their Taxes?" by Casey B. Mulligan, The New York Times (Economix), April 13, 2011 ---
http://economix.blogs.nytimes.com/2011/04/13/who-cheats-on-their-taxes/?partner=rss&emc=rss

Jensen Comment
Note that there's a huge difference between "cheating" and playing by the rules to minimize/avoid taxation. Cheating is especially common in trades where cash is paid without filing W-2 or 1099 forms such as paying house cleaners for a few hours work per week, hiring day laborers off the streets, cash tipping, paying guys who plow snow from your driveway, and crime dealings, including drug dealings and prostitution. The IRS has made it increasingly more difficult to under report income. For example, most casinos now withhold taxes from significant winnings, although some players may walk away without reporting small winnings. House cleaners now may want to have their earnings reported for Social Security purposes.

Tax cheating and most financial crimes could be eliminated in a cashless world of all-electronic transfers, but don't hold your breath for our legislators to agree to that solution to crime. Too many of them might might be prevented tax cheating and crime in a cashless society. Smart criminals now are either avoiding bank accounts or laundering money before depositing it into bank accounts.

Tax cheating is much less of a problem in the U.S. than in most other nations such as Greece and Italy where tax cheating is virtually a way of life. Studies show that most U.S. taxpayers have greatly exaggerated fears of full tax audits, which is comes as a delight to tax collectors who better understand the real odds of being audited. Of course there are those pesky partial audits and the things taxpayers can do to increase the odds of a partial audit such as taking a huge deduction for a home office. Many people are likely to overpay taxes out of fear of audits such as people who qualify for more deductions than they actually declare simply to avoid the stress of worrying about letters from the IRS.

Forged mortgage paperwork mess: the next housing shock and toxic mold threats?

I have written tens of thousands of tidbits over the years. Aside from my tidbits on wars, deficits/entitlements, and unemployment, I think my most depressing tidbits are on the corrupted real estate deed registries of virtually all counties in the 50 states if America. The major reason for this corruption is that, after the subprime bubble burst in 2008, megabanks and Wall Street brokerage houses lost track of mortgage paperwork on millions of real estate parcels. These banks/brokerages then forged new copies of the mortgages, often with fictitious names of bank officials where the loans originated. When these properties were then foreclosed or otherwise resold to new buyers, the forged mortgages became part of recorded deeds, thereby corrupting the deed registries across the entire United States.

Watch the Video
"Mortgage paperwork mess: the next housing shock?" CBS Sixty Minutes, April 3, 2011 ---
http://www.cbsnews.com/stories/2011/04/01/60minutes/main20049646.shtml

If there was a question about whether we're headed for a second housing shock, that was settled last week with news that home prices have fallen a sixth consecutive month. Values are nearly back to levels of the Great Recession. One thing weighing on the economy is the huge number of foreclosed houses.

Many are stuck on the market for a reason you wouldn't expect: banks can't find the ownership documents.

Who really owns your mortgage?
Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents.

It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there

Continued in article

Deed Registry --- http://en.wikipedia.org/wiki/Registry_of_deeds

Mortgage --- http://en.wikipedia.org/wiki/Mortgage_loan

Mortgage Backed Security --- http://en.wikipedia.org/wiki/Mortgage-backed_security

Collateralized Debt Obligation (CDO) or Structured Asset Backed Security (CABS) --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Registered deeds keep legal track over the years of all real estate in the United States. Often the owners have taken out mortgages that give lenders priority claims on the real estate ownership when owners default on mortgage lending contracts. It's important to note that names of mortgage investors, along with the property owners, are written into the recorded deeds. Before a buyer purchases real estate the chronological records of recorded deeds on the property are generally searched by legal experts who then certify and sometimes insure that the buyer will have a clear title to the purchased property.

If mortgages referenced in recorded deeds are forged, the recorded deeds are thereby corrupted. Present owners accordingly do not have clear titles to the purchased real estate. This includes John and Jane Doe now living in their home at 123 Main Street. It also includes Fannie Mae, Freddie Mack, Goldman Sachs, Bank of America, JP Morgan, and most of the other megabanks inside and outside the United States. All are waiting for former owners to file lawsuits claiming damages because of forged documents (including lawsuits from owners who simply abandoned their houses because they could not make the mortgage payments and those that got forced out by foreclosure proceedings).

The FDIC claims that probably the only way out of this mess is for the large banks and brokerages who in one way or another are responsible for the document forgeries to pay tens of billions into a "clean up fund" to be administered by the government to make claimants accept cash settlements and relinquish their rights to sue over forged or missing documents. This may be the only way to clear the titles to registered deeds, including the deeds on millions of empty homes that now cannot be sold until the titles are cleared of the forged recorded paperwork.

A Summary of How This Mess Came About

1.
The main cause of this mess roots back to a time when banks and mortgage companies that initially approve mortgage contracts commenced selling all their mortgage investments to downstream investors like Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers, Merrill Lynch, and virtually all the large international banks and Wall Street brokerages. Some like Bank of America did not directly buy many of these downstream mortgages but later inherited millions of mortgages such as when Bank of America bought the troubled Countrywide and JP Morgan bought the troubled Wachovia as part of the TARP deals engineered by the U.S. Treasury Department. It took until 2011 for the government to finally mandate that original lenders must retain "some skin" in the mortgages sold downstream (currently at least 5% of the financial risk skin). That was not the case when the subprime bubble burst in 2008.

2.
Another leading cause was the common 1990s practice of issuing subprime interest rate mortgages where interest in the early years was below prime rates with a clause that higher rates would eventually kick in several years down the road. Even current owners were tempted to abandon their fixed rate mortgages and refinance with subprime mortgages with the intent of flipping their homes before the higher rates kicked in with payments they could not afford. The plan was to sell their houses at huge gains and move up the hill to bigger houses and better neighborhoods. All of this was predicated on the assumption that the price bubble in real estate would never burst. But in 2008 it did burst and millions of home owners could no longer make their mortgage payments when the subprime rates gave way to double-digit rates. Low income people defaulted in droves, but higher income people also defaulted. Some very high income people bought mansions on the hill at subprime rates hoping to turn those mansions over for enormous profits as long as housing prices in America kept going up and up. CBS Sixty Minutes captured the essence of what happened when the bubble burst.

3.
The eventual downstream owners of these risky subprime mortgages invented a way of diversifying default risk by putting together and selling portfolios of mortgages known as Collateralized Debt Obligation portfolios. Buyers included many wealthy investors in the Middle East and Asia. Forest Gump describes a CDO portfolio as a box of chocolates with mostly small pieces of good mortgages with a few turds thrown in (small pieces of mortgages are likely to go into default by owners who cannot afford their mortgage payments). Note that a CDO portfolio does not 100% of any mortgage investment. Rather it contains like a 1% piece of a mortgage spread over 100 CDO portfolios. This is important because this slicing and dicing shredding of financial risk is where much of the original paperwork got lost.

Mortgage Backed Securities are like boxes of chocolates. Criminals (bankers and brokers) on Wall Street and one particular U.S. Congressional Committee stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard & Poors rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide. Hank Paulson now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, Hank's buddies, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted. Momma always said: "Sniff the chocolates first Forrest." Things generally don't pass the smell test if they came from Wall Street or from Washington DC.
Forrest Gump as quoted at http://newsgroups.derkeiler.com/Archive/Rec/rec.sport.tennis/2008-10/msg02206.html

4.
Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009 ---
http://www.cbsnews.com/video/watch/?id=5274961n&tag=contentBody;housing
The free download will only be available for a short while. I downloaded this video (a little over 5 Mbs) using a free updated version of RealMedia --- Click Here
http://www.real.com/dmm/superpass?pcode=cj&ocode=cj&cpath=aff&rsrc=1275588_10303897_SPLP

Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis. The interview features my hero Frank Partnoy. I don't know of anybody who knows derivative securities contracts and frauds better than Frank Partnoy, who once sold these derivatives in bucket shops. You can find links to Partnoy's books and many, many quotations at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

For years I've used the term "bucket shop" in financial securities marketing without realizing that the first bucket shops in the early 20th Century were bought and sold only gambles on stock pricing moves, not the selling of any financial securities. The analogy of a bucket shop would be a room full of bookies selling bets on NFL playoff games.
See "Bucket Shop" at http://en.wikipedia.org/wiki/Bucket_shop_(stock_market)

5.
So where does mortgage/deed forgeries enter into the picture.
It turns out that the Wall Street brokerage houses and megabanks that ended up downstream with the mortgages and then sliced and diced them into new securitization instruments called Mortgage Backed Obligation (MBO) portfolios completely lost track of the millions original mortgage paper work that they were shredding into millions of MBOs. Then when owners defaulted on their original subprime mortgages the megabanks and brokerages, gasp, could not find the original paperwork. Even worse, when responsible homeowners sold their homes and wanted to pay off their mortgages the megabanks and brokerages also could not find the original paperwork.

Horrors!
What's a megabank  to do when new deeds have to be recorded and the current recorded deeds/mortgages cannot be located. What the megabanks essentially did was forge new paperwork. Not wanting to implicate their own employees in this fraud they hired sleazy mortgage servicing companies who in turn hired high school kids at minimum wage to forge up to 4,000 names per hour (including forged notary public signatures). The megabanks now claim they did not know these forgeries were taking place, but if you believe this I've got some ocean front property in Arizona and the Brooklyn Bridge that I would like to sell to those megabanks.

To see how all of this forgery really took place watch the following:

Mortgage paperwork mess: the next housing shock?" CBS Sixty Minutes, April 3, 2011 ---
http://www.cbsnews.com/stories/2011/04/01/60minutes/main20049646.shtml

If there was a question about whether we're headed for a second housing shock, that was settled last week with news that home prices have fallen a sixth consecutive month. Values are nearly back to levels of the Great Recession. One thing weighing on the economy is the huge number of foreclosed houses.

Many are stuck on the market for a reason you wouldn't expect: banks can't find the ownership documents.

Who really owns your mortgage?
Scott Pelley explains a bizarre aftershock of the U.S. financial collapse: An epidemic of forged and missing mortgage documents.

It's bizarre but, it turns out, Wall Street cut corners when it created those mortgage-backed investments that triggered the financial collapse. Now that banks want to evict people, they're unwinding these exotic investments to find, that often, the legal documents behind the mortgages aren't there

Continued in article

6.
So where does this leave us now and why is this so serious?

This leaves us with millions of corrupted deed registries containing references to forged documents. Current owners do not have clear titles to their properties, including megabanks holding corrupted titles to vacant homes.

Currently 13% of all the houses in America are vacant, including millions of double wides in mobile home parks and millions of mansions in every county of the United States. Owners, including megabanks, of these vacant houses do not have clear title do to forged documents. The houses cannot be sold with corrupted titles such that they sit vacant year after year.

Mold takes hold in the walls and ceilings of vacant homes that are not properly cooled and dehumidified in hot summer months and warmed in frigid winter months. The mold spreads more and more until it reaches toxic levels where real estate inspectors will not allow the homes to be sold. The bull dozers have to push through those double wides and even those mansions on the hill.

Now lawyers are hovering like vultures to commence the lawsuits on behalf of former owners such as owners thrown out of foreclosed houses and new owners who do not have clear titles to properties purchased in good faith ---
http://wgroup.ning.com/

The FDIC is proposing a forged document cleanup fund where the megabanks responsible for using forged paperwork put up tens of billions of dollars into a fund to pay off the damaged former owners so that titles can be cleared on millions of homes now having corrupted deeds on file due to those forgeries. It's a little like how the BP fund in being administered for oil spill damages to employees and businesses along the Gulf Coast, only the forged mortgage fund has to be much, much, much larger.

What a mess!

"Using Deception to Comply With Title IX," Inside Higher Ed, April 25, 2011 ---
http://www.insidehighered.com/news/2011/04/26/qt#258037

Many colleges are relying on deception to inflate the rosters of women's teams to comply with Title IX of the Education Amendments of 1972, The New York Times reported. Colleges add women to teams even if the women never play or, in some cases, even realize they are on the team, recruit some women by telling them they need not attend practice, and list male "practice players" (who participate in practices) as members of women's squads, the Times reported. Colleges have found it less expensive to create women's slots through increasing the number of alleged athletes on existing teams than to create new teams -- and need to add to their women's totals because the institutions do not want to cut football.

Bob Jensen's threads on collegiate athletics controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Athletics

Helpers for Women in Academe ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#HelpersForWomen

"Accounting Giant KPMG LLP Faces $350 Million Gender Discrimination Class Action," PR Newswire, June 2, 2011 ---
http://www.prnewswire.com/news-releases/accounting-giant-kpmg-llp-faces-350-million-gender-discrimination-class-action-123021028.html

Although KPMG LLP – one of the "Big Four" accounting firms – publicly touts its commitment to diversity and equal opportunity, the numbers tell a different story entirely. Women comprise about half of KPMG's employees, but are conspicuously absent from the top leadership positions. The Company's 20-member global executive team and 24-member global board each have only one female representative. Similarly, women are only 18% of all KPMG Partners compared to nearly 50% of all employees.

Aiming to put an end to the systemic gender discrimination at KPMG, a former female Senior Manager filed a $350 million class action discrimination lawsuit against the company today in the U.S. District Court for the Southern District of New York. The Plaintiff, Donna Kassman, lives in New York and worked in KPMG's New York office for seventeen years before resigning as a result of gender discrimination. Plaintiff Kassman and the class are represented by Janette Wipper, Siham Nurhussein, and Deepika Bains of Sanford Wittels & Heisler, LLP.

KPMG is an audit, tax, and advisory services firm headquartered in Netherlands with U.S. offices headquartered in New York City. In 2010, KPMG reported global revenues of $20.63 billion.

Plaintiff Kassman alleges that KPMG engages in systemic discrimination against its female Managers, including but not limited to Managers, Senior Managers and Managing Directors. The lawsuit is intended to change KPMG's discriminatory pay and promotion policies and practices, as well as its systemic failure to properly investigate and resolve complaints of discrimination and harassment. The Plaintiff is filing this action on behalf of a class of thousands of current and former female employees who have worked as Managers at KPMG from 2008 through the date of judgment.

KPMG promotes fewer women to Partner (18%) than the industry average (23%) and fewer women to Senior Manager (35%) than the industry average (44%). "Across the accounting industry, women are conspicuously absent from leadership positions; but at KPMG, women fare even worse," said Janette Wipper. "As soon as women come within reach of partnership, the Company's male-dominated owners find ways to block their advancement,"

Despite Plaintiff Kassman's long tenure and stellar performance, KPMG refused to promote her along the partnership track. Ms. Kassman's supervisors repeatedly told her throughout 2008 and 2009 that she was next in line for a promotion to Managing Director. Around the time Ms. Kassman was to be promoted, however, two male employees complained that she was "unapproachable" and "too direct," thinly-veiled gender-based criticisms designed to derail her career advancement. Based on these unfounded, discriminatory comments, KPMG removed Ms. Kassman from the promotion track, subjected her to numerous hostile interrogations, and advised her to meet with a "coach" to work on her supposed issues. Instead of disciplining the two male employees for their campaign of harassment, KPMG rewarded them by putting them up for promotion.

KPMG's female Managers are not only under-promoted, but underpaid as well. In one particularly egregious act of discrimination, KPMG slashed Ms. Kassman's base salary by $20,000 while she was on maternity leave because she was paid "too much." KPMG cited no business justification for slashing her salary. When Ms. Kassman complained about the salary cut, her male supervisor asserted that she did not need the money because she "ha[d] a nice engagement ring."

"Unfortunately, Ms. Kassman's story is completely representative of the treatment of women at KPMG," Siham Nurhussein said. "Ms. Kassman repeatedly complained up the chain of command about the gender discrimination and harassment she was experiencing, and the Company reacted with neither surprise nor concern. Her supervising Partner told her matter-of-factly that her male colleague might have a problem working with women, and the Office of Ethics and Compliance told Ms. Kassman that men had ganged up on women at KPMG before. KPMG not only tolerates gender discrimination, but displays an active interest in perpetuating it."

Continued in article

June 6, 2011 reply from Glen Gray

Bob,

I don’t want to be too philosophical here, but your story below is about males behaving badly and you frequently send out emails about auditors behaving badly. Couldn’t someone ask where did the teachers/professors fail? You and I and many other professors on this list have been teaching for a long time—so these “bad” people were very likely our students. How come we didn’t put them on the correct ethical path? Or weed the bad apples out?

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
18111 Nordhoff ST
Northridge, CA 91330-8372
818.677.3948
http://www.csun.edu/~vcact00f

June 6, 2011 reply from Bob Jensen

Hi Glen,

You ask the question that's been asked and "answered" over and over for the past few decades. I personally think that there's only a limited benefit that comes from increased focus on ethics in accounting curricula, although I certainly don't think it's topic that should be neglected in any accounting, auditing, systems, or tax course. Ethical behavior or lack thereof is far too complex to expect educators to solve the problem any more than we can expect preachers to eradicate sin in their congregations.

I was forever impressed with a presentation years ago by long-serving audit senior executive and later accounting professor Bob Sack, a professional that I truly admire with extensive and varied service to the American Accounting Association.

Bob contends that perhaps the major solution to the problem is the "tone at the top" as set by both the example and the policies set by by executives at the very top of the organization. However, I think the alleged behavior of this latest huge lawsuit against KPMG illustrates that the tone at the top is certainly important but not enough. Most certainly alleged bad behavior within KPMG runs totally counter to the tone at the top of KPMG and all other large auditing firms and most smaller auditing firms.

Of course we must note the American legal tradition of not being guilty until confessions transpire or being declared guilty in a court of law. There are perhaps some sides of this particular lawsuit that have not yet been disclosed in the media.

There are a growing number of interesting references to gender and ethics course materials and literature cited at the AAA Commons. I really recommend accounting teachers and researchers to use these categories in the Commons.

Of course there is still evidence of glass ceilings in auditing firms, but experts (not me) on gender and minority issues admit that the issues are far more complex than despicable bias.

I certainly invite more messaging on the AECM from experts on these issues as long as we keep in mind that the dust has not really settled on this particular KPMG lawsuit.

Everybody is also waiting breathlessly for the U.S. Supreme Court ruling on Wal-Mart. Is this a genuine grievance or a legal lottery or both? It's the "both" part that disturbs me the most when and if the punitive damages are more of a jackpot for the lawyers than the plaintiffs.

Respectfully,
Bob Jensen

Bob Jensen's threads on the two faces of KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

"The Costs of Bad Security:  Mounting threats to the security of information are forcing companies to make more sophisticated cost-benefit analyses when they craft their security strategies," by David Talbot, MIT's Technology Review, June 1, 2011 ----
http://www.technologyreview.com/business/37675/?nlid=4542

Jensen Comment
Accounting instructors who teach cost-benefit analysis may want to pass this article along to students.

"Koss suit against former auditor (Grant Thornton) to proceed," by Doris Hajewski, Journal Sentinel, June 22, 2011 ---
http://www.jsonline.com/business/124389194.html
Thank you Caleb Newquist for the heads up.

Koss Corp.'s lawsuit against the company's former auditor, Grant Thornton, will move forward in Cook County, Ill., according to a ruling from a judge in Chicago this week.

Koss accuses Grant Thornton of gross negligence for not uncovering the $34 million embezzlement by its former vice president of finance. Sujata "Sue" Sachdeva is serving an 11-year sentence in federal prison for the crime, which came to light in December 2009 when American Express notified Koss of the fraud.

Grant Thornton had sought to have the Cook County action dismissed.

In other litigation related to the embezzlement, a fairness hearing is scheduled Friday in Milwaukee County on a proposed settlement for a derivative lawsuit against the Koss board of directors, Sachdeva and Grant Thornton. The agreement, reached in May, calls for the dismissal with prejudice of claims against individual Koss directors. Claims against Grant Thornton and Sachdeva would be dismissed without prejudice, meaning they could be refiled

The suit didn't seek money for shareholders but asked the court to order corporate governance reforms at the company and for any money paid by defendants in that case to be paid to Koss.

Koss also has suits pending against firms that were involved in payments using embezzled money.

A Maricopa County court is considering Koss' request for reconsideration of the dismissal of its complaint against American Express. Koss claims Amex should have notified the company sooner when it discovered Sachdeva was using company money to pay her bills.

In another suit pending in Milwaukee County Circuit Court, Koss claims that Park Bank was lax in issuing checks to Sachdeva from company accounts and not detecting the fraud.

Bob Jensen's threads on Grant Thornton are at
http://www.trinity.edu/rjensen/Fraud001.htm

PCAOB Snags KPMG Yet Another Time (this time for a client named Motorola with dubious revenue recognition to meet an earnings target)

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.
"Dirty Secrets Fester in 50-Year Relationships," byJonathan Weil, Bloomberg News, June 9, 2011 ---
http://www.bloomberg.com/news/2011-06-09/dirty-secrets-fester-in-50-year-relationships-jonathan-weil.html

Another financial scandal. Another cover-up by regulators. Four years ago, inspectors for the auditing industry's chief watchdog discovered that KPMG LLP had let Motorola Inc. record revenue during the third quarter of 2006 from a transaction with Qualcomm Inc. (QCOM), even though the final contract wasn’t signed until the early hours of the fourth quarter. That’s no small technicality. Without the deal, Motorola would have missed its third-quarter earnings target.

The regulator, the Public Company Accounting Oversight Board, later criticized KPMG for letting Motorola book the revenue when it did. Although KPMG had discussed the transaction’s timing with both Motorola and Qualcomm, the board said the firm “failed to obtain persuasive evidence of an arrangement for revenue-recognition purposes in the third quarter.” In other words, KPMG had no good reason to believe the deal shouldn’t have been recorded in the fourth quarter.

The oversight board didn’t tell the public that this happened at Motorola, though. The maker of wireless- communications equipment, now known as Motorola Solutions Inc., didn’t restate its earnings for the period in question. And there’s no sign the Securities and Exchange Commission ever followed up with an investigation of Motorola’s accounting, even though it oversees the board and had access to its findings.

All of this is business as usual for America’s numbers cops. Since the board’s creation by the Sarbanes-Oxley Act in 2002, its inspectors have found audit failures by large accounting firms at hundreds of U.S.-listed companies. Yet its policy is to keep the identities of those clients secret.

‘Issuer C’

Likewise, in August 2008 when the board released its annual inspection report on KPMG, it referred to Motorola as “Issuer C” in the section on the auditor’s work for the company. For what it’s worth, Motorola paid the firm $244.2 million from 2000 to 2010.

This is the third column I’ve written revealing the name of a client whose accounting practices were a subject of a major auditing firm’s inspection report. Motorola is the biggest yet. I hope a whistleblower comes forward someday to leak many more. This is information investors need to know.

The Sarbanes-Oxley Act authorizes the oversight board to disclose “such confidential and proprietary information as the board may determine to be appropriate” in the public portions of its inspection reports. So it’s the board’s call whether to disclose clients’ names, although the SEC could overrule it. The board never does, bowing to the wishes of the accounting firms.

Identity Revealed

Motorola’s identity was disclosed in public records last month as part of a class-action shareholder lawsuit against the company in a federal district court in Chicago. The plaintiffs in the case, led by the Macomb County Employees’ Retirement System in Michigan, filed a transcript of a September 2010 deposition of a KPMG auditor, David Pratt, who testified that Issuer C was Motorola. KPMG isn’t a defendant in the lawsuit.

Pratt also identified the Motorola customers cited in the board’s inspection report. It’s his deposition that allows me to describe the report’s findings using real names.

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.

Making the Numbers

Motorola booked $275 million of earnings during the 2006 third quarter as a result of the Qualcomm deal, according to estimates by the plaintiffs in the shareholder suit. The plaintiffs allege that all of it was recorded in violation of generally accepted accounting principles. That’s 28 percent of the net income Motorola reported for the quarter.

A Motorola spokesman, Nicholas Sweers, said the company’s accounting complied with GAAP, and that the financial statements for the periods covered in the inspection report have never been the subject of an SEC investigation. He declined to discuss details of Motorola’s accounting, citing the litigation. A KPMG spokesman, George Ledwith, declined to comment. So did an oversight board spokeswoman, Colleen Brennan, and an SEC spokesman, John Nester.

The story doesn’t end there. Last week the board’s new chairman, James Doty, gave a speech in which he said the board should consider setting mandatory term limits for auditors at public companies. To prove his point, he cited two instances that were “galling in their simplicity” where auditors “have failed to exercise the required skepticism and have accepted evidence that is less than persuasive.”

Making a Match

One of his examples matched the fact pattern of KPMG’s 2006 review at Motorola exactly. “PCAOB inspectors found at one large firm that an engagement team was aware that a significant contract was not signed until the early hours of the fourth quarter,” Doty said. “Nevertheless, the audit partner allowed the company to book the transaction in the third quarter, which allowed the company to meet its earnings target.”

Continued in article

Jensen Comment
Recall that KPMG was fired from the big Fannie Mae audit because of alleged cooperation in helping Fannie's top executives creatively meet earnings targets for their personal bonuses ---
http://www.trinity.edu/rjensen/Theory02.htm

Bob Jensen's threads on revenue recognition and Hypothetical Future Value are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

Bob Jensen's threads about the two faces of KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

How KPMG will be specifically affected by any fallout will be interesting to see.
"KPMG UK Report Shows Libya’s Qaddafi Held Billions in US and UK Banks," by Lisa Chapman, Big Four Blog, May 28, 2011 ---
http://www.big4.com/blog/kpmg-uk-report-shows-libya%E2%80%99s-qaddafi-held-billions-in-us-and-uk-banks-76

In the Big Four world, truth sometimes appears to be stranger than fiction. A tale of how the Big Four firm KPMG is involved in a global financial intrigue is revealed by globalwitness.org which has obtained papers which were prepared by KPMG UK on Libyan leader Col. Muammar el-Qaddafi’s ill-gotten and stashed wealth.

First, globalwitness.org has obtained a leaked full investment profile of Libyan Investment Authority for the period ending June 30, 2010. http://www.globalwitness.org/sites/default/files/LIA.pdf

This report appears to be prepared by KPMG UK.

The New York Times notes, “The document, independently verified as authentic by The New York Times, is a summary of the Libyan Investment Authority’s investments, created for the fund by the London office of the KPMG consulting firm and dated June 30, 2010. “

And it is clear from this document that Qaddafi stashed $53 billion of Libyan oil revenues, with some big amounts with HSBC, Goldman Sachs, JP Morgan, HSBC Holdings and Société Générale. Goldman Sachs held $43 million in 3 accounts and HSBC held $292.69 million in 10 accounts. LIA also invested $1 billion in structured financial products through Société Générale and JPMorgan Chase; and in Central Bank of Libya, the Arab Banking Corporation and the British Arab Commercial Bank. The fund held large investments in top multinationals such as General Electric, Halliburton, Schlumberger, Caterpillar, BP and Nokia, and United States government bonds.

While this amount is mind boggling, it was not immune from market downtrends, the report notes that total market value of the fund’s investments fell 4.53% from $55.9 billion in March 2010 to $53.3 billion in June 2010.

The investments appear to have been legal at the time, although the United Nations, the European Union and the United States in February imposed targeted financial sanctions against the assets of Colonel Qaddafi and his family. The United States also froze the assets of Libyan government-owned and controlled entities.

Global Witness, which issued a statement on its website, said,” However the Libyan people could not know where it was invested or how much it was, because banks have no obligation to disclose state assets they hold. Global Witness asked both banks to confirm that they held funds for the state-owned Libyan Investment Authority, and whether they still hold them. They both refused, with HSBC citing client confidentiality. Numerous other banks and financial firms are listed including Societe Generale, UniCredit and the Arab Banking Corporation.”

Global Witness then pummels the banks….“It is completely absurd that banks like HSBC and Goldman Sachs can hide behind customer confidentiality in a case like this. These are state accounts, so the customer is effectively the Libyan people and these banks are withholding vital information from them,” said Charmian Gooch, director of Global Witness.

KPMG does not appear to be involved in any malfeasance or accused of any misdemeanor, as far as these public reports go, though it appears to have been the author of this leaked investment portfolio report.

How KPMG will be specifically affected by any fallout will be interesting to see.

Bob Jensen's threads on the two faces of KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm

U.S. auditing firms are roaring tigers compared to Chinese auditing firms
Chinese Firms Need to Open Up Books

Question
What do Trojan Horse viruses, listed Chinese companies in the U.S., and many for-profit universities have in common?

Answer
They all entered by way of the back door. Trojan viruses are known for the the sneaky way they gain back door entry into computer systems. Many for-profit universities bought regional accreditation (especially from the lax Northwest Acceditation Commission) by purchasing small, failing, and nearly bankrupt non-profit colleges that had shaky lingering accreditation due mostly to laxness of the accrediting agencies). And here's how Chinese companies entered into U.S. capital markets by way of the back door:

 In the U.S., Chinese companies have used reverse mergers to gain access to the benefits of public listing without having gone through the rigorous regulatory process of an initial public offering. Further, Chinese companies listed in Hong Kong and other worldwide markets are allowed to use auditors from mainland China in producing financial statements for submission in fulfillment of listing requirements. However, China has no agreement with international regulators to allow supervision over the audit function in the country. "In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China 'a gaping hole in investor protection.'"
See below

Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 24, 2011

Chinese Firms Need to Open Up Books
by: Peter Stein
Jun 20, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: International Accounting, International Auditing, Mergers and Acquisitions, Public Accounting, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission

SUMMARY: In the U.S., Chinese companies have used reverse mergers to gain access to the benefits of public listing without having gone through the rigorous regulatory process of an initial public offering. Further, Chinese companies listed in Hong Kong and other worldwide markets are allowed to use auditors from mainland China in producing financial statements for submission in fulfillment of listing requirements. However, China has no agreement with international regulators to allow supervision over the audit function in the country. "In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China 'a gaping hole in investor protection.'"

CLASSROOM APPLICATION: The article may be used in an auditing class to relate the role of the PCAOB and the audit function to investor confidence in financial markets. It also may be used in an international accounting class to discuss current issues faced in globalization of financial markets.

QUESTIONS: 
1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)?

2. (Advanced) What role does the PCAOB play that provides critical support to the Securities and Exchange Commission (SEC) and other regulators over U.S. markets?

3. (Introductory) What is the difference between the role the PCAOB fills with respect to U.S. publicly-traded companies and the role it can play regarding Chinese companies listed in the U.S.?

4. (Advanced) What is a "reverse merger"? How can this transaction avoid difficult requirements associated with an initial public offering (IPO)?

5. (Introductory) How do stock markets react to the uncertainty created by the current situation for Chinese companies with shares listed outside of their home country? What does it mean to say that these companies should "open their books" to resolve this uncertainty?

6. (Introductory) Refer to the related video. Who will get "left behind" as China moves to higher value added production as its economic focus? How does that possibility compare to the situation we face in the U.S.?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
SEC Weighs Curbs on Backdoor Stock Listing
by Andrew Ackerman
Jun 22, 2011
Online Exclusive

 

"Chinese Firms Need to Open Up Books," by: Peter Stein, The Wall Street Journal, June 20, 2011 ---
http://online.wsj.com/article/SB10001424052702304453304576391273351090918.html?mod=djem_jiewr_AC_domainid

Poor access to information is a major culprit in the selloff of China's overseas-listed companies. If China hopes to limit the damage, it needs to open up.

The Securities and Exchange Commission is investigating accounting and disclosure issues at a number of U.S.-listed Chinese companies that acquired backdoor listings through so-called reverse mergers, and even top-name Chinese companies are inviting new scrutiny. Renren Inc., a social-networking site that launched its shares to much fanfare in early May, now trades at about half its IPO price. Renren itself stirred controversy when it lowered the growth rate of its user base without explanation in its IPO prospectus and the head of its audit committee resigned just before the listing.

Shares of Toronto-listed Sino-Forest Corp. have plunged 80% since late May after a short seller alleged problems in the forestry company's accounting, which the company denies. Hong Kong-listed Chinese companies, too, are drawing new scrutiny over their accounting.

Not all Chinese companies are shady. But investors are right to ask: How do you know which aren't?

One answer is access to information. Auditors need it to be sure a company's business is as good as management says it is. So do regulators who oversee the auditors.

In the case of Chinese companies, however, there are no arrangements that allow the Public Company Accounting Oversight Board, the U.S. government's accounting regulator, to inspect the work of accountants in China. So the PCAOB can't really know whether that work is reliable. Using U.S. accountants doesn't help because they outsource the real work to accountants in China anyway.

In testimony to U.S. lawmakers this past April, James Doty, the PCAOB's chairman, called the group's inability to inspect the work of registered firms in China "a gaping hole in investor protection."

The limited ability of Hong Kong regulators to access information on Chinese companies has long been a risk factor for the city's stock market, the primary venue through which foreign investors buy a piece of China. That ability suffered a new blow late last year when the local exchange agreed to let mainland Chinese companies listed in the territory use mainland auditors. As part of the new arrangement, Hong Kong's Securities and Futures Commission secured a promise that it would be able to examine records of auditors for companies it wants to investigate.

"Clearly the test will be when we have a live case to go through," Martin Wheatley, the outgoing head of the SFC, recently said in an interview. That hasn't yet happened.

Concerns about the transparency of Chinese companies put one Hong Kong-listed stock through the wringer last week. On Tuesday, Standard & Poor's withdrew its ratings for long-term corporate debt of a major Chinese packaging manufacturer, Nine Dragons Paper (Holdings) Ltd., after its analyst complained of being unable to get senior management to answer questions about the company's business. The stock plunged more than 17% after S&P's move, though it regained much of the loss the next day, when Nine Dragons said it was willing to cooperate with S&P and respond to requests for information.

Continued in article

Jensen Comment
Sometimes we think it might be nice to send these listed Chinese companies out the back door on the horse they road in on, but then we must face the reality that China is our banker that keeps the deficit-ridden United States afloat. It's wise to send your banker back out on the horse he rode in on.

It would seem that listed Chinese companies would have audits conducted by large international CPA firms in order to attract investors suspicious of Chinese accounting and auditing. Capital market efficiency is not entirely dead.

"Drake U. Hit With $600,000 Embezzlement," Chronicle of Higher Education, April 25, 2011 ---
http://chronicle.com/blogs/ticker/drake-u-hit-with-600000-embezzlement/32401

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

April 21, 2011 message from Francine

I am flattered that the authors chose to close their paper with my thoughts from a recent Forbes article.

 

Stanford Closer Look Series

Topics, Issues and Controversies in Corporate Governance

The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important.

These free instructional materials may be used in the classroom and by practitioners who want to develop a more sophisticated understanding of governance practices.

 

The Resignation of David Sokol: Mountain or Molehill for Berkshire Hathaway? (PDF)

In 2011, David Sokol, CEO of Berkshire Hathaway’s energy subsidiary, purchased $10 million of Lubrizol stock days before recommending that Berkshire Hathaway acquire the firm. Did Sokol’s actions reflect a broad governance failure for the firm? 

 

 

Francine McKenna

Managing Editor

My site: http://retheauditors.com

At Forbes: http://blogs.forbes.com/francinemckenna

@ReTheAuditors on Twitter

312-730-4884

 

"Slippery People: Corporate Governance at Berkshire Hathaway," by Francine McKenna, re:TheAuditors, April 24, 2011 ---
http://retheauditors.com/2011/04/24/slippery-people-corporate-governance-at-berkshire-hathaway/
 

Warren Buffet announced the sudden resignation of his heir apparent, David Sokol, on March 30, 2011. Berkshire Hathaway shareholders, fundamental style value investors, law professors, and the business media have been talking about it ever since. However, Buffett doesn’t want us to question him further and is not willing to say anything more…

I have held back nothing in this statement. Therefore, if questioned about this matter in the future, I will simply refer the questioner back to this release.

The Berkshire Hathaway Annual Meeting is typically a marathon of openness and transparency. Buffet has been known to stay on stage at the revival-style event, this year scheduled for April 30, for up to eight hours. But Berkshire Hathaway has an Achilles heel. Buffett’s storied forthcoming manner is not going to carry over to this case:

Alice Schroeder, author of  “The Snowball: Warren Buffett and the Business of Life”: ORIGINALLY I didn’t think Buffett was going to entertain questions on this subject at the meeting. I think he’ll talk about it for maybe five or ten minutes in a statement at the beginning of the meeting, much of which time will be a recap of what happened. He could then cite litigation as a reason for why he can’t have an open-ended discussion and take questions.

I’ve written several articles about this case because it fascinates me to see an iconic figure stumble. Call it schadenfreude. Or just call it my natural cynicism. Either way, I’m gratified that my first hunch – it’s not a case of insider trading but one of an agent/fiduciary taking advantage of his trusted position to benefit himself first – has been ratified.

On April 4: I wrote, The Gnome of Nebraska: Warren Buffett, Berkshire Hathaway, and Self-Dealing, for Forbes:

When asked by CNBC what he’d learned from the controversy over the transaction, Sokol responded:

“Knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone…”

According to Professor Macey, that’s called “usurping a corporate opportunity,” and it’s a violation of an officer’s duty of loyalty to a corporation.

On April 11, Professor Stephen Bainbridge reconsidered his and others’ idea that this was an “insider trading” case. His reconsideration is based on, reportedly, an email from his co-author Bill Klein.

Professor Bainbridge doesn’t mention that I sent him an email on April 8 in response to his March 30 post discussing the insider trading theory and drawing his attention to my April 4^th post at Forbes. I  asked him to consider the possibility that Sokol had “usurped a corporate opportunity” and breached his fiduciary duty to Berkshire Hathaway. Bainbridge never responded to me.

Bainbridge does not expand on the agency, fiduciary duty, and usurpation theories until April 20, after the shareholder derivative lawsuit is filed against Sokol and the Berkshire board for breach of fiduciary duty. The suit also asks for disgorgement of Sokol’s gain on his investment of Lubrizol stock.

In the meantime, I wrote quite a few more more posts at Forbes and on this site, including one about the lawsuit.

My posts and links to my opinions were as follows:

April 4: My first post included this quote:

So, what, you might ask, is wrong with Sokol taking a little bit of the action ahead of his typically successful dealmaking for Berkshire Hathaway?  After all, as he told CNBC, Charlie Munger did it.

Jonathan R. Macey of Yale, in his 1991 article, Agency Theory and the Criminal Liability of Corporations, tells us:

…[C]orporate actors do not engage in criminal activity to benefit the firms for which they work but to benefit themselves. In some, but not all cases, these activities will benefit the firms for which the corporate actors work. But the basic motivation for the behavior is self-interest.

Professor Macey told me he doesn’t think this is an insider trading issue at all unless Sokol failed to disclose his interests and his trading to Berkshire, according to their policies.

I agree.

April 5: I posted here at re: The Auditors about my April 4^th post at Forbes with some additional information including a link to Sokol’s interview on CNBC:

Continued in article

Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/Fraud001.htm#Governance

A parallel civil complaint brought by the Securities and Exchange Commission said that Mr. Goffer’s nickname among his fellow traders was “Octopussy” — a reference to the James Bond movie — because his arms reached into so many sources of information.
Peter Lattman, "Zvi Goffer Found Guilty in Insider Trading Case," The New York Times, June 13, 2011 ---
http://dealbook.nytimes.com/2011/06/13/zvi-goffer-found-guilty-in-insider-trading-case/

A federal jury in Manhattan on Monday found Zvi Goffer and two co-conspirators guilty of insider trading, the latest development in the government’s investigation into insider trading at hedge funds.

Mr. Goffer, his brother Emanuel Goffer and Michael A. Kimelman were convicted of participating in an insider trading scheme that produced more than $20 million in illegal profits.

The case was connected to the prosecution of Raj Rajaratnam, the hedge-fund tycoon and co-founder of the Galleon Group who was found guilty last month in the largest insider trading case in a generation. Zvi Goffer, who sat in on much of Mr. Rajaratnam’s trial, was employed by Galleon.

Continued in article

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

"Michigan State Finds That Professor Plagiarized," Inside Higher Ed, April 20, 2011 ---
http://www.insidehighered.com/news/2011/04/20/qt#257476

A Michigan State University panel has found that Sharif Shakrani, a professor there, plagiarized in a 2010 analysis he wrote of school-consolidation plans in the state, The Grand Rapids Press reported. The panel also found three other instances of plagiarism by Shakrani, who declined to comment on the findings. His analysis has been heatedly debated in the state by people with various positions on school consolidation. A decision on any punishment of the professor is pending.

Bob Jensen's threads on Professors Who Plagiarize or Otherwise Cheat are at
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

"PwC India Affiliates Settle with SEC, PCAOB Over Satyam Audit Failures," By Caleb Newquist, Going Concern, April 5, 2011 ---
http://goingconcern.com/2011/04/pwc-india-affiliates-settle-with-sec-pcaob-over-satyam-audit-failures/

The affiliates – Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta – must pay $6 million to the SEC, $1.5 million to the PCAOB and are barred from accepting U.S.-based clients for six months. The SEC fine is the largest ever levied against a foreign-based accounting firm in an SEC Enforcement Action and the PCAOB fine is the largest in the regulator’s history. PW India must also “establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.” The SEC’s press release stated that the failures “were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.”

Continued in article

Jim skillfully tells it like it is in this almost laughable settlement
"The PCAOB Settlement in Satyam: PwC Agrees to Fall on its Pen-Knife," by Jim Peterson, re:Balance, April 6, 2011 ---
http://www.jamesrpeterson.com/home/2011/04/the-pcaob-settlement-in-satyam-pwc-agrees-to-fall-on-its-pen-knife.html

. . .

From the PwC perspective, meanwhile, the chance for a cheap exit from a major problem would have been a no-brainer. Consider:

First, an enforcement ding on the Satyam engagements had to be coming, sooner or later. From the PCAOB’s order – which PwC agreed not to contest – the Indian engagement teams on the audits from 2005 through 2008 basically did not:

• Adequately audit the company’s cash positions
• Control the confirmation process on bank balances or accounts receivable
• Pursue indications of inconsistent information or control weaknesses
• Follow PwC global directives on audit execution
• Inform or advise higher-level quality oversight personnel
• Document the work actually done (or not) in the work-papers, until subsequent back-dating while already under regulatory scrutiny

So a strategic decision not to defend the indefensible indicates early recognition of a step toward sustainable credibility. 

As for the sanctions – PwC’s undertakings on future practice quality, staffing, training and internal oversight are no more than necessary for an enterprise with aspirations to professionalism; the two-year presence of an outside monitor only adds one more stranger to the list of foreign intruders imposed on its Indian practice; and the six-month restraint on new SEC clients runs only to the settling Indian firms, so does not inhibit either the global network or its other Indian affiliates.

And, lastly, the financial impact of the fines on the massive PwC network is no more than a dime added to a roll of nickels.

For good measure, with the week’s news cycle dominated by military activities in Libya and a threatened government shut-down in Washington, and subsidiary attention to post-earthquake Japan’s nuclear hazards and Silvio Berlusconi’s “bunga bunga” trial, the entire story will drop off the media screen in less than no time.

Predictably, critics of the accounting profession who are unwilling to settle for less than the scalps of the Big Four leaders nailed to an enforcer’s door will make their outrage known.

But they will fail to acknowledge that both the regulators and PwC itself are only acting in full accordance with their respective DNA.

So once again, this settlement points up the challenge to the long-term achievability of a valuable, sustainable assurance function, to serve the issuers and users of the financial information of global-scale companies: the terms of the discourse are revealed as hopelessly inadequate.

Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm

Win Some and Lose Some:  Some Good News for Ernst & Young
"High Court Denies Suit Against E&Y Over Time-AOL Deal," by Samuel Howard, Law360.com, June 13, 2011 ---
http://www.law360.com/topnews/articles/250918/high-court-denies-suit-against-e-y-over-time-aol-deal
Thank you Caleb Newquist for the heads up!

The U.S. Supreme Court on Monday declined to hear an appeal brought by an AOL Inc. investor alleging that Ernst & Young LLP approved tainted financial statements related to Time Warner Inc.'s merger with AOL.

In rejecting the petition for certiorari, the high court dashed AOL investor Dominic Amorosa and co-petitioner attorney Christopher Gray’s claims that the Second Circuit failed to properly apply the Securities Litigation Uniform Standards Act of 1998 when it dismissed the fraud suit in February.

The decision brings an end to 2003 suit claiming that Ernst & Young, the independent auditor for AOL, Time Warner and the merged company, engaged in fraud and abetted the companies' fraud when it issued audited financial statements approving the companies' allegedly faulty accounting.

"My client and I believe that the certiorari petition raised significant and unsettled questions of law concerning an 'opt-out' securities plaintiff’s right to pursue individual claims under the Securities Exchange Act and state law," petitioner Christopher Gray said. "While we are disappointed with the denial of certioriari, obviously not every case can be heard by the U.S. Supreme Court on the merits and we look forward to moving on to other matters."

The Second Circuit found that Amorosa had failed to state a claim for loss causation because none of the events he identified as corrective disclosures addressed AOL’s accounting practices or in any way implicated Ernst & Young’s June 1999 audit opinion.

The petitioners argued that the high court previously established that a corrective disclosure explicitly reflecting the alleged false statement is not required state such a claim.

Amorosa and Gray also challenged the Second Circuit's finding in its Feb. 2 dismissal that SLUSA preempted Amorosa's state law claims.

SLUSA defines cases that are to be considered preempted as covered class actions — cases that seek damages for more than 50 people and that are joined, consolidated or otherwise proceed as a single action — but it does not preempt state law claims in individual securities lawsuits like Amorosa's, the petitioners argued.

Continued in article

Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Ernst & Young must face class action over Broadcom's option backdating," by Carol J. Williams, Los Angeles Times, April 14, 2011 ---
http://latimesblogs.latimes.com/money_co/2011/04/ernst-young-broadcom-options-backdating-scheme-class-action-appeals-court.html

A federal appeals court Thursday reinstated a class-action lawsuit filed by Broadcom Corp. investors against Ernst & Young, saying the auditors should have known about an option-backdating scheme at the Irvine tech company.

A lower-court judge had dismissed the case against Ernst & Young after concluding the plaintiffs hadn’t shown that the auditors knew that the value of Broadcom’s stock was probably inflated by the company’s manipulation of its financial statements.

Thursday’s ruling by the U.S. 9th Circuit Court of Appeals in San Francisco reversed that dismissal and scolded Ernst & Young for not acting to stop the $2.2-billion backdating scheme.

Ernst & Young "apparently accepted management at its word, never received requested documentation and issued an unqualified opinion on the accuracy of Broadcom’s financial statements," the 9th Circuit panel ruled in overturning the lawsuit’s dismissal by U.S. District Judge Manuel L. Real in Los Angeles.

Ernst & Young’s audit "amounted to no audit at all," the appeals court said.

A spokesman for Ernst & Young declined to comment on the ruling, saying the firm was still reviewing it.

Continued in article

Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm

"Northwestern Details Dispute With Journalism Professor," Inside Higher Ed, April 7, 2011 ---
http://www.insidehighered.com/news/2011/04/07/qt#256211 

David Protess, a leading journalism professor at Northwestern University known for his work investigating wrongfully convicted individuals, has been in a high profile dispute with the institution, which suspended his teaching duties this semester. Protess and his supporters have accused the university of failing to protect his rights as law enforcement officials have questioned his tactics. But on Wednesday, the Chicago Tribune reported, Northwestern officials told faculty members that Protess had doctored records and lied repeatedly to the journalism dean,

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

Tell me all about your day Honey.
"Pacific Heights Socialite (and wife of a Deloitte partner) Pleads Guilty to Insider Trading," , by Zoe Corneli, The Bay Citizen, April 6, 2011 ---
http://www.baycitizen.org/crime/story/pacific-heights-socialite-pleads-guilty/

A Pacific Heights housewife will be heading to prison after pleading guilty Tuesday to insider trading and obstruction of justice charges.

In her plea agreement, Annabel McClellan says she gleaned confidential information about publicly traded companies by overhearing her husband, Arnold McClellan, then a partner at Deloitte Tax LLC, discussing details of deals he was working on. She then passed the information on to her sister, Miranda Sanders, and brother-in-law, James Sanders, who was involved in a trading business in London, according to the document.

Continued in article

Bob Jensen's threads on Deloitte are at
http://www.trinity.edu/rjensen/Fraud001.htm

You can play amateur psychologist with new revelations from Bernie Madoff behind bars

"From behind bars, Madoff spins his story,"  by David Gelles and Gillian Tett, Financial Times, April 8, 2011 ---
http://www.ft.com/cms/s/2/a29d2b4a-60b7-11e0-a182-00144feab49a.html?ftcamp=traffic/email/regsnl//memmkt/#axzz1JVhNNEee 

We are cruising through North Carolina on a foggy morning in late March, heading up to its rural north. Our route takes us through swampland shrouded in a thick mist; spruce trees and an occasional pink dogwood line the interstate. Butner, population 6,391, is our destination.

The town is home to a vast federal prison complex that includes a hospital, a minimum security unit and two medium security facilities. Since July 14 2009, arguably the most notorious inmate at FCI Butner Medium I has been Bernard Lawrence Madoff, the disgraced New York financier who orchestrated a $65bn Ponzi scheme, among the biggest financial frauds of all time. He is prisoner 61727-054.

When the Madoff scandal broke in 2008, a Financial Times reporter learnt that two acquaintances of his were close to the Madoffs and passed along an invitation for any member of the family to speak with the paper. For more than a year, there was silence. Then, early last December, the reporter received an e-mail from Madoff himself. Following sporadic correspondence, and at very short notice, a message came from the prison: Madoff would meet with the FT.

 It is only the second time he has agreed to meet a reporter in prison. But as we drive north, we wonder if this man who built his career on lies will tell us the truth. Or when we get to the prison, will he simply vanish – like all those billions in his Ponzi scheme? Crossing rusted train tracks, we drive a couple of miles and arrive at the main intersection of this one-traffic-light town.

Butner revolves around the prison. Its centre is just a clutch of convenience stores and a petrol station. In search of strong coffee we consult an iPhone: the nearest Starbucks is 18.4 miles away. Instead, we go to a diner and order the classic southern fare of biscuits and grits. The coffee is terrible.

. . .

Exactly when the Ponzi scheme started is actually a matter of dispute. The trustee seeking to retrieve assets for Madoff’s victims, Irving Picard, says the fraud began as early as 1983. But Madoff denies this, telling us that in the 1980s, at least, he was making plenty of legitimate trades. “[The prosecutors] came up with this idea that I came up with this whole legitimate business to come up with this fraud,” he says. “That is wrong. In the end I left $1bn on the table. I had access to any Swiss bank and offshore bank in the world if I had wanted to stash money. But it wasn’t about the money.”

To hear Madoff say it was not about the money strikes us as improbable. He spent lavishly on his lifestyle; after the fraud was revealed, authorities uncovered $75m in a Gibraltar bank account and millions in jewelry and luxury goods. These were reminders of how much Madoff personally had to lose. He was on the board of Yeshiva University and a regular at charity balls in Manhattan. He and Ruth holidayed in Monte Carlo, where she liked to shop.

We ask why he didn’t just hand the money back to investors. After all, he says that in 1992 he was already a fairly wealthy man, since the market-making operation was performing well. “Ego,” he explains. “Put yourself in my place. Your whole career you are outside the ‘club’ but then suddenly you have all the big banks – Deutsche Bank, Credit Suisse – all their chairmen, knocking on your door and asking, ‘Can you do this for me?’

“[I was] under a lot of pressure – a lot,” he mutters. “And I was embarrassed. It was the first time in my life that something hadn’t worked. I was just dumb. Dumb! Starting in the early 1990s there were no trades. It was just paper. But let me tell you,” he adds forcefully. “It looked real.”

Once the Ponzi scheme was under way, it required a constant influx of new cash. Madoff began taking on clients referred to him by existing ones, who were inclined to keep their money parked with him because of the steady returns. At some point – Madoff never makes it clear exactly when – the real trading ceased altogether, and he began forging trade records for clients. And he says Picower, Chais, Levy and Shapiro – his big four clients – knew something was amiss. “They were complicit, all of them,” he says.

Madoff’s accusations cannot be corroborated. None of the four families has been charged with criminal wrongdoing. Picower is dead, and his estate settled for $7.2bn; his lawyers maintain he was not aware of the fraud. Levy is dead and his family settled for $220m. Chais is dead; his family denies any wrongdoing and has not settled. And Shapiro, the only one still alive, settled for $625m but denies any wrongdoing and has not been accused by authorities of being complicit. In the words of his lawyer, “Mr Madoff is a liar. These latest statements are no more believable than all the other lies that Madoff told his investors and the authorities for decades.”

On its surface, the fraud looked real enough to attract a steady stream of new investors, and not just from the US. According to Madoff, there were rich clients on both sides of the Atlantic eager to use his services to dodge local regulations. In France, for example, wealthy clients initially invested with him in order to avoid rules that prevented them from exporting francs.

“I did it for all of them – so many important people from France and elsewhere,” says Madoff. “That woman from L’Oréal, Christian Dior, so many – I even impressed myself. They came up to my office to meet me. They really wanted to deal with me.” The woman from L’Oréal Madoff refers to is Liliane Bettencourt, one of Europe’s richest women.

The returns on Madoff’s funds were not extraordinarily high, running at about 10 per cent; however, they were steady, which appealed to conservative European investors. Clients were also reassured by the apparently close ties that Madoff enjoyed to respected French and Swiss banks, such as Union Bancaire Privée.

Not everybody in Europe was keen to deal with the fund: Société Générale, for example, stayed away. But most investors seemed impressed by Madoff’s “black box”. Some also suspected that Madoff might be using inside information to give him an “edge”. That added to his allure. “The Swiss thought this – they are the most suspicious of all,” Madoff says, revealing a dislike that may stem from his Jewish heritage and the actions of some Swiss banks in relation to Nazi Germany. “Slimy people.”

In the US, Madoff used his powerful network of contacts across the wealthy Jewish community to lure money. By this time, Madoff had moved into the very heart of the financial “club” he once scorned. He was appointed the chairman of the Nasdaq index, to the board of the Depository Trust & Clearing Corporation, and was vice-chairman of the NASD, his industry’s self-regulatory body.

This did not prevent the regulators from watching him. “In 2002 I had a contact with the SEC, who were concerned that I was front-running,” he recalls, referring to the practice of using insider information to inform trades. “I started laughing to myself – I knew I wasn’t because I wasn’t doing the trades.” Some of his rivals also asked why his returns were so steady. Harry Markopolos, a fund manager, was so suspicious that he filed reports to the SEC in 2000, and again in 2005, suggesting that Madoff was running a Ponzi scheme. “Markopolos was the biggest idiot in the world,” recalls Madoff, displaying his first flash of anger, blinking hard again. “He had a hedge fund that couldn’t make money and his clients abandoned him [so he called the regulators].”

But the regulators did not crack down. “The regulators get calls all the time,” Madoff says. They didn’t investigate “because I had the reputation at the time for being the gold standard. I had all the credibility. Nobody could believe at that time that I would do something like that. Why would I? Stupidity – that is why. But remember that when people asked me about the strategy, it made sense. I was big, credible.”

. . .

As we leave the prison, we are still not sure where the truth ends and his lies begin. What we know is that this is a man who mercilessly ran a Ponzi scheme for at least 16 years, corrupted the financial system, destroyed lives and bankrupted families and charities. Yet, in the flesh, Madoff spins a credible tale of how a renegade entrepreneur ­conquered Wall Street and was drawn into crime by personalities and forces he could not control. It sounds almost convincing; or at least no more absurd than many of the other stories we hear every day in western finance.

The fact that so much of Madoff’s story is so commonplace on Wall Street – the tax shelters, black boxes and mysterious returns – is what allowed him to go undetected for so long. And this is why Madoff has sent chills through investors at every level. If the most sophisticated minds in finance were easily duped through an elementary scheme run by one of their own, how can anyone with money invested in the modern financial system know who to trust? This bedevilling question is why Madoff cannot be ignored, even as he ­languishes in a North Carolina prison.

David Gelles is US media and marketing correspondent. Gillian Tett is the FT’s US managing editor. For expanded coverage and full statements from JPMorgan, UBS, HSBC and Madoff’s prominent clients,
go to www.ft.com/madoff

Bob Jensen's threads on Ponzi Schemes Where Bernie Madoff was King are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi

Where were the internal controls?
"Woman Admits Million-Dollar Bank Ripoff," WTAE, April 6, 2011 ---
http://www.wtae.com/news/27455532/detail.html

A Pittsburgh woman has pleaded guilty to bank fraud and money laundering for taking advantage of an online glitch that enabled her to make $1.1 million in overdraft withdrawals.

Regulators say that contributed to the failure of a tiny minority-owned bank.

Forty-six-year-old Jammie Harris learned of the glitch from another woman. That woman was indicted in January on charges that she stole more than $900,000 from Dwelling House Savings and Loan.

Prosecutors say Harris was seen "living the high life with new-found wealth" when she stole the money in 272 separate transactions from February to December 2008.

Dwelling House closed down in 2009 because it couldn't absorb $3 million in fraud losses.

A federal prosecutor says Harris and the other woman are the only people charged "so far."

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