Hannaford is a large New England-based supermarket chain with a good
reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers
at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on
credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to
overlook this breach entirely ---
http://www.hanaford.com/
My opinion of Hannaford dropped to zero because there is no help on the
company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford
(even recorded messages might help)
My advice: Get a free credit card that offers cash discounts on almost
all purchases. Shop around! There are some good deals in this regard and bad
deals for airline miles. The airlines now have so many billions in outstanding
liabilities for free miles that they are increasingly being creative on how to
avoid providing free redemptions. Also the huge reduction in the numbers of
flights scheduled by most all airlines is another bummer.
About the only good deal remaining for free miles, at least for me, is the
Southwest Airlines free ticket deal, and you don't need any particular credit
card to get this deal. Southwest Airlines, to my knowledge, is the only major
airline to consistently earn a profit year-to-year. There are a lot of reasons
why!
Walter C. Cathie, a vice
president at Widener University, spent years working his way up the ranks of
various colleges and forging a reputation as a nationally known financial
aid administrator. Then he made a business out of it.
He created a consulting
company, Key West Higher Education Associates, named after his vacation home
in Florida. The firm specializes in conferences that bring college deans of
finance together with lenders eager to court them.
The program for the next
conference, slated for June at the Marriott Inner Harbor at Camden Yards in
Baltimore, lists seven lenders as sponsors. One sponsor said it would pay
$20,000 to participate. Scheduled presentations include “what needs to be
done in Washington to fight back against the continued attacks on student
lenders” and the “economics and ethics of aid packaging.”
Investigations into student
lending abuses are broadening in Washington and Albany. Mr. Cathie is still
at Widener, and his roles as university official and entrepreneur have put
him center stage, as a prime example of how university administrators who
advise students have become cozy with lenders.
Widener, with campuses in
Pennsylvania and Delaware, put Mr. Cathie on leave this week after New
York’s attorney general requested documents relating to his consulting firm
and told the university that one lender, Student Loan Xpress, had paid Key
West $80,000 to participate in four conferences.
Mr. Cathie said in an
interview yesterday that he still hoped to pull off the June event. “Though
who knows, if nobody comes, I guess it’ll implode,” he said.
Several of the scheduled
speakers said in interviews that they were canceling.
“Yes, I’ve made money,” he
said, “but I haven’t done anything illegal. So I’d sure like this story to
get out, that — you know, Walter Cathie is a giving individual, that he’s
been very open, that he’s always taken the profits and given back to
students.”
He said he had donated some
consulting profits to a scholarship fund in his father’s name at Carnegie
Mellon University, where he worked for 21 years. “I’ve been in this business
a long time, I’ve always been a student advocate, and I haven’t done
anything wrong,” Mr. Cathie said.
Others say his case
illustrates how some officials have become so entwined with lenders that
they have become oblivious to conflicts of interest.
“The allegations made
against Mr. Cathie and his institution point at the structural corruption of
the student lending system,” said Barmak Nassirian, a director of the
American Association of Collegiate Registrars and Admissions Officers.
The system has become so
complex, and involves so much money, Mr. Nassirian said, “the temptation has
become too great for many of the players to take a little bite for
themselves.”
The program for the
conference in June lists corporate sponsors. One is Student Loan Xpress,
whose president, according to documents obtained by the United States
Senate, provided company stock to officials at several universities and at
the Department of Education.
Another is Education Finance
Partners Inc., which Attorney General Andrew M. Cuomo of New York has
accused of making payments to 60 colleges for loan volume. Neither company
returned calls for comment.
The program lists as a
speaker Dick Willey, chief executive of the Pennsylvania Higher Education
Assistance Authority, a state loan agency facing calls for reform after
reports that board members, spouses and employees have spent $768,000 on
pedicures, meals and other such expenses since 2000.
Mr. Willey’s spokesman,
Keith New, said that Mr. Willey would not speak at the conference, but that
the agency intended to sponsor it with a “platinum level” commitment of
$20,000.
Mr. Cathie came to Widener
in 1997, initially as its dean of financial aid, after years at Allegheny
College, Carnegie Mellon and Wabash College in Indiana, building a
background in enrollment management and financial aid.
In 1990, well into his
tenure at Carnegie Mellon, Mr. Cathie and his boss, William Elliott, an
admissions official who is today Carnegie Mellon’s vice president for
enrollment, began organizing annual conferences for college administrators
to debate policy issues, both men said.
They named their conferences
the Fitzwilliam Audit after the Fitzwilliam Inn in New Hampshire, where they
were held, Mr. Cathie said.
Continued in article
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
Another Case of Academic Fraud Involving Athletes
For the fourth time in a little over a year, the
National Collegiate Athletic Association’s Division I Committee on Infractions
has punished a big-time sports program for academic wrongdoing. And in punishing
the University of New Mexico for engaging in academic fraud on Wednesday, the
NCAA panel linked the shenanigans back to a single source, much to the dismay of
the institution singled out.
In its report on the case,
the NCAA infractions panel found that two since-fired assistant football coaches
at New Mexico, operating without the knowledge of officials at the university,
had arranged in 2004 for one then-football player and three prospective players
to take correspondence courses from an unidentified instructor they knew at
another institution. According to the NCAA, the athlete who was already enrolled
at New Mexico actually completed the work in the correspondence course, but the
situation still violated NCAA rules against “extra benefits” — over and above
those available to the typical student — because the former coaches arranged for
him to take the course.
Inside Higher Ed, August 21, 2008 ---
http://www.insidehighered.com/news/2008/08/21/newmexico
Bob Jensen's threads on college athletics scandals are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Athletics
An Almost Unbelievable Ponzi Fraud at the University of Miami
Federal officials are investigating an apparent
ponzi scheme in which a University of Miami alumnus is alleged to have used
university employees and facilities for meetings in which he may have obtained
tens of millions of dollars from investors who may now have lost their funds,
CNN reported. Andres Pimstein, who reportedly has
confessed to the scheme, declined to comment. A spokeswoman for the university
said that no funds from Miami were involved, that a few current or former
employees may have been involved, and that the university was cooperating fully
with the investigation.
Inside Higher Ed, August 21, 2008 ---
http://www.insidehighered.com/news/2008/08/21/qt
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
An Almost Unbelievable Ponzi Fraud at the University of Miami
Federal officials are investigating an apparent
ponzi scheme in which a University of Miami alumnus is alleged to have used
university employees and facilities for meetings in which he may have obtained
tens of millions of dollars from investors who may now have lost their funds,
CNN reported. Andres Pimstein, who reportedly has
confessed to the scheme, declined to comment. A spokeswoman for the university
said that no funds from Miami were involved, that a few current or former
employees may have been involved, and that the university was cooperating fully
with the investigation.
Inside Higher Ed, August 21, 2008 ---
http://www.insidehighered.com/news/2008/08/21/qt
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Senator Grassley Pressures Universities on Conflicts of Interest," by
Jeffrey Brainard, Chronicle of Higher Education, August 8, 2008 ---
http://chronicle.com/weekly/v54/i48/48a01201.htm
University scientists should have their grants
yanked by the National Institutes of Health if they fail to report financial
conflicts of interest, said U.S. Sen. Charles E. Grassley.
In an exclusive interview last week with The
Chronicle, the Republican from Iowa said an aggressive campaign by the
agency would forestall legislation forcing it to act.
"I'm on a campaign to make sure existing
requirements of NIH and universities" are followed, "and I don't think we
have to pass any law to do that," he said.
Recently, Senator Grassley has singled out several
institutions — Harvard and Stanford Universities, and the University of
Cincinnati — after his office determined that some scientists had
underreported their own financial interests in research projects supported
by the NIH. Senator Grassley is seeking details from about 20 more
institutions about financial conflicts among scientists.
Since 1995 an NIH regulation has required
scientists to report to their universities any "significant financial
interests" they hold in research projects financed by the agency. The
universities, in turn, are required to tell the NIH whether they were able
to manage or eliminate the conflicts in order to avoid bias in the research
findings.
A January report by the inspector general of the
Department of Health and Human Services, the NIH's parent agency, said the
NIH rarely checks up on the universities' reports. Senator Grassley's
investigators also found discrepancies when they asked pharmaceutical
companies to list their payments to researchers and then asked universities
to describe financial disclosures by those same scientists.
Mr. Grassley said that rather than leaning on the
universities themselves, he expects to use the NIH as the lever to pressure
them.
"If University X isn't doing their job, they pull
one grant; that's all they'd have to do; it would send a very clear signal,"
the senator said. He added that he had little control over university
practices, "but I've got oversight over the NIH, and I want them to do their
job."
The agency says that it is. In a letter last week
to Senator Grassley, the NIH's director, Elias A. Zerhouni, wrote that the
agency was working to ensure that its oversight of financial conflicts "is
both vigorous and effective."
Senator Grassley said the NIH has informed his
staff that it believes it lacks the legal authority to revoke a grant for
failures to report. But the senator disagrees.
"If you don't have the authority to do it, I'll
work to get you the authority to do it," he said. But the NIH needn't wait
for that, he said. "What university is going to sue the NIH because they
pulled a grant because the university wasn't doing what NIH says they have
to do anyway? … That's like being caught with your hand in the cookie jar."
Mr. Grassley said he thinks the NIH has failed to
ride herd on universities adequately because the agency wishes to maintain
"buddy-buddy relationships with universities and with researchers."
Continued in article
Bob Jensen's threads about accountability and conflicts of interest in
higher education are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability
"Merrill Lynch Settlement With SEC Worth Up to $7B," SmartPros,
August 25, 2008 ---
http://accounting.smartpros.com/x62971.xml
Federal regulators said Friday that investors who
bought risky auction-rate securities from Merrill Lynch & Co. before the
market for those bonds collapsed will be able to recover up to $7 billion
under a new agreement.
The largest U.S. brokerage will buy back the
securities from thousands of investors under a settlement with the
Securities and Exchange Commission, New York Attorney General Andrew Cuomo
and other state regulators over its role in selling the high-risk bonds to
retail investors. Under that deal, announced Thursday, Merrill agreed to
hasten its voluntary buyback plan by repurchasing $10 billion to $12 billion
of the securities from investors by Jan. 2.
Merrill also agreed to pay a $125 million fine in a
separate accord with state regulators.
The $330 billion market for auction-rate securities
collapsed in mid-February.
The SEC's estimate of a $7 billion recovery is
based on its projection of the eventual amount of the bonds that will be
cashed in by the affected investors, who bought them before Feb. 13. The $10
billion to $12 billion is the total amount that Merrill is committing to buy
back. The firm has to offer redemptions to all investors, though not all may
cash in the securities.
The SEC said the new agreement will enable retail
investors, small businesses and charities who purchased the securities from
Merrill "to restore their losses and liquidity."
New York-based Merrill neither admitted nor denied
wrongdoing in agreeing to the federal settlement, which is subject to
approval by SEC commissioners.
The firm wasn't fined under the accord, but the SEC
said Merrill "faces the prospect" of a penalty after completing its
obligations under the agreement. The amount of the penalty, if any, would
take into account the extent of Merrill's misconduct in marketing and
selling auction-rate securities, and an assessment of whether it fulfilled
its obligations, the SEC said.
"Merrill Lynch's conduct harmed tens of thousands
of investors who will have the opportunity to get their money back through
this agreement," Linda Thomsen, the agency's enforcement director, said in a
statement. "We will continue to aggressively investigate wrongdoing in the
marketing and sale of auction-rate securities."
Merrill, Goldman Sachs Group Inc. and Deutsche Bank
on Thursday brought to eight the number of global banks that have settled a
five-month investigation into claims they misled customers into believing
the securities were safe.
The auction-rate securities market involved
investors buying and selling instruments that resembled regular corporate
debt, except the interest rates were reset at regular auctions - some as
frequently as once a week. A number of companies and retail clients invested
in the securities because, thanks to the regular auctions, they could treat
their holdings as liquid, almost like cash.
Major issuers included companies that financed
student loans and municipal agencies like the Port Authority of New York and
New Jersey. When big banks ceased backstopping the auctions with supporting
bids because of concerns about credit exposure, the bustling market
collapsed. That left some issuers paying double-digit interest rates because
of the terms under which they issued the securities.
Regulators have been investigating the collapse in
the market to determine who was responsible for its demise and whether banks
knowingly misrepresented the safety of the securities when selling them to
investors.
Jensen Comment
It's unbelievable how many huge frauds there are in which Merrill Lynch has been
an active participant. For example, go to the following site and do a word
search for "Merrill" ---
http://www.trinity.edu/rjensen/FraudRotten.htm
For example, Merrill Lynch was a key player in the derivatives instrument fraud
that cost Orange County over a billion dollars. This is just one of the many
examples.
How to Prevent Corporate and Other Organizational Cheating
"How to Prevent Cheating," by Margaret Steen, Stanford Magazine,
August 2008 ---
http://www.gsb.stanford.edu/news/bmag/sbsm0808/feature-preventcheating.html
WHEN A CORPORATE SCANDAL throws a company into
crisis or even destroys it, many onlookers’ reaction is that the people
involved must have been immoral. Certainly they, the onlookers, would never
become involved in cooking the company books, approving mortgages without
proper documentation, or lying to customers about a product’s capabilities.
Yet it’s easier than most people realize for
ordinary, well-meaning people to get caught up in activities they should
have known were wrong. These activities do “real harm to real people,” says
GSB accounting Professor Maureen McNichols,
who teaches an elective course called Understanding Cheating. Among other
things, the course helps students see how good leadership and the right
organizational structure can cut down on the opportunities for corruption.
Creating a structure that reduces the chances of
cheating requires a balancing act: between too few controls and too many,
and between understanding why people cheat and intolerance for such
behavior.
Many people, including students at business
schools, resist discussing how the influence of a group or a situation can
lead good people to do bad things. It seems to excuse the behavior, and they
want individuals to be held accountable for their actions. But research
indicates that leaders who don’t acknowledge that group pressure exists—so
they can use that understanding to promote an ethical organizational culture
and appropriate controls—may be setting their organizations up for
corruption.
“I would say that there are some people who are
just flat-out corrupt: They would steal the offering from the church plate,”
says Douglas Brown, MBA ’61, who was named treasurer of the state of New
Mexico in 2005 after a corruption scandal led to the indictment of the two
previous treasurers. But there’s a much larger group who are deeply
conflicted about what to do and finally “just kind of tunnel under and put
up with it.”
Brown didn’t fire everyone who had had a hand in
his department’s corrupt practices. For example, an employee who was asked
by her boss to send out invitations to a golf tournament “which was
basically lining the pockets of the state treasurer” was kept on.
Just as posting speed limit signs and exhortations
that “Speed Kills!” will do little to reduce speeding if the police aren’t
issuing tickets, so businesses need controls and independent auditors to
rein in potential cheating. But “too many controls can breed enormous
inefficiencies,” Brown says, causing business to grind to a halt. “This is a
common managerial problem: You have to trust your people and empower them”
while still monitoring what they’re doing.
The idea that ordinary, good people can end up
involved in corruption is counterintuitive to some. “We underestimate the
power of a situation to control people’s actions,” says GSB organizational
behavior Professor Deborah Gruenfeld. “Most of us believe we’re much more
auto-nomous than we are.”
Social science research suggests leaders need to
take into account group power, organizational structure, rationalization,
and fear and confusion.
• GROUP POWER. If the supervisor of the storeroom
notices supplies are disappearing fast, he or she is likely to remind
coworkers that too many people are stealing. That’s exactly the wrong
approach to take, psychologist Robert Cialdini of Arizona State University
told researchers at a recent Business School conference. In an experiment in
Petrified Forest National Park in Arizona, Cialdini placed signs at
entrances asking people not to take home petrified wood. The sign at one
entrance showed three thieves with an X over them, while at another
entrance, the sign depicted just one thief. The latter was far more
effective at reducing theft.
“You want to alert people to the extent of a
problem as a way of mobilizing them against it,” Cialdini says. But when you
emphasize how common cheating is, “there’s a subtext message, which is that
all of your neighbors and coworkers are doing this. And if there’s a single,
most primitive lever for behavior in our species, it’s the power of the
crowd.”
• ORGANIZATIONAL STRUCTURE. “My lifetime’s work in
business ethics suggests that business corruption has everything to do with
culture and with incentives,” says Kirk Hanson, MBA ’71, executive director
of the Markkula Center for Applied Ethics at Santa Clara University and an
emeritus GSB faculty member.
For example, Don Moore, associate professor of
organizational behavior and theory at the Tepper School of Business at
Carnegie Mellon University, has written about how the relationship between
accounting firms and their clients “makes it impossible for auditors to be
objective, given what we know about human psychology.” Auditors want smooth
working relationships with their clients, and they don’t want to be fired,
so they have an incentive not to ask awkward questions.
Executives may also “look the other way when a
salesperson overpromises,” Cialdini says. They may ignore exaggeration in
the company’s marketing materials or use proprietary information gained from
one vendor in negotiation with another.
Actions speak louder than words. “You can’t dupe
people by saying, ‘This is what we stand for,’ when promotions are based on
something else,” Gruenfeld says.
• RATIONALIZATION. Because people generally want to
view themselves as ethical, they will reframe a situation to justify their
actions, says Elizabeth Mullen, assistant professor of organizational
behavior at the GSB, whose courses on negotiation and organizational
behavior include ethics topics. “The division of labor required for much
corporate work, with many people contributing a small amount to a project,
makes this easier. For example, an employee can tell himself, ‘I’m not the
person who falsified the safety data for the product; I just reported the
data that I had,’” Mullen says.
People also accept uncritically information that
confirms what they want to believe, Moore said, while poking holes in
statements they wish weren’t true.
• FEAR AND CONFUSION. GSB political economy
Professor Jonathan Bendor, who teaches a course on negotiation that includes
discussions of cheating, thinks for most people fear is a more common cause
of corrupt behavior than greed. People want to avoid conflict, and being a
whistleblower can ruin a person’s career, even if the person is vindicated.
So many people keep quiet.
“It takes a huge amount of courage to say ‘stop.’
Some of this stuff is a judgment call, and you may be wrong, and then you
really look stupid. But you have to take the risk,” says Bowen “Buzz” McCoy,
a former member of the Business School’s Advisory Council who spent 30 years
at Morgan Stanley. He has written and consulted on business ethics and, with
his wife, endowed a GSB chair in leadership values and helped fund the
Stanford Program in Ethics in Society.
Although many cases of corruption involve behavior
that anyone should know is wrong, it’s not always so clear cut. For example,
says Professor Blake Ashforth of Arizona State’s W.P. Carey School of
Business, “Small gifts are ways of cementing friendships. Big gifts are
bribes. How big is big?”
McCoy points out that a good salesperson may use
hyperbole but doesn’t lie, and that in some cases the sophistication of the
customer plays a role in how far a salesperson should go in making claims.
Adds Gruenfeld: “When people say someone is entrepreneurial or resourceful,
part of what they mean is that person knows how to work around constraints
in the system.”
GSB Professor Emeritus James March adds that
“without a certain amount of cheating—violating rules—and
corruption—inducing others to violate rules—no organization can survive. It
is often called ‘taking initiative’ or ‘using your head.’ That is not a
justification of egregious behavior, but a reminder that the boundary
between art and obscenity is often hazy.”
Tepper’s Moore describes “an endless process of
co-evolution” in which businesses explore new models. Some are deemed by
society to be unethical or undesirable and eventually outlawed. Others
become the norm.
Moore explains how auditors can go from behavior
that is technically correct but ethically borderline to outright corrupt in
just a few years. First, the auditor sees the client doing something that’s
just on the edge of permissibility and doesn’t say anything. The next year,
the client pushes just a bit further, this time over the line. Now the
auditor doesn’t confront the client about it, since the practice is so
similar to the one that went unremarked the previous year. By the third
year, the client’s practice is clearly wrong, but the auditor realizes that
to challenge it would be to admit mistakes in previous audits. And by the
fourth year, the auditor is actively engaged in a coverup with the client to
prevent the corrupt practice from being discovered.
Continued in article
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's threads on corporate governance are at
http://www.trinity.edu/rjensen/fraud001.htm#Governance
"How to Prevent Investment Adviser Fraud," by Brian Carroll, Journal of
Accountancy, January 2006 ---
http://www.aicpa.org/pubs/jofa/jan2006/carroll.htm
EXECUTIVE SUMMARY |
SECTION 206 OF THE INVESTMENT ADVISERS ACT
OF 1940 provides guidelines for
investment advisers on what constitutes
fraud.
THE SUPREME COURT HAS HELD THAT THE ACT
imposes a fiduciary duty on
investment advisers to act in the best
interest of their clients by fully
disclosing all potential conflicts of
interest.
INVESTMENT ADVISERS SHOULD REVIEW CAREFULLY
SEC and other disclosure
requirements to ensure they clearly
understand potential conflicts.
INVESTMENT ADVISERS SHOULD REVIEW ALL SEC
FILINGS, client marketing materials
and other significant documents to ensure
that they have appropriately disclosed all
potential conflicts. |
Brian Carroll, CPA, is
special counsel with the SEC in Philadelphia
and an adjunct professor at Rutgers
University School of Law, Camden, N.J. |
|
|
"Keep Private Equity Away From Our Banks," by Andy Stern, The Wall
Street Journal, July 7, 2008; Page A13 ---
http://online.wsj.com/article/SB121538911268431155.html?mod=djemEditorialPage
Private-equity firms have made a lavish living on
making big bets when no one is looking. Unlike banks and thrifts – which are
regulated, transparent and generally publicly owned enterprises –
private-equity firms operate in secret, virtually free from regulation. They
use tax loopholes around carried interest – and deduct interest payments on
the debt they use for buyouts – to extract huge profits from the companies
they buy. Private-equity profits are built on big risks, and taking
advantage of lax regulation – the very problems that led to the subprime and
credit crises.
Shareholders are also paying the price for
private-equity investments in banks. Texas Pacific Group's (TPG) recent
investment in Washington Mutual (WaMu) massively diluted shareholder stakes
by handing 50.2% of the company to TPG and its partners. While the deal –
crafted in secret without shareholder input or approval – has already put
$50 million in transaction fees in the pocket of TPG, WaMu shareholders have
seen their stock value fall to $5.38 a share, the lowest level in 16 years
(a nearly 90% drop in the last year alone).
Continued in article
Bob Jensen's threads on "Rotten to the Core" are at
http://www.trinity.edu/rjensen/FraudRotten.htm
The Timeline of Derivative Financial Instruments Fraud ---
http://www.trinity.edu/rjensen/FraudRotten.htm
The Timeline of the Recent History of Fannie Mae Scandals 2002-2008 ---
http://www.trinity.edu/rjensen/caseans/000index.htm#FannieMae
"Fannie Mayhem: A History," The Wall Street Journal, July 14, 2008
The Mouse That Roared
Hundreds of super-rich American tax cheats have, in
effect, turned themselves in to the IRS after a bank computer technician in the
tiny European country of Liechtenstein came forward with the names of US
citizens who had set up secret accounts there, according to Washington lawyers
investigating the scheme. The bank clerk, Heinrich Kieber, has been branded a
thief by the government of Liechtenstein for violating the country's bank
secrecy laws.
Brian Ross and Rhoda Schwartz,
"Day of Reckoning? Super Rich Tax Cheats Outed by Bank Clerk," ABC News,
July 15, 2008 ---
http://abcnews.go.com/print?id=5378080
"Nancy Heinen, Former Apple General Counsel, Settles Backdating Charges,"
by Arik Hesseldahl, Business Week, August 14, 2008 ---
Click Here
Posted by: Arik Hesseldahl on August 14 Nancy
Heinen, Apple’s former general counsel has settled civil charges brought by
the Securities and Exchange Commission in 2007, the commission announced
today.
The settlement calls for Heinen, who had served as
Apple’s general counsel from 1997 until her departure in mid-2006, to pay
$2.2 million in disgorgement, interest and penalties, and to be barred from
serving as an office of a public company for five years. Under terms of the
settlement, she has neither admitted nor denied any wrongdoing.
Heinen had been accused by the SEC of being
responsible for the backdating of two big blocks of stock options grants to
Apple executives, a matter that had cast a pall over the company it first
disclosed the matter in June of 2006, about a month after Heinen’s
departure. The SEC said that company records pertaining to a grant of 4.8
million options to Apple’s senior executive team in February of 2001, and a
grant of 7.5 million shares made to CEO Steve Jobs in December of 2001 had
been altered to conceal what it called a fraud. The result was that Apple
underreported its stock-related expenses by nearly $40 million.
In the case of the first grant, the SEC said, six
executives including Heinen, received options that were in-the-money,
meaning their strike price was lower than the actual share price on the date
of grant.
Apple was required to report the $18.9 million
difference as a stock-based compensation charge in regulatory filings, but
didn’t. The commission had accused Heinen of backdating the options to Jan.
17 when the price of Apple’s stock was lower, and, was also accused of
having directed underlings to prepare documents showing that the grant had
been properly approved by Apple’s board of directors when it had not.
Heinen’s lawyer, Cris Areguedas had argued that
Heinen hadn’t backdated the options to the Jan. 17 date as the SEC alleged,
but had been laboring under the impression that the grant had been properly
approved by Apple’s board in late 2000, and was only pushing back the grant
date, which was legal under rules in force at the time. Her intent, Arguedas
said, had been not to defraud Apple investors but to help the company avoid
the appearance of having “spring-loaded” the options in advance of a an
important Steve Jobs keynote address at the 2001 MacWorld Expo in San
Francisco.
In the second case, Heinen had been accused of
signing fictitious board meeting minutes concerning a “special board
meeting” that had never taken place, that reflected the approval of
directors of a grant to Jobs. Again the difference, $20.3 million in this
instance, wasn’t properly reported in regulatory filings.
In this instance, while the SEC complaint implied
that Heinen believed the proper grant date was Aug. 29, but when Jobs
complained about the vesting schedule, and had wanted some of the options in
the grant to be “pre-vested” meaning he would have been able to exercise
them right away. As a November 2001 deadline for properly reporting the
expense neared, Heinen became concerned about the delay, the SEC complaint
said, and looked for a data where Apple’s share price was close to the
$17.83 price of Aug. 29. She chose Oct. 19, when the stock was at $18.30,
but less than $21.01, its price on the actual grant date of Dec. 18, thus
creating for Jobs, an instant paper profit.
The settlement would appear to bring final closure
to the matter of Apple’s relatively minor backdating issue. During parts of
2006 and 2007, the matter had caused Apple investors some anxiety that Jobs
might be targeted by the SEC either for civil charges or by the U.S.
Department of Justice for criminal charges. The amount of money involved –
less than $40 million – was in fact minimal to Apple, who during the its
fiscal years 2006 and 2007 had reported sales of $20 billion and $24 billion
respectively, and whose cash horde had exceeded $15 billion by the close of
its 2007 fiscal year.
The matter had been expected to come to trial in
the federal court for the Northern District of California this year, and
would have likely generated substantial media attention because Jobs, having
been subpoenaed in 20007 was expected to appear as a witness.
The settlement also means that Heinen’s version of
events will likely not be aired in public. When Apple’s former CFO Fred
Anderson settled charges related to the matter in 2007, he issued a public
broadside at Apple and Jobs in particular. At the time Anderson, through his
lawyer, said that he had warned Jobs that the company would need to record a
charge for the options granted Apple executives in early 2001.
Anderson’s version of events would seem to
contradict Apple’s version of events, which it announced in October of 2006,
after an investigation by a special committee of its outside directors
concluded that Jobs didn’t fully appreciate the accounting implications of
the matter.
TrackBack URL for this entry:
http://blogs.businessweek.com/mt/mt-tb.cgi/11392.1234112593
Bob Jensen's threads on backdating are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
Ending a bitter public fight over whether former New
York Stock Exchange Chief Executive Dick Grasso was paid too much, a state
appeals court ruled that Mr. Grasso can keep every penny collected from his
$187.5 million multiyear compensation package. The 3-to-1 ruling by the
Appellate Division of the New York State Supreme Court was a vindication for the
relentless Mr. Grasso, who was ousted after details of his lucrative pay were
revealed in 2003.
Aaron Lucchetti, "Grasso Wins Court Fight, Can Keep NYSE Pay," The Wall
Street Journal, July 2, 2008; Page A1 ---
http://online.wsj.com/article/SB121492781324819635.html?mod=todays_us_page_one
Simple Ways to Commit Fraud With Excel
July 23, 2008 message from Glen L Gray
[glen.gray@CSUN.EDU]
Who knew fraud was so easy...
SEC: Ex-CFO Used Spreadsheets for Fraud
http://cfo.com/article.cfm/11779964/c_11780170
----
Glen L. Gray, PhD, CPA
Accounting & Information Systems, COBAE California State University,
Northridge 18111 Nordhoff ST Northridge, CA 91330-8372
818.677.3948 818.677.2461
(messages)
http://www.csun.edu/~vcact00f
July 23, 2008 reply from David Albrecht
[albrecht@PROFALBRECHT.COM]
Yes, I recall reading that article. Didn't the CFO
rely on hidden rows and columns, as well as using a font colored white? It
seems so basic to check for hidden items, but so easy to overlook.
Other important items to check for would be cell
links and file ancestery.
David Albrecht
July 24, 2008 reply from Roger Debreceny
[roger@DEBRECENY.COM]
My colleague Ray Panko is recognized as one of the
leaders in research on spreadsheet errors .. check out his excellent website
at
http://panko.shidler.hawaii.edu/SSR/index.htm
.. his (recently updated) paper " What We Know About
Spreadsheet Errors" gives interesting (and frightening) data on errors in
s'sheets found in a variety of studies.
Interestingly, research in Europe on s'sheets is
much more advanced than in North America. The Eusprig group (
http://www.eusprig.org/ ) has an annual meeting
with interesting papers that can be downloaded from the Eusprig website.
Question: How many spreadsheets touch in some way
on the financial statements in the typical Fortune 1000 company?
Roger
Second Circuit Affirms Dismissal of Indictment Against Former KPMG Partners
and Employees
Because of 6th Amendment Violation In a major victory
for the white collar defense bar, the Second Circuit affirmed the district
court's dismissal of the indictment against former KPMG partners and employees
because the government deprived the defendants of their Sixth Amendment right to
counsel by causing KPMG to place conditions on the advancement of legal fees and
to cap the fees and ultimately end them. U.S. v. Stein (2d Cir. August 28,
2008).
Securities Law Professor Blog, August 28, 2008 ---
http://lawprofessors.typepad.com/securities/
KPMG Going to Court in New Jersey for Alleged professional malpractice
and negligence
"KPMG Ordered to Stand Trial in Fraud Law," SmartPros, July 28, 2008 ---
http://accounting.smartpros.com/x62665.xml
Big Four auditing firm KPMG LLP
has been ordered by a New Jersey Superior Court judge to stand trial in an
accounting fraud lawsuit involving Cast Art Industries, according to a
statement issued Friday by law firm Eagan O'Malley & Avenatti, which
represents Cast Art.
Cast Art sued KPMG in 2003 for professional
malpractice and negligence for allegedly failing to detect a pervasive
financial fraud at Papel Giftware, Inc. prior to Cast Art acquiring Papel in
December 2000 for nearly $50 million.
In a written opinion, Judge Heidi Willis Currier
found sufficient evidence for a jury trial to proceed against KPMG, Papel's
auditor.
In one email uncovered during the lawsuit, a member
of Papel's management described how the company had "raped and pillaged to
an extreme" in order to meet its forecasts. A KPMG partner later
acknowledged, in a memorandum he sent to others at KPMG, that Papel's
management could not be trusted.
The lawsuit alleges that KPMG knew Papel's
management could not be trusted yet repeatedly represented to Cast Art and
others that Papel's financial statements were accurate and no fraud had
occurred.
"Wall Street, Main Street, investors, and the
public at large depend on auditing firms to be truthful and accurate when
reporting on the financial condition of company," stated Michael Avenatti, a
lawyer for Cast Art. "In this case, like in too many others, KPMG cut every
possible corner and fell woefully short."
Cast Art claims that for three years prior to its
acquisition of Papel, KPMG repeatedly affirmed that Papel's financial
statements were accurate when in reality the company's management had
engaged in a number of fraudulent schemes designed to inflate the value of
the company to potential buyers. Cast Art alleges that Papel's management
booked tens of thousands of fraudulent transactions on the company's books
and records by, among other things, purposely shipping product to phony
customers and double and triple shipping the same product to the same
customer.
Cast Art plans to seek close to $50 million at
trial. Opening statements are expected to begin in the trial on Sept. 15,
2008.
KPMG Hit Once Again for Negligence (this time in the United Kingdom)
"The UK's economic elites cannot effectively regulate themselves: The
disciplining of major accounting firms is still little more than a cynical
public relations exercise," by Prim Sikka, The Guardian, July 4, 2008 ---
http://www.guardian.co.uk/commentisfree/2008/jul/04/economy
Governments talk of heavy fines and incarceration
for antisocial behaviour for normal people, but it is entirely different for
economic elites, as exemplified by major accountancy firms. Despite
recurring audit failures, they get their own courts, puny fines and little
or no public accountability. Appeals professionalism and private
disciplinary arrangements disarm journalists and critics and mask the usual
predatory moneymaking business.
Last week, seven years after the collapse of
Independent Insurance Group, the UK accountancy profession frightened KPMG
with a fine of £495,000 over its audit failures. The partner in charge of
the audits was fined £5,000 and the firm had to pay disciplinary hearings
costs of £1.15m. The audit failures played a part in helping the company to
report a loss of £105m into a profit of £22m. In October 2007, two
Independent directors were jailed for seven years.
The puny fines will hardly worry KPMG or its
partners. The firm boasts worldwide income of nearly $20bn (£10bn) and about
£1.6bn of this is from its UK operations. Its partners are charged out at an
hourly rate of £600. Last year, its 559 UK partners enjoyed profits of
£806,000 each and also shared a Christmas bonus of £100m.
The seven-year delay is not unusual. The
professional structures took eight years to levy a fine on Coopers & Lybrand
(now part of PricewaterhouseCoopers) for audit shortcomings that might have
prevented the late Robert Maxwell from looting his companies and employee's
pension funds. The frauds came to light after his suicide in 1991. A UK
government investigation did not report until 2001. In 1999, a professional
disciplinary hearing placed most of the blame for audit failures on an audit
partner who died in the intervening years. The firm was fined £1.2m for its
audit failures and ordered to pay costs of £2.2m. Taken together this
amounted to £6,000 per partner. Coopers had collected over £25m in fees from
Maxwell. In 1999, PricewaterhouseCoopers had UK income of £1.8bn.
The fraud-ridden Bank of Credit and Commerce
International (BCCI) was closed down in July 1991. Nearly 1.4 million
depositors lost some part of their $8bn savings, though some UK savers were
bailed out by the taxpayer funded depositor protection scheme. The UK
government failed to appoint an independent inquiry to investigate the role
of auditors, but a US Senate report published in 1992, raised numerous
questions about the conduct of auditors. Eventually, in 2006, without
commenting on any of the findings of the US Senate, a disciplinary panel of
the UK accountancy profession found some faults with the audits conducted by
the UK arm of Price Waterhouse (now part of PricewaterhouseCoopers). The
firm was fined £150,000 and ordered to pay hearing costs of £825,000. At
that time the firm had UK income of around £2bn.
The above is a small sample of what passes for
self-regulation in the UK accountancy profession. The sinking ship of
self-regulation has now been refloated, albeit with a few deckchairs
rearranged. The government has delegated the investigation of major audit
failures to the Financial Reporting council (FRC), a statutory regulator
dominated by corporate and accounting elites. In August 2005, it announced
an investigation into the audits of MG Rover conducted by Deloitte & Touche.
So far no report has materialised.
The usual excuse is that the accountancy regulators
can't do anything until all litigation is resolved. Such an excuse did not
stop the US government from investigating auditors of Enron or WorldCom.
There is hardly any evidence to show that the UK fines are effective or have
resulted in any improvement in audit quality. Despite recurring failures, no
partner from any major UK auditing firm has ever been banned from practising
and no major firm has ever been suspended from selling audits. Most
stakeholder lawsuits against auditors are barred after six years, and the
much-delayed disciplinary findings are of little use to them. In any case,
generally auditors only owe a "duty of care" to the company as a legal
person and not to any individual shareholder, creditor or other stakeholder
who may have suffered loss as a result of auditor negligence.
The above cases do not suggest that auditors
directly participated in any of the irregular activities. Nevertheless, the
disciplining of major accounting firms remains a cynical public impression
management exercise. The victims of poor audits can submit evidence to
disciplinary panels, but cannot appeal against its findings, or
feather-duster fines. In contrast, the firms and their partners can. There
is no way of knowing how any evidence gathered by the disciplinary panels is
weighted or filtered. None of it is available for public scrutiny. The fines
levied swell the coffers of the regulators and their sponsors and are not
used to compensate the victims of audit failures. Neither the professional
bodies nor any disciplinary structure owes a "duty of care" to any
individual affected by their policies. It is time the economic elites were
subjected to the legal processes that apply to normal people.
Bob Jensen's threads on KPMG are at
http://www.trinity.edu/rjensen/Fraud001.htm
FORMER HEWLETT PACKARD VICE PRESIDENT PLEADS GUILTY TO THEFT OF IBM TRADE
SECRETS
A former vice president of imaging and printing
services at the Hewlett Packard Company (HP) pleaded guilty today to stealing
trade secrets, announced Acting Assistant Attorney General Matthew Friedrich of
the Criminal Division and U.S. Attorney Joseph P. Russoniello for the Northern
District of California. Atul Malhotra, 42, of Santa Barbara, Calif., was charged
on June 27, 2007, in a one count information with theft of trade secrets.
According to court documents, from Nov. 17, 1997, to April 28, 2006, Malhotra
was employed by International Business Machines Corporation (IBM) as director of
sales and business development in output...
FBI, July 11, 2008 ---
http://sanfrancisco.fbi.gov/dojpressrel/2008/sf071108.htm
"SEC Obtains Asset Freeze Against Alleged International Fraud,"
Blog of the Corporate Law Center, University of Cincinnati College of Law,
August 16, 2008 ---
http://lawprofessors.typepad.com/securities/
The SEC obtained an emergency court order freezing
the profits from an alleged $13 million international fraud involving a
Seattle-area microcap company and a Barcelona stock promoter. The Commission
charged GHL Technologies, Inc., and its CEO Gene Hew-Len with issuing a
series of false press releases touting the company's business dealings. The
Commission also charged Francisco Abellan (also known as "Frank Abel") of
Barcelona, Spain with coordinating the scheme, sending glossy promotional
mailers to over 2 million U.S. recipients and unloading over $13 million in
GHL stock on unsuspecting investors. At the SEC's request, the federal
district court in Tacoma, Wash. Thursday issued an order freezing Abellan's
assets and prohibiting him from further dissipating the proceeds of the
scheme (most of which, according to the SEC, he transferred to multiple bank
accounts in the principality of Andorra).
GHL (later renamed NXGen Holdings, Inc.) is an
installer of GPS-based navigation equipment. According to the Commission's
complaint, in early 2006, President and CEO Hew-Len and stock promoter
Abellan arranged for GHL to issue millions of shares of GHL stock to
offshore entities designated by Abellan. In April 2006, the SEC alleges,
Abellan caused the dissemination of "The Street Stock Report," a full-color
glossy mailer sent to millions of U.S. addresses urging investors to
purchase GHL stock quickly to see huge trading profits. Around the same
time, Hew-Len issued nine press releases over a nine-week period hyping the
company. Among other things, according to the SEC, the press releases made
false claims about contracts with large customers, fraudulently touting
millions of dollars in potential revenues. Following this concerted
promotion campaign, GHL's stock price doubled and trading volume spiked
nearly 1500%. Abellan and his entities sold their GHL stock holdings for
profits in excess of $13 million. The stock, which reached a high of nearly
$9 per share at the height of the scheme, now trades at under a penny.
The SEC's complaint charges GHL, Hew-Len and
Abellan with numerous securities violations and seeks preliminary and
permanent injunctions, disgorgement, penalties, and other permanent and
emergency relief. Pursuant to the court's order, a hearing will be held on
August 27, 2008 to determine whether the asset freeze will remain in place
during the remainder of the litigation.
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Wachovia Agrees to Buy Back over $8.5 Billion in ARSs," Blog of
the Corporate Law Center, University of Cincinnati College of Law, August
16, 2008 ---
http://lawprofessors.typepad.com/securities/
The SEC and the New York Attorney General announced
on August 15 that investors, small businesses, and charities who purchased
auction rate securities (ARS) through and Wachovia Capital Markets, LLC
(collectively Wachovia) could receive over $8.5 billion to fully restore
their losses and liquidity through a preliminary settlement that has been
reached with Wachovia.
Continued in article
JP Morgan Chase and Morgan Stanley Also Agree to Buy Back ARSs in Settlement
with New York AG.
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's Rotten to the Core threads on banks are at
http://www.trinity.edu/rjensen/FraudRotten.htm
"Whistle-Blowers Say California State U. Fired Them for Questioning No-Bid
Contracts," by Kathryn Masterson, Chronicle of Higher Education
August 17, 2008 ---
Click Here
Three senior employees at California State
University say they lost their jobs after questioning whether the system’s
chancellor, Charles B. Reed, misused public funds when he hired a
labor-consulting firm without soliciting competitive bids, the
San Francisco Chronicle reported.
Two lawyers who worked in California State’s
labor-relations office — Paul Verellen and Joel Block — said their firings
were directly related to their questions over the hiring of C. Richard
Barnes and Associates, a Georgia-based firm, to represent the university in
negotiations with labor unions and in arbitration with faculty members.
Mr. Verellen has filed a whistle-blower complaint
with California’s Bureau of State Audits and said he plans to file a lawsuit
against Mr. Reed and the university. A third dismissed employee has signed a
legal settlement that prevents him from discussing the case, but others told
the newspaper he too had lost his job after asking questions about the
Barnes contracts.
The Barnes firm, which is led by C. Richard Barnes,
a former director of the Federal Mediation and Conciliation Service, has
received more than $2-million so far, the newspaper reported. The university
says the no-bid contracts were necessary and legitimate.
Mr. Reed said that the former employees were let go
in a staff reorganization, and that the Barnes contracts had been some of
the office’s “best-spent resources.” The San Francisco Chronicle quoted him
as saying: “I frankly got tired of all the labor-relations problems that we
were having. I asked somebody who the very best labor person was in the
country, and it turned out to be a guy in Atlanta who had worked in the
Clinton administration. … And I asked him if he would help us with our labor
problems.”
Bob Jensen's threads on whistle blowing are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Cheating in Business School Rankings in India
From the Mostly Economics Blog by Amol Agrawal on July 7, 2008 ---
http://mostlyeconomics.wordpress.com/
Premchand Palety has been writing some fantastic
columns every Monday in Mint. He has been discussing each activity of
B-schools in his column and it makes you wonder what are we getting into.
In his
recent column he talks about the B-School ranking
season with a number of magazines coming out with their views on which
school is the best. He says:
I have spoken to different directors and main
promoters of B-schools about the issue of corruption in rankings. Some of
them have confirmed that corrupt practices are followed by some agencies and
publications. I was always surprised by the Top 10 ranking of an otherwise
average B-school that used to participate in only one survey, by a business
magazine.An insider from that school told to me the real reason. There was a
major financial deal, amounting to several lakhs of rupees, struck between
the CEO of the B-school and the agency head.
And then there is a lot
more on corruption in these rankings.
Frankly it does not matter as the list hardly
changes and I do not care why so much newsprint is wasted. I have always
maintained that Business Schools in India, especially the elite ones, are
anything like their abroad counterparts.
In abroad the main thing is the quality of
research. Here, the main (perhaps only) criteria is placements. There is
hardly any research by anyone in India. I haven’t come across one paper from
these elite schools being referred in any research paper, be it any topic
even India-specific. But you do get to hear a lot on their placement
achievements. And if the government imposes a service tax on the basis of
their placement services, there is a big hue and cry.
I would maintain the trend is set by these elite
schools and otehrs have simply copied their ways. There are so many
advertisements these days even of elite schools and all you get to read is
this “100% placements”. It is getting crazy and no one is interested in
teaching. There are so many who pass out paying crazy sums not knowing
anything at all. Throughout Day one and Day final all the students talk
about is internships and placements. So like it was said “All roads lead to
Rome” , B-Schools say ” all roads lead to Placement”.
Continued in article
Bob Jensen's threads on collegiate ranking controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#BusinessSchoolRankings
"As Textbooks Go 'Custom,' Students Pay Colleges Receive Royalties For
School-Specific Editions; Barrier to Secondhand Sales,"
by Diana Hacker, The Wall Street Journal, July 10, 2008, Page B10 ---
http://online.wsj.com/article_print/SB121565135185141235.html
The University of Alabama, for instance, requires
freshman composition students at its main campus to buy a $59.35 writing
textbook titled "A Writer's Reference,"
The spiral-bound book is nearly identical to the
same "A Writer's Reference" that goes for $30 in the used-book market and
costs about $54 new. The only difference in the Alabama version: a 32-page
section describing the school's writing program -- which is available for
free on the university's Web site. This version
also has the University of Alabama's name printed across the top of the
front cover, and a notice on the back that reads: "This book may not be
bought or sold used."
Custom textbooks like this one are proliferating on
U.S. college campuses, guaranteeing hefty sales for publishers -- and
payments to colleges that are generally undisclosed to students. The
publisher of the Alabama book -- Bedford/St. Martin's, based in Boston --
pays the Tuscaloosa school's English department a $3 royalty on each of the
4,000 copies sold each year. And though the
prohibition on selling the book used can't be legally enforced, the college
bookstore won't buy the books back, making it more difficult for students to
find used copies.
Textbook companies and college officials involved
in such deals say custom textbooks provide needed resources for academic
departments and more-useful materials for students.
But Ann Marie Wagoner, a 19-year-old University of
Alabama freshman who pays $1,200 a year for textbooks, calls the cost of new
custom books "ridiculous" and complains that students aren't told about the
royalties. "They're hiding it so there isn't a huge uproar," she says.
The custom-textbook business has become the
fastest-growing segment of the $3.5 billion market for U.S. new college
texts, comprising 12% of sales for 2006, the latest year for which data is
available. Royalty deals generate tens of thousands of dollars for some big
academic departments. The arrangements have drawn little attention, despite
increasing legislative and regulatory scrutiny of the spiraling price of
textbooks, which have been rising at twice the rate of inflation over the
past two decades.
In 2005, a report by the U.S. Government
Accountability Office criticized several textbook industry practices --
including frequent new editions and the "bundling" of books with extras like
CDs and workbooks -- that discourage the purchase of used books and inflate
prices for students.
The agency found that college students spend an
average of about $900 a year on textbooks. That's the equivalent of 8% of
tuition and fees at the average private four-year college, 26% at a state
university and 72% at a community college.
Controlling Textbook Costs
In recent years, 34 states have proposed or passed
legislation to control textbook costs, including measures to prohibit
inducements to professors for adopting textbooks, according to a May 2007
congressional study. A bill pending in Congress would require more
disclosure of textbook pricing, in part by requiring publishers to sell
textbooks separately from the bundles of extras with which they are now
often packaged.
The book-royalty arrangements resemble a practice
exposed during last year's student-loan scandal, when some universities
steered students to particular lending firms and received a secret cut of
the loans. New York Attorney General Andrew Cuomo called those payments
"kickbacks" and forced universities, many of which said they used the money
to fund scholarships, to halt the practice. Mr. Cuomo recently launched a
broad conflict-of-interest investigation of the relationship between
colleges and vendors, including book publishers.
For publishers, the custom market is a way to
thwart used-book sales, which cut deeply into their profits. Though used
books have been around for decades, they have become a much bigger industry
threat in the Internet age. Web sites for used books, such as Amazon.com1
and eBay, have transformed fragmented, campus-by-campus dealings in old
texts into a national market, where discounts of 50% off the new-book price
are common. Because of their limited audience, custom books are difficult to
resell -- and they sometimes aren't eligible for authorized campus
book-buyback programs.
James V. Koch, former president of Old Dominion
University and the University of Montana, says that colleges, rather than
requiring students to buy custom texts, should post exclusive material free
on university Web sites. Prof. Koch, an economist who studied textbook costs
for a Congressional advisory committee last year, says royalty arrangements
involving specially made books may violate colleges' conflict-of-interest
rules because they appear to benefit universities more than students.
'Unethical Behavior'
"It treads right on the edge of what I would call
unethical behavior," he says. "I'm not sure it passes the smell test." Many
colleges forbid professors from personally accepting royalties when they
assign their own books for classes; others have no rules.
At the University of Alabama, Carolyn Handa, who
until recently directed the school's writing program, acknowledges that
students can save money if they buy used standard editions or sell their
books at the end of the term. But Prof. Handa says the university edition is
designed as a long-term reference. "You don't sell back your dictionary
after your first year of college," she says. "It should be a resource they
have on their shelf."
The writing program so far has collected about
$20,000 in royalties in the two years since it started requiring custom
textbooks, Prof. Handa says. She adds that she regularly declines pitches
from other publishers offering even higher royalties. "I feel bad enough
getting $3," she says.
Prof. Handa says the royalty money helps pay for
trips to conferences for graduate students and will underwrite teaching
awards. This year, three graduate students received about $500 apiece to
attend the April convention of the Conference on College Composition and
Communication in New Orleans.
Bedford/St. Martin's is a unit of Macmillan, which
is owned by German publishing giant Verlagsgruppe Georg von Holtzbrinck
GmbH. Brian Napack, president of Macmillan, says university departments
deserve royalties because of the time they spend putting together custom
texts. "We didn't come to the market to give departments royalties," he
says. "We think there's a decent argument to be made for it. It's a nice
bonus for colleges to have a couple of extra bucks to use for education."
Attracted to 15% annual sales growth, big players
such as Pearson PLC, McGraw-Hill Cos. and Macmillan are all making major
pushes into the custom-book field. In part, that's because technology has
made it cost-effective for customers to create specialized books for
relatively few students. Proponents say students often complain that
professors use only a few chapters of standard texts, whereas custom books
can follow a course precisely.
Searching Facebook
Nicole Allen, textbooks advocate for U.S. Public
Interest Research Groups -- a consumer organization -- says students, faced
with buying a custom textbook, should ask the professor whether they can
instead make do with a used standard version. If a custom text is required,
students can try to find it used through local book exchanges or by
searching social-networking sites such as Facebook for students who have
recently taken the course and may want to sell a copy, Ms. Allen says.
Some custom books involve more than just little
tweaks of established texts. At Virginia Tech, about 3,000 first-year
students annually buy a required composition guide created by its faculty.
The school distributes a new edition each year featuring student work. At
the university bookstore, the text, published by Pearson, sells for about
$50. Carolyn Rude, who chairs the English department, says the book helps
provide consistency across more than 100 sections of freshman composition by
ensuring a standard curriculum. She wouldn't disclose the precise amount of
the royalty but said it was "several dollars" per book and generated about
$20,000 annually. The university uses the money to bring in expert speakers
and pay for $600 research and travel stipends for instructors, Prof. Rude
says.
A $10 Royalty per Book
Pennsylvania State University recently ended a
contract with Pearson for the roughly 10,000 students taking introductory
economics courses. The economics department received a $10 royalty for each
custom textbook students purchased, generating about $50,000 a year for the
program, says Susan Welch, dean of the college of liberal arts. But, Prof.
Welch says, the school was uncomfortable "making money on students like
that," and the arrangement discouraged students from buying cheaper, used
books. Under a new contract with Pearson, Penn State now uses standard texts
with no royalties, as well as custom course packs.
Don Kilburn, chief executive of Pearson's
custom-publishing division, says royalties are justified when professors and
others "put in a fair amount of time and effort." Pearson says it pays
royalties on 300 of roughly 9,000 custom projects. Mr. Kilburn acknowledged
that custom books have lower resale value for students. But with custom
books, he says, students "get something better suited for their needs."
Bob Jensen's threads on publisher frauds are at
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals
How the Media Networks and Hollywood in general commit frauds
"Law and Disorder Producer Dick Wolf and NBC Are Battling Over the Profits Of
One of the Richest TV Shows Ever. These Are Their Stories," by Rebecca Dana,
The Wall Street Journal, July 12, 2008; Page A1 ---
http://online.wsj.com/article/SB121582018406147559.html?mod=todays_us_page_one
NBC Universal and Hollywood producer Dick Wolf have
built "Law and Order" into one of the most lucrative properties in the
history of television, generating billions of dollars from the franchise's
three procedural crime dramas. The 19-year-old marriage was never an idyllic
one, but as long as both sides were getting rich, it remained intact.
Now, it's on the rocks.
This spring, Mr. Wolf faced off against his
corporate bosses in two major legal battles over the series's revenue,
prestige and legacy -- a high-stakes saga that played out largely behind
closed doors. If it were a TV show, it would be called "Law and Order: Law
and Order."
According to Mr. Wolf's friends and employees, the
producer believes he has been systematically cheated by NBC. He thinks the
company has sold the show at a cheap in-house price to its own cable outlets
rather than getting the best deal possible by letting other networks bid on
it. NBC denies this, and in a private hearing this spring, an arbitrator
sided with the network.
Continued in article
More on How White Collar Crime Pays Even When You Get Caught
"The Milberg Double Cross," The Wall Street Journal, July 14, 2008;
Page A16 ---
http://online.wsj.com/article/SB121599290265249457.html?mod=djemEditorialPage
The Justice Department recently took a bow in its
legal victory over the law firm of Milberg Weiss. But now it seems Justice
may itself have been conned by the notorious firm and its felonious former
lead partner, Melvyn Weiss.
It was only last month that Milberg agreed to pay
$75 million as part of a nonprosecution agreement over Justice's charges
that it had run a 30-year kickback scheme. Not 30 days, or months. Thirty
years. The firm got off easy, not least because it finally cut ties with the
partners (including Weiss) it blamed for the scheme. Yet according to papers
filed in New York State court, even as Milberg was pinning the blame on
these criminals and telling Justice it had thrown them overboard, the law
firm's remaining partners were agreeing to pay millions to Weiss going
forward. Apparently crime does pay.
Continued in article
Jensen Comment
If I'm not mistaken, before we knew Melvyn Weiss was going to become a
convicted felon, he was a very sanctimonious featured plenary session
speaker a few years ago at an American Accounting Association annual
meeting. I no longer have the video (I gave it and my other videos to the
accounting history archives at the University of Mississippi.) My
recollection is that Mr. Weiss lambasted CPA firms for wanting limited
liability.
Bob Jensen's threads on how white collar crime pays even if you get caught
are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays