Accounting Scandal Updates and Other Fraud Between April 1 and June 30, 2014
Bob Jensen at
Trinity University

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

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

Bob Jensen's Enron Updates are at --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates 

Other Documents

Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.htm 

Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp 

Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp 

Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk 

Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

Bob Jensen's American History of Fraud ---  http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

"What’s Your Fraud IQ?  Think you know enough about corruption to spot it in any of its myriad forms? Then rev up your fraud detection radar and take this (deceptively) simple test." by Joseph T. Wells, Journal of Accountancy, July 2006 --- http://www.aicpa.org/pubs/jofa/jul2006/wells.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

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

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

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

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

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

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

Center for Audit Quality Releases 'Fighting Fraud' Video in April 2013 ---
http://www.accountingweb.com/article/center-audit-quality-releases-fighting-fraud-video/221506

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

Academic Versus Political Reporting of Research:  Percentage Columns Versus Per Capita Columns ---
http://www.cs.trinity.edu/~rjensen/temp/TaxAirlineSeatCase.htm
by Bob Jensen, April 3, 2013

WRESTLING WITH REFORM: FINANCIAL SCANDALS AND THE LEGISLATION THEY INSPIRED ---
http://www.sechistorical.org/
Thank you Jim McKinney for the heads up.

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

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




Question
Who would have guessed that insider trading is commonplace?

"Study Asserts Startling Numbers of Insider Trading Rogues," by Andrew Ross Sorkin, The New York Times, June  16, 2014 ---
http://dealbook.nytimes.com/2014/06/16/study-asserts-startling-numbers-of-insider-trading-rogues/?_php=true&_type=blogs&_r=0

There is often a tip.

Before many big mergers and acquisitions, word leaks out to select investors who seek to covertly trade on the information. Stocks and options move in unusual ways that aren’t immediately clear. Then news of the deals crosses the ticker, surprising everyone except for those already in the know. Sometimes the investor is found out and is prosecuted, sometimes not.

That’s what everyone suspects, though until now the evidence has been largely anecdotal.

Now, a groundbreaking new study  finally puts what we’ve instinctively thought into hard numbers — and the truth is worse than we imagined.

A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement.

The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)

But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.”

The S.E.C. and the Justice Department have publicly made prosecuting insider trading a priority. Judging from the headlines about traders at Steven A. Cohen’s hedge fund or the hedge fund manager Raj Rajaratnam or the investigation involving the activist investor Carl C. Icahn, they do appear to be focused on it. The S.E.C. recently hired Palantir Technologies, a firm that has helped the government analyze data to find terrorists, to help it uncover illegal trading activity. And with the mini-merger boom — the first quarter of merger activity this year was the most active since 2007, according to Mergermarket — there should be fresh evidence of more insider trading.

Yet if history is any guide, based on the results of the study over 16 years, the government has a lot of catching up to do.

The professors found that “it takes the S.E.C., on average, 756 days to publicly announce its first litigation action in a given case. Thus, assuming that the litigation releases coincide approximately with the actual initiations of investigations, it takes the S.E.C. a bit more than two years, on average, to prosecute a rogue trade.” The average “rogue trade” the professors found, was worth about $1.6 million.

A spokeswoman for the S.E.C. had no immediate comment.

The professors — Menachem Brenner and Marti G. Subrahmanyam at N.Y.U. and Patrick Augustin at McGill — began their study, which won the Investor Responsibility Research Center Institute’s annual investor research competition, two years ago.

Continued in article

 


Note the KPMG lettering on Phil's cap in this WSJ article. Check in future tournaments if he changes caps at the request of KPMG.

"Insider-Trading Probe Hits Snag News of Investigation Derails Effort to Deploy Wire Taps," by Michael Rothfeld and Susan Pulliam, The Wall Street Journal, June 1, 2014 ---
http://online.wsj.com/articles/insider-trading-probe-1401665146?tesla=y&mod=djemCFO_h&mg=reno64-wsj 

A snag has hit the insider-trading investigation of investor Carl Icahn, golfer Phil Mickelson and sports bettor William "Billy" Walters: News of the probe derailed government efforts to secretly deploy wiretaps, which have been key components of many successful insider-trading cases.

Criminal and civil investigators are examining whether Mr. Icahn tipped Mr. Walters about his plans relating to stocks of several companies, including Clorox Co. CLX +0.16% , according to people briefed on the probe. The investigation was first reported by The Wall Street Journal on Friday. Messrs. Icahn, Walters and Mickelson have denied any wrongdoing.

Mr. Walters on Sunday declined to comment on the latest development, and Mr. Icahn didn't return calls for comment.

Continued in article

Jensen Comment
If Phil Mickelson was an employee of KPMG such accusations this far along probably would result in termination. However, since Phil is only a spokesman and promoter for KPMG it is less clear whether his efforts on behalf of KPMG will be suspended.

Note the KPMG lettering on Phil's cap in this WSJ article. Check in future tournaments if he changes caps at the request of KPMG.

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


"The IRS Wins a Big Offshore Case A millionaire could owe penalties of $2.2 million on a secret $1.5 million Swiss bank account," The Wall Street Journal, June 6, 2014 ---
http://online.wsj.com/articles/tax-report-the-irs-wins-a-big-offshore-case-1402091163?KEYWORDS=laura+saunders


Waterbury police have arrested a city (library) employee, who is accused of stealing $170,000 from a local library over five years because she thought she should be making more money.
"City Worker Stole $170K from Library," NBC Connecticut, June 10, 2014 ---
http://www.nbcconnecticut.com/news/local/Waterbury-City-Worker-Stole-170K-from-Library-Police-262537271.html

. . .

At first, James denied stealing the money, but then police presented the evidence and James admitted to taking the money because she thought she should be earning more.

She said she started taking the cash in 2006 to help pay for her son’s college education and food, according to police.

James was in charge of depositing money from the library and is accused of stealing as much as $100 per day over a five-year span.

The money came from fines that library patrons paid for overdue books and videos, according to police.

Police started investigating a little over a month ago and also determined that James was also paying herself thousands of dollars in an unauthorized stipend, police said.

NBC Connecticut went to James’ home for comment, but no one answered the door.

James is expected to be charged with first-degree larceny and appear in court later this month.

Jensen Comment
Sounds like a really ineffective internal control system

 


Where were the accounting internal controls?
"Former U. of Louisville Official Is Charged With Stealing $2.8-Million," by Nick DeSantis, Chronicle of Higher Education, April 3, 2014 ---
http://chronicle.com/blogs/ticker/jp/former-u-of-louisville-official-is-charged-with-stealing-2-8-million?cid=at&utm_source=at&utm_medium=en

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


Q: If you die does that deny you funding for installed new body parts sometime in the future?

A:
Medicaid paid $12M for Illinois dead, audit finds
http://triblive.com/usworld/nation/5972784-74/state-medicaid-services#ixzz2zLlj1mGT

The motto in Illinois is that when the dead vote they're entitled to more Medicaid funding.

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


Barry Minkow (who became a preacher after his first conviction) --- http://en.wikipedia.org/wiki/Barry_Minkow

Barry Minkow is headed back to prison for his third conviction --- why doesn't California's Three Strikes Law apply to him for life?
"Barry Minkow gets 5 years for embezzling from San Diego church The former whiz kid whose ZZZZ Best carpet-cleaning firm turned out to be a scam is sentenced for embezzling $3 million from his congregation. It was his third fraud conviction," by E. Scott Reckard, Los Angeles Times, April 28, 2014 ---
http://www.latimes.com/business/la-fi-minkow-sentence-20140429,0,4879604.story#axzz30Hn5lPRH


From the CFO Journal's Morning Ledger on May 16, 2014

GE Capital insider case is a new test for SEC
Fresh off a major courtroom victory, the Securities and Exchange Commission will test its insider-trading theories in another long-running case set for Monday, the
WSJ’s Joe Palazzolo reports. Regulators say Nelson J. Obus, a principal at hedge fund Wynnefield Capital Inc., traded on an inside tip about an acquisition he received from one of his analysts, who got the tip from a college friend at General Electric Co.’s GE Capital unit. The SEC sued Mr. Obus in 2006 and a federal trial judge threw out the case, but an appeals court reinstated it in 2012.


From the CPA Newsletter on May 16, 2014

Credit Suisse pleads guilty to aiding Americans' tax evasion
Credit Suisse has become the first major bank in about 20 years to plead guilty to a criminal charge. The Swiss bank agreed to pay about $2.6 billion in fines as it acknowledged that it helped American clients evade taxes. Reuters (5/19), The New York Times (tiered subscription model)/DealBook blog (5/19), Financial Times (tiered subscription model) (5/19)


"Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor," by Matt Levine, Bloomberg View, May 23, 2014 ---
http://www.bloombergview.com/articles/2014-05-23/barclays-manipulated-gold-as-soon-as-it-stopped-manipulating-libor

Libor Fraud (bigger than Enron) ---
http://en.wikipedia.org/wiki/Libor

Jensen Comment
The London banks may be the most fraudulent of the global banks (with the exception of enabling global tax evasion in Swiss, Cayman Island, and Luxemburg banks).


"Georgia Tech Professor Resigns After Allegedly Bilking Students," by Charles Huckabee, Chronicle of Higher Education, May 6, 2014 ---
http://chronicle.com/blogs/ticker/jp/georgia-tech-professor-resigns-after-allegedly-bilking-students?cid=at&utm_source=at&utm_medium=en

Jensen Comment
This is an egregious extension of what is some times a problem when teachers maintain their own commercial Websites related to their courses or require their own textbooks in courses. One of my textbook author friends donated the profits of his courses as a contribution (of course a tax-deductible contribution to offset his incremental income taxation) to our department. Some might argue that that he was still bilking students. His argument was that they would have to pay for the textbooks even if he required a competitor's textbook.

Returning the profits to students can get messy like any other cash dealings with students.

Then there's the related problem of student labor. A professor might assign case writing to teams of students. Some of these cases might then be used, possibly with proper attribution, in his commercial casebook or commercial Website where he keeps all the profits or royalties. All good accountants know that attributing the profit of an entire case book with 40 cases to three of the cases written by students is possibly very complicated and controversial.

Life is often not as simple as we would like.


2006 Déjà Vu All Over Again
"
$30M Long Island Mortgage Fraud Scam Busted, Feds Say," by Timothy Bolger, Long Island Press, May 6, 2014 ---
http://www.longislandpress.com/2014/05/06/30m-long-island-mortgage-fraud-scam-busted-feds-say/

Aaron Wider, 50, of Copiague, owner of Garden City-based mortgage company HTFC Corp., was described by authorities as the ringleader of the alleged scheme.

“Instead of using their skills in banking, the law and investing to assist individuals pursuing the American Dream, the defendants cooked up a sophisticated scheme that defrauded lenders and then fed toxic debt to the investigating public at large in the secondary mortgage market,” Loretta Lynch, U.S. Attorney for the Eastern District of New York, said in a statement.

Wider’s codefendants include 46-year-old Manjeet Bawa of Dix Hills, 54-year-old Joseph Mirando of Centereach, 68-year-old John Petiton of Garden City and 70-year-old Joseph Ferrara of Long Beach. Eric Finger, 48, of Miami, was also charged. Four were scheduled to appear at Central Islip federal court Tuesday and the other two Wednesday.

Prosecutors said that after the group obtained mortgages using artificially inflated prices of the properties in Nassau and Suffolk counties, they resold the loans in the secondary mortgage market, causing millions in losses when the loans went into foreclosure.

Lynch described the alleged schemed as “a prime example of the type of corrupt mortgage-lending practices that preceded the bursting of the real estate bubble, the loss of faith in securitized mortgage obligations, and the financial collapse of 2007 and 2008.”

Petiton, an attorney, allegedly orchestrated the inflated sales transactions. Mirando, a real estate appraiser, allegedly prepared false reports to justify the prices. And Finger, another attorney, allegedly concealed the true sales prices at closings, then shared the difference in price with the others.

Prosecutors are moving to seize 19 properties between the six men or restitution. They face up to 30 years in prison, if convicted.


KPMG's Former Los Angeles Managing Partner Headed for Prison
Scott London Sentenced to 14 Months in the Can and a $100k Fine
PMG partner who gave tips to golf buddy sentenced for insider trading ---
http://www.latimes.com/business/money/la-fi-mo-kpmg-scott-london-sentencing,0,3315282.story#axzz2zuM77Xjv

A former partner with accounting giant KPMG was sentenced to 14 months in federal prison for giving confidential information about his firm’s clients to a golfing buddy, who used it to make more than $1 million in profits trading stocks.

Scott London, 51, pleaded guilty to insider trading last year, admitting that he gave confidential information about KPMG clients, including Herbalife Ltd. and Skechers USA Inc., to his stock-trading friend several times from October 2010 to May 2012.

U.S. District Judge George Wu issued the sentence Thursday in Los Angeles. He also ordered London to pay a $100,000 fine.

Defense attorney Harland Braun had argued for a sentence of 6 to 12 months, noting that his client had already paid dearly for his crime: losing his $900,000-a-year job, his reputation and a host of KPMG friends who are not permitted to talk to him.

The prosecutor in the case, Assistant U.S. Atty. James A. Bowman, said three years was appropriate because of the significant violation of London’s duties to his clients and the damage it caused them. Herbalife and Skechers were required to hire new accounting firms and restate their earnings after learning of London’s actions.

London benefited from the crimes. As a reward for the tips, London’s friend, Bryan Shaw, gave him thousands of dollars in cash, concert tickets and jewelry, including a Rolex watch, prosecutors said.

London was a senior partner at KPMG in charge of the audit practice for clients in California, Arizona and Nevada. He also personally oversaw audits of Herbalife and Skechers.

He gave Shaw inside information at least 14 times, reading him news releases before they were issued, telling him about planned acquisitions and giving him advance word about company earnings, prosecutors said.

The tips enabled Shaw to make numerous profitable trades.

Shaw snapped up thousands of Herbalife shares in the weeks before a May 2011 announcement of the company's record sales, prosecutors said. The news drove Herbalife shares up 13%. Shaw sold his shares within days, netting about $450,000 in profit.

In February 2012, London told Shaw that KPMG client Pacific Capital Bancorp was about to be acquired by Union Bank, prosecutors said. Pacific Capital's shares soared 57% when the news was announced in March 2012. Shaw made $365,000.

The scheme unraveled after regulators became suspicious of Shaw’s well-timed trades. He later agreed to cooperate in an investigation of London, secretly recording their conversations and handing him an envelope stuffed with cash while FBI agents snapped photographs.

Shaw, who has also pleaded guilty, is scheduled to be sentenced May 19.

In April 2012, KPMG shocked the financial world by announcing it had fired London and withdrawn several past audits of Herbalife and Skechers. The criminal case was filed a few days later.

Continued in artocke

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


"Danny Kuo Wants His MBA Diploma Before Getting His Insider-Trading Sentence,"  by Patrick Clark and Patricia Hurtad, Bloomberg Businessweek, April 16, 2014 ---
http://www.businessweek.com/articles/2014-04-16/danny-kuo-wants-his-mba-diploma-before-getting-his-insider-trading-sentence

Here’s proof that there is life after securities fraud: Danny Kuo, who pleaded guilty in 2012 to swapping illegal stock tips, asked a judge on Tuesday to delay his sentencing so he can attend next month’s commencement ceremony at the University of Southern California’s Marshall School of Business and receive his MBA.

Kuo was working as an analyst at Whittier Trust, which is based in South Pasadena, Calif., when he ran afoul of the Justice Department. Going to business school gave Kuo a productive way to fill the time between pleading guilty to securities fraud charges and his eventual sentencing. “He thought it would be a good way to improve his résumé during a period … when he had difficulty working because of the pendency of this case,” his lawyer, Roland Riopelle, said in an interview. Kuo has even been telling his classmates about his experience, his lawyer said, as a way to warn others about insider trading.

Amy Blumenthal, a spokeswoman for Marshall, confirmed Kuo is enrolled as an MBA student in the school’s part-time program. She wouldn’t comment on his guilty plea or the school’s knowledge of his record.

Continued in article

Jensen Comment
I suggest that USC run a plagiarism check on the writings of Danny Kuo while in the MBA program. Seems like this guy is willing to skirt ethics to acieve his personal goals.


Man Convicted Of Selling $2.6 Million In Knockoff Batteries To The US Navy ---
http://www.businessinsider.com/man-convicted-battery-fraud-2014-4#ixzz2zF7bUx8o

Bank CFO Banned From Industry For Using Bailout Money To Buy A Condo ---
http://www.businessinsider.com/darryl-woods-banned-from-banking-sector-2014-4#ixzz2zFNavqMJ

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


SAC Capital Agrees To Pay $1.8 Billion In Largest Insider Trading Settlement In History ---
http://www.businessinsider.com/sac-capital-settlement-2014-4#ixzz2ya0l6fo9


Teaching Case from The Wall Street Journal Weekly Review on April 18, 2014

Tax Day! Now comes the Great Refund Rip-off
by: Justin Gelfand
Apr 15, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Fraud, Fraud Detection, Internal Controls, IRS, Tax Return Filing

SUMMARY: This Opinion page piece describes how simple it has been for people to steal tax refunds: "A person steals a name and Social Security number, files a tax return making a claim for a fraudulent tax refund, and directs the IRS to wire-transfer the stolen proceeds onto a prepaid debit card." The author is a former federal prosecutor who "was one of a few ...who spearheaded the Justice Department's efforts..." to fight these crimes. He argues that solving the problem, however, cannot be done by law enforcement alone. "Citizens must ask the IRS why it is so easy to steal money I this way, and why the IRS is losing so much money to this crime alone," Mr. Gelfand concludes.

CLASSROOM APPLICATION: The article may be used in a tax class or when covering internal controls in auditing or accounting systems courses.

QUESTIONS: 
1. (Introductory) According to the article, how easy is it for fraudsters to steal tax refunds by filing fraudulent tax returns with the Internal Revenue Service?

2. (Advanced) Who is the author of this opinion page piece, and what is his main conclusion about the approach needed to stop these fraud crimes?

3. (Advanced) Consider the steps to reduce these identity theft crimes that Mr. Gelfand recommends. Explain how these steps are basic internal controls, including a definition of internal control in your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

"Tax Day! Now comes the Great Refund Rip-off," by Justin Gelfand, The Wall Street Journal, April 15, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304117904579499760441441756?mg=reno64-wsj

The crime is simple and profitable: A person steals a name and Social Security number, files a tax return making a claim for a fraudulent tax refund, and directs the IRS to wire-transfer the stolen proceeds onto a prepaid debit card.

The Justice Department's Tax Division, where I was a federal prosecutor until earlier this year, calls the crime "stolen identity refund fraud." It costs the federal government billions in lost revenue each year, and its individual victims the nightmare of scrutiny and red tape that comes with a federal investigation. If the problem continues unabated, Treasury estimates the IRS will lose $21 billion in fraudulent tax refunds over the next five years. That's more than twice the Environmental Protection Agency's annual budget.

n 2013, Justice charged more than 880 defendants for their involvement in such crimes, and federal prosecutors have successfully advocated for sentences substantially more severe than the routine criminal tax case. The IRS says it is a top priority, and that every year it investigates more and more cases involving identity theft and fraudulent tax returns.

But as the government ramps up investigations and prosecutions in this area, the thieves stay one step ahead through the use of cutting-edge technology to mask IP addresses from which tax returns are filed, by directing stolen proceeds onto prepaid debit cards and stealing those cards from the mailboxes of strangers, and by stealing names and Social Security numbers from businesses that lack adequate security controls and firewalls.

As one of a few federal prosecutors who spearheaded the Justice Department's efforts in this area, I saw firsthand that these schemes can be as sophisticated as they are costly. For instance, federal agents and prosecutors may look to IP addresses for evidence that a particular suspect filed a particular tax return, but modern technology makes it all too easy for a fraudster to make it look like the return was filed from one IP address when it was in fact filed from another (by using a proxy server known as an anonymizer), or to make it look like a victim is the perpetrator (by hijacking or "spoofing" an IP address).

Similarly, while tracing the money may reveal that stolen funds are being deposited into a particular bank account that may lead to the actual thief, someone willing to steal another person's identity may perpetrate fraud in the name of yet another identity theft victim. Therefore, with the increased pressure to prosecute more of these cases and to do so quickly, the risk of putting an innocent person behind bars becomes greater.

If we as a society are interested in actually stopping this problem, the solution cannot only be through law enforcement. Citizens must ask the IRS why it is so easy to steal money in this way, and why the IRS is losing so much money to this crime alone.

In some ways, the IRS is like a bank that is robbed after leaving the doors unlocked for the night with a large sign that says, "Money Inside!"—a victim, yes, but the victim of a crime that can easily be avoided.

While the IRS claims otherwise, the solution isn't particularly complex: stop wire-transferring multiple tax refunds onto the same prepaid debit card; stop mailing hundreds of tax-refund checks to the same mailbox; stop accepting thousands of tax returns from the same IP address without looking into it; and stop paying tax refunds without actually verifying the accuracy of the information with existing IRS records.

Ultimately, the law should be enforced. But this isn't a problem the government can prosecute its way out of. Instead of just demanding more prosecutions, the public should demand that the IRS increase its efforts to detect fraud before paying billions of dollars in fraudulent tax refunds. That way, victims won't have to wait months for the IRS to pay their legitimate tax refunds, Treasury won't lose billions of dollars to criminals, and the government can tackle this problem without the risk of sending innocent people to prison.

Mr. Gelfand is a former federal prosecutor who is now a criminal-defense attorney in St. Louis.

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


Because CVS's other bit of naughtiness was accounting naughtiness.
"CVS's Optimistic Accounting Didn't Charm the SEC," by Matt Levine, Bloomberg View, April 9, 2014 ---
http://www.bloombergview.com/articles/2014-04-09/cvs-s-optimistic-accounting-didn-t-charm-the-sec

For reasons of time management, personal dignity and avoiding legal liability, I did my best to avoid any involvement in securities offering due diligence when I was a banker. Still, I think I have some idea of what goes on on a due diligence call for a $1.5 billion bond offering by an investment-grade company with $10 billion of debt already outstanding. So let me attempt to dramatize for you the call between CVS Caremark, Barclays, BofA, BNY Mellon, J.P. Morgan and Wells Fargo on September 8, 2009:

Junior Barclays banker: Anything we should know about?
Junior CVS treasury employee: Nah, everything's fine.
Junior Barclays banker: Cool.

And off they went to push the button on the deal. But everything was not, in fact, fine. CVS was harboring a deep dark secret:

In offering documents for a $1.5 billion bond offering in 2009, CVS fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in the pharmacy benefits segment. Investors were therefore misled about the expected future financial results for that line of business. When CVS eventually revealed the full extent of the setbacks on Nov. 5, 2009, its stock price fell 20 percent in one day.
 

That's from Tuesday's announcement of a $20 million settlement between CVS and the Securities and Exchange Commission, for two unrelated bits of naughtiness. The first naughtiness is that bond deal: CVS sold some bonds without telling investors that it had lost a bunch of contracts. This means that CVS, "in the offer or sale of securities ... employed devices, schemes or artifices to defraud which operated as a fraud or deceit upon purchasers of CVS securities," i.e. those bonds.

This one is sort of weird, because those bond purchasers probably didn't care that much. They're not buying 30-year CVS bonds for that year's earnings, and while a few lost contracts don't fill debt investors with glee, nor do they seem to have filled them with terror. "When CVS eventually revealed the full extent of the setbacks on Nov. 5, 2009, its stock price fell 20 percent in one day," but the price of the bonds it sold in that offering fell by about 1.5 percent.1 You might, if you were CVS, argue a little about whether this disclosure failure was in fact material to the bondholders who were supposedly defrauded by it.2

But I guess you wouldn't argue that much, since you're not supposed to put out misleading disclosure anyway, because your equity investors might read it and get ideas. Here, the idea that you hadn't lost a bunch of contracts that you had in fact lost. I don't know. The moral here seems uncertain. Do better due diligence? (But the banks didn't get in trouble for missing this.) Don't issue bonds if you're trying to hide business problems from your shareholders?3 CVS lost its contracts in August 2009, but the SEC doesn't say that CVS needed to disclose that at the time. It let its shareholders believe that everything was fine throughout August, and the SEC is fine with that -- it never says that CVS had an affirmative obligation to disclose the lost contracts. The problem came in September, with this bond deal. If not for the bond deal, everything would have been fine.

Except the other thing, I mean! Because CVS's other bit of naughtiness was accounting naughtiness. While my dramatic interpretation of the due diligence call has no names attached, the accounting awkwardness is attributable to one particular guy. That guy -- whom the SEC went after individually, and who settled for a $75,000 fine and a one-year bar from public-company accounting -- is one Laird Daniels, the vice president for corporate budgeting at CVS until May 2009, when he became retail controller.

He has since moved up in the world,4 and you can see why. Most accountants come to work and ask themselves, "How can I comply with generally accepted accounting principles and accurately reflect the financial condition of my company?" This does not always endear them to their co-workers, who tend not to feel the same strong emotions about generally accepted accounting principles.

Daniels, on the other hand, seems to have viewed himself as a revenue center. At the end of 2008, CVS had bought Longs Drug Stores for $2.9 billion in cash, and by mid-2009 that acquisition seemed to be a drag on profitability. Daniels had other ideas:

On June 16, 2009, Daniels told a co-worker that he had been making “some good progress on the tangible asset side” with the valuation firm and that he was now “extremely confident (by the way that’s the most confident I get) that the final valuation will no longer be a bad guy but rather a good guy.” (Daniels routinely used the terms “good guy” and “bad guy” to indicate whether an item improved or harmed CVS’s purported profitability.)

CVS had allocated the purchase price of Longs among its assets, accounting for the deal as though it had bought all of Longs's assets at their fair value, and putting the excess in goodwill. Of the $2.9 billion, CVS had allocated $229.3 million of the price to stuff that was in the Longs stores. Shelves and carpets and whatnot, I guess. CVS was depreciating that property, which was a drag on earnings. But in mid-2009, CVS was also remodeling some of the Longs stores and throwing out some of the shelves and whatnot. Daniels had the bright idea of:

In general you are not supposed to change your mind about your purchase price allocation: You get time to figure out what it was, but it's supposed to be based on your plans and information at the time you did the deal, to avoid exactly this sort of thing. But Daniels managed to convince everyone that this was the intention all along, so they scrapped the original "draft" allocation that valued the stuff in the stores, replaced it with the new one that basically didn't, and so reduced CVS's depreciation cost. That increased third-quarter earnings per share by 2.4 cents, and I guess if you made CVS $49 million in one quarter you'd get a promotion, too.5 That's a good quarter.

Continued in article

Jensen Comment
I think EY became the independent auditor for CVS in 2013, but this appears to be after the  "accounting naughtiness" at CVS ---
http://biz.yahoo.com/e/130513/cvs8-k.html

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


From the CPA Newsletter on April 25, 2014

Tax fraud hits health care providers in New England (including 150 physicians in Maine and NH)
More than 150 cases of tax fraud have affected doctors and health care providers in New Hampshire and Vermont. Hospitals and private providers were targeted. The theft involved Social Security numbers that were then used to file fraudulent tax returns. Other states have reported similar cases. Boston.com/The Associated Press (4/24), Portland Press Herald (Maine) (4/24)

150 Doctors Targeted for Tax Fraud in NH, Vt. ---
http://www.boston.com/business/news/2014/04/24/doctors-targeted-for-tax-fraud/fW2cJu6EjU1boZDAYQoefM/story.html

CONCORD, N.H. (AP) — New Hampshire Sen. Jeanne Shaheen has asked the Secret Service and Internal Revenue Service to investigate reports of tax fraud affecting more than 150 doctors and health care providers in the state and in Vermont.

The medical societies in both states say Social Security numbers have been stolen and used to file fraudulent federal tax returns. At least several hospitals and some private providers have been targeted.

Rick Adams, a spokesman for Dartmouth-Hitchcock Medical Center, tells the Valley News about 50 doctors and other employees who work at the hospital have been affected.

Scott Colby of the New Hampshire Medical Society says similar cases have been reported in other states, such as Maine, Connecticut and Massachusetts.

Shaheen is asking for a joint investigation between the Secret service and IRS.

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

 

 

Jensen Comment

My family physician was a victim last year when somebody filed a fake tax return in his name and collected an illegal tax refund from the IRS. It sounds like a gang of insiders who perhaps work for the hospitals and health clinics. Each year the IRS pays out billions in phony refunds and is making little progress detecting and preventing such crimes.

 

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

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

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

IRS Identity Protection Specialized Unit at 800-908-4490

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

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


"Court Case May Help Define 'Insider Trading'," by Christopher Matthews, The Wall Street Journal, April 20, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304626304579508002188325992?mod=djemCFO_h&mg=reno64-wsj

What is insider trading?

A case pending before a federal appeals court could help define a financial crime that has been in the spotlight for the past few years.

The outcome of the appeal, which centers on two former hedge-fund managers, could threaten some of the convictions won by prosecutors in their yearslong crackdown on insider trading.

At issue in the appeal is whether, to be considered to have traded on confidential material information, a trader must have known the tip had been illegally disclosed in exchange for a reward.

The appeal is being pursued by Todd Newman and Anthony Chiasson, two portfolio managers whose 2012 insider-trading convictions were a significant victory for prosecutors. The two men, free on bail pending the appeal, are seeking to have their convictions overturned. Their case is scheduled to be heard Tuesday in the U.S. Court of Appeals for the Second Circuit in Manhattan.

Lawyers for both men declined to comment.

Messrs. Newman and Chiasson were so-called downstream tippees—meaning they didn't receive information on technology companies Dell Inc. and Nvidia Corp. NVDA +0.38% directly from its source, but were one or more layers removed.

The original trial judge told jurors that Messrs. Chiasson and Newman could be convicted of insider trading even if they hadn't known that the person who leaked the information had done so in return for a "personal benefit."

Lawyers for Messrs. Newman and Chiasson say prosecutors must show that their clients knew the tippers were somehow compensated for the tips and that the judge's instruction was erroneous. The inside tips on which the pair traded were conveyed through a network of analysts before reaching analysts who worked for Messrs. Chiasson and Newman, the lawyers said in court documents. Their clients didn't seek out or knowingly use inside information, they said.

Prosecutors have said they need only show that people who used the tips were aware the tipper disclosed the nonpublic information in breach of a fiduciary duty when they traded on it.

Even if the instruction was erroneous, the jury would have concluded the two men inferred the information was given in exchange for a reward, prosecutors said in court documents.

If the court sides with Mr. Chiasson, who founded Level Global Investors, and Mr. Newman, once a Diamondback Capital portfolio manager, the two will either be granted a new trial or a judgment of acquittal.

The question gets to the core of what defines insider trading as companies sometimes officially sanction information leaks and traders rely on a torrent of tips that may pass through many hands.

Whatever its outcome, the appeal won't affect most of the 80 convictions for insider trading won by Manhattan federal prosecutors over the past five years.

However, if the court rules in favor of Messrs. Chiasson and Newman, defense lawyers will have new ammunition to overturn several high-profile convictions, including that of Michael Steinberg, a former SAC Capital LP portfolio manager, in December.

The confidential information used by Mr. Steinberg reached him after being passed along a chain of analysts and traders. his lawyers argued that he didn't know the information was illegally obtained.

The appeal by Messrs. Chiasson and Newman has drawn the attention of top officials in the Manhattan U.S. attorney's office, according to a person familiar with the matter, and is being closely watched by lawyers and compliance officers on Wall Street, according to Amy Lynch, who advises investment firms on regulatory compliance as president of Frontline Compliance LLC.

Ms. Lynch said private investment funds don't always ask analysts whether a personal benefit was given at some point for the information they convey, and the outcome of this appeal would be analyzed by those who advise investment firms.

The federal judiciary also is watching the appeal, in part, because the law on insider trading is ambiguous. Judges in the Manhattan federal courthouse, which has seen the vast majority of cases in the government's insider-trading push, have come down on opposite sides of the issue.

U.S. District Judge Naomi Reice Buchwald, who is presiding over the coming insider-trading trial of Rengan Rajaratnam, the younger brother of convicted hedge-fund manager Raj Rajaratnam, said last month she hoped the appeals court would "finally speak" on the issue and deferred making a decision on it herself. Rengan Rajaratnam's lawyer has argued his client wasn't aware the alleged source of the inside information received a personal benefit in exchange for the tip and should have charges against him dropped.

Continued in article

"Is High-Frequency Trading Insider Trading?" by Matthew Philips, Bloomberg Businessweek, April 4, 2014 ---
 http://www.businessweek.com/articles/2014-04-04/is-high-frequency-trading-insider-trading?campaign_id=DN040414
Watch the Video

Ever since Michael Lewis went on 60 Minutes Sunday night to accuse high-frequency traders of rigging the stock market, it has been hard to avoid the debate over HFT’s merits and evils. Some of it’s been useful; most has been a lot of angry yelling. The peak of the frenzy came on Tuesday afternoon in a heated segment on CNBC with IEX’s Brad Katsuyama and BATS Chief Executive Officer William O’Brien.

To me, this debate is just circling the ultimate question: Should high-frequency trading be considered insider trading?

Classically defined, insider trading means having access to material, non-public information before it reaches the rest of the market; it’s like getting a heads-up about a merger before it’s announced, or maybe a phone call from a Goldman Sachs (GS) board member saying that Warren Buffett is about to invest $5 billion in the bank. Over the past few years, federal prosecutors have collected a number of big insider-trading convictions of people who got early word about a piece of highly valuable information and made a lot of money as a result.

To its most vehement critics, high-frequency trading is not terribly dissimilar. The most common accusation is that these traders get better information faster than the rest of the market. They do this through three primary methods:

First, they put computer servers next to those of the exchanges, cutting down the time it takes for an order to travel from their computers to the exchanges’ electronic matching engines. Second, they use faster pathways—fiber-optic cables, microwave towers, and yes, even laser beams—to trade more quickly between far-flung markets such as Chicago and New York.

Last, they pay exchanges for proprietary data feeds. This is where it gets really complicated. These proprietary feeds are different than the public, consolidated data feed maintained by the public exchanges, called the securities information processor, or the SIP. Though it’s now a piece of software, the public feed is the modern-day equivalent of the ticker tape that provided stock price data to brokers, traders, and media outlets. It’s what feeds the stock quotes crawling along the bottom of the screen on CNBC (CMCSA) Bloomberg TV, or on financial websites; when the public feed broke in August, trading on NASDAQ stopped for 3 hours.

While the purpose of the public feed is to ensure that everyone gets the same price information at the same time, the playing field isn’t as level as it would seem since exchanges sell proprietary feeds. And not just to HFT firms. Lots of different types of investors buy proprietary market data from exchanges. By law, prices must be entered into the SIP and the proprietary feeds at the same time, but once the data leaves the exchanges, the proprietary systems often process and transmit the information faster. These feeds arrive sooner and contain more robust information—including all prices being offered, not just the best ones.

From 2006 to 2012, Nasdaq’s proprietary market data revenue more than doubled, to $150 million. The money it earns from the public feed fell 21 percent over roughly the same period. So while Nasdaq used to earn more money from its public feed, it now makes more from proprietary ones. Especially after the August outage, this has stirred a lot of complaints from market players that the SIP has been neglected in favor of prop feeds. For its part, Nasdaq has been lobbying the committee that oversees the SIP to beef it up.

Speed traders spend a lot of money for faster access to better information. This allows them to react more quickly to news and, in some cases, jump in front of other people’s orders by figuring out which way the market is going to move. So is that insider trading?

New York Attorney General Eric Schneiderman has called HFT “insider trading 2.0″ on a number of occasions. His office is looking into the relationships between traders, brokers and exchanges and asking whether it all needs to be reformed. The FBI spent the last year looking to uncover manipulative trading practices among HFT firms; the federal agency is now asking speed traders to come forward as whistleblowers.

U.S. laws dealing with insider trading were first passed 80 years ago. Some restrict the way corporate executives and board members can trade in and out of their company’s shares. Others deal with the fair disclosure of important information—which, when it comes to high-frequency trading, is what we’re talking about here. These laws essentially require companies to release material information, such as earnings, to everyone at the same time. No playing favorites.

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

 


Efficient Market Hypothesis (EMH) --- http://www.trinity.edu/rjensen/Theory01.htm#EMH

"Why Those Guys Won the Economics Nobels," by Justin Fox, Harvard Business Review Blog, April 2, 2014 ---
http://blogs.hbr.org/2014/04/why-those-guys-won-the-economics-nobels/

Jensen Comment 1
They won their Nobel Prizes on the assumption of the speed and fairness to which stock markets react under the Efficient Market Hypothesis (EMH). In the recent furor raised by Michael Lewis regarding high speed robot traders allegedly skimming profits it will be interesting to see how Fama, Shiller, and Hansen react to defend High Speed Trading in theory ---  I assume they will come to the defense of HSP for the sake of the EMH.

The may wait for the FBI and SEC findings, however, before they defend the HSP as currently implemented and maligned by Machael Lewis.

Jensen Comment 2
When I had almost no money, while  in college, I was a very, very small time call options investor and sometimes went to a brokerage firm to watch the NYSE trading prices flashing by on an electronic ribbon. In those days those were the up-to-the-moment trading prices. Now they're misleading phony prices that are skimmed by higher-speed robots that beat your orders in microseconds to 13 public exchanges armed with your bid or ask price just to steal some of your money. Thank you Michael Lewis and the clever detectives you write about who discovered how these high speed robots are ripping off investors --- no thanks to the obsolete SEC.

In simple terms here's how the high speed robots work using an analogy form one of the detectives described in 60 Minutes segment. If you want to buy four online tickets for an event a robot detects your order for four tickets costing at an unknown cost not to exceed $25 apiece.. Your order is immediately filled for only two tickets at $20 apiece. The robot buys the adjoining two tickets for $20 apiece and makes them available for $25 apiece. In the completed transaction you pay $90 for the four tickets. High speed skimming ripoffs on the stock exchanges don't work exactly like that, but the robots sneak ahead of your orders in microseconds to skim part or all of your ultimate purchase or sale of stocks and bonds.

There is some debate as to whether this is illegal "stealing," but let's say that the future of keeping investors in the stock market means that the government and the stock exchange managers will have to put an end to this practice or investors will abandon the market in droves or go to a new stock exchange that is electronically blocking these robot ripoffs.

By All Means Watch the CBS 60 Minutes Interview With Michael Lewis (links shown below)
"Book Review: 'Flash Boys' by Michael Lewis High-frequency traders use dedicated data cables and specialized algorithms to trade milliseconds ahead of the rest of the market.," by Philip Delves Broughton, The Wall Street Journal, March 31, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304432604579473281278352644?mod=djemMER_h&mg=reno64-wsj

Back in the day, if an investor wanted to buy or sell a stock, he would call a broker, who would find a way to execute the trade as efficiently as possible by talking to other human beings. The arrival of computerized exchanges slowly eliminated people from the process. Instead, bids and offers were matched by servers. The shouting men in colorful jackets on the exchange floors became irrelevant. In theory, this meant that the cost of trading fell and that the markets became more efficient. But the effects of technology are rarely so simple.

In 2002, 85% of all U.S. stock-market trading happened on the New York Stock Exchange and the rest mostly on the Nasdaq. NDAQ +0.60% By early 2008, there were 13 different public exchanges, most just stacks of computer servers in heavily guarded buildings in northern New Jersey. Now, if you place an order for 1,000 shares of Microsoft, MSFT +0.32% it pings from exchange to exchange claiming a few shares at each stop, seeking the best price until the order is completed. But the moment that it hits the first exchange, the HFTs see it, and they race ahead to the other exchanges, buy the stock you want, and sell it back to you for fractionally more than you hoped to pay. All in a matter of milliseconds, millions of times a day to millions of investors—your grandmother and hedge-fund titans alike. These tiny but profitable trades, Mr. Lewis writes, add up to big profits for firms like Getco and Citadel. He cannot put a hard number on the size of the industry, suggesting only that many billions are involved.

If this sounds like the old Wall Street scam of front-running the market, that's because it is. Except, in this case, it is entirely legal. Indeed, Mr. Lewis suggests, the strategies of high-frequency traders were the unintended consequence of well-intentioned regulation. Back in 2005 the SEC, in an effort to ensure greater fairness for investors, changed a key rule. Once, brokers had to perform the "best execution" for their clients. This meant taking into account factors such as timing and likelihood of completing the transaction, as well as price. Now they have to find the "best price," as determined by regulators' own creaky computers, scanning the bids and offers available on the various exchanges. But traders could do the same analysis more quickly using their own networks, and make trades in the milliseconds between an investor placing an order, the SEC establishing the best price and the broker executing the trade.

A decade later, the HFTs do such big business that they have begun to influence the operations of the exchanges that depend on them. The exchanges take fees from the HFTs for access to the flow of orders, as do investment banks that run their own private exchanges, called "dark pools." Exchanges bend their rules to the bidding of the high-frequency traders: The HFTs wanted an extra decimal place added to stock prices, for instance, so they could mop up every thousandth of a penny in price fluctuations; the exchanges obliged. "By the summer of 2013," writes Mr. Lewis, "the world's financial markets were designed to maximize the number of collisions between ordinary investors and high-frequency traders—at the expense of ordinary investors."

"Flash Boys" is not as larky as "Liar's Poker" (1989), Mr. Lewis's memoir of working at Salomon Brothers during the lead-up to the 1987 crash, or as accessible as "The Big Short" (2010), his jaw-dropping take on the subprime meltdown. It may end up more important to public debate about Wall Street than either, however, in exposing what one of his central characters calls the "Pandora's box of ridiculousness" that financial exchanges have become.

Mr. Lewis wants to argue, though, that the markets are not just ridiculous, but rigged. The heroes of this book are clear: Mr. Katsuyama eventually assembles a team of talented misfits to create an HFT-proofed exchange called IEX, where a price is a price is a price. It's backed by leading hedge funds and banks (and Jim Clark, the co-founder of Netscape and the subject of Mr. Lewis's 1999 book, "The New New Thing"). Mr. Lewis gives the reader extensive insight into how his heroes see the market, but the alleged villains of the piece—HFTs themselves—are all but silent in their own defense. "Flash Boys" is a decidedly one-sided book.

Yet there are reasonable arguments to be made that the frenetic trading by HFTs leads to greater liquidity and more efficient pricing. Or, God forbid, that they are not nearly so harmful to investors' returns as Mr. Lewis makes out. Their rise has coincided with a historic bull market. It is not hard to imagine a different book by Michael Lewis, one celebrating HFTs as revolutionary outsiders, a cadre of innovative engineers and computer scientists (many of them immigrants), rising from the rubble of 2008 and making fools of a plodding financial system. "Flash Boys" makes no claim to be a balanced account of financial innovation: It is a polemic, and a very well-written one. Behind its outrage, however, lies nostalgia for a prelapsarian Wall Street of trust and plain dealing, which is a total mirage.

Mr. Delves Broughton's latest book is "The Art of the Sale: Learning From the Masters About the Business of Life."

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

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

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

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

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

Continued article

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

Jensen Comment 3
The three segments on the March 30, 2014 hour of CBS Sixty Minutes were exceptional. The most important to me was an interview with Michael Lewis on how the big banks and other operators physically laid very high speed cable between stock exchanges to skim the cream off purchase an sales of individuals, mutual funds, and pension funds. The sad part is that the trading laws have a loop hole allowing this type of ripoff.

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

Try the revised links below. These are examples of links that will soon vaporize. They can be used in class under the Fair Use safe harbor but only for a very short time until you or your library purchases these and other Sixty Minutes videos.
 
But the transcripts will are available from CBS and can be used for free on into the future. Click on the upper menu choice "Episodes" for links to the transcripts.
 
Note the revised video links. a menu should appear to the left that can lead to the other videos currently available for free (temporarily).

 

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

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

Free access to the video is very limited, so take advantage of the following link now:
Lewis explains how the stock market is rigged ---
http://www.cbsnews.com/videos/is-the-us-stock-market-rigged/

Cliff Asness Explains How High-Frequency Trading Helps Us And Why Everyone Else Is Making A Big Stink About It
http://www.businessinsider.com/cliff-asness-on-high-frequency-trading-2014-4#ixzz2xkXEzgt1
Jensen Comment
What Asness fails to mention is that high-frequency trading will be a disaster if millions of investors and investment funds leave the HFT exchanges in favor of other exchanges that ban high frequency trading the HFT robots will be left making markets for one another without the trillions of dollars of investors who are weary of being ripped off by HFT exchanges. Time will tell, but it's great that alternatives will be available to investors who fear the high speed robotic traders.

 

Jensen Comment 4
The big question remaining is why it is taking the SEC so long to put an end to this type of skimming?

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


Bob Jensen's threads on rankings controversies ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings


Gasparino (Fox News) Shreds Michael Lewis, Says He's A 'Lefty' And 'Completely And Utterly Disingenuous'
http://www.businessinsider.com/gasparino-on-michael-lewis-2014-4#ixzz2xq53yeFp

Jensen Comment
Yeah right! Watch the naive Charlie Gasparino get shredded in the comments to this naive article. Read the comments following the article if you can overlook some of the foul language.

I don't think I want Charlie Gasparino to be my investment adviser.


Charles Schwab Seems to Agree With Michael Lewis

SCHWAB: High-Frequency Trading Is A Growing Cancer That Must Be Addressed ---
http://www.businessinsider.com/schwab-on-high-frequency-trading-2014-4#ixzz2xq82daen


"Is High-Frequency Trading Insider Trading?" by Matthew Philips, Bloomberg Businessweek, April 4, 2014 ---
 
http://www.businessweek.com/articles/2014-04-04/is-high-frequency-trading-insider-trading?campaign_id=DN040414
Watch the Video

Ever since Michael Lewis went on 60 Minutes Sunday night to accuse high-frequency traders of rigging the stock market, it has been hard to avoid the debate over HFT’s merits and evils. Some of it’s been useful; most has been a lot of angry yelling. The peak of the frenzy came on Tuesday afternoon in a heated segment on CNBC with IEX’s Brad Katsuyama and BATS Chief Executive Officer William O’Brien.

To me, this debate is just circling the ultimate question: Should high-frequency trading be considered insider trading?

Classically defined, insider trading means having access to material, non-public information before it reaches the rest of the market; it’s like getting a heads-up about a merger before it’s announced, or maybe a phone call from a Goldman Sachs (GS) board member saying that Warren Buffett is about to invest $5 billion in the bank. Over the past few years, federal prosecutors have collected a number of big insider-trading convictions of people who got early word about a piece of highly valuable information and made a lot of money as a result.

To its most vehement critics, high-frequency trading is not terribly dissimilar. The most common accusation is that these traders get better information faster than the rest of the market. They do this through three primary methods:

First, they put computer servers next to those of the exchanges, cutting down the time it takes for an order to travel from their computers to the exchanges’ electronic matching engines. Second, they use faster pathways—fiber-optic cables, microwave towers, and yes, even laser beams—to trade more quickly between far-flung markets such as Chicago and New York.

Last, they pay exchanges for proprietary data feeds. This is where it gets really complicated. These proprietary feeds are different than the public, consolidated data feed maintained by the public exchanges, called the securities information processor, or the SIP. Though it’s now a piece of software, the public feed is the modern-day equivalent of the ticker tape that provided stock price data to brokers, traders, and media outlets. It’s what feeds the stock quotes crawling along the bottom of the screen on CNBC (CMCSA) Bloomberg TV, or on financial websites; when the public feed broke in August, trading on NASDAQ stopped for 3 hours.

While the purpose of the public feed is to ensure that everyone gets the same price information at the same time, the playing field isn’t as level as it would seem since exchanges sell proprietary feeds. And not just to HFT firms. Lots of different types of investors buy proprietary market data from exchanges. By law, prices must be entered into the SIP and the proprietary feeds at the same time, but once the data leaves the exchanges, the proprietary systems often process and transmit the information faster. These feeds arrive sooner and contain more robust information—including all prices being offered, not just the best ones.

From 2006 to 2012, Nasdaq’s proprietary market data revenue more than doubled, to $150 million. The money it earns from the public feed fell 21 percent over roughly the same period. So while Nasdaq used to earn more money from its public feed, it now makes more from proprietary ones. Especially after the August outage, this has stirred a lot of complaints from market players that the SIP has been neglected in favor of prop feeds. For its part, Nasdaq has been lobbying the committee that oversees the SIP to beef it up.

Speed traders spend a lot of money for faster access to better information. This allows them to react more quickly to news and, in some cases, jump in front of other people’s orders by figuring out which way the market is going to move. So is that insider trading?

New York Attorney General Eric Schneiderman has called HFT “insider trading 2.0″ on a number of occasions. His office is looking into the relationships between traders, brokers and exchanges and asking whether it all needs to be reformed. The FBI spent the last year looking to uncover manipulative trading practices among HFT firms; the federal agency is now asking speed traders to come forward as whistleblowers.

U.S. laws dealing with insider trading were first passed 80 years ago. Some restrict the way corporate executives and board members can trade in and out of their company’s shares. Others deal with the fair disclosure of important information—which, when it comes to high-frequency trading, is what we’re talking about here. These laws essentially require companies to release material information, such as earnings, to everyone at the same time. No playing favorites.

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


From the CFO Journal's Morning Ledger on April 3, 2014

High-frequency trading book slows Virtu’s race to market
Executives at Virtu Financial Inc. underestimated the firestorm that would surround the release of “Flash Boys,” Michael Lewis’s new book about high-frequency trading, report WSJ’s Telis Demos and Bradley Hope. Even though the firm was mentioned only in a footnote, the entire industry has been hit by accusations of corruption, which has dragged on the shares of comparable companies. Still, Virtu officials are confident the controversy will pass and plan to move ahead. The earliest roadshow is expected to take place this month.

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

 


From The Wall Street Journals Accounting Weekly Review on March 28, 2014

Jury Finds Staff Aided Madoff Con
by: Christopher M. Matthews
Mar 25, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Fraud, Ponzi Schemes

SUMMARY: In contrast to Bernard L. Madoff's statements that he alone concocted the massive, long-running Ponzi scheme at his investment firm, "jurors found five [of his] former employees...guilty of aiding and hiding the fraud...." Two computer programmers, two portfolio managers and a former operations director all range in ages from 48 to 67 and face decades in prison "on a total of 31 charges ranging from securities fraud to conspiring to defraud investors." The programmers created programs to randomly generate false documents and the portfolio managers "backdated nonexistent trades, prosecutors said." Former CFO Frank DiPascali Jr. aided the prosecution in exchange for a recommendation for a more lenient sentence from his 2009 guilty plea. He testified, for example, that he once saw two of the defendants make specific efforts to create a document for a KPMG auditor which appeared old and used rather than newly printed which it in fact was.

CLASSROOM APPLICATION: The article may be used to provide closure on some aspects of the Madoff Ponzi scheme case in a financial reporting, auditing, or ethics class.

QUESTIONS: 
1. (Advanced) What is a Ponzi scheme? What was the scale of the Ponzi scheme which Bernard L. Madoff has admitted to running over a long period of time?

2. (Introductory) What activities did CFO DiPascali admit to doing and observing which produced fraudulent records in support of the Ponzi scheme?

3. (Introductory) What were Ms. Bongiorno and Mr. Bonventre's arguments about their actions and claims to innocence?

4. (Advanced) If you had worked at the Madoff firm and became suspicious of the activity you observed, what would your options be in reacting to the situation?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Aide Saw Madoff as 'Big Brother'
by Christopher M. Matthews
Feb 24, 2014
Page: ##

"Jury Finds Staff Aided Madoff Con," by Christopher M. Matthews, The Wall Street Journal, March 25, 2014 ---
http://online.wsj.com/news/articles/SB10001424052702304679404579459551977535482?mod=djem_jiewr_AC_domainid

Bernard L. Madoff has maintained for years that his decadeslong Ponzi scheme was a one-man show. On Monday, a jury concluded instead that it was a team effort.

Jurors found five former employees of Mr. Madoff guilty of aiding and hiding the fraud in a trial that painted the money manager's Manhattan offices as a hive of illegal activity, where employees cooked up lies and manufactured fake documents to keep afloat a scam that ultimately cost investors $17 billion.

Computer programmers Jerome O'Hara, 51 years old, and George Perez, 48, were convicted in federal court in Manhattan of creating phony customer accounts, while portfolio managers Annette Bongiorno, 66, and JoAnn Crupi, 53, were convicted of concocting phony trading records. Daniel Bonventre, 67, a former operations director for Mr. Madoff, helped gin up false books and records, the jury found.

The findings reshape the narrative from a crime that has been tightly linked in the public's consciousness with one man to a group effort that transpired within the firm's offices in the iconic Lipstick building in midtown Manhattan.

Mr. Madoff directed the scheme from his office on the 19th floor, prosecutors told jurors, but much of the work done to conceal it took place in the secretive offices of the 17th floor, where the investment-advisory business was run. On that floor, dubbed "House 17" and accessible only with a security card, Messrs. O'Hara and Perez created computer programs to randomly generate false documents, while Ms. Bongiorno and Ms. Crupi backdated nonexistent trades, prosecutors said.

Mr. Bonventre, 67 years old, worked on the market-making business on the 18th and 19th floors, along with Mr. Madoff's sons Mark and Andrew and brother Peter. But prosecutors said Mr. Bonventre was cooking the books and funneling money to the investment-advisory business.

According to several jurors speaking outside the courthouse after their verdicts, their decision wasn't even close.

"How could Bernie be the only one that could pull this off?" said juror Sheila Amato, a teacher in Rockland County, N.Y. "He's the mastermind. They were like his soldiers."

"They were in it for so long, that maybe the truth became a blur," she added.

The result, which followed four days of deliberations, caps a nearly six-month trial and hands prosecutors a win in their only attempt to bring a Madoff case before a jury. Mr. Madoff pleaded guilty in 2009.

The defendants, who are expected to appeal, each face decades in prison on a total of 31 charges ranging from securities fraud to conspiring to defraud investors. They are due to be sentenced at the end of July.

The trial was one of the longest white-collar trials in recent years and was difficult for all involved, including the jurors, one of whom fell sick during the deliberations and was excused.

As they listened to the verdicts, most of the defendants sat grim-faced, saying nothing. Ms. Crupi repeatedly shook her head during the reading, while Ms. Bongiorno's husband stared at the ceiling with his arms crossed.

The Madoff fraud has wreaked havoc on thousands of investors across the globe, led to the downfall of prominent investors, including the late billionaire Jeffry Picower, and sparked a hail of criticism against regulators who failed to catch the fraud, which dates as far back as the 1970s.

Mr. Madoff, who was sentenced nearly five years ago to 150 years in prison, has insisted he carried out the long-running scheme on his own. But during the trial, prosecutors turned to an array of witnesses, including several of Mr. Madoff's former employees, to establish that wasn't the case.

The government's main witness was Frank DiPascali Jr., the former chief financial officer who worked with Mr. Madoff for 33 years.

Mr. DiPascali was on the stand for more than a month and in sometimes emotional testimony implicated all of the defendants, telling jurors he worked with all five to produce fraudulent records.

In one instance, Mr. DiPascali testified he saw Messrs. O'Hara and Perez and Ms. Crupi putting a new fake document in the fridge to cool it down after it came off the printer and then throwing it around like a "medicine ball" to make it look used before turning it over to a KPMG auditor who had arrived to collect it.

Mr. DiPascali, 57 years old, pleaded guilty in 2009 and faces a maximum of 125 years in prison. He is confined to his home as part of a government cooperation agreement that could result in a recommendation for a more lenient sentence.

Other testimony focused on the alleged spending habits of the defendants, who prosecutors said became millionaires while at the firm. Ms. Bongiorno, for example, bought a Bentley and two Mercedes-Benz automobiles as well as a $6.5 million Florida condominium, which she said she purchased to "downsize."

Continued in article

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


 


 

 







  • Accounting and finance professors should use this video every semester in class!
    The best explanation ever of the sub-prime (meaning lending to borrowers with much less than prime credit ratings) mortgage greed and fraud.
    The best explanation ever about securitized financial instruments and worldwide banding frauds using such instruments.
    The best explanation ever about how greedy employees will cheat on their employers and their customers.

    "House Of Cards: The Mortgage Mess Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide," Sixty Minutes Television on CBS, January 27, 2008 --- http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515.shtml
    For a few days the video may be available free.
    The transcript will probably be available for a longer period of time.

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





    Other Links
    Main Document on the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/Fraud.htm 

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

    Bob Jensen's threads on professionalism and independence are at  file:///C:/Documents%20and%20Settings/dbowling/Local%20Settings/Temporary%20Internet%20Files/OLK36/FraudUpdates.htm#Professionalism 

    Bob Jensen's threads on pro forma frauds are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

    Bob Jensen's threads on ethics and accounting education are at 
    http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation

    The Saga of Auditor Professionalism and Independence ---
    http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
     

    Incompetent and Corrupt Audits are Routine ---
    http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits

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

    Future of Auditing --- http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing 

     

     


     

    The Consumer Fraud Portion of this Document Was Moved to http://www.trinity.edu/rjensen/FraudReporting.htm 

     

     

     

     

    Bob Jensen's home page is at http://www.trinity.edu/rjensen/