Accounting Scandal Updates and Other Fraud Between July 1 and September 30, 2010
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

Richard Campbell notes a nice white collar crime blog edited by some law professors --- http://lawprofessors.typepad.com/whitecollarcrime_blog/ 

Lexis Nexis Fraud Prevention Site ---  http://risk.lexisnexis.com/prevent-fraud

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 threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm

Investor Protection Trust --- http://www.investorprotection.org/
This site provides teaching materials.

The Investor Protection Trust provides independent, objective information to help consumers make informed investment decisions. Founded in 1993 as part of a multi-state settlement to resolve charges of misconduct, IPT serves as an independent source of non-commercial investor education materials. IPT operates programs under its own auspices and uses grants to underwrite important initiatives carried out by other organizations.

Bob Jensen's threads on fraud prevention and fraud reporting ---
http://www.trinity.edu/rjensen/FraudReporting.htm

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

 

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---
http://www.trinity.edu/rjensen/2008Bailout.htm




The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print

Being Honest About Being Dishonest
Democrats openly admit that most of the stimulus money is going to counties that voted for Obama

A new study released by USA Today also finds that counties that voted for Obama received about twice as much stimulus money per capita as those that voted for McCain. "The stimulus bill is designed to help those who have been hurt by the economic downturn.... Do you see disparity out there in where the money is going? Certainly," a Democratic congressional staffer knowledgeable about the process told FOXNews.com.
John Lott, "ANALYSIS: States Hit Hardest by Recession Get Least Stimulus Money," Fox News, July 19, 2009--- http://www.foxnews.com/story/0,2933,533841,00.html

Auditors Work for Banking Clients, Not Investors:  Resistance to Disclosing Subprime Poison Repurchase Risk
"Auditors Aren’t Forcing Full Repurchase Risk Exposure Disclosure," by Francine McKenna, re:TheAuditors, September 27, 2010 ---
http://retheauditors.com/2010/09/27/auditors-arent-forcing-full-repurchase-risk-exposure-disclosure/

Bob Jensen's threads on where the where the poison originated and where it ended up ---
http://www.trinity.edu/rjensen/2008Bailout.htm

Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


FBI Corporate Fraud Chart in August 2008 --- http://www.aicpa.org/pubs/jofa/aug2008/ataglance.htm#Chart1.htm


From the AICPA
Overview of Certified in Financial Forensics (CFF) Credential --- Click Here
http://www.aicpa.org/InterestAreas/ForensicAndValuation/Membership/Pages/Overview Certified in Financial Forensics Credential.aspx 


What to do if you suspect identity theft --- http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

Identity Theft Resource Center --- http://www.idtheftcenter.org/

Question
Why doesn't some of the information below appear prominently on Hannaford's Website?
Fortunately, there are no Hannaford stores close to where I live.
Hannaford cut corners when protecting customer privacy information.

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)

Hannaford's is going to belatedly get a firewall and improve encryption of networked credit card information (the company remains tight lipped regarding whether it followed encryption rules up to now) --- http://www.geeksaresexy.net/2008/03/18/hannaford-data-breach-is-likely-much-worse-than-reported/ 

And when the Vice President of Marketing gets quoted in the press talking about the security breach, it means that there is no CIO (Chief Information Officer) at the company.  It means their network was designed haphazardly with only a minimal thought to security.  What, they couldn’t get a quote from the President of Marketing?  How does the dairy stocker in store 413 feel about the breach?  He probably knows as much about network security as the Marketing VP.

All of this means that as the days go on, you will see more and more headlines talking about this breach being much worse than originally thought. The number of fraud cases will climb precipitously… and no one will be fired from Hannaford.

If you shop there and have used a credit card, get a copy of your credit report ASAP.

By law, you get one free credit report per year. You can contact them below.

Equifax: 800-685-1111; www.equifax.com

Experian: 888-EXPERIAN (888-397-3742); www.experian.com

TransUnion: 800-916-8800; www.transunion.com

Also see http://www.geeksaresexy.net/2008/03/19/followup-hannaford-used-rapid7-for-security/

Bob Jensen's threads on computing and networking security are at http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection

What to do if you suspect identity theft --- http://www.trinity.edu/rjensen/FraudReporting.htm#IdentityTheft

Identity Theft Resource Center --- http://www.idtheftcenter.org/
 

Report to the Nations on Occupational Fraud and Abuse, 2010 Global Fraud  --- http://www.acfe.com/rttn/rttn-2010.pdf
Thanks to Jim McKinney for the heads up.

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


NelNet --- http://en.wikipedia.org/wiki/Nelnet

"Nelnet to Pay $55-Million to Resolve Whistle-Blower Lawsuit," by Kelly Field, Chronicle of Higher Education, August 15, 2010 ---
http://chronicle.com/article/Nelnet-to-Pay-55-Million-to/123912/

Nelnet will pay $55-million to settle its share of a whistle-blower lawsuit that accuses it and several other lenders of defrauding taxpayers of more than a billion dollars in student-loan subsidies.

The settlement, which Nelnet announced late Friday, is the latest to result from a lawsuit brought by Jon H. Oberg, a former Education Department researcher, on behalf of the federal government. A federal judge ordered Nelnet and seven other student-loan companies to participate in a settlement conference last week after two of the other defendants in the case, Brazos Higher Education Service Corporation and Brazos Higher Education Authority, reached a tentative settlement agreement with Mr. Oberg.

Among the other defendants in the case is Sallie Mae, the nation's largest student-loan company. A year ago, the Education Department's inspector general issued an audit concluding that Sallie Mae overbilled the Education Department for $22.3-million in student-loan subsidies and should be required to return the money to the department.

Continued in article

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


"Universities Help Companies Bypass Earmark Ban," Inside Higher Ed, July 6, 2010 ---
http://www.insidehighered.com/news/2010/07/06/qt#231647

The House of Representatives has banned earmarks of funds directly to companies, but many corporations that have received earmarks in the past and that want to keep them coming are working through nonprofit groups -- including colleges and universities -- to do so, The New York Times reported. The earmarks technically go to the nonprofit group, which then subcontracts much of the work to a corporate entity. Among the universities cited in the article are Eastern Kentucky University, Pennsylvania State University and the University of Toledo.


FBI Corporate Fraud Chart in August 2008 --- http://www.aicpa.org/pubs/jofa/aug2008/ataglance.htm#Chart1.htm

From Smart Stops of the Web, Journal of accountancy, October 2008 ---

FRAUD / FORENSIC ACCOUNTING

HAVE FRAUD FEARS?
http://fvs.aicpa.org/Resources/Antifraud+Forensic+Accounting
Search no further than the AICPA’s offering of antifraud and forensic accounting resources. Click “Tools and Aids” to download Managing the Business Risk of Fraud: A Practical Guide, which outlines principles for establishing effective fraud risk management. The paper was released jointly by the AICPA, the Association of Certified Fraud Examiners and The Institute of Internal Auditors (see “Highlights,” page 16). The site also offers fraud detection and prevention tips, including an “Indicia of Fraud” checklist and case studies. There’s also information on the newly created Certified in Financial Forensics (CFF) credential (see “News Digest,” Aug. 08, page 30) and upcoming Web seminars.

BE CRIME SMART
www.fbi.gov/whitecollarcrime.htm
Think of the most outrageous business fraud scheme you’ve ever heard of— you’re likely to find it, plus hundreds of other white-collar crime cases—at this site from the FBI. Look under “Don’t Be Cheated” for a fraud awareness test or click on “Know Your Frauds” for access to the FBI’s analysis of common fraud schemes, including the prime bank note scheme, telemarketing fraud and up-and-coming Internet scams. CPAs and financial professionals can access details on options backdating, securities scams and investment fraud under “Interesting Cases” or learn about the FBI’s major programs involving corporate, hedge fund and bankruptcy fraud.

SURF THE FRAUD NET
www.auditnet.org/fraudnet.htm
Jim Kaplan, a government auditor and author of The Auditor’s Guide to Internet Resources, 2nd Edition, hosts this Internet portal for auditors, which provides fraud policies, procedures, codes of ethics and articles on a range of topics, including internal auditing, fraud risk mitigation and preventing embezzlement. The site also features a newsfeed, piping in daily fraud news from around the world..

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


Fraud Among Top Democrats and Their Lobbies
It may not be Talk Like a Pirate Day, but this story is guaranteed to make you say, “Aaaaargh!” The Obama administration will
pay a British distiller almost $3,000,000,000 (billion) in subsidies in order to move its operation from Puerto Rico to St. Croix in the Virgin Islands. The makers of Captain Morgan’s Spiced Rum, Diageo PLC, won’t be complaining about their booty, but the people on Puerto Rico feel pillaged — and so should American taxpayers . .
Ed Morrissey, "Obama administration putting billions into British distiller; Update: DNC member/lobbyist behind push?" Hot Air, September 1, 2009 --- http://hotair.com/archives/2009/09/01/obama-administration-putting-billions-into-british-distiller/


I saw one of these clips on ABC News last night. It showed a University of Phoenix recruiter assuring a long-time, street sleeping homeless man that he was certain to get a job teaching in NY or Arizona if he took out government loans to attend the University of Phoenix.

More Hidden Camera Findings on U. of Phoenix
The latest entity to send undercover investigators to the University of Phoenix is ABC News, which on Thursday reported the results. They include a recording of a recruiter giving incorrect information about whether a program would enable a graduate to become a teacher, and encouragement to take out as large a student loan as possible -- even more than the fake student needed. William Pepicello, president of the University of Phoenix, appeared on camera to say that "absolutely" the university could do better in terms of the way it recruits but that the answer to whether Phoenix encourages recruiting like that shown in the segment is "absolutely not."
Inside Higher Ed, August 20, 2010

Bob Jensen's threads on for-profit college scandals are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud


How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug

 

Rotten Fraud in General --- http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

 

The Sad State of Government (Governmental) Accounting and Accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

 

 

We hang the petty thieves and appoint the great ones to public office.
Aesop

 

Congress is our only native criminal class.
Mark Twain --- http://en.wikipedia.org/wiki/Mark_Twain

 

Why should members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides," The Wall Street Journal, March 28, 2006; Page A1 --- http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one

The Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties:  Few if any are uncorrupted
Committee members have shown no appetite for taking up all those cases and are considering an amnesty for reporting violations, although not for serious matters such as accepting a trip from a lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates that members of Congress have received more than $18 million in travel from private organizations in the past five years, with Democrats taking 3,458 trips and Republicans taking 2,666. . . But of course, there are those who deem the American People dumb as stones and will approach this bi-partisan scandal accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points for her minion, that are sure to come back and bite her .... “House Minority Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips she accepted from outside sponsors that were worth $8,580 and occurred as long as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National Ledger, January 6, 2006 --- http://www.nationalledger.com/artman/publish/article_27262498.shtml 

And when they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol Hill, which created the conditions for this mess last summer with its latest energy bill. That legislation contained a sop to Midwest corn farmers in the form of a huge new ethanol mandate that began this year and requires drivers to consume 7.5 billion gallons a year by 2012. At the same time, Congress refused to include liability protection for producers of MTBE, a rival oxygen fuel-additive that has become a tort lawyer target. So MTBE makers are pulling out, ethanol makers can't make up the difference quickly enough, and gas supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page A20  --- Click Here

Once again, the power of pork to sustain incumbents gets its best demonstration in the person of John Murtha (D-PA). The acknowledged king of earmarks in the House gains the attention of the New York Times editorial board today, which notes the cozy and lucrative relationship between more than two dozen contractors in Murtha's district and the hundreds of millions of dollars in pork he provided them. It also highlights what roughly amounts to a commission on the sale of Murtha's power as an appropriator: Mr. Murtha led all House members this year, securing $162 million in district favors, according to the watchdog group Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to create the National Defense Center for Environmental Excellence in Johnstown to develop anti-pollution technology for the military. Since then, it has garnered more than $670 million in contracts and earmarks. Meanwhile it is managed by another contractor Mr. Murtha helped create, Concurrent Technologies, a research operation that somehow was allowed to be set up as a tax-exempt charity, according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed; the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 --- http://www.captainsquartersblog.com/mt/archives/016617.php

The Sad State of Government (Governmental) Accounting and Accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting

"How States Hide Their Budget Deficits:  The SEC's charges against New Jersey for misleading investors should warn other states against sweeping the truth under the rug," by Steve Malanga, The Wall Street Journal, August 23, 2010 ---
http://online.wsj.com/article/SB10001424052748703579804575441240180244472.html?mod=djemEditorialPage_t

In April, the New York State Comptroller, Thomas DiNapoli, issued a damning report on the Empire State's financial practices. Albany's budgets, he observed, increasingly employ "fiscal manipulations" to present a "distorted view of the State's finances." Money shuffled among accounts to hide deficits, loans made by the state to itself, and other maneuvers Mr. DiNapoli called a "fiscal shell game" are meant to "mask the true magnitude of the State's structural budget deficit."

The comptroller's report produced yawns. Last week, however, the Securities and Exchange Commission (SEC) filed fraud charges against New Jersey for misrepresenting its financial obligations, particularly its pension obligations, and misleading investors in its bonds. New York—and many other states—had better sit up and take notice.

The Citizens Budget Commission of New York recently measured states' obligations against their economic resources. New Jersey was rated in the worst fiscal shape, but it judged other states that employ questionable budget practices, including New York, California, Illinois and Rhode Island, to be only marginally better. Closer SEC scrutiny of these states' muni offerings should be welcomed by investors, and also by taxpayers from whom legislators often try to hide the true depth of fiscal problems until they grow unmanageable.

New Jersey is an object case in how such manipulations eventually backfire. The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues. To make the gambit seem reasonable, Trenton projected unrealistic annual investment returns—between 8% and 12% per year—on the borrowed money. The maneuver temporarily made the funds seem well-off.

In 2001, when legislators wanted to further enhance rich pension benefits, they valued the state's plan at its richest point: 1999, when the system was flush with borrowing and the tech bubble hadn't yet burst. The scheme proved disastrous, of course, because the stock market has since gone sideways, and New Jersey has achieved nowhere near the returns it needed on that borrowed money.

Meanwhile, New Jersey compounded its woes with other ploys. In 2004, the state broke the cardinal rule of municipal budgeting when it borrowed nearly $2 billion to close a budget deficit, which is like borrowing on your credit card to pay off your mortgage. (The state supreme court ruled this move unconstitutional but allowed it to go forward anyway because it didn't want to "disrupt" government operations.) Over time, New Jersey's combination of overspending in its budget and underfunding of its pensions resulted in a tidal wave of tax increases and spending cuts.

Now, even if Gov. Chris Christie can solve the state's long-term, structural budget problems, New Jersey will have to find some $3 billion a year in new revenues to begin contributing again to its pensions.

Municipal bondholders seem complacent in the face of such problems. They like to assert that they have first dibs on any tax revenues. But New Jersey has written so many "guarantees" into its constitution—whether regarding pensions or citizens' right to a "quality" education—that sorting out the competing interests in a fiscal crisis could keep the courts busy for years.

As alarming is how Jersey-style fiscal practices have proliferated in other states.

The manipulations date back to the late 1970s, when taxpayer revolts produced spending caps and constitutional limits on tax increases in states. Rather than hew to these restrictions, politicians found increasingly inventive ways around them.

State officials have acknowledged such practices are growing common. During the 2002 recession, a report by the National Association of State Budget Officers admitted that states were employing "creative, innovative . . . adjustments" to budgets. They include financing current operations with debt, moving money from trust funds dedicated to specific tasks (like highway maintenance) into general funds, and pushing payments to vendors into future fiscal years.

"The long-running use of gimmicks is part of the reason most state budgets are in crisis today," noted Eileen Norcross of the Mercatus Center at George Mason University in a recent study.

The federal government has served as enabler. Although the special tax-free status it bestows on municipal bonds amounts to a subsidy, Washington does little to enforce responsible budgeting. In its fiscal stimulus packages of 2009 and 2010, for instance, the federal government funneled hundreds of billions of dollars to the states without regard for their fiscal practices, treating irresponsibility in New Jersey and New York the same as prudence in, say, Texas and Indiana.

California granted its workers big pension and benefit enhancements in 1999. As in New Jersey, those benefits were based on unrealistic projections of stock-market returns over the long term. Now the costs of those pension enhancements—which have added some $4 billion annually to the state budget and hundreds of millions more to municipal costs—have deepened Sacramento's fiscal woes, which it is solving with more ploys, like pushing tax refunds and payments to vendors into future years.

These maneuvers often don't make it into bond presentations. Like New Jersey, Illinois used extensive borrowing—including a whopping $10 billion offering in 2003—to make its pensions appear well-funded. The state then skipped contributions into the system for several years, creating additional funding problems. A recent study by Joshua Rauh of Northwestern University projects that Illinois's pension system is among a handful that, like New Jersey's, could run out of money in the next decade.

Yet a presentation made by Illinois officials to potential investors in June mentioned the pension borrowings only briefly, then painted a rosy picture of the state's fiscal practices. "Does the state have the Will To Govern needed to address its challenges?" the presentation asked. "YES" it answered in big, bold letters. The presentation then touted modest pension reforms that the state had enacted, even though legislators are doing little to ensure the system's long-term viability.

The SEC should demand, at the very least, that states acknowledge the unease of their own in-house experts. There is nothing in the nearly 200 pages of New York's current disclosure document for investors, for instance, that hints at the state comptroller's concerns over the direction of the state budget. In refreshingly candid language, Mr. Napoli describes in his report a growing lack of transparency, which hides the state's true fiscal condition, as a "deficit shuffle."

If that's a new dance step, it's one that investors and taxpayers everywhere need to work harder to ban. The SEC should help.

"SEC charges State of New Jersey for fraudulent municipal bond filings," AccountingWeb, August 19, 2010 ---
http://www.accountingweb.com/topic/sec-charges-state-new-jersey-fraudulent-municipal-bond-filings

This Week (August 20, 2010) in Securities Litigation
Fraud in offering: In the Matter of State of New Jersey, Adm. Proc. File No. 3-14009 (Aug. 18, 2010) is the SEC’s first fraud action against a state. The Order for Proceedings alleges fraud in violation of Securities Act Section 17(a)(2) & (3) in connection with 79 municipal bond offerings from August 2001 through April 2007 for $26 billion. The cases center on the failure of the state to make certain disclosures regarding the financial condition of two large pension funds, the Teachers’ Pension and Annuity Fund and the Public Employees’ Retirement System. Specifically, the state created the fiscal illusion, according to the SEC, that the two pension funds were being adequately funded when in fact they were severely under funded. New Jersey was aware of the underfunding, according to the Order, but took no steps to correct the misleading documents used in connection with the bond offerings. During this period, the state did not have any written policies and procedures regarding the review or update of the bond offering documents and no training was given to its employees regarding disclosure obligations. To resolve the proceeding the state consented to the entry of a cease and desist order from commencing or committing or causing any violations and any future violations of the Sections on which the Order is based
http://www.secactions.com/

Bob Jensen's fraud updates are at
http://www.accountingweb.com/topic/sec-charges-state-new-jersey-fraudulent-municipal-bond-filings

The Sad State of Government (Governmental) Accounting and Accountability ---
http://www.trinity.edu/rjensen/theory01.htm#GovernmentalAccounting


The WSJ is often my best source when I look for fraud reports and fraud warnings.

Although Paul Williams likes to put down the Wall Street Journal, I like to give some credit where credit is due.
The WSJ is making money at a time when most other newspapers are failing, and this allows the WSJ to afford some of the best reporters in the world, many of whom pride themselves on their independence and integrity.

Here is an old example followed by a new example.

Old Example
A dogged WSJ reporter deserves credit for the the first public arrow that eventually brought down Enron's house of cards. If the WSJ was overly concerned about the welfare of the largest corporations in the U.S., this reporter or his employer would've buried this report.
A WSJ reporter was the first to uncover Enron's secret "Related Party Transactions."  What reporter was this and what are those transactions that he/she investigated?
Answer --- http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#22

New Example
"By pushing professional cards to consumers who otherwise wouldn't want them, card issuers can get around some of the provisions of the Card Act," says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.
"Beware That New Credit-Card Offer," by Jessica Silver-Greenberg, The Wall Street Journal, August 28, 2010 ---
http://online.wsj.com/article/SB10001424052748704913704575454003924920386.html?mod=WSJ_hps_sections_personalfinance 

Amid all the junk mail pouring into your house in recent months, you might have noticed a solicitation or two for a "professional card," otherwise known as a small-business or corporate credit card.

If so, watch out. While Capital One Financial Corp.'s World MasterCard, Citigroup Inc.'s Citibank CitiBusiness/AAdvantage Mastercard and the others might look like typical plastic, they are anything but.

Professional cards aren't covered under the Credit Card Accountability and Responsibility and Disclosure Act of 2009, or Card Act for short. Among other things, the law prohibits issuers from controversial billing practices such as hair-trigger interest rate increases, shortened payment cycles and inactivity fees—but it doesn't apply to professional cards (see table).

Until recently professional cards largely had been reserved for small-business owners or corporate executives. But since the Card Act was passed in March 2009, companies have been inundating ordinary consumers with applications. In the first quarter of 2010, issuers mailed out 47 million professional offers, a 256% increase from the same period last year, according to research firm Synovate.

The Card Act's strictures have squeezed banks' profits and their ability to operate freely. By moving cardholders out of protected consumer cards and into professional cards, banks might recoup some of the revenue they have lost.

"By pushing professional cards to consumers who otherwise wouldn't want them, card issuers can get around some of the provisions of the Card Act," says Josh Frank, a senior researcher at the Center for Responsible Lending, a consumer group.

Several solicitations from J.P. Morgan Chase & Co. have ended up in the mailbox of John and Gloria Harrison, a retired military couple who live in Destrehan, La., outside New Orleans. Mrs. Harrison says she gets an offer for an Ink From Chase card, geared toward small businesses, almost every month. She says she finds this puzzling because her husband retired in 1986 and doesn't own a business.

Bob Jensen's threads on The Dirty Secrets of Credit Card Companies ---
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO

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


In re New Century, Case No. CV 07-00931 (C.D. CA.) is a securities class action arising out of the collapse of sub-prime lender New Century. The defendants include a group of the former officers and directors of the company, its outside auditors KPMG LLP and underwriters J.P. Morgan Securities, Inc., Deutsche Bank Securities, Inc. and Morgan Stanley & Co. This week the court gave preliminary approval to a $125 million settlement. The officers and directors will pay $65 million, KPMG $44.75 million and the underwriters $15 million.
http://www.secactions.com/

Insider trading: SEC v. Gansman, Civil Action No. 08-CV-4918 (S.D.N.Y. Filed May 29, 2008) is an insider trading case against a former attorney at the Transaction Advisory Services group of Ernst & Young, James Gansman, and his former stock broker and close friend, Donna Murdoch. The Commission alleged, as discussed here, that Mr. Gansman tipped Ms. Murdoch concerning at least seven different acquisition targets of E&Y clients. Ms. Murdoch traded in the securities of each and also tipped her father and recommended trading in two stocks to others, all of who traded. Previously, Mr. Gansman was convicted on parallel criminal charges and sentenced to serve a year and a day in prison. Ms. Murdoch pleaded guilty to a seventeen-count superseding information in December 2008 and is awaiting sentencing. To settle with the SEC, each defendant consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Gansman also agreed to pay disgorgement of $233,385 along with prejudgment interest while Ms. Murdoch will disgorge $339,110 along with prejudgment interest. Mr. Gansman consented to the entry of an order barring him from appearing or practicing as an attorney before the Commission in a related administrative proceeding. Ms. Murdoch agreed to the entry of an order barring her from association with any broker or dealer in a related administrative proceeding.
http://www.secactions.com/

Bob Jensen's fraud updates are at
http://www.accountingweb.com/topic/sec-charges-state-new-jersey-fraudulent-municipal-bond-filings

Bob Jensen's threads on accounting firm litigation are at
http://www.trinity.edu/rjensen/fraud001.htm


"Damien Hirst in plagiarism row – does it really matter?," by Ben East, The National, September 12, 2010 ---
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100912/ART/709119970 

Bob Jensen's threads on cheating and plagiarism ---
http://www.trinity.edu/rjensen/Plagiarism.htm


Question
Why do auditors continue to allow earnings management with loan loss reserves?

July 19, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]

Bob,

Sound familiar? The banks are making what they can based on technical accounting manipulation including playing with loan loss reserves. There's still a lot of bad debt on their books.

http://www.nytimes.com/2010/07/17/business/17bank.html?_r=1&scp=3&sq=citigroup&st=Search 
"Citigroup’s net income declined 37 percent, to $2.7 billion, and Bank of America’s net income fell 3 percent, to $3.1 billion, from a year earlier. Both banks padded those results with a big release of funds that had been set aside to cover future loan losses, with executives citing improvements in the economy."

http://www.businessweek.com/news/2010-07-16/bank-of-america-citigroup-fall-as-loan-books-interest-shrink.html  "
Citigroup also got $599 million of mark-ups on loans and securities in a “special asset pool” of trading positions left over from before the credit crisis. Citigroup booked a $447 million gain from writing down the value of its own debt, under an accounting rule that allows companies to profit when their creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

About $1.2 billion of Bank of America’s revenue came from writing down the value of obligations assumed from its purchase of Merrill Lynch & Co., according to the bank’s CFO, Charles Noski."

Francine

Francine

July 19, 2010 reply from Bob Jensen

Hi Francine,

Bank behaviors with auditor blessings are so sad.

Thanks for the tidbit.

 Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them. “Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said
"Bank Profits Appear Out of Thin Air ," by Andrew Ross Sorkin, The New York Times, April 20, 2009 --- http://www.nytimes.com/2009/04/21/business/21sorkin.html?_r=1&dbk

This is starting to feel like amateur hour for aspiring magicians.

Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Investors reacted by throwing tomatoes. Bank of America’s stock plunged 24 percent, as did other bank stocks. They’ve had enough.

Why can’t anybody read the room here? After all the financial wizardry that got the country — actually, the world — into trouble, why don’t these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market.

What’s particularly puzzling is why the banks don’t just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That’s the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates.

“If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit,” said Professor Finkelstein of the Tuck School. “And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.’s that populate corner offices?”

But maybe now the banks are simply following the lead of Washington, which keeps trotting out the latest idea for shoring up the financial system.

The latest big idea is the so-called stress test that is being applied to the banks, with results expected at the end of this month.

This is playing to a tough crowd that long ago decided to stop suspending disbelief. If the stress test is done honestly, it is impossible to believe that some banks won’t fail. If no bank fails, then what’s the value of the stress test? To tell us everything is fine, when people know it’s not?

“I can’t think of a single, positive thing to say about the stress test concept — the process by which it will be carried out, or outcome it will produce, no matter what the outcome is,” Thomas K. Brown, an analyst at Bankstocks.com, wrote. “Nothing good can come of this and, under certain, non-far-fetched scenarios, it might end up making the banking system’s problems worse.”

The results of the stress test could lead to calls for capital for some of the banks. Citi is mentioned most often as a candidate for more help, but there could be others.

The expectation, before Monday at least, was that the government would pump new money into the banks that needed it most.

But that was before the government reached into its bag of tricks again. Now Treasury, instead of putting up new money, is considering swapping its preferred shares in these banks for common shares.

The benefit to the bank is that it will have more capital to meet its ratio requirements, and therefore won’t have to pay a 5 percent dividend to the government. In the case of Citi, that would save the bank hundreds of millions of dollars a year.

And — ta da! — it will miraculously stretch taxpayer dollars without spending a penny more.

 

"Watch Banks Pull Rabbits Out of Hats, Ably Assisted by Their Auditors," by Francine McKenna, re:TheAuditors, July 19, 2010 ---
http://retheauditors.com/2010/07/19/watch-banks-pull-rabbits-out-of-hats-ably-assisted-by-their-auditors/

Do you own stock in a large money center bank?  Work for one?  Count on one to lend you money for a small business?  Expect them to stimulate the economy via commercial loans and lending again for residential or commercial real estate?

You’ve been deluded by the illusion of their self-serving public relations – rah-rah intended to help you forget financial reform that barely is and no safety net for anyone but the elite.

The global money center banks are masters at managing financial reporting. Regulators repeatedly feign surprise at balance sheet sleight of hand, prestidigitation at the expert level intended to buy time until the banks can grow out of the black hole that bubble lending put them in. They announce their quarterly results, with all the details – they don’t even try to hide them anymore – and they’re ignored or the con is traded on for short term profits.

The New York Times, July 16, 2010

“Citigroup’s net income declined 37 percent, to $2.7 billion, and Bank of America’s net income fell 3 percent, to $3.1 billion, from a year earlier. Both banks padded those results with a big release of funds that had been set aside to cover future loan losses, with executives citing improvements in the economy.”

Business Week reports that Citigroup flip flopped on the value of assets acquired with Merrill Lynch and magic happened:

“Citigroup also got $599 million of mark-ups on loans and securities in a “special asset pool” of trading positions left over from before the credit crisis. Citigroup booked a $447 million gain from writing down the value of its own debt, under an accounting rule that allows companies to profit when their creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

About $1.2 billion of Bank of America’s revenue came from writing down the value of obligations assumed from its purchase of Merrill Lynch & Co., according to the bank’s CFO, Charles Noski.”

Interestingly enough, the opposite move also netted them a gain last year. How exactly did this years write down equal a gain too?

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.
“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

John Talbott, meanwhile, explains today why Treasury Secretary Tim Geithner doesn’t want watchdog Elizabeth Warren as the head of the new post-reform consumer protection agency – she’ll prevent banks from making money off the little guy while lending and trading remain unreliable profit drivers.

“Hank Paulson, the Treasury Secretary at the time, had announced that the $700 billion TARP funds would be used to buy toxic assets like bad mortgage loans from the commercial banks. But this never happened and now the amount of bad bank loans has increased in the trillions. Immediately after receiving authorization of the funding for TARP from Congress, Paulson reversed direction and decided to make direct equity investments in the banks rather than using the TARP funds to acquire their bad loans.

So where are the trillions of dollars of bad loans that the banks had on their books? They are still there. The Federal Reserve took possession temporarily of some of them as collateral for lending to the banks in an attempt to clean up the banks for their supposed” stress tests”. But as of now, the trillions of dollars of underwater mortgages, CDO’s and worthless credit default swaps are still on the banks books. Geithner is going to the familiar “bank in crisis” playbook and hoping that the banks can earn their way out of their solvency problems over time so the banks are continuing to slowly write off their problem loans but at a rate that will take years, if not decades, to clean up the problem.”

Paul Krugman predicted this roller coaster ride with bank earnings back in October, in particular with regard to Bank of America and Citigroup. What he missed is that when trading profits are down too, the banks – with the assistance of their auditors advice –  must be ever more creative to avoid having to write off those bad assets all at once or without cover.

…while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.

You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.

But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?

Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations.”

I’ve told you more than once that Citigroup is still a mess. Anyone who isn’t a senior insider is nuts to buy their stock or count on them for a job or business. Listen to me talk about AIG, Bank of America and Citigroup, “an accident waiting to happen,” at the 8:15 mark on this video for Stocktwits TV recorded June 3, 2010.

. . .

Both AIG and Goldman Sachs executives have been questioned recently by the Financial Crisis Inquiry Commission.. The Commission seeks to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” We’ve also seen Lehman executives called to account by Congressional inquisitors.

But we’ve yet to see the auditors – Pricewaterhouse Coopers (auditor of AIG, Goldman Sachs, and Freddie Mac), Ernst & Young (auditor of Lehman) or KPMG (auditor of Citigroup, previously of Countrywide, Wells Fargo and Wachovia and earlier of Fannie Mae) – called to testify to explain their role in blessing fraudulent bank balance sheet accounting.

Isn’t it about time?

July 19, 2010 reply from Bob Jensen

Hi Francine,

Here’s an important citation on this topic --- my favorite!

My all-time heroes Frank Partnoy and Lynn Turner contend that Wall Street bank accounting is an exercise in writing fiction: Watch the video! (a bit slow loading) Lynn Turner is Partnoy's co-author of the white paper "Make Markets Be Markets" "Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy, Roosevelt Institute, March 2010 --- http://makemarketsbemarkets.org/modals/report_off.php 

Watch the above video!

Bob Jensen

July 19, 2010 message from Steven Kachelmeier, University of Texas at Austin [kach@MAIL.UTEXAS.EDU]

An article by Kanagaretnam, Krishnan, and Lobo that is forthcoming in the November 2010 issue of The Accounting Review is the most recent effort on this topic of which I am aware.  You can find it on the SSRN network at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590506

The title is "An Empirical Analysis of Auditor Independence in the Banking Insustry," but don't be fooled by the title -- it's about manipulation of banks' loan loss reserves, with an emphasis on how auditors bear upon that phenomenon.  Kanagaretnam et al. (2010) also cite most of the earlier studies on earnings management involving bank loan loss reserves.  Kiridan Kanagaretnam is at McMaster University, Gopal Krishnan is at Lehigh University, and Gerald Lobo is at the University of Houston.

Best.
Steve

July 19, 2010 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

I have briefly gone through this paper. Its main thesis is that there is lack of an association between banks fiddling with earnings via LLLP (loan loss provisions) and "unexpected" audit fees for large banks, while for the small banks that association is strongly negative. The authors consider this evidence of a relationship between audit independence and earnings management at least in the case of smaller banks. They provide a blizzard of regressions and other data.

The paper is interesting from a policy perspective, and would be a great paper in a policy oriented economics journal. I am glad for the authors that it got accepted. However, does it have a bearing on accounting' practice beyond setting the regulators on a chase of auditors of small banks? Does it give us a better way of computing LLP? Does it give us a way of finding out the reliability of the LLP number? Does it even tell us if the LLP numbers are more (or less) reliable for the larger banks? Does the age distribution of the loan portfolio vary between the two types of banks? What is the distribution of auditors between the two types of banks? There are a host of questions that should be triggered by this thread. Of course, the authors pick the hypothesis they want to study, but an accounting or auditing orientation (as opposed to "about" accounting orientation in Sterling's language) would make a lot more sense for is accountants.

The other issue, endemic to most of these types of papers is the oblique way of introducing causality (a definite no-no for a positivist) to obfuscate discussions. Figure 1 in the paper is what is usually called a path graph giving the trace of causality (the direction of the arrows indicating causality), but the statistical analysis is entirely associational. Statistical techniques have existed for causal analysis for almost half a century, but accounticians have uniformly pretended they do not exist. Stating the models in causal terms but testing them associationally is certainly less than truthful advertising. Unless, of course, I am misstating the model, which I doubt. I have been in this game for too long.

Nothing I have said above should be construed as indicating my doubt on the questions raised by the authors; they should be of great interest to a policy oriented audience. It is just that when it comes to accounting practice, they are trying to sell kryptonite or worse.

Jagdish Gangolly (gangolly@albany.edu)
Department of Informatics College of Computing & Information
State University of New York at Albany
7A, Harriman Campus Road, Suite 220 Albany, NY 12206 Phone: (518) 956-8251, Fax: (518) 956-8247

Bob Jensen's threads on creative accounting and earnings management
http://www.trinity.edu/rjensen/Theory01.htm#ManagementAccounting

Where were the auditors when over 1,000 banks failed ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


From The Wall Street Journal Accounting Weekly Review on September 3, 2010

Suspect Pleads Guilty in Disney Tips Case
by: Chad Bray
Aug 24, 2010
Click here to view the full article on WSJ.com

TOPICS: Code of Ethics, Code of Professional Conduct, Ethics

SUMMARY: "The boyfriend of a former Walt Disney Co. administrative assistant admitted to engaging in a scheme to sell early access to the company's earnings report..." Yonni Sebbag was arrested in May after contacting more than a dozen hedge funds and investment companies anonymously in March. FBI agents posing as hedge-fund traders paid $15,000 to Mr. Sebbag for early access to the earnings information.

CLASSROOM APPLICATION: The article is useful to discuss inside information, ethics, and the Code of Professional Conduct. The first related article describes another case of access to different inside information. The second related article offers arguments against regulating insider trading and was the subject of a separate review in October 2009. Students may refer to it in answering the last question of the review.

QUESTIONS: 
1. (Introductory) What is insider information?

2. (Introductory) List the two items of inside information described in the main and related articles. Describe how each of these pieces of information is of interest to stock market participants.

3. (Advanced) How often are practicing accountants privy to information such as the two items listed in answer to question 2 above? What requirements must practicing accountants follow in handling such information?

4. (Advanced) Describe the differences in penalties against these three individuals. Why were they so different? Do you agree with the differing levels of penalty?

5. (Advanced) Do you think there could ever be a case in which it is ethical to act on inside information? Support your answer.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
SEC Charges Wharton Buddies
by Jenny Strasburg
Sep 02, 2010
Page: C1

Learning to Love Insider Trading
by Donald J. Boudreaux
Oct 24, 2009
Page: W1

"Suspect Pleads Guilty in Disney Tips Case," by: Chad Bray, The Wall Street Journal, August 24, 2010 ---
http://online.wsj.com/article/SB10001424052748703846604575447480788739938.html?mod=djem_jiewr_AC_domainid

The boyfriend of a former Walt Disney Co. administrative assistant admitted to engaging in a scheme to sell early access to the company's earnings report in U.S. district court in Manhattan Monday.

Yonni Sebbag, 30 years old, and his girlfriend Bonnie Hoxie, the former assistant to Disney's head of communications, allegedly contacted more than a dozen hedge funds and investment companies anonymously in March, offering to provide an early look at Disney's earnings.

"I disclosed material and nonpublic information about the Walt Disney Co. to outside investors," Mr. Sebbag said.

Mr. Sebbag pleaded guilty to conspiracy to commit securities fraud and wire fraud and one count of wire fraud. He has been in custody since his arrest in May.

As part of a plea agreement with prosecutors, he faces 27 to 33 months in prison under federal sentencing guidelines.

Steven R. Kartagener, Mr. Sebbag's lawyer, said his client isn't cooperating with prosecutors.

"Mr. Sebbag has come forward and admitted full responsibility for his conduct," Mr. Kartagener said. "I think the foundation of this guilty plea is a fair basis to go forward and ultimately resolve this matter."

Prosecutors from the U.S. Attorney's office in Manhattan had alleged that after Mr. Sebbag sent the anonymous letters, he was contacted by FBI agents posing as hedge-fund traders and he agreed to give them early access to Disney's earnings. Mr. Sebbag received $15,000 in cash from the agents for sharing the inside information, the prosecutors said.

In court Monday, Assistant U.S. Attorney Julian Moore said prosecutors have video and audio recordings of Mr. Sebbag meeting with the undercover agents and would have presented those recordings as evidence if the case had gone to trial.

The anonymous letters offered to share information about the company's second-quarter earnings report before its release in May and asked those who were interested to contact an email account, according to the criminal complaint in the matter.

Ms. Hoxie has been charged with wire fraud and conspiracy to commit securities fraud. She is currently free on bail, which was set at $50,000 in June. Her lawyer, Robert Baum, didn't immediately return a phone call seeking comment Monday.

The U.S. Securities and Exchange Commission has brought separate civil charges in the matter that are still pending. It alleges that Ms. Hoxie laid claim to a portion of the illicit profits Mr. Sebbag hoped to gain from the tip, sending him a picture of an expensive Stella McCartney designer handbag that cost $700.

Mr. Sebbag allegedly responded that he would get her the bag "next week" and that "I may be able to [buy] u 2 of them, lol," the SEC said. Ms. Hoxie responded, "In that case, i also love love these shoes" and attached a picture of a pair of expensive Stella McCartney shoes, according to the SEC.

The SEC said at least 20 hedge funds in the U.S. and Europe received the letters.


Francine says "The report nailed the KPMG auditors"

"Settling For Silence: KPMG Closes The Books On New Century And Countrywide," by Francine McKenna, re:TheAuditors, August 18, 2010 ---
http://retheauditors.com/2010/08/18/settling-for-silence-kpmg-closes-the-books-on-new-century-and-countrywide/

And in the naked light I saw
Ten thousand people maybe more
People talking without speaking
People hearing without listening
People writing songs that voices never shared
No one dared
Disturb the sound of silence

It’s no coincidence that settlements were announced less than a week apart for both New Century and Countrywide.  As two of the earliest subprime failures, all parties were probably anxious to clear some clutter and make room for other matters.

Fortune, August 3, 2010: A federal judge signed off Monday on a settlement under which former shareholders of the troubled mortgage [originator] will get $624 million, the Los Angeles Times reported. The plaintiff lawyers called the sum the largest shareholder settlement since the mortgage meltdown started in 2007.

Bank of America (BAC), which acquired the mortgage lender two years ago and has since stopped using the Countrywide name, will pay $600 million and accounting firm KPMG will pay $24 million.

The Countrywide settlement comes just days after officers and directors in another big subprime class action agreed to pay $90 million to settle claims in that case. New Century co-founder Brad Morrice said then that he hoped the settlement “would make up for some of the losses suffered and provide closure to me and the shareholders.”

Closure isn’t coming any time soon for Countrywide. Bank of America’s annual report provides a list of legal cases tied to Countrywide that covers parts of three pages.

Nor is [Angelo] Mozilo [Countrywide former CEO] out of the woods. He and two other former Countrywide execs still face a Securities and Exchange Commission fraud suit that centers on familiar allegations, that the company duped shareholders by failing to disclose the growing risk of its subprime lending business.

Countrywide was not, strictly speaking, a failure.  Bank of America agreed to buy them in January of 2008, before the bigger “failures” of Lehman, AIG, and Bear Stearns changed the language describing our economic challenges from subprime crisis to full-blown, “is-it-a-second-coming-of-the-depression-well-at-least-it’s-a-serious-recession” financial crisis.

 

Reuters, January 11, 2008:Regulators and politicians in Washington are very keen to see troubled lenders find solutions to their problems, experts said. Egan said the Federal Deposit Insurance Corp did not want to deal with the potential failure of Countrywide. And Bove said: “The people in Washington must be having fits about what would happen if a bank or a thrift with $55 billion in assets went under, so I think they pushed Countrywide hard in this direction.”

 

I started writing about the subprime crisis in early 2007.  Countrywide was already spinning out of control.

 

“Countrywide, the nation’s biggest mortgage lender in terms of loan volume, said it faces “unprecedented disruptions” in debt and mortgage-finance markets that could hurt earnings and the company’s financial condition. In its quarterly filing with the SEC, the bank said “the situation is rapidly evolving and the impact on the company is unknown.”

KPMG is their auditor and gave them a squeaky clean opinion in 2006.

By mid-2007, New Century was giving KPMG a migraine and Deloitte had its hands full with American Home. By November, Deloitte was also worried about Bear Stearns and Merrill Lynch.

Countrywide became a black hole for Bank of America.  The bank was still gushing red ink in March, while due diligence continued, before the deal closed.

This was unexpected, they said.

Countrywide’s Mortgage Woes Deepen

Countrywide Financial Corp.’s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows…The lender also said it took a big loss in the fourth quarter on home-equity lines of credit. 

Further losses may lie ahead…Countrywide was blindsided during the quarter by obligations on home-equity lines of credit that it had sold to investors in the form of securities…Countrywide said the likelihood of such a situation was “deemed remote” until late 2007. It blamed a “sudden deterioration” in the housing market. As a result, it recorded a $704 million loss to cover the estimated costs of its obligations on the lines of credit…A Countrywide computer model used to gauge risks on these securities didn’t take into account the possible effects of exceeding the loss levels that cut off reimbursements…

 

Much has been written about Countrywide and its failings. There was enough evidence, I suppose, in re Countrywide Financial Corp. Securities Litigation, 07-05295 that “former Countrywide Chief Executive Officer Angelo Mozilo and other executives hid the fact that the company was fueling its growth by letting underwriting standards deteriorate” to scare the defendants away from a trial.  Mozilo is still subject to SEC civil suits and potential criminal indictments for fraud. But Countrywide, its executives and its auditors, KPMG, were not subjected to a bankruptcy filing and a bankruptcy examiner’s report like New Century was.

The judge in the Countrywide case has agreed to accept KPMG’s acknowledgment of $24 million of the $624 million liability or about 4% culpability. Without a bankruptcy examiner’s report such as the New Century report or a trial, we will never know the full extent, if any, of KPMG’s knowledge, negligence, aiding or abetting of the alleged Countrywide fraud.

Michael Missal’s New Century bankruptcy examiner report was a tour de force, the complete anatomy of a pre-financial crisis fraud, including several smoking guns pointed at auditors KPMG. Let me remind you that pros like Mr. Missal, who cut his teeth on the World Com bankruptcy and Arthur Andersen, drew the map used by Anton Valukas and the Lehman bankruptcy examiner’s report. Missal set the standard for Valukas’ colorable claims against Ernst and Young for professional impotence and complacency when faced with Lehman’s Repo 105 activities.

Paul Barrett of Business Week reminded us, too, of the important role of the virtuoso bankruptcy examination when setting up Trustees’ litigation and criminal indictments:

“The unavoidable question is whether the SEC will hold someone responsible for what happened at Lehman,” says Michael J. Missal, a partner in Washington with the law firm K&L Gates. Missal, who makes a living defending companies faced with government investigations, is another of those attorneys capable, when asked by a court, of transforming himself into a public-spirited, if generously compensated, pit bull. He published an impressive bankruptcy examiner’s report of his own in 2008 in the case of New Century Financial, one of the subprime mortgage giants that, with Wall Street’s assistance, recklessly inflated the housing bubble.

I spoke to Michael Missal recently.  He told me that to have a successful bankruptcy examiner’s engagement, the examiner must be:

1) Thorough

2) Accurate

3) Fair

4) Objective

5) Timely

I think his New Century report, clocking in at 551 pages plus appendices, did a great job of explaining, for the first time, difficult issues we would see so many times in later subprime and financial crisis litigation.

The report also really nailed the auditors, KPMG.

Bloomberg, April 2, 2009: KPMG’s audits of New Century violated both professional standards promoted by its international body and regulatory requirements, according to the complaint. Dissenters within the auditing firm were silenced by senior partners to protect the firm’s business relationship with New Century and KPMG LLP’s fees from the company.

One KPMG specialist who complained about an incorrect accounting practice on the eve of the company’s 2005 annual report filing was told by a lead KPMG audit partner “as far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off,” the complaint said.

KPMG’s regulator, the PCAOB, has told us over and over that KPMG will fudge on behalf of their clients when it comes to auditing estimates of loan loss reserves. That claim was the smoking gun in the New Century litigation.

Attorney for the New Century Trustee, Steven Thomas, thought so much of this smoking gun he put a $1 billion price tag on the litigation by the Trustee against KPMG

Continued in article

Will the large international auditing firms survive the multi-billion dollar lawsuits resulting from the lousy audits of the failed banks?
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors

Late in the afternoon I'm tired of reporting bad news --- read it for yourself and weep!
"Westpoint Now Embroils KPMG, Deloitte And Australian Securities and Investments Commission," Big Four Blog, August 19, 2010 ---
http://bigfouralumni.blogspot.com/2010/08/westpoint-now-embroils-kpmg-deloitte.html

KPMG's litigation woes ---
http://www.trinity.edu/rjensen/fraud001.htm


Expensive Underwear:  Ex-Dean Accused of Stealing $1 Million From St. John’s
Among the many jobs performed by college administrators, Cecilia Chang’s was at once challenging and glamorous. As dean of the Institute of Asian Studies at St. John’s University in Queens, she traveled the world soliciting donations, luring potential contributors with sumptuous meals, entertainment and gifts, all of it paid for by the college. Her expenses sometimes reached $50,000 a month.  . . . On Wednesday, Ms. Chang, 57, was arrested at her 15-room colonial in Jamaica Estates and accused of embezzling about $1 million from the university, money that prosecutors said she used to pay for lingerie, trips to casinos and her son’s tuition bills . . .   As part of her scheme, prosecutors said, Ms. Chang siphoned a $250,000 donation from a Saudi prince’s foundation into a nonprofit organization she had created ostensibly for the university but that, in fact, was a personal piggy bank.
Fernanda Santos, "Ex-Dean Accused of Stealing $1 Million From St. John’s," Chronicle of Higher Education, September 15, 2010 ---
http://www.nytimes.com/2010/09/16/nyregion/16scam.html?_r=1&hpw

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


Clawback Teaching Case:  Earnings Management and Creative Accounting

"Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes," by Miriam A. Cherry and Jarrod Wong, SSRN, August 23, 2009 --- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460104

Abstract:
In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.

Clawback in the Context of TARP --- http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

On October 14, 2008, Secretary of the Treasury Paulson and President Bush separately announced revisions in the TARP program. The Treasury announced their intention to buy senior preferred stock and warrants in the nine largest American banks. The shares would qualify as Tier 1 capital and were non-voting shares. To qualify for this program, the Treasury required participating institutions to meet certain criteria, including: "(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive." The Treasury also bought preferred stock and warrants from hundreds of smaller banks, using the first $250 billion allotted to the program.

The first allocation of the TARP money was primarily used to buy preferred stock, which is similar to debt in that it gets paid before common equity shareholders. This has led some economists to argue that the plan may be ineffective in inducing banks to lend efficiently.[15][16]

In the original plan presented by Secretary Paulson, the government would buy troubled (toxic) assets in insolvent banks and then sell them at auction to private investor and/or companies. This plan was scratched when Paulson met with United Kingdom's Prime Minister Gordon Brown who came to the White House for an international summit on the global credit crisis.[citation needed] Prime Minister Brown, in an attempt to mitigate the credit squeeze in England, merely infused capital into banks via preferred stock in order to clean up their balance sheets and, in some economists' view, effectively nationalizing many banks. This plan seemed attractive to Secretary Paulson in that it was relatively easier and seemingly boosted lending more quickly. The first half of the asset purchases may not be effective in getting banks to lend again because they were reluctant to risk lending as before with low lending standards. To make matters worse, overnight lending to other banks came to a relative halt because banks did not trust each other to be prudent with their money.[citation needed]

On November 12, 2008, Secretary of the Treasury Henry Paulson indicated that reviving the securitization market for consumer credit would be a new priority in the second allotment

From The Wall Street Journal Accounting Weekly Review on August 13, 2010

Clawbacks Divide SEC
by: Kara Scannell
Aug 07, 2010
Click here to view the full article on WSJ.com

TOPICS: Accounting, Auditing, Executive Compensation, Restatement, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission, Stock Options

SUMMARY: During the settlement with Dell, Inc. in which founder Michael Dell agreed to pay a $4 million penalty without admitting or denying wrongdoing, Commissioner Luis Aguilar raised the issue of "clawing back" compensation to executives based on inflated earnings. "The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings....Under [Section 304 of the 2002 Sarbanes-Oxley law], the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated." The SEC has been working on a formal policy to guide them in cases in which an executive has not been accused of personal wrongdoing, "but hammering out a policy acceptable to the five-member Commission...may be difficult." The related article announced the clawback provision when it was enacted into law in July and compares it to the previous requirements related to executive compensation under Sarbanes-Oxley.

CLASSROOM APPLICATION: The article covers topics in financial reporting related to restatement, executive compensation topics, the Sarbanes-Oxley law, and the SEC's recent enforcement efforts in general.

QUESTIONS: 
1. (Introductory) Based on the main and related article, define and describe a "clawback" policy.

2. (Introductory) Why will most publicly traded companies implement change as a result of the new law and resultant SEC requirements?

3. (Advanced) When must a company restate previously reported financial results? Cite the authoritative accounting literature requiring this treatment.

4. (Advanced) Describe one executive compensation plan impacted by reported financial results. How would such a plan be impacted by a restatement?

5. (Introductory) What is the difficulty with applying the new clawback provisions to executive stock option plans? Based on the related article, how are companies solving this issue?

6. (Advanced) Is it possible that executives who are innocent of any wrongdoing could be affected financially by these new clawback provisions? Do you think that such executives should have to repay to their companies compensation amounts received in previous years? Support your answer.

7. (Advanced) Refer to the main article. Consider the specific case of Dell Inc. founder Michael Dell. Do you believe Mr. Dell should have to return compensation to the company? Support your answer.

8. (Introductory) How do the new requirements under the financial reform law enacted in July exceed the requirements of Sarbanes-Oxley? In your answer, include one or two statements to define the Sarbanes-Oxley law.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Law Sharpens 'Clawback' Rules for Improper Pay
by JoAnn S. Lublin
Jul 25, 2010
Online Exclusive

"Clawbacks Divide SEC," by: Kara Scannell, The Wall Street Journal, August 7, 2010 ---
http://online.wsj.com/article/SB10001424052748703988304575413671786664134.html?mod=djem_jiewr_AC_domainid

A dispute over how to claw back pay from executives at companies accused of cooking the books is roiling the Securities and Exchange Commission.

Commissioner Luis Aguilar, a Democrat, has threatened not to vote on cases where he thinks the agency is too lax, people familiar with the matter said. That prompted the SEC to review its policies for the intermittently used enforcement tool.

"The SEC ought to use all the tools at its disposal to try to seek funds for deterrence," Mr. Aguilar said in an interview on Tuesday. "It's important for us to the extent possible to try to deter, and part of that means using tools Congress has given us."

The issue of clawbacks came up during the SEC's recent settlement with Dell Inc. and founder Michael Dell, people familiar with the matter said.

The SEC alleged Mr. Dell hid payments from Intel Corp. that allowed the company to inflate earnings. He agreed to pay a $4 million penalty to settle the case without admitting or denying wrongdoing, but didn't return any pay.

Mr. Aguilar initially objected to the Dell settlement, according to people familiar with the matter. It is unclear whether the penalty—considered high by historical standards for an individual—swayed Mr. Aguilar's vote or whether he removed himself from the case.

In the interview, Mr. Aguilar spoke generally about clawbacks and declined to discuss Dell or other specific cases.

A spokesman for the SEC declined to comment.

Section 304 of the 2002 Sarbanes-Oxley law gave the SEC the ability to seek reimbursement of compensation from the chief executive and chief financial officer of a company when it restates its financial statements because of misconduct.

Under the law, the SEC can seek the repayment of bonuses, stock options or profits from stock sales during a 12-month period following the first time the company issues information that has to be restated.

Last year, the SEC used the tool for the first time against an executive who wasn't accused of personal wrongdoing.

In that case the SEC sued Maynard Jenkins, the former chief executive of CSK Auto Corp., for $4 million in bonuses and stock sales. Mr. Jenkins is fighting the allegations.

SEC attorneys have been working on a more formal policy to guide them in such cases, people familiar with the matter said. They were seeking to tie the amount of the clawback to the period of wrongdoing, these people said.

Mr. Aguilar felt the emerging new policy wasn't stringent enough and told the SEC staff he would recuse himself from cases when he didn't agree with the enforcement staff's recommendations, the people said.

Amid the standoff, SEC enforcement chief Robert Khuzami has halted the initial policy and set up a committee to take another look at the matter, the people said.

Hammering out a policy acceptable to the five-member commission, which has split on recent high-profile cases, may be difficult.

The divisions worry some within the SEC because the absence of an agreement could affect cases in the pipeline, especially on close calls where Mr. Aguilar's vote might be necessary to go forward.

Mr. Aguilar's hard line on clawbacks was bolstered by the Dodd-Frank law, signed by President Obama on July 21. It says stock exchanges need to change listing standards to require companies to have clawback policies in place that go further than the Sarbanes-Oxley policy.

Section 954 of the law says that pay clawbacks should apply to any current or former employee and instructs companies to seek pay earned during the three-year period before a restatement "in excess of what would have been paid to the executive under the accounting restatement."

Since becoming a commissioner in late 2008, Mr. Aguilar has called for a tougher enforcement approach, including a rework of the agency's policy of seeking penalties against companies.

In a speech in May, Mr. Aguilar took up the issue of executive pay in the context of the SEC's lawsuit against Bank of America Corp. for failing to disclose to shareholders the size of bonuses paid to Merrill Lynch executives. The bank agreed to pay $150 million to settle the matter.

Mr. Aguilar said that penalty "pales" in comparison to the $5.8 billion in bonuses paid during the merger.

"Perhaps what should happen is that, when a corporation pays a penalty, the money should be required to come out of the budget and bonuses for the people or group who were the most responsible," he said.

Bob Jensen's threads on outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation


Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
The Great Ponzi Crooks (R. Allen Stanford and Bernie Madoff) Who Allegedly Manipulated the SEC

"Ex-SEC Official May Be Prosecuted for Role in Stanford Inquiries," SmartPros, September 23, 2010 ---
http://accounting.smartpros.com/x70500.xml

Sept. 23 (The Dallas Morning News) — WASHINGTON -- Federal authorities are considering whether to prosecute a former securities regulator in Fort Worth who repeatedly quashed investigations into whether R. Allen Stanford was running a Ponzi scheme.

Under questioning at a hearing of the Senate Banking Committee on Wednesday, the Securities and Exchange Commission's inspector general told lawmakers that he's "had discussions with criminal authorities about whether there would be any criminal action arising because of that."

In a report issued earlier this year, Inspector General David Kotz wrote that Spencer C. Barasch had "a significant role" in decisions over the years not to formally investigate Stanford, who is accused of bilking investors out of $8 billion. The Houston businessman has pleaded not guilty.

The report said that some SEC examiners thought as early as 1997 that Stanford's financial empire was built on a Ponzi scheme.

"If you don't get the Justice Department involved in this, shame on you as the inspector general," said Sen. Jim Bunning, R-Ky. "That, to me, is criminal negligence. And the sooner they get him before a U.S. court, the better I will like it."

Barasch remains a partner in the Dallas office of Andrews Kurth. Bob Jewell, the firm's managing partner, said Wednesday that Kotz's testimony was "disappointing" and that Barasch "served the SEC with honor, integrity and distinction."

"We disagree with the characterization of Mr. Barasch's involvement put forth by the inspector general," Jewell said in a prepared statement. "We believe he acted properly during his contacts with the Stanford Financial Group and the Securities and Exchange Commission. He did not violate conflicts of interest."

Kotz also reported that Barasch, who left the SEC in 2005, later represented Stanford before the SEC despite ethics laws against doing so. An SEC spokesman confirmed that the agency's ethics office referred the matter to the State Bar of Texas to consider whether Barasch committed any professional misconduct.

A spokeswoman for the State Bar said such grievances remain confidential unless a district court or grievance panel sanctions the lawyer.

Many senators at Wednesday's hearing appeared to be grappling with Kotz's report for the first time.

The SEC made the report public on the same day in April that it charged Goldman Sachs with fraud, a case that got far more attention in the media. Several senators questioned whether the timing was an attempt to reduce public attention to the inspector general's embarrassing report.

The report said that SEC examiners in Fort Worth thought as early as 1997 that Stanford might be operating a Ponzi scheme and referred the matter to the enforcement staff. A manager who was leaving the agency told her boss that year that Stanford's business "looks like a Ponzi scheme to me, and someday it's going to blow up," according to Kotz's report.

However, the enforcement staff opened and closed its case after Stanford refused to voluntarily produce any records. Led by Barasch, the enforcement staff didn't open investigations after three other examinations in 1998, 2002, and 2004 all concluded that Stanford's certificates of deposit were probably a Ponzi scheme or other type of fraud.

"Any way you look at it, this is a colossal failure of the SEC," said Sen. Richard Shelby, D-Ala.

The SEC charged Stanford and three of his firms with fraud and other securities violations in February 2009. Rose Romero, the regional director of the SEC in Fort Worth, told lawmakers Wednesday that the SEC has notified other former Stanford employees that it intends to seek fraud charges against them. The group includes "former high level executives and financial advisers," Romero said.

Kotz said that Barasch and other enforcement attorneys believed the Stanford case was too complex and would absorb too many resources. The group believed that Washington judged regional offices based on how many cases they brought, which led them to pursue easier cases, Kotz said.

SEC officials generally conceded that they'd missed opportunities to cut off Stanford's alleged fraud.

The officials said they were implementing several changes to their enforcement priorities, including placing more emphasis on cases that affect a substantial number of investors. The SEC also said it has increased coordination between its examiners -- who originally suspected the Stanford fraud -- and its enforcement staff.

Robert Khuzami, the SEC's director of enforcement, told the panel that his staff has focused on complex accounting and securities cases, particularly since the credit crisis of 2008.

"If you look at the course of cases that we have brought in the last 18 months, particularly across the credit crisis -- New Century, Countrywide, Goldman, Dell, State Street, Evergreen, ICP, Citigroup, Bank of America -- these are hugely complicated accounting fraud, structured product cases," Khuzami said.

"We're not getting quick stats on those cases, I assure you."

 

From The Wall Street Journal Accounting Weekly Review on September 10, 2009

Madoff Report Reveals Extent of Bungling
by Kara Scannell and Jenny Strasburg
Sep 05, 2009
Click here to view the full article on WSJ.com

TOPICS: Auditing, Ponzi Schemes

SUMMARY: "The SEC's inspector general released the full 477-page version of his report on how the SEC missed red flags on [Bernard Madoff]....and details just how many opportunities there were for examiners to find the fraud and how bungled their efforts were." For example, "one anonymous complaint directed the SEC to a 'scandal of major proportion' by the Madoff firm and said assets of a specific investor 'have been 'co-mingled' with funds controlled by the Madoff firm. The SEC called Mr. Madoff's lawyer and had him ask Mr. Madoff if he managed money for that investor. When the lawyer said Madoff didn't, the complaint wasn't pursued further. The IG report concludes that 'accepting the word of a registrant who is alleged to be engaged in a specific instance of fraud is an inadequate investigation'....SEC Chairman Mary Schapiro said, 'In the coming weeks, we will continue to closely review the full report and learn every lesson we can to help build upon the many reforms we have already put into place since January.'"

CLASSROOM APPLICATION: The article makes clear the need for auditing roles at the SEC as well as in public accounting firms auditing general purpose financial statements.

QUESTIONS: 
1. (Introductory) What is a "Ponzi Scheme"? When was Mr. Madoff convicted of running such a scheme? How did this scheme impact Madoff's investors?

2. (Introductory) Who issued the report on the SEC's failure to uncover the Madoff scheme before it collapsed and he himself admitted to the crime?

3. (
Advanced) What did "an unnamed hedge-fund manager" say in an email to the SEC? Explain how each of the points listed in the email indicate the possibility of a Ponzi scheme in operation.

4. (Introductory) What is "front-running" in trading? How did a senior examiner explain this trading activity as his choice of action to investigate in Mr. Madoff's operations?

5. (Advanced) How do you think a choice of action in examination should be determined if the SEC receives a credible indication of possible fraud in operating an investment firm such as Mr. Madoff's? How should this choice drive the determination of expertise needed on an investigatory team?

6. (Advanced) What audit step failure was evident in the SEC investigatory actions undertaken between December 2003 and March 2004, as described in the article?

7. (Introductory) What expertise do you think was needed on the investigative teams handling the Madoff case, at least as described in this article?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Ex-SEC Lawyer: Madoff Report Misses Point
by Suzanne Barlyn
Sep 04, 2009
Online Exclusive

'Evil' Madoff Gets 150 Years in Epic Fraud
by Robert Frank and Amir Efrati
Jun 30, 2009
Online Exclusive

 


New Hints at Why the SEC Failed to Seriously Investigate Madoff's Hedge Fund
After being repeatedly warned for six years that this was a criminal scam
It's beginning to look like a family "affair"

(The SEC's) Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported. Swanson, no longer with the agency, declined to comment, the Post said.
"SEC lawyer raised alarm about Madoff: report," Reuters, July 2, 2009 --- http://news.yahoo.com/s/nm/20090702/bs_nm/us_madoff_sec
The Washington Post account is at --- Click Here

A U.S. Securities and Exchange Commission lawyer warned about irregularities at Bernard Madoff's financial management firm as far back as 2004, The Washington Post reported on Thursday, citing agency documents and sources familiar with the investigation.

Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent emails to a supervisor saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, the report said.

Several of the questions directly challenged Madoff activities that turned out to be elements of his massive fraud, the newspaper said.

Madoff, 71, was sentenced to a prison term of 150 years on Monday after he pleaded guilty in March to a decades-long fraud that U.S. prosecutors said drew in as much as $65 billion.

The Washington Post reported that when Walker-Lightfoot reviewed the paper documents and electronic data supplied to the SEC by Madoff, she found it full of inconsistencies, according to documents, a former SEC official and another person knowledgeable about the 2004 investigation.

The newspaper said the SEC staffer raised concerns about Madoff but, at the time, the SEC was under pressure to look for wrongdoing in the mutual fund industry. Walker-Lightfoot was told to focus on a separate probe into mutual funds, the report said.

One of Walker-Lightfoot's supervisors on the case was Eric Swanson, an assistant director of her department, the Post reported, citing two people familiar with the investigation.

Swanson later married Madoff's niece, and their relationship is now under review by the SEC inspector general, who is examining the agency's handling of the Madoff case, the Post reported.

Swanson, no longer with the agency, declined to comment, the Post said.

SEC spokesman John Nester also declined to comment, citing the ongoing investigation by the agency's inspector general, the newspaper said.

Our Main Financial Regulating Agency:  The SEC Screw Everybody Commission
One of the biggest regulation failures in history is the way the SEC failed to seriously investigate Bernie Madoff's fund even after being warned by Wall Street experts across six years before Bernie himself disclosed that he was running a $65 billion Ponzi fund.

CBS Sixty Minutes on June 14, 2009 ran a rerun that is devastatingly critical of the SEC. If you’ve not seen it, it may still be available for free (for a short time only) at http://www.cbsnews.com/video/watch/?id=5088137n&tag=contentMain;cbsCarousel
The title of the video is “The Man Who Would Be King.”
Also see http://www.fraud-magazine.com/FeatureArticle.aspx

Between 2002 and 2008 Harry Markopolos repeatedly told (with indisputable proof) the Securities and Exchange Commission that Bernie Madoff's investment fund was a fraud. Markopolos was ignored and, as a result, investors lost more and more billions of dollars. Steve Kroft reports.

Markoplos makes the SEC look truly incompetent or outright conspiratorial in fraud.

I'm really surprised that the SEC survived after Chris Cox messed it up so many things so badly.

As Far as Regulations Go

An annual report issued by the Competitive Enterprise Institute (CEI) shows that the U.S. government imposed $1.17 trillion in new regulatory costs in 2008. That almost equals the $1.2 trillion generated by individual income taxes, and amounts to $3,849 for every American citizen. According the 2009 edition of Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State, the government issued 3,830 new rules last year, and The Federal Register, where such rules are listed, ballooned to a record 79,435 pages. “The costs of federal regulations too often exceed the benefits, yet these regulations receive little official scrutiny from Congress,” said CEI Vice President Clyde Wayne Crews, Jr., who wrote the report. “The U.S. economy lost value in 2008 for the first time since 1990,” Crews said. “Meanwhile, our federal government imposed a $1.17 trillion ‘hidden tax’ on Americans beyond the $3 trillion officially budgeted” through the regulations.
 Adam Brickley, "Government Implemented Thousands of New Regulations Costing $1.17 Trillion in 2008," CNS News, June 12, 2009 ---
http://www.cnsnews.com/public/content/article.aspx?RsrcID=49487

Jensen Comment
I’m a long-time believer that industries being regulated end up controlling the regulating agencies. The records of Alan Greenspan (FED) and the SEC from Arthur Levitt to Chris Cox do absolutely nothing to change my belief ---
http://www.trinity.edu/rjensen/FraudRotten.htm

How do industries leverage the regulatory agencies?
The primary control mechanism is to have high paying jobs waiting in industry for regulators who play ball while they are still employed by the government. It happens time and time again in the FPC, EPA, FDA, FAA, FTC, SEC, etc. Because so many people work for the FBI and IRS, it's a little harder for industry to manage those bureaucrats. Also the FBI and the IRS tend to focus on the worst of the worst offenders whereas other agencies often deal with top management of the largest companies in America.

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

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


A Starr for the Stars Fell Into a Prison Yard

"Financial Adviser to Stars Pleads Guilty to Fraud," by Julie Creswell and Colin Moynihan, The New York Times, September 10, 2010 ---
http://www.nytimes.com/2010/09/11/business/11fraud.html?_r=2&dbk

Kenneth I. Starr, the New York investment adviser who once counted Hollywood celebrities like Al Pacino, Martin Scorsese and Sylvester Stallone as clients, pleaded guilty on Friday in Federal District Court in Manhattan to charges that he diverted tens of millions of dollars of his clients’ money to pay for his lavish lifestyle.

A money manager to the stars who frequented charity events, high-profile parties and movie premieres in search of clients, Mr. Starr, 66, wore a dark blue prison smock and appeared stooped and drawn as he stood before Federal Magistrate Judge Theodore H. Katz and pleaded guilty to one count each of wire fraud, money laundering and investment adviser fraud.

Mr. Starr, who is not related to the special prosecutor with the same name who investigated President Bill Clinton, admitted that he stole $20 million to $50 million from his clients to use for his own purposes.

Some of the money paid a multimillion-dollar legal settlement with a former client while other money bought a sprawling $7.5 million Upper East Side condo complete with a lap pool and a 1,500 square-foot garden.

A plea agreement between Mr. Starr and the government calls for a prison sentence of 10 to 12.5 years. But Federal District Judge Shira A. Scheindlin, who is scheduled to sentence Mr. Starr on Dec. 15, is not bound by that agreement and could impose a greater or lesser penalty.

The government said it could also seek the forfeiture of as much as $50 million in assets owned or controlled by Mr. Starr and $50 million in restitution for his victims.

After the courtroom proceedings, a lawyer for Mr. Starr, Flora Edwards, indicated that the forfeiture and restitution amounts were under discussion but that they were likely to be “significantly less” than $50 million.

“He’s assumed full responsibility for his conduct,” Ms. Edwards said. “He made a colossal error in judgment that he recognizes. He’s paying a very, very heavy price.”

In a statement, Preet Bharara, the United States attorney in Manhattan, said, “Kenneth Starr’s is a tale of fiction and fraud, in which he played the role of legitimate investment adviser to a cast of unsuspecting victims.”

Mr. Starr was indicted in June on 23 counts, including wire fraud, securities fraud, fraud by an investment adviser and money laundering.

Clients relied on him to provide investment advice, financial planning and even pay bills and help with tax filings, federal prosecutors said in the indictment.

In federal court on Friday, Mr. Starr admitted that his clients had “entrusted him” with their money, but that “from 2009 to 2010, instead of using my clients’ money as I promised, I knowingly used a portion of the money for my own purposes,” he told the judge.

Continued in article

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


Joe Cassano --- http://en.wikipedia.org/wiki/Joe_Cassano

A PwC Partner’s Scribbled Notes Helped Save Joe Cassano’s Hide ---
http://goingconcern.com/2010/07/a-pwc-partners-scribbled-notes-helped-save-joe-cassanos-hide/scribble_2/

 

July 23, 2010 message from Francine McKenna [retheauditors@GMAIL.COM]

Here's what I wrote about the issue.  In April. And again in June.

http://goingconcern.com/2010/04/good-news-bad-news-aig’s-cassano-snitches-on-pricewaterhousecoopers/

http://goingconcern.com/2010/06/what-a-tangled-web-we-weave-aig’s-cassano-says-he-told-pwc-everything/

The stories in NYT and WSJ are coming out because the documents that contain the evidence of the PwC knowledge of Cassano's contentions in November, pre- the investors meeting in December, have just been made public by the Financial Crisis Inquiry Commission.  They make for interesting reading for anyone with the interest, aptitude and patience.

http://www.fcic.gov/hearings/06-30-2010.php

Francine

"With Cassano Off The Hook, Where Does PwC Hide In The AIG Case?" by Francine McKenna, re:TheAuditors, July 27, 2010 ---
http://retheauditors.com/2010/07/27/with-cassano-off-the-hook-where-does-pwc-hide-in-the-aig-case/

Welcome to Episode 33 rpm of AIG and PwC and the Big Bad Wolf, Goldman Sachs. In this episode we attempt to slow things down and stop blaming our mother, I mean Goldman Sachs, for everything.

 

Let’s consider for a moment the unnaturally close, preternatural relationship between AIG and PwC over the years. The dramas these two have been through together evoke the classic dysfunctional family, hell bent on destroying each other before they let anyone or anything destroy any of them…

“For decades,” Gretchen Morgenson tells us last Saturday in the New York Times,  “Goldman and AIG had a long and fruitful relationship, with AIG insuring billions in mortgage-related securities that Goldman Sachs underwrote. When the mortgage market started to deteriorate in 2007, however, the relationship went sour…”

Goldman bought insurance against an AIG failure from large foreign and domestic banks, including Credit Suisse ($310 million), Morgan Stanley ($243 million) and JPMorgan Chase ($216 million). Goldman also bought $223 million in insurance on AIG from a variety of funds overseen by Pimco, the money management firm.

Back in 2005, during an earlier scandal, reporters and plaintiffs like the Ohio pension plans that recently settled with AIG and PwC for more than $800 million, questioned PwC’s independence from AIG:

The Washington Post, May 2005: “The relationship between PWC and AIG stretches back decades to when the firm still was called Coopers & Lybrand, before its 1998 merger with Price Waterhouse. Former AIG finance chief Howard I. Smith, who left the company earlier this year under pressure for failing to cooperate with regulators, spent almost two decades as an auditor at Coopers before joining AIG in 1984. Steven Bensinger, AIG’s new chief financial officer, also started his career at Coopers & Lybrand.

In the lawsuit filed earlier this spring in U.S. District Court in Manhattan, Petro, the Ohio attorney general, alleges that PWC’s independence was “impaired” by these long-standing ties and by nearly $137 million in audit and consulting fees it received from AIG between 2000 and 2003.

They also didn’t buy the excuses AIG made for PwC at the time – that PwC had been kept in the dark – and claimed there were enough red flags to pin some of the liability on the auditor.

“In a boost to PWC, AIG in its release this spring also explicitly told investors that auditors and board members had been kept in the dark by management about some AIG accounting maneuvers, including the company’s dealings with Capco Reinsurance Co. Ltd., a Barbados reinsurance firm, and Union Excess Reinsurance Co. Ltd.”

In the latest scandal at AIG, we’ve seen PwC and AIG’s most senior executives such as former CEO Sullivan and CFO Bensinger attempt to divert attention from themselves. One example is the accusation against Joseph Cassano.  Mr. Cassano, albeit not the most likeable guy for numerous reasons, seems to have done everything he could to get it through the thick heads of PwC, Sullivan and Bensinger that there were wolves at AIG’s door, even though Cassano believes even now that enough time and a suitably stubborn attitude could have fought them off.

Everyone pointed at Cassano as an obdurate, incorrigible, obfuscating guy at the root of all of AIG’s problems.

The Wall Street Journal, July 22, 2010:

Joseph Cassano was once portrayed as a villain of our times.

Prosecutors… interviewed AIG senior management and the company’s external auditor, and came away thinking Mr. Cassano hadn’t properly disclosed multi-billion-dollar accounting changes that drastically cut the size of estimated losses, these people said…In interviews in 2008, Mr. Ryan told prosecutors he sometimes couldn’t get straight answers from Mr. Cassano when he asked him to justify how AIG accounted for the swaps, these people said…Senior executives at AIG’s parent company voiced similar misgivings to prosecutors a couple of years ago…However, Cassano was able to prove that he gave both PwC and Sullivan/Bensinger enough of a heads up to make their own decision what to tell investors in December.

{…}

The defense team rebutted the prosecution’s allegations, presenting a version of events that portrayed Mr. Cassano as repeatedly disclosing bad news to his bosses, investors and PwC…its efforts helped focus prosecutors’ attention on an obscure set of handwritten notes in their files, found scrawled on the bottom of a printed spreadsheet…the annotations, which were made by a PwC partner at a meeting with Mr. Cassano and AIG management a week before the key December 2007 investor conference…Prosecutors realized the notes were disastrous to their case… Mr. Cassano had in fact disclosed the size of the accounting adjustments to both his bosses and external auditors.

It wasn’t really news when the Wall Street Journal wrote about auditors’ “scribbled notes that scuttled the AIG probe” and the New York Times Deal Book followed with a “me too” blurb the next day.  We’ve known since late May that the Department of Justice no longer had a case against Cassano. He had apparently told the auditors and his bosses everything.

I wrote about Cassano’s apparent transparency in early April and then again at the end of June.

The investigations went south when, “prosecutors found evidence Mr. Cassano did make key disclosures. They obtained notes written by a PwC auditor suggesting Mr. Cassano informed the auditor and senior AIG executives about the adjustment…[and] told AIG shareholders in November 2007 that AIG would have “more mark downs,” meaning it would lower the value of its swaps.” So who’s telling the truth?

Why are we seeing more stories now with more color commentary on the Cassano vindication story?  There have been a number of parallel investigations and inquiries occurring – criminal, civil and congressional – of the entire AIG/Goldman Sachs affair as well constant reminders of the financial crisis conundrums.  As Gretchen Morgenson so aptly put it this past weekend:

“What did they know, and when did they know it?” Those are questions investigators invariably ask when trying to determine who’s responsible for an offense or a misdeed….a third, equally important question must be asked: “What did they do once they knew what they knew?

All of these investigations are inevitably producing reams of information – lots of it in electronic form via emails and electronic records of conversations, meeting minutes, contracts and calculations.  But this information is being made available to journalists and the general public on an intermittent and inconsistent basis. As the information dribbles out in linkable, source-able, quotable form, the journalists write more stories.

Emails documenting internal conversations at AIG from 2007 were available to some journalists at the Washington Post as early as December of last year but were only recently posted to the Financial Crisis Inquiry Commission’s (FCIC) website for review by the general public.

The PwC documents proving Mr. Cassano’s contentions of good faith were probably available to the Department of Justice early this year. The substance of them was made available to some journalists in April when they started reporting Cassano would not face charges and then later in May when stories were written about charges being dropped. The actual documents show clearly that PwC knew everything in advance of the December 2007 AIG investor meeting. They were recently posted to the FCIC and House Oversight Committee sites.

The stories have been out there for a while. The details are now well known. AIG was under pressure from all sides since late 2006 and PwC stood side by side with them throughout:

Every time a scandal such as this occurs, earnest journalists believe the auditors will come under closer scrutiny.

They don’t.

American International Group Inc.’s admission this week that it engaged in improper accounting practices is putting the nation’s largest independent auditing firm in the spotlight: PricewaterhouseCoopers LLP…For now, the Securities and Exchange Commission, which in February subpoenaed documents from the firm about AIG, isn’t focusing on the accountants’ actions, people familiar with the matter said. Instead, SEC investigators, working with New York state officials, are trying to determine what AIG told its auditors about deals under scrutiny and whether that information was truthful, the people said. But at some point, investigators will press PricewaterhouseCoopers to explain the reasons it missed the improper accounting, the people added.”

Instead, in this case, PwC was reappointed to their jobs with the help of enabler Arthur Levitt.

PwC, as auditor also of Goldman Sachs, JP Morgan, Bank of America, Barclays, Freddie Mac, PIMCO funds,  and two of the Big 3 ratings agencies – Moody’s (until mid-2008) and Fitch – had a pretty good eye into both AIG’s and Goldman Sachs’ counterparty risk and the ratings roller coaster ride they all were on.

From Cassano’s FCIC testimony in June 2010: “In light of the auditors’ heavy involvement in the fair-market-model evolution generally, and their prior knowledge of the existence and magnitude of the negative-basis adjustment in particular, I also found the material-weakness finding surprising, to say the least. I know AIG senior management argued strenuously against it.”

PwC, with KPMG, continues to allow their clients to delay asset markdowns, thereby only delaying inevitable losses to shareholders.

I asked Tucker Warren, spokesperson for the FCIC, when or if any of the audit firms – EY for Lehman, Deloitte for Bear Stearns, WaMu, American Home and Merrill Lynch, KPMG for Citigroup, Fannie Mae, Countrywide, Wachovia, and New Century or PwC for AIG, Freddie Mac, Goldman Sachs or Bank of America – would testify before the Commission on the causes of the financial crisis.

Continued in article

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

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


Interesting Video (painfully slow loading) on How to Detect Accounting Gimmicks & Fraud in Financial Reports
Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports: How to Detect Accounting Gimmicks & Fraud in Financial Reports … Dr. Howard Schilit pulls back the curtain on the current climate of accounting
http://cfapodcast.smartpros.com/Take15/CFA_Institute_T15_063_Sm.mp4

Jensen Comment
I was disappointed in this video, but it might have some benefit for students in the last third of the video where a brief summary of the bombshell Lehman Bank Examiner's Report (2,200 pages) --- http://dealbook.blogs.nytimes.com/2010/03/11/lehman-directors-did-not-breach-duties-examiner-finds/#reports

Bob Jensen's threads on the Lehman Bank Examiner's Report ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst


"Convicted CPA Bill Murray draws 19-year sentence," Sacramento News10, May 10, 2010 ---
http://www.news10.net/news/story.aspx?storyid=82421

The prominent accountant who stole at least $13 million from more than 50 clients apologized to them moments before receiving one of the harshest sentences for white collar crime in recent memory in Sacramento federal court.

William R. Murray, 56, was ordered by U.S. District Court Senior Judge Edward Garcia to serve 19 1/2 years in federal prison followed by three years of supervised release.

Murray pleaded guilty in March to two mail fraud and tax charges for a long-running Ponzi scheme in which he converted clients' tax payments to his personal use and stole money they trusted him to invest.

News10 first reported the massive fraud last November before criminal charges were filed. Murray, a former IRS agent, frequently appeared on News10 to discuss tax and investment strategies.

Prior to Friday's sentencing, nine of Murray's victims described their losses to Garcia and implored him to impose the maximum sentence. One of the victims, Joyce Clifford, broke down in tears as she spoke of losing her home and life savings to Murray.

"It's difficult to realize there can be such rotten people in this world," said Clifford, 78. "He betrayed an innocent elderly person who trusted him."

One of the two criminal charges involved in the plea bargain was filed specifically for Clifford, and Murray's sentence was enhanced because of her age.

Murray stood alongside attorney Donald Heller during the entire proceeding, which lasted more than an hour. Murray wore an orange jumpsuit issued by the Butte County Jail where he had been housed under contract by the U.S. Marshal. Although he wore a shackle around his waist, his hands were not cuffed.

Other victims described how Murray had the ability to keep their trust even as the IRS was asking about missing tax payments.

"He was like my brother. We broke bread together," said William Ames, an El Dorado Hills electrician and inventor who lost as much as $1 million to Murray.

When asked by Garcia if he had anything to say before being sentenced, Murray offered the following apology but was quickly challenged by the judge.

"I deeply regret it, and it's something I will live with the rest of my life. I'm sorry for my actions," Murray told Garcia, with his back to his victims.

"This case calls out for an explanation," Garcia responded. "Why?"

Murray: "I started with the intention of paying back the money."

Continued in article

"FD faces the music at London:  Philharmonic Former employee stole £645,000," by Pat Sweet , Accountancy Age, September 2, 2010 --- Click Here
http://www.accountancymagazine.com/croner/jsp/Editorial.do?channelId=-305535&contentId=1656672&Failed_Reason=Session+not+found&Failed_Page=%2Fjsp%2FEditorial.do&BV_UseBVCookie=No

A former finance director at the London Philharmonic Orchestra (LPO) is facing jail for stealing £645,000 from the company.

Australian accountant Cameron Poole forged signatures on company cheques and credit cards to embezzle cash which he then spent on holidays, designer clothes, art and jewellery, according to the Daily Mail .

The fraud took place between January 2007 and November 2009. Poole hid the payments he was making to himself by making false entries on the orchestra's computerised accounting system.

Poole claimed that money had been paid to IMG Artists, which manages singers and musicians, when in fact he used the cash to pay a building contractor. He was also in charge of running annual audits, and manipulated the figures to show the orchestra’s expenditure as far less than its revenue. The false information had an impact on LPO’s funding and grant applications.

Cameron is currently paying off a £2.3m High Court order arising from a civil action brought by the orchestra in February.

In a hearing at Southwark crown court, Poole admitted fraud by abuse of position and acquiring and using criminal property. He is due to be sentenced on 28 September, but the judge in the case warned the 'most likely outcome' would be a custodial sentence.

Poole, an active member of his south London church, worked for consulting firm Accenture and a child poverty charity in Africa before moving to the orchestra.

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


"Hedge-Fund Manager Pleads Guilty to Multimillion-Dollar Swindle of 4 Universities," by Paul Fain, Chronicle of Higher Education, July 29, 2010 --- "
http://chronicle.com/article/Hedge-Fund-Manager-Pleads/123713/?sid=at&utm_source=at&utm_medium=en

A former hedge-fund manager has pleaded guilty to criminal charges in an investment scam in which he bilked as much as $900-million from investors, including four university endowments.

In his plea, Paul R. Greenwood said on Wednesday that he and his partner, Steven Walsh, had spent money from the investment accounts on themselves and their family members. According to investigators, the two spent at least $160-million on mansions, horses, rare books, and an $80,000 collectible teddy bear. Mr. Walsh has pleaded not guilty, and Mr. Greenwood will testify against him at trial.

The two promised low risks and high returns to investors in what was essentially a Ponzi scheme. Their 16 institutional investors included the University of Pittsburgh ($65-million invested), Carnegie Mellon University ($49-million), Bowling Green State University ($15-million), and Ohio Northern University ($10-million).

The universities realized something was wrong last year, when they discovered that much of their assets had been signed out as promissory notes attributed to Mr. Walsh and Mr. Greenwood. Carnegie Mellon's treasurer traveled to the firm's offices in New Jersey and Connecticut in an unsuccessful quest to find out what had happened to the university's investment.

After the two money managers were arrested, an investment adviser who works with university endowments said that background checks should have spotted problems with the fund, and that he had advised colleges to pull out of it.

A court-appointed receiver is pursuing the pair's assets in an attempt to recoup some of the losses for investors. Mr. Greenwood's assets will be auctioned off, including, presumably, his collection of rare stuffed animals. He faces a prison sentence of as long as 85 years and hundreds of millions of dollars in fines at his December sentencing, according to news reports.

Jensen Comment
Some of you might recall my earlier tidbits on how this case also involved Deloitte.

Question
Why would four universities (Carnegie-Mellon, Pittsburgh, Bowling Green, and Ohio Northern) invest hundreds of millions dollars in a fraudulent investment fund and what makes this fraud different from the Madoff and Stanford fund scandals?

One of the reasons is that the fraudulent Westridge Capital Management Fund was audited by the reputable Big Four firm of Deloitte. It seems to be Auditing 101 to verify that securities investments actually exist and have not be siphoned off illegally. Purportedly, Paul R. Greenwood and Stephen Walsh siphoned off hundreds of millions to fund their lavish personal lifestyles

Koch recently told state lawmakers that Iowa officials believed they had "covered the bases" but that "obviously, something went wrong." He and Cochrane, in an interview, said that there was no apparent problem with Westridge that would raise concerns. Numerous government regulatory agencies had audited the company and the venerable Deloitte and Touche firm was Westridge's auditor. The company's investment returns did not raise suspicion because they generally followed market trends: The firm gained and lost money when the rest of the market did.
Stephen C. Fehr, "Iowa, N.D. victims of investment fraud," McClatchy-Tribune News Service, March 16, 2009 ---
http://www.individual.com/story.php?story=97917687

As with the investors who lost $65 billion in the Madoff Fund, word of mouth from respected people and institutions seem to weigh more than factual analysis for countless investors? Rabbi Ragan says a good man runs this fund? If Carnegie-Mellon's investing in it it most be safe? Yeah Right!
Various other investors and investment funds allegedly lost millions in the Greenwood-Walsh Fund Fraud ---
http://www.nytimes.com/2009/02/26/business/26scam.html?scp=1&sq=paul greenwood&st=cse
The Pennsylvania Employees’ Retirement System  was saved in the nick of time from investing nearly a billion dollars in the fund upon discovering that the National Futures Association began an investigation of the Greenwood-Walsh Fund. For other duped investors it was too late.

But in some cases the auditing firm is reputable and has deep pockets.

"A 4th University Is Missing Money in Alleged $554-Million Swindle," by Paul Fain, Chronicle of Higher Education, March 19, 2009 --- Click Here

Ohio Northern University is the fourth higher-education institution to announce that it is seeking to recoup money in an alleged $554-million investment fraud, university officials said today. Ohio Northern’s endowment had $10-million invested with two Wall Street veterans who face criminal charges for allegedly using investors’ money as a “personal piggy bank,” spending at least $160-million on mansions, horses, rare books, and collectible toys.

Also tied up in the apparent swindle is $65-million from the University of Pittsburgh, $49-million from Carnegie Mellon University, and $15-million from Bowling Green State University. Securities lawyers say little value from the original investments will be recovered. Officials from all of the universities say the potential losses will have no immediate impact on their operations.

Most college endowments rely on outside investment consultants to help direct their money. Hartland & Company, a financial firm in Cleveland, steered the now-missing investments by Ohio Northern and Bowling Green to the firm running the allegedly-fraudulent scheme. Pitt and Carnegie Mellon relied on the advice of Wilshire Associates, a major California-based consulting firm.

Paul R. Greenwood and Stephen Walsh, the two Wall Street traders who owned the suspect firm, face charges of securities fraud, wire fraud, and conspiracy. Federal regulators have also sued the men, and are pursuing their assets.

"Pitt, CMU money managers arrested in fraud FBI says they misappropriated $500 million for lavish lifestyles," by Jonathon Silver, Pittsburgh Post-Gazette, February 26, 2009 --- http://www.post-gazette.com/pg/09057/951834-85.stm

Two East Coast investment managers sued for fraud by the University of Pittsburgh and Carnegie Mellon University misappropriated more than $500 million of investors' money to hide losses and fund a lavish lifestyle that included purchases of $80,000 collectible teddy bears, horses and rare books, federal authorities said yesterday.

As Pitt and Carnegie Mellon were busy trying to learn whether they will be able to recover any of their combined $114 million in investments through Westridge Capital Management, the FBI yesterday arrested the corporations' managers.

Paul Greenwood, 61, of North Salem, N.Y., and Stephen Walsh, 64, of Sands Point, N.Y., were charged in Manhattan -- by the same office prosecuting the Bernard L. Madoff fraud case -- with securities fraud, wire fraud and conspiracy.

Both men also were sued in civil court by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which alleged that the partners misappropriated more than $553 million and "fraudulently solicited" $1.3 billion from investors since 1996.

The Accused

Paul Greenwood and Stephen Walsh are accused of misappropriating millions from investors. Here is a look at some of their biggest personal purchases:

• HOME: Mr. Greenwood, a horse breeder, owned a horse farm in North Salem, N.Y., an affluent community that counts David Letterman as a resident.

• BEARS: Mr. Greenwood owns as many as 1,350 Steiff toys, including teddy bears costing as much as $80,000.

• DIVORCE: Mr. Walsh bought his ex-wife a $3 million condominium as part of their divorce settlement.

"This is huge," said David Rosenfeld, associate regional director of the SEC's New York Regional Office. "This is a truly egregious fraud of immense proportions."

Lawyers for the defendants either could not be reached or had no comment.

Mr. Greenwood and Mr. Walsh, longtime associates and former co-owners of the New York Islanders hockey team, ran Westridge Capital Management and a number of affiliated funds and entities.

As late as this month, the partners appeared to be doing well. Mr. Greenwood told Pitt's assistant treasurer Jan. 21 that they had $2.8 billion under management -- though that number is now in question. And on Feb. 2, Pitt sent $5 million to be invested.

But in the course of less than three weeks, Westridge's mammoth portfolio imploded in what federal authorities called an investment scam meant to cover up trading losses and fund extravagant purchases by the partners.

An audit launched Feb. 5 by the National Futures Association proved key to uncovering the alleged deceit and apparently became the linchpin of the case federal prosecutors are building.

That audit came about in an indirect way. The association, a self-policing membership body, had taken action against a New York financier. That led to a man named Jack Reynolds, a manager of the Westridge Capital Management Fund in which CMU invested $49 million; and Mr. Reynolds led to Westridge.

"We just said we better take a look at Jack Reynolds and see what's happening, and that led us to Westridge and WCM, so it was a domino effect," said Larry Dyekman, an association spokesman. "We're just not sure we have the full picture yet."

Mr. Reynolds has not been charged by federal authorities, but he is named as a defendant in the lawsuit that was filed last week by Pitt and CMU.

"Greenwood and Walsh refused to answer any of our questions about where the money was or how much there was," Mr. Dyekman continued.

"This is still an ongoing investigation, and we can't really say at this point with any finality how much has been lost."

The federal criminal complaint traces the alleged illegal activity to at least 1996.

FBI Special Agent James C. Barnacle Jr. said Mr. Greenwood and Mr. Walsh used "manipulative and deceptive devices," lied and withheld information as part of a scheme to defraud investors and enrich themselves.

The complaint refers to a public state-sponsored university called "Investor 1" whose details match those given by Pitt in its lawsuit.

The SEC's Mr. Rosenfeld said the fraud hinged not so much on the partners' investment strategy but on the fact that they are believed to have simply spent other people's money on themselves.

"They took it. They promised the investors it would be invested. And instead of doing that they misappropriated it for their own use," Mr. Rosenfeld said.

Not only do federal authorities believe Mr. Greenwood and Mr. Walsh used new investors' funds to cover up prior losses in a classic Ponzi scheme, they used more than $160 million for personal expenses including:

• Rare books bought at auction;

• Steiff teddy bears purchased for up to $80,000 at auction houses including Sotheby's;

• A horse farm;

• Cars;

• A residence for Mr. Walsh's ex-wife, Janet Walsh, 53, of Florida, for at least $3 million;

• Money for Ms. Walsh and Mr. Greenwood's wife, Robin Greenwood, 57, both of whom are defendants in the SEC suit. More than $2 million was allegedly wired to their personal accounts by an unnamed employee of the partners.

"Defendants treated investor money -- some of which came from a public pension fund -- as their own piggy bank to lavish themselves with expensive gifts," said Stephen J. Obie, the Commodity Futures Trading Commission's acting director of enforcement.

It is not clear how Pitt and CMU got involved with Mr. Greenwood and Mr. Walsh. But there is at least one connection involving academia. The commission suit said Mr. Walsh represented to potential investors that he was a member of the University at Buffalo Foundation board and served on its investment committee.

Mr. Walsh is a 1966 graduate of the State University of New York at Buffalo where he majored in political science.

He was a trustee of the University at Buffalo Foundation, but the foundation did not have any investments in Westridge or related firms.

Universities, charitable organizations, retirement and pension funds are among the investors who have done business with Mr. Greenwood and Mr. Walsh.

Among those investors are the Sacramento County Employees' Retirement System, the Iowa Public Employees' Retirement System and the North Dakota Retirement and Investment Office, which handles $4 billion in investments for teachers and public employees.

The North Dakota fund received about $20 million back from Westridge Capital Management, but has an undetermined amount still out in the market, said Steve Cochrane, executive director.

Mr. Cochrane said Westridge Capital was cooperative in returning what money it could by closing out their position and sending them the money.

"I dealt with them exclusively all these years," Mr. Cochrane said.

"They always seemed to be upfront and honest. I think they're as stunned and as victimized as we are, is my guess."

He said Westridge Capital had done an excellent job over the years.

The November financial statement indicated that the one-year return from Westridge Capital was a negative 11.87 percent, but the five-year annualized rate of return was a positive 8.36 percent.

 

According to Bloomberg, Carnegie-Mellon University received audited financial statements and relied heavily on the certification from Deloitte --- http://www.bloomberg.com/apps/news?pid=20601087&sid=abOuQYqKtndc&refer=home
Actually, CMU’s consulting firm (Wilshire) claims it relied on that Deloitte certification:

******Begin Quotation
“It said all clients received audited financial results from Deloitte & Touche, and custodial statements from trustee banks showing Westridge’s trading. Carnegie Mellon hires consultants to provide expertise and perform substantial due diligence, said Ken Walters a spokesman for the school. “In this case, this investment was “highly recommended” to the university by Wilshire, he said. He declined to comment further on the consultant.”
******End Quotation

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

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

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


August 11, 2010 message from Gerald Trites [gtrites@ZORBA.CA]

Noted University of Toronto Accounting professor, Dr Gordon Richardson, has filed an expert witness report in a pending class action suit against the Canadian Imperial Bank of commerce, saying that the bank substantially overstated its profits in 2007 and 2008 by basing its estimates of risk on indefensible assumptions. The lawsuit is expected to go to court in March, 2011. A write-up on the submission is at http://business.financialpost.com/2010/08/10/subprime-suit-challenges-cibc-accounting/ 
Dr Richardson recommended that the bank restate its income.

"Subprime suit challenges CIBC accounting, by Jim Middlemis, Financial Post, August 10 ,2010 ---
http://business.financialpost.com/2010/08/10/subprime-suit-challenges-cibc-accounting/

Canadian Imperial Bank of Commerce breached Canadian accounting standards by failing to properly disclose its exposure to subprime mortgages, according to expert testimony filed in Canada’s biggest lawsuit to stem from the credit crisis.

Gordon Richardson, the KPMG professor of accounting at the Rotman School of Management in Toronto and a PhD, writes in his 65-page review of the bank’s subprime disclosure that “CIBC failed to comply with GAAP disclosure requirements … and the information provided to pertaining credit risk was, prior to December 6, 2007, wholly misleading to the market in general and to class members who invested in CIBC.”

The lawsuit covers the period of May 31, 2007 to Feb. 28, 2008, a tumultuous period in the capital markets when credit started freezing up and investment firms scrambled to understand their exposure to subprime investments.

Mr. Richardson said, “CIBC substantially overstated its income for the last three quarters of fiscal 2007 and the first quarter of 2008 and income for these periods should be restated in order to comply with GAAP.” The overstatement resulted from “indefensible assumptions” related to its hedge fund exposure.

A second expert witness report from a noted securities valuation firm in the United States pegs CIBC investor losses at a maximum of $6.6-billion. The filings are made in preparation for the mammoth class-action suit, which is expected to come before the Ontario Superior Court for certification in March 2011.

CIBC spokesman Rob McLeod said, “CIBC denies these allegations and plans to vigorously defend this action. CIBC is confident that, at all times, its conduct was appropriate and that its disclosure met applicable requirements.” The bank is expected to file its response by the end of August.

Joel Rochon, who is representing Thornhill, Ont., investor Howard Green in the lawsuit, which was filed on July 22, 2008, declined to comment on the expert testimony reports.

The lawsuit claims CIBC misrepresented the bank’s exposure to subprime investments and failed to implement appropriate risk-management controls related to billions of dollars in investments in collateralized debt obligations and U.S. subprime mortgages.

A similar investor lawsuit in the United States covering CIBC disclosures between May 2007 to May 2008 was dismissed in March. Judge William Pauley of the Manhattan Federal Court wrote, “CIBC, like so many other institutions, could not have been expected to anticipate the crisis with the accuracy [the] plaintiff enjoys in hindsight.”

However, the laws between the two countries differ and CIBC is being sued in Canada under a new section of the Ontario Securities Act, which makes it easier for investors to sue corporations for misrepresentations. An investor class action against Imax Corp. over disclosure about the status of theatre construction was certified by an Ontario judge in February.

Mr. Richardson’s extensive report examined CIBC’s exposure to various tranches of subprime residential mortgage-backed securities and collateralized debt obligations tied to subprime mortgages, including its hedged and unhedged position.

He makes some damning conclusions.

“In a nutshell, investors needed to be told by no later than April 30, 2007 that CIBC’s maximum exposure to credit risk was $11.4-billion. Instead CIBC misled its shareholders by remaining silent and by misstating and minimizing its exposure.” He writes that it wasn’t until Dec. 6, 2007 that the bank “stunned the investment community” and revealed the $11.4-billion exposure.

He said based on the TABX and ABX indices, which tracked the value of credit default swaps tied to subprime mortgage bonds, the bank should have realized that its main $3.5-billion hedge with counterparty ACA Financial was in trouble. “CIBC had to have known that its hedge of $3.5-billion with ACA had collapsed by April 30, 2007 and by no later than July 2007.”

He said that should have resulted in fair value writedowns of $769-million, $2.38-billion and $3.82-billion for the second and third quarters of fiscal 2007 versus the $273-million and $747-million hit the bank declared.

He examined two other hedges involving XL Capital and FGIC Corp. and concluded that “CIBC should have recorded cumulative U.S. subprime fair value write downs between $6.54-billion and $6.95-billion by the end of the first [fiscal] quarter of 2008, rather than the $4.14-billion cumulative U.S. subprime write own it did take…. ”

While the CIBC suit is one of the few pieces of subprime litigation in Canada, in the United States there have been more than 400 lawsuits filed in federal courts related to the credit crisis, according to NERA Economic consulting, which tracks such suits.

Elaine Buckberg, a senior vice-president at NERA in New York, said her firm has identified 74 cases relating to collateral debt obligations, 10 of which were filed in 2010 and the others filed between 2007 and 2009. Overall, U.S. credit crisis lawsuits have resulted in US$2.1-billion in settlements involving a number of parties. Mortgage lender Countrywide Financial Corp. agreed to pay US$600-million to shareholders who accused it of misleading investors about its lending practices. Mortgage loan originator New Century Financial settled with investors for $125-million. Merrill Lynch settled its subprime litigation for $475-million. Charles Schwab paid out $225-million over allegations of misrepresentation related to one of its mutual funds.

It isn’t the first investor class action CIBC has been at the centre of. In 2005, it settled a claim by Enron Corp. shareholders for US$2.4-billion.

Read more:
http://business.financialpost.com/2010/08/10/subprime-suit-challenges-cibc-accounting/#ixzz0wKYkmPRY

Ernst & Young LLP, Chartered Accountants, Toronto, Ontario, is the external auditor who prepared the Independent Auditors’ Reports to Shareholders - Report on Financial Statements and Report on Internal Control over Financial Reporting. Ernst & Young LLP is independent with respect to CIBC within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario, United States federal securities laws - 13 - and the rules and regulations thereunder, including the independence rules adopted by the United States Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002; and applicable independence requirements of the Public Company Accounting Oversight Board (United States).
Annual Information Form, Canadian Imperial Bank of Commerce, December 4, 2008 ---
http://www.cibc.com/ca/pdf/investor/2008-annual-info-form-en.pdf

Where Were the Auditors ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms

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


"There Are More Than a Few Texans Who Aren’t Impressed with Ernst & Young’s Auditing Abilities," by Caleb Newquist, Going Concern, August 26, 2010 ---
http://goingconcern.com/2010/08/there-are-more-than-a-few-texans-who-arent-impressed-with-ernst-youngs-auditing-abilities/ 

Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.

The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.

“Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.

Continued on article

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


Grant Thornton said in a statement that it had met "all of our professional obligations and that our work complied with professional standards."
See below

"Koss embezzlement ran in spurts, lawsuit says $478,735 spent over three days in summer 2006" by Cary Spivak, Milwaukee Journal Sentinel, July 10, 2010 --- http://www.jsonline.com/business/98152439.html

The $31 million embezzlement at Koss Corp. included several spurts of rapid-fire spending, according to a recent court filing - including one three-day span in 2006 during which nearly $500,000 flew out of the Milwaukee company's accounts and into the hands of three high-end retailers and a credit card company.

The lists of checks and wire transfers shed new light on the scheme for which Sujata "Sue" Sachdeva, former vice president of finance for Koss, is facing six federal felony charges. She was arrested by the FBI in December and has pleaded not guilty.

The list, which takes up the equivalent of about 10 single-spaced pages, is contained in a lawsuit that Koss filed last month against Sachdeva and its former auditor, Grant Thornton LLP.

The list shows that in addition to expenditures at upscale clothing retailers, Koss funds also were spent on smaller luxury items such as a personal trainer and limousine rides. Koss charges that the payments listed in the lawsuit were used to pay for Sachdeva's personal expenses.

The spending spurts left some experts wondering how the scheme could have gone unchecked for at least seven years.

"If they just looked at a sample of the withdrawals, they would have found it," said Joel Joyce, a forensic accountant at Reilly, Penner & Benton, referring to Koss executives or outside auditors. "They might not have caught it in the first month . . . but my guess is it would not have been six to seven years."

A case in point was a flurry of check-writing in the summer of 2006.

On Aug. 1 of that year, two cashier's checks totaling $154,021 went to Valentina Inc., an exclusive Mequon clothing store.

The next day, an $18,100 cashier's check was cut to Neiman Marcus and a $10,120 check was made out to Saks Fifth Avenue.

Then, on Aug. 3, three checks totaling $296,494 were written to American Express, the credit card company that eventually blew the whistle on Sachdeva last year.

Total over the three-day span: $478,735.

The checks to retailers identified the merchants by their initials, Koss said in the lawsuit. For example Valentina was V Inc. and Saks Fifth Avenue was S.F.A Inc.

Tony Chirchirillo, owner of Valentina, said he saw nothing suspicious about the large cashier's checks his company received from Sachdeva. He said he assumed the checks were backed by her own funds.

It's believed that over a five-year period Sachdeva spent more than $5 million at the boutique, sources said, although Chirchirillo said that figure "seemed high."

"I didn't know it came from Koss," Chirchirillo said, explaining that unlike personal checks, the cashier's checks did not list whose account the money was being drawn from. "I was told by an FBI agent that the money came from Koss. I would not have taken it if it said Koss."

The largest withdrawals listed in the lawsuit went to upscale retailers and to American Express, the target of an earlier lawsuit filed by Koss that contended the credit card company should have raised suspicions about the expenditures sooner.

The August spurt wasn't the only one. On Feb. 3, 2006, two cashier's checks were written to American Express, one for $102,836 and the other for $101,451.

And from July 11 to July 17 of 2003, a check for $20,182 was written to Marshall Fields, a second for $26,420 went to Saks Fifth Avenue, and five checks totaling $104,738 went to American Express.

The indictment against Sachdeva charges that she spent most of the embezzled money on luxury clothing and jewelry, furs, vacations and items for her Mequon home. More than 22,000 items - some with price tags still attached - have been seized by federal authorities in connection with the investigation, including fur coats, designer clothing, jewelry, art items and hundreds of pairs of shoes.

Among the payments detailed in the latest lawsuit:

• Carey Limousine received $16,706 from 2006 to 2008, with the bulk of the money coming in 2007. The most expensive ride was for $4,460 in September 2007.

• Chris A. Aiello, a personal trainer, was paid $770 in 2005. Aiello said he trained Sachdeva two to three times a week, sometimes in a conference room at Koss headquarters and sometimes at her Mequon home. Normally, Aiello said, he was paid with personal checks by Sachdeva, although he recalled that on a handful of occasions Sachdeva told him to get his money from one of her assistants, Julie Mulvaney. He said he thinks those few checks came from Koss.

"You question it in your mind, but you don't say anything," said Aiello, who no longer trains Sachdeva. "We weren't doing anything illegal."

• Several payments, including one for $21,000 and another for $14,000, went to individuals. Ongoing investigations include an effort to determine what connection, if any, those people had to Sachdeva.

• Mulvaney was paid a total of $14,000, and another Sachdeva assistant, Tracy Malone, was paid about $1,800. Both employees were fired by Koss last year, and attorneys for both women have said they did nothing wrong.

In addition, more than $145,000 was taken from petty cash, in increments ranging from $482 to $9,049, according to the Koss list.

"That's a lot of distributions coming out of petty cash," said Richard Brown, the retired head of accounting company KPMG's Milwaukee office. "But petty cash doesn't get a lot of attention."

At the time of the scheme, Michael Koss held five high-level titles in the company including chief executive officer and chief financial officer. Koss, the son of the company's founder, remains CEO but is no longer CFO.

"A CFO should have been reviewing financial reports that might have raised questions, which might have included 'Let me see the documents,' " said Brown, who now teaches accounting. That review would have likely led to question about why thousands, and in some cases millions, were being paid to retailers, he said.

The suit, filed in Cook County, Ill., seeks damages from Grant Thornton and alleges the national accounting firm failed to spot the fraud and repeatedly assured Koss that it had adequate internal controls.

Grant Thornton said in a statement that it had met "all of our professional obligations and that our work complied with professional standards."

Michael Koss and the California attorney who filed the lawsuit did not return calls for comment.

Brown said suits filed against auditors by companies that are fraud victims often are settled out of court.

"A full blown civil lawsuit will bring out a lot of facts potentially embarrassing to both the company and the accounting firm," Brown said, adding it was impossible to say which side might prevail in litigation. "Both the company and the audit firm will suffer continued embarrassing publicity if the suit goes to completion. It is for this reason that these types of suits often get settled out of court before a trial

The $31 million embezzlement at Koss Corp. included several spurts of rapid-fire spending, according to a recent court filing - including one three-day span in 2006 during which nearly $500,000 flew out of the Milwaukee company's accounts and into the hands of three high-end retailers and a credit card company.

The lists of checks and wire transfers shed new light on the scheme for which Sujata "Sue" Sachdeva, former vice president of finance for Koss, is facing six federal felony charges. She was arrested by the FBI in December and has pleaded not guilty.

The list, which takes up the equivalent of about 10 single-spaced pages, is contained in a lawsuit that Koss filed last month against Sachdeva and its former auditor, Grant Thornton LLP.

The list shows that in addition to expenditures at upscale clothing retailers, Koss funds also were spent on smaller luxury items such as a personal trainer and limousine rides. Koss charges that the payments listed in the lawsuit were used to pay for Sachdeva's personal expenses.

The spending spurts left some experts wondering how the scheme could have gone unchecked for at least seven years.

"If they just looked at a sample of the withdrawals, they would have found it," said Joel Joyce, a forensic accountant at Reilly, Penner & Benton, referring to Koss executives or outside auditors. "They might not have caught it in the first month . . . but my guess is it would not have been six to seven years."

A case in point was a flurry of check-writing in the summer of 2006.

On Aug. 1 of that year, two cashier's checks totaling $154,021 went to Valentina Inc., an exclusive Mequon clothing store.

The next day, an $18,100 cashier's check was cut to Neiman Marcus and a $10,120 check was made out to Saks Fifth Avenue.

Then, on Aug. 3, three checks totaling $296,494 were written to American Express, the credit card company that eventually blew the whistle on Sachdeva last year.

Total over the three-day span: $478,735.

The checks to retailers identified the merchants by their initials, Koss said in the lawsuit. For example Valentina was V Inc. and Saks Fifth Avenue was S.F.A Inc.

Tony Chirchirillo, owner of Valentina, said he saw nothing suspicious about the large cashier's checks his company received from Sachdeva. He said he assumed the checks were backed by her own funds.

It's believed that over a five-year period Sachdeva spent more than $5 million at the boutique, sources said, although Chirchirillo said that figure "seemed high."

"I didn't know it came from Koss," Chirchirillo said, explaining that unlike personal checks, the cashier's checks did not list whose account the money was being drawn from. "I was told by an FBI agent that the money came from Koss. I would not have taken it if it said Koss."

The largest withdrawals listed in the lawsuit went to upscale retailers and to American Express, the target of an earlier lawsuit filed by Koss that contended the credit card company should have raised suspicions about the expenditures sooner.

The August spurt wasn't the only one. On Feb. 3, 2006, two cashier's checks were written to American Express, one for $102,836 and the other for $101,451.

And from July 11 to July 17 of 2003, a check for $20,182 was written to Marshall Fields, a second for $26,420 went to Saks Fifth Avenue, and five checks totaling $104,738 went to American Express.

The indictment against Sachdeva charges that she spent most of the embezzled money on luxury clothing and jewelry, furs, vacations and items for her Mequon home. More than 22,000 items - some with price tags still attached - have been seized by federal authorities in connection with the investigation, including fur coats, designer clothing, jewelry, art items and hundreds of pairs of shoes.

Among the payments detailed in the latest lawsuit:

• Carey Limousine received $16,706 from 2006 to 2008, with the bulk of the money coming in 2007. The most expensive ride was for $4,460 in September 2007.

• Chris A. Aiello, a personal trainer, was paid $770 in 2005. Aiello said he trained Sachdeva two to three times a week, sometimes in a conference room at Koss headquarters and sometimes at her Mequon home. Normally, Aiello said, he was paid with personal checks by Sachdeva, although he recalled that on a handful of occasions Sachdeva told him to get his money from one of her assistants, Julie Mulvaney. He said he thinks those few checks came from Koss.

"You question it in your mind, but you don't say anything," said Aiello, who no longer trains Sachdeva. "We weren't doing anything illegal."

• Several payments, including one for $21,000 and another for $14,000, went to individuals. Ongoing investigations include an effort to determine what connection, if any, those people had to Sachdeva.

• Mulvaney was paid a total of $14,000, and another Sachdeva assistant, Tracy Malone, was paid about $1,800. Both employees were fired by Koss last year, and attorneys for both women have said they did nothing wrong.

In addition, more than $145,000 was taken from petty cash, in increments ranging from $482 to $9,049, according to the Koss list.

"That's a lot of distributions coming out of petty cash," said Richard Brown, the retired head of accounting company KPMG's Milwaukee office. "But petty cash doesn't get a lot of attention."

At the time of the scheme, Michael Koss held five high-level titles in the company including chief executive officer and chief financial officer. Koss, the son of the company's founder, remains CEO but is no longer CFO.

"A CFO should have been reviewing financial reports that might have raised questions, which might have included 'Let me see the documents,' " said Brown, who now teaches accounting. That review would have likely led to question about why thousands, and in some cases millions, were being paid to retailers, he said.

The suit, filed in Cook County, Ill., seeks damages from Grant Thornton and alleges the national accounting firm failed to spot the fraud and repeatedly assured Koss that it had adequate internal controls.

Grant Thornton said in a statement that it had met "all of our professional obligations and that our work complied with professional standards."

Michael Koss and the California attorney who filed the lawsuit did not return calls for comment.

Brown said suits filed against auditors by companies that are fraud victims often are settled out of court.

"A full blown civil lawsuit will bring out a lot of facts potentially embarrassing to both the company and the accounting firm," Brown said, adding it was impossible to say which side might prevail in litigation. "Both the company and the audit firm will suffer continued embarrassing publicity if the suit goes to completion. It is for this reason that these types of suits often get settled out of court before a trial takes place."

Continued in article

"Defending Koss And Their Auditors: Just Loopy Distorted Feedback," by Francine McKenna, re: TheAuditors, January 16, 2010 ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/

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

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


2009 PCAOB Inspection Report for Ernst & Young ---
Scroll down to "Ernst & Young LLP July 2, 2010" at http://pcaobus.org/Inspections/Pages/InspectedFirms.aspx
The initial response of E&Y is at the bottom of the document

See also http://www.scribd.com/doc/34056825/2010-Ernst-Young-LLP-US

"PCAOB Report States That There Was a Fair Amount of Failing Going on at Ernst & Young," by Caleb Newquist, Going Concern, July 8, 2010 ---
Click Here
http://goingconcern.com/2010/07/pcaob-report-states-that-there-was-a-fair-amount-of-failing-going-on-at-ernst-young/

The PCAOB has issued its annual report on Ernst & Young having given the firm the third degree at its national office and 30 of its 80 U.S. offices. It inspected 58 audits performed by the firm but exactly who is, of course, a big secret (unless you tell us).

There were five “Issuers” that were listed in the report and some form of the word “fail” was used 25 times (that includes the footnotes).

[Issuer A] The Firm failed to adequately test the issuer’s loan loss reserves related to certain loans held for investment. Specifically, the Firm failed to reconcile certain values used in the issuer’s models with industry data, failed to test the recovery rates used in the issuer’s calculation, and failed to test the qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform sufficient procedures to test the issuer’s allowance for loan losses (“ALL”). The issuer determined the general portion of its ALL estimate, which represented a significant portion of the ALL, using certain factors such as loan grades. Data for this calculation were obtained from information technology systems that reside at a third-party service organization. The Firm relied on these systems, but it failed to test the information-technology general controls (“ITGCs”) over certain of these systems, and it failed to test certain of the application controls over these systems. Further, the Firm’s testing of the controls over the assignment and monitoring of loan grades was insufficient, as the Firm failed to assess the competence of the individuals performing the control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test the costing of work-in-process and finished goods inventory. Specifically, the Firm’s tests of controls over the costing of such inventory were limited to verifying that management reviewed and approved the cost allocation factors, without evaluating the review process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is below for your reading pleasure. E&Y’s got its $0.02 in, however it was short and was mostly concerned about the firm’s right to keep its response to Part II (the non-public part)…non-public:

We are enclosing our response letter to the Public Company Accounting Oversight Board regarding Part I of the draft Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the Sarbanes-Oxley Act requires that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.” Based on this statutory provision, we understand that our comments on Part ii will be kept non-public as long as Part ii of the Report itself is non-public.

In addition, we are requesting confidential treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would prefer that no one know how it managed to tell the PCAOB to fuck right off as nicely as it could.

If you had the pleasure of being on one of these 58 engagements, we’d love to hear about your experience.

 Other PCAOB Inspection Reports --- http://pcaobus.org/Inspections/Pages/InspectedFirms.aspx

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


Sam Antar and Crazy Eddie --- http://en.wikipedia.org/wiki/Sam_Antar

"Sex, lies, and accounting fraud," AccountingWeb, July 7, 2010 ---
http://www.accountingweb.com/topic/watchdog/sex-lies-and-accounting-fraud

When Sam Antar was cooking the books for his company, he used a number of complicated accounting tricks to dupe auditors. But some tactics were simple.

"These auditors from the Big Four accounting firms are usually single kids just a few years out of school. What do kids in their 20s think about all the time? Sex," said Antar, who was at the center of a multi-million dollar fraud 20 years ago.

So Antar would pair "cute hot female" employees with male auditors as part of his distraction strategy. "In effect, I was a fraudster, matchmaker, and pimp," said Antar, who avoided jail time by working with the U.S. government, and now advises government agencies and businesses on avoiding accounting fraud.

Since the financial crisis struck, accounting scams – such as the multi-billion dollar Bernard Madoff scheme – have made regular headlines. Last week, a Hong Kong executive at Ernst & Young was detained by police and documents were seized after evidence of falsified audit documents came to light in a court case. Ernst settled a $1 billion negligence claim by the liquidators of Akai Holdings out of court for an undisclosed sum and the executive was suspended awaiting internal disciplinary action.

A London executive for accounting firm KPMG – another of the "Big Four" accounting firms (along with Ernst, PricewaterhouseCoopers and Deloitte Touche Tohmatsu) – was sentenced to four years in jail in September for siphoning nearly $900,000 of company funds for personal use.

While there are no international statistics charting white-collar crime arrests, the number of people being trained to detect accounting shenanigans has exploded since the financial crisis. The U.S.-based Association of Certified Fraud Examiners, which trains accountants in fraud investigation, has 47,000 members worldwide – adding 10,000 new members last year alone.

"There's always an uptick in fraud activity when the economy goes down," said Kim Frisinger, a former FBI accounting fraud investigator and managing director of LECG Hong Kong, a consulting firm. "It's like the ocean going out and you can see everything that was hidden under water."

The fraud triangle

If an employee is having an affair, Gary Zeune knows exactly where he would look to find equivalent accounting chicanery. "Look at his or her company expense reports – they will almost always have false entries," said Zeune, an accountant who specializes in fraud. "No one budgets to have an affair."

Although there are "millions of ways to commit fraud, there are always three common elements in any employee fraud case – incentive, opportunity, and rationalization," Zeune said.

Although greed is an obvious incentive, it is not the only one – infidelity, gambling debts, drug use or simple ego can start the slide into accounting crime.

"Look at the Société Générale incident where a single trader, Jerome (Kerviel), lost the company $7 billion," said Zeune, referring to the incident that nearly destroyed the French financial services company in 2008. "Why? He wanted to show what a smart securities trader he was. He was looking for psychic income, not monetary income."

Opportunity is created when a culprit feels there is a relatively low likelihood of being caught – most often at private companies, Zeune said. "They have less internal controls than publicly listed companies."

Rationalization is the conversation with the white-collar criminal has with him or herself to assuage their conscience – something that is much more likely to have during a downturn, when companies are downsizing and employees are asked to do more for less, Zeune said.

Catching a crook with crooks

But many accounting fraudsters don't operate within the bounds of right and wrong. Large-scale frauds such as Madoff or Enron are more pathological in nature, Antar said.

"You have to take morality out of the equation to understand the criminal mind ... I'd still be doing it today if I didn't get caught," said Antar, who went to school and obtained his accounting degree solely to look for ways to subvert the law.

Like diverting auditors with attractive staff, accounting fraud is all about distraction, Antar said. "It's like David Copperfield, it's an illusion...I want you to look over here so you don't see what I'm doing over there."

Another tactic: Delay. "They would come in here with maybe six weeks to go through the books ... my goal would be to leave them 80 percent of the work for the last week, so they're rushed to finish."

Digging into accounting fraud means understanding "there is a big difference between truth and accuracy," said Mark Morze, who spent five years in U.S. prisons for a billion-dollar stock fraud in the 1990s. "Every financial statement I put together was accurate, but it wasn't truthful."

In fact, perfection is often a sign of shadiness, said Morze, who, like Antar now teaches accountants about fraud. "You're doing everything in reverse, so of course it's going to add up," he said.

One of the best ways to detect fraud in financial statements is to read only the footnotes, and compare how they have changed over time. "Look for subtle differences, and that is where they will hide the fraud," said Antar. "That's what I did."

Most frauds fail to unravel because obvious questions aren't asked – often because the perpetrators wrap themselves in a veneer of integrity. "Everyone thought Enron was legit," Morze said. "Bernie Madoff, people would say – look who his clients are, Steven Spielberg – he must be legit."

But once questions are asked – and asked again – the fraud often becomes apparent. "If people get offended when you ask them a question about verification, that's a sign something is up," Morze said. "No honest person gets offended when asking to verify something."

Kevin Voigt's article is reprinted with permission from The Pros & The Cons, the only speakers’ bureau in the United States for white-collar criminals.

Related articles: A day in the life of...a counter fraud specialist Small company suffers massive embezzlements

Related articles

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


"Dell Is the Latest to Go the SEC’s Woodshed; Settlement of $100 million for Fraudulent Accounting, Disclosure Violations," by Caleb Newquist, Going Concern, July 22, 2010 --- http://goingconcern.com/2010/07/michael-dell-is-the-latest-to-go-the-secs-woodshed/

Also see http://www.crn.com/it-channel/201800702;jsessionid=5YIC355EBYCZNQE1GHPSKHWATMY32JVN

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


Why Even Renowned Scientists Need to Have Their Research Independently Replicated

"Author on leave after Harvard inquiry Investigation of scientist’s work finds evidence of misconduct, prompts retraction by journal," by Carolyn Y. Johnson, The Boston Globe, August 10, 2010 ---
http://www.boston.com/news/education/higher/articles/2010/08/10/author_on_leave_after_harvard_inquiry/

Harvard University psychologist Marc Hauser — a well-known scientist and author of the book “Moral Minds’’ — is taking a year-long leave after a lengthy internal investigation found evidence of scientific misconduct in his laboratory.

The findings have resulted in the retraction of an influential study that he led. “MH accepts responsibility for the error,’’ says the retraction of the study on whether monkeys learn rules, which was published in 2002 in the journal Cognition.

Two other journals say they have been notified of concerns in papers on which Hauser is listed as one of the main authors.

It is unusual for a scientist as prominent as Hauser — a popular professor and eloquent communicator of science whose work has often been featured on television and in newspapers — to be named in an investigation of scientific misconduct. His research focuses on the evolutionary roots of the human mind.

In a letter Hauser wrote this year to some Harvard colleagues, he described the inquiry as painful. The letter, which was shown to the Globe, said that his lab has been under investigation for three years by a Harvard committee, and that evidence of misconduct was found. He alluded to unspecified mistakes and oversights that he had made, and said he will be on leave for the upcoming academic year.

In an e-mail yesterday, Hauser, 50, referred questions to Harvard. Harvard spokesman Jeff Neal declined to comment on Hauser’s case, saying in an e-mail, “Reviews of faculty conduct are considered confidential.’’

“Speaking in general,’’ he wrote, “we follow a well defined and extensive review process. In cases where we find misconduct has occurred, we report, as appropriate, to external agencies (e.g., government funding agencies) and correct any affected scholarly record.’’

Much remains unclear, including why the investigation took so long, the specifics of the misconduct, and whether Hauser’s leave is a punishment for his actions.

The retraction, submitted by Hauser and two co-authors, is to be published in a future issue of Cognition, according to the editor. It says that, “An internal examination at Harvard University . . . found that the data do not support the reported findings. We therefore are retracting this article.’’

The paper tested cotton-top tamarin monkeys’ ability to learn generalized patterns, an ability that human infants had been found to have, and that may be critical for learning language. The paper found that the monkeys were able to learn patterns, suggesting that this was not the critical cognitive building block that explains humans’ ability to learn language. In doing such experiments, researchers videotape the animals to analyze each trial and provide a record of their raw data.

The work was funded by Harvard’s Mind, Brain, and Behavior program, the National Science Foundation, and the National Institutes of Health. Government spokeswomen said they could not confirm or deny whether an investigation was underway.

The findings have resulted in the retraction of an influential study that he led. “MH accepts responsibility for the error,’’ says the retraction of the study on whether monkeys learn rules, which was published in 2002 in the journal Cognition.

Two other journals say they have been notified of concerns in papers on which Hauser is listed as one of the main authors.

It is unusual for a scientist as prominent as Hauser — a popular professor and eloquent communicator of science whose work has often been featured on television and in newspapers — to be named in an investigation of scientific misconduct. His research focuses on the evolutionary roots of the human mind.

In a letter Hauser wrote this year to some Harvard colleagues, he described the inquiry as painful. The letter, which was shown to the Globe, said that his lab has been under investigation for three years by a Harvard committee, and that evidence of misconduct was found. He alluded to unspecified mistakes and oversights that he had made, and said he will be on leave for the upcoming academic year.

In an e-mail yesterday, Hauser, 50, referred questions to Harvard. Harvard spokesman Jeff Neal declined to comment on Hauser’s case, saying in an e-mail, “Reviews of faculty conduct are considered confidential.’’

“Speaking in general,’’ he wrote, “we follow a well defined and extensive review process. In cases where we find misconduct has occurred, we report, as appropriate, to external agencies (e.g., government funding agencies) and correct any affected scholarly record.’’

Much remains unclear, including why the investigation took so long, the specifics of the misconduct, and whether Hauser’s leave is a punishment for his actions.

The retraction, submitted by Hauser and two co-authors, is to be published in a future issue of Cognition, according to the editor. It says that, “An internal examination at Harvard University . . . found that the data do not support the reported findings. We therefore are retracting this article.’’

The paper tested cotton-top tamarin monkeys’ ability to learn generalized patterns, an ability that human infants had been found to have, and that may be critical for learning language. The paper found that the monkeys were able to learn patterns, suggesting that this was not the critical cognitive building block that explains humans’ ability to learn language. In doing such experiments, researchers videotape the animals to analyze each trial and provide a record of their raw data.

The work was funded by Harvard’s Mind, Brain, and Behavior program, the National Science Foundation, and the National Institutes of Health. Government spokeswomen said they could not confirm or deny whether an investigation was underway.

Gary Marcus, a psychology professor at New York University and one of the co-authors of the paper, said he drafted the introduction and conclusions of the paper, based on data that Hauser collected and analyzed.

“Professor Hauser alerted me that he was concerned about the nature of the data, and suggested that there were problems with the videotape record of the study,’’ Marcus wrote in an e-mail. “I never actually saw the raw data, just his summaries, so I can’t speak to the exact nature of what went wrong.’’

The investigation also raised questions about two other papers co-authored by Hauser. The journal Proceedings of the Royal Society B published a correction last month to a 2007 study. The correction, published after the British journal was notified of the Harvard investigation, said video records and field notes of one of the co-authors were incomplete. Hauser and a colleague redid the three main experiments and the new findings were the same as in the original paper.

Science, a top journal, was notified of the Harvard investigation in late June and told that questions about record-keeping had been raised about a 2007 paper in which Hauser is the senior author, according to Ginger Pinholster, a journal spokeswoman. She said Science has requested Harvard’s report of its investigation and will “move with utmost efficiency in light of the seriousness of issues of this type.’’

Colleagues of Hauser’s at Harvard and other universities have been aware for some time that questions had been raised about some of his research, and they say they are troubled by the investigation and forthcoming retraction in Cognition.

“This retraction creates a quandary for those of us in the field about whether other results are to be trusted as well, especially since there are other papers currently being reconsidered by other journals as well,’’ Michael Tomasello, co-director of the Max Planck Institute for Evolutionary Anthropology in Leipzig, Germany, said in an e-mail. “If scientists can’t trust published papers, the whole process breaks down.’’

This isn’t the first time Hauser’s work has been challenged.

In 1995, he was the lead author of a paper in the Proceedings of the National Academy of Sciences that looked at whether cotton-top tamarins are able to recognize themselves in a mirror. Self-recognition was something that set humans and other primates, such as chimpanzees and orangutans, apart from other animals, and no one had shown that monkeys had this ability.

Gordon G. Gallup Jr., a professor of psychology at State University of New York at Albany, questioned the results and requested videotapes that Hauser had made of the experiment.

“When I played the videotapes, there was not a thread of compelling evidence — scientific or otherwise — that any of the tamarins had learned to correctly decipher mirrored information about themselves,’’ Gallup said in an interview.

In 1997, he co-authored a critique of the original paper, and Hauser and a co-author responded with a defense of the work.

In 2001, in a study in the American Journal of Primatology, Hauser and colleagues reported that they had failed to replicate the results of the previous study. The original paper has never been retracted or corrected.

Continued in article

Also see http://chronicle.com/blogPost/Harvard-Confirms-Hausergate/26198/

"Harvard Clarifies Wrongdoing by Professor," Inside Higher Ed, August 23, 2010 ---
http://www.insidehighered.com/news/2010/08/23/qt#236200

Harvard University announced Friday that its investigations had found eight incidents of scientific misconduct by Marc Hauser, a prominent psychology professor who recently started a leave, The Boston Globe reported. The university also indicated that sanctions had been imposed, and that Hauser would be teaching again after a year. Since the Globe reported on Hauser's leave and the inquiry into his work, many scientists have called for a statement by the university on what happened, and Friday's announcement goes much further than earlier statements. In a statement sent to colleagues on Friday, Hauser said: "I am deeply sorry for the problems this case has caused to my students, my colleagues, and my university. I acknowledge that I made some significant mistakes and I am deeply disappointed that this has led to a retraction and two corrections. I also feel terrible about the concerns regarding the other five cases."

Why did Harvard take three years on this one?
http://chronicle.com/blogPost/HauserHarvard/26308/

Bob Jensen's threads on this cheating scandal are at
http://www.trinity.edu/rjensen/TheoryTAR.htm#SocialScience

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

August 10, 2010 reply from Jagdish Gangolly [gangolly@CSC.ALBANY.EDU]

Bob,

This is a classic example that shows how difficult it is to escape accountability in science. First, when Gordon Gallup, a colleague in our Bio-Psychology in Albany questioned the results, at first Hauser tried to get away with a reply because Albany is not Harvard. But then when Hauser could not replicate the experiment he had no choice but to confess, unless he was willing to be caught some time in the future with his pants down.

However, in a sneaky way, the confession was sent by Hauser to a different journal. But Hauser at least had the gumption to confess.

The lesson I learn from this episode is to do something like what lawyers always do in research. They call it Shepardizing. It is important not to take any journal article at its face value, even if the thing is in a journal as well known as PNAS and by a person from a school as well known as Harvard. The other lesson is not to ignore a work or criticism even if it appears in a lesser known journal and is by an author from a lesser known school (as in Albany in this case).

Jagdish -- J
agdish Gangolly
(gangolly@albany.edu)
Department of Informatics College of Computing & Information
State University of New York at Albany 7A, Harriman Campus Road, Suite 220 Albany, NY 12206

August 10, 2010 message from Paul Williams [Paul_Williams@NCSU.EDU]

Bob and Jagdish,
This also illustrates the necessity of keeping records of experiments. How odd that accounting researchers cannot see the necessity of "keeping a journal!!!"

August 21, 2010 reply from Orenstein, Edith [eorenstein@FINANCIALEXECUTIVES.ORG]

I believe a broad lesson arises from the tale of Professor Hauser's monkey-business:

"It is unusual for a scientist as prominent as Hauser­ - a popular professor and eloquent communicator of science whose work has often been featured on television and in newspapers ­- to be named in an investigation of scientific misconduct."

Disclaimer: this is my personal opinion only, and I believe these lessons apply to all professions, but since this is an accounting listserv, lesson 1 with respect to accounting/auditing research is:

1. even the most prominent, popular, and eloquent communicator professors' research, including but not limited to the field of accounting, and including for purposes of standard-setting, rule-making, et al, should not be above third party review and questioning (that may be the layman's term; the technical term I assume is 'replication'). Although it can be difficult for less prominent, popular, eloquent communicators to raise such challenges, without fear of reprisal, it is important to get as close to the 'truth' or 'truths' as may (or may not) exist. This point applies not only to formal, refereed journals, but non-refereed published research in any form as well.   

 

And, from the world of accounting & auditing practice, (or any job, really), the lesson is the same:

2. even the most prominent, popular, and eloquent communicator(s) - e.g. audit clients....should not be above third party review and questioning; once again, it can be difficult for less prominent, popular, and eloquent communicators (internal or external audit staff, whether junior or senior staff) to raise challenges in the practice of auditing in the field (which is why staffing decisions, supervision, and backbone are so important). And we have seen examples where such challenges were met with reprisal or challenge (e.g. Cynthia Cooper challenging WorldCom's accounting; HealthSouth's Richard Scrushy, the Enron - Andersen saga, etc.)

Additionally, another lesson here, (I repeat this is my personal opinion only) is that in the field of standard-setting or rulemaking, testimony of 'prominent' experts and 'eloquent communicators' should be judged on the basis of substance vs. form, and others (i.e. those who may feel less 'prominent' or 'eloquent') should step up to the plate to offer concurring or counterarguments in verbal or written form (including comment letters) if their experience or thought process leads them to the same conclusion as the more 'prominent' or 'eloquent' speakers/writers - or in particular, if it leads them to another view.

I wonder sometimes, particularly in public hearings, if individuals testifying believe there is implied pressure to say what one thinks the sponsor of the hearing expects or wants to hear, vs. challenging the status quo, particular proposed changes, etc., particularly if they may fear reprisal. Once again, it is important to provide the facts as one sees them, and it is about substance vs. form; sometimes difficult to achieve.

Edith Orenstein
www.financialexecutives.org/blog   

Bob Jensen's threads on professors who cheat ---
 http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize 

 


Potentially a Great Case for Managerial Accounting Courses:  How can Harry Potter movies be financial losers?
"'Hollywood Accounting' Losing In The Courts:  From the math-is-hard dept," TechDirt ---
http://www.techdirt.com/articles/20100708/02510310122.shtml

If you follow the entertainment business at all, you're probably well aware of "Hollywood accounting," whereby very, very, very few entertainment products are technically "profitable," even as they earn studios millions of dollars. A couple months ago, the Planet Money folks did a great episode explaining how this works in very simple terms. The really, really, really simplified version is that Hollywood sets up a separate corporation for each movie with the intent that this corporation will take on losses. The studio then charges the "film corporation" a huge fee (which creates a large part of the "expense" that leads to the loss). The end result is that the studio still rakes in the cash, but for accounting purposes the film is a money "loser" -- which matters quite a bit for anyone who is supposed to get a cut of any profits.

For example, a bunch of you sent in the example of how Harry Potter and the Order of the Phoenix, under "Hollywood accounting," ended up with a $167 million "loss," despite taking in $938 million in revenue. This isn't new or surprising, but it's getting attention because the income statement for the movie was leaked online, showing just how Warner Bros. pulled off the accounting trick:

In that statement, you'll notice the "distribution fee" of $212 million dollars. That's basically Warner Bros. paying itself to make sure the movie "loses money." There are some other fun tidbits in there as well. The $130 million in "advertising and publicity"? Again, much of that is actually Warner Bros. paying itself (or paying its own "properties"). $57 million in "interest"? Also to itself for "financing" the film. Even if we assume that only half of the "advertising and publicity" money is Warner Bros. paying itself, we're still talking about $350 million that Warner Bros. shifts around, which get taken out of the "bottom line" in the movie accounting.

Now, that's all fascinating from a general business perspective, but now it appears that Hollywood Accounting is coming under attack in the courtroom... and losing. Not surprisingly, your average juror is having trouble coming to grips with the idea that a movie or television show can bring in hundreds of millions and still "lose" money. This week, the big case involved a TV show, rather than a movie, with the famed gameshow Who Wants To Be A Millionaire suddenly becoming "Who Wants To Hide Millions In Profits." A jury found the whole "Hollywood Accounting" discussion preposterous and awarded Celador $270 million in damages from Disney, after the jury believed that Disney used these kinds of tricks to cook the books and avoid having to pay Celador over the gameshow, as per their agreement.

On the same day, actor Don Johnson won a similar lawsuit in a battle over profits from the TV show Nash Bridges, and a jury awarded him $23 million from the show's producer. Once again, the jury was not at all impressed by Hollywood Accounting.

With these lawsuits exposing Hollywood's sneakier accounting tricks, and finding them not very convincing, a number of Hollywood studios may face a glut of upcoming lawsuits over similar deals on properties that "lost" money while making millions. It's why many of the studios are pretty worried about the rulings. Of course, these recent rulings will be appealed, and a jury ruling might not really mean much in the long run. Still, for now, it's a fun glimpse into yet another way that Hollywood lies with numbers to avoid paying people what they owe (while at the same sanctimoniously insisting in the press and to politicians that they're all about getting content creators paid what they're due).

Bob Jensen's threads on case learning are at
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases

Bob Jensen's threads on return on investment
http://www.trinity.edu/rjensen/roi.htm

Bob Jensen's threads on management accounting
http://www.trinity.edu/rjensen/theory01.htm#ManagementAccounting

Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen/theory01.htm


Question
Can you believe a highly respected corporation would over-value an asset just to spruce up its financial statements?

Gormbley said he was punished for challenging the valuation of silicon-maker Momentive Performance Materials, an investment asset. GE Capital overstated Momentive’s value in December 2008 to improve its own balance sheet, he said. Valuing the asset correctly would have reduced ‘GE Capital’s earnings 100 percent,’ in the fourth quarter that year, according to the complaint.”
Andrew H. Harris, "Former GE Unit Executive Says He Was Pushed Out for Questioning Accounting," Bloomberg, September 8, 2010 ---
http://www.bloomberg.com/news/2010-09-08/former-ge-unit-executive-says-he-was-pushed-out-for-questioning-accounting.html
GE Capital denies the allegation.


More on the For-Profit University Saga
Kaplan is a for-profit mostly online university (with limited onsite alternatives) that includes a law school ---
http://portal.kaplanuniversity.edu/Pages/MicroPortalHome.aspx


"Justice Department Weighs In for Whistle-Blowers in Cases Against Kaplan," by Goldie Blumenstyk, Chronicle of Higher Education, July 6, 2010 ---
http://chronicle.com/article/Justice-Dept-Weighs-In-for/66150/?sid=at&utm_source=at&utm_medium=en 

The U.S. Department of Justice weighed in Tuesday on the side of several whistle-blowers who have alleged in lawsuits that various colleges owned by Kaplan Higher Education defrauded the government of hundreds of millions of dollars by paying incentives to recruiters and lying to obtain accreditation.

The three cases, all filed under the federal False Claims Act, were consolidated before the same federal judge in Miami last year. Kaplan has been arguing to have two of the cases, one filed in Illinois and the other filed in Florida, dismissed on grounds that under a "first to file" provision of the act, only the earliest lawsuit filed should proceed. Kaplan is also arguing that the suit that was filed first, in Pennsylvania, should be dismissed on grounds that it lacks the specificity required in a federal fraud case.

(A fourth suit out of Nevada initially was considered as part of this consolidation, but it never was included).

The Justice Department, however, has urged the judge to allow the allegations against Kaplan to proceed based on the various "first-filed" claims from each of the cases, as long as the cases don't substantially piggyback on one another.

As a condition of participating in federal student-aid programs, colleges and universities owned by Kaplan affirm that they will abide by the rules of a "program participation agreement," or PPA, with the Department of Education. Each of the lawsuits alleges that Kaplan fraudulently obtained millions in federal student-aid funds by violating various provisions of that agreement—allegations that the company denies.

The False Claims Act allows individuals to sue on behalf of the government for alleged fraud. The Justice Department has a stake in such lawsuits because the government shares in any damages that may eventually be recovered.

A memorandum it filed on Tuesday, at the request of Judge Patricia A. Seitz of the U.S. District Court in Miami, suggests that the department is eager to keep that option open in all three cases. To best serve the purposes of the False Claims Act, the memo says, "there is no reason why an allegation of a violation of one provision of a PPA should act as a first-to-file bar against unrelated allegations of a violation of a wholly different provision."

Bob Jensen's threads on for-profit colleges and universities are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud

 


"Journal Review Process Increasingly Includes Check for Plagiarism," by Sophia Li, Chronicle of Higher Education, July 9, 2010 ---
http://chronicle.com/blogPost/Journal-Review-Process/25420/?sid=pm&utm_source=pm&utm_medium=en
Thank you David Albrecht for the heads up.

A growing number of journal publishers are checking papers for possible plagiarism as part of their review process.

That's according to the makers of CrossCheck, a service that checks articles submitted to scholarly journals against already-published work for possible plagiarism. Over 80 publishing companies have adopted CrossCheck since its debut in June 2008, Nature News reported, and the service's increasing use has sniffed out high rates of plagiarism in the submissions to some journals.

The anti-plagiarism service uses software from iParadigms, the California-based company behind Turnitin, which checks student papers for plagiarized work. CrossCheck compares submitted materials with the full text of the 25.5 million articles in its database, a collection of articles pooled by the publishers that subscribe to the service.

The service, which has been adopted by publishers including Nature Publishing and Sage, has turned up plenty of copycat work, including articles that would have been published otherwise. Taylor & Francis, a publishing company based in the United Kingdom, found that 23 percent of submissions to one of its journals were rejected because they contained plagiarism, Nature News reported. (The journals that were selected to test CrossCheck had seen incidents of plagiarism in the past.)

After using CrossCheck on submissions, one journal from Mary Ann Liebert, a publisher based in New Rochelle, N.Y., rejected about 7 percent of articles that had been peer-reviewed and accepted for publication, said Adam Etkin, assistant vice president and the director of online and Internet services for the publishing company. On the other hand, some of the publisher's other journals, out of the dozen or so that have begun using CrossCheck, have not uncovered any incidents of plagiarism.

After CrossCheck has detected passages that are identical or similar to work that has already been published, journal editors must decide what to do next.

This depends on the incident's severity and intent, Mr. Etkin said. CrossCheck sometimes flags passages as plagiarized when they have been improperly cited, and, in some instances, there are few ways to describe methods or materials differently. Editors at his company's journals sometimes contact authors to ask them to revise their work or correct their citations.

The consequences are much more severe when plagiarists are caught: Authors have been banned from Mary Ann Liebert's journals after they were caught plagiarizing—in one instance, for three years. In some cases, the violations have been reported to the author’s institution.

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


"Five Major Defects of the Financial Reform Bill," by Nobel Laureate Gary Becker, Becker-Posner Blog, July 11, 2010 --- 
http://www.becker-posner-blog.com/2010/07/five-major-defects-of-the-financial-reform-bill-becker.html 

A 2300 page bill is usually an indication of many political compromises. The Dodd-Frank financial reform bill is no exception, for it is a complex, disorderly, politically motivated, and not well thought out reaction to the financial crisis that erupted beginning with the panic of the fall of 2008. Not everything about the bill is bad-e.g., the requirement that various derivatives trade through exchanges may be a good suggestion- but the disturbing parts of the bill are far more important. I will concentrate on five major defects, including omissions.

1. The bill adds regulations and rules about many activities that had little or nothing to do with the crisis. For example, it creates a consumer financial protection bureau to be housed at the Fed that is supposed to protect consumers from fraud and other abusive financial practices. Yet it is not apparent that many consumers were victimized during the financial boom years, or that consumer behavior had anything of importance to do with the crisis. For example, consumers who took out subprime mortgages that required almost no down payments and had low interest rates were not victimized since these conditions enabled them to cheaply own houses, at least for a while. The “victims” were the banks, and especially Fannie Mae and Freddie Mac, that were foolishly willing to hold such risky mortgages.

The bill gives the Fed authority to limit interchange or “swipe” fees that merchants pay for each debit-card transaction, although these fees had not the slightest connection to the financial crisis. Such price controls are in general undesirable, and hardly seem to require the attention of the Federal Reserve. The bill also gives the SEC authority to empower stockholders to run their own candidates for corporate boards of directors. Corporate boards often receive some blame for the crisis-mainly unjustified in my opinion- but stockholder election of some members will not improve corporate governance, and will probably make that worse.

2. The Dodd-Frank bill gives several government agencies considerable additional discretion to try to forestall another crisis, even though they already had the authority to take many actions. The Fed could have tightened the monetary base and interest rates as the crisis was developing, but chose not to do so. The SEC and various Federal Reserve banks-especially the New York Fed- had the authority to stop questionable lending practices and increase liquidity requirements. These and other government bodies did not use their authority to try to head off the crisis partly because they got caught up in the same bubble hysteria as did banks and consumers. In addition, regulators are often “captured” by the firms they are regulating, not necessarily because the regulators are corrupt, but because they are mainly exposed to arguments made by the banks and other groups they are regulating.

Despite the fact that regulators failed to use the powers they already had, the bill mainly adds not clear rules of behavior for banks, but additional governmental discretionary power. For example, the bill creates the Financial Stability Oversight Council, a nine-member panel drawn from the Fed, SEC, and other government agencies, that is supposed to monitor Wall Street’s largest companies and other market participants to spot and respond to any emerging growth in systemic risk in the economy. With a two-thirds vote this Council could impose higher capital requirements on lenders and place hedge funds and dealers under the Fed’s authority. Given the regulators reluctance to use the power they already had to forestall the crisis, it seems highly unlikely that this Council will act decisively prior to the emergence of a crisis, especially when a two thirds majority is required.

3. Insufficient capital relative to bank assets was an important cause of the financial crisis. The bill does reduce the ability of banks to count as bank capital certain risky assets, such as trust preferred securities, and gives the Fed authority to impose additional capital and liquidity requirements on banks and non-bank financial companies, including insurers. I would have preferred a simple rule that raised capital requirements of banks relative to their assets, especially capital of larger and more interconnected banks. As suggested by Raghu Rajan and the Squam Lake group of economists, the bill probably should have required larger banks to issue “contingent” capital, such as debt that automatically converts to equity when the banks are experiencing large losses, or when a bank’s capital to asset ratio falls below a certain level.

4. One of the most serious omissions is that the bill essentially says nothing about Freddie Mac or Fannie Mae. In 2008 these organizations were placed into conservatorship of the Federal Housing Finance Agency. During the run up to the crisis, Barney Frank and others in Congress encouraged Freddie and Fannie to absorb most of the subprime mortgages. In 2008 they held over half of all mortgages, and almost all the subprimes. They have absorbed even a larger fraction of the relatively few mortgages written after 2008. Freddie and Fannie deserve a considerable share of the blame for the crisis, but they continue to have strong political support. I would like to see both of them eventually dissolved, but that is unlikely to happen. Instead we are promised that they will be dealt with in future legislation, but I am skeptical that anything will be done to terminate either organization, or even improve their functioning.

5. Many proposals in the bill will have highly uncertain impacts on the economy. These include, among many other provisions, the requirement that originators of mortgages and other assets retain at least 5% of the assets they originate, that many derivatives go on organized exchanges (may be an improvement but far from certain), that hedge funds become more closely regulated, and that consumer be “protected” from their financial decisions.

Most of these and other changes in the bill are not based on a serious analysis of what contributed to the financial crisis, but rather are the result of political and emotional reactions to the crisis. Usually, such reactions do more harm than good. That is likely to be the fate of the great majority of the provisions of the Dodd-Frank bill.

 

 

 




  • 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/