Question
In the United States, what officers are most like the Iraqi police (working for evil people they're supposed to be protecting us from)?
Agents fighting crime on the border are dealing with increasing corruption in their ranks. Among those facing charges are immigration, customs and border patrol agents. All were caught working for smugglers in El Paso who are supposed to protect our border are increasingly taking bribes instead. They're the agents who guard our borders and decide who and what gets past nearby checkpoints leading to highways that double as lucrative smuggling routes. It was at a checkpoint in far West Texas that four agents who were supposed to protect the border switched sides. "We're disappointed when any agent violates the trust...
Angela Kocherga, "More corruption seen among border agents, San Antonio
Express News, November 28, 2006 ---
Click Here
Question
Where were (are) the lawyers in the recent corporate governance and investment
scandals?
Report of the Task Force on the Lawyer's Role in Corporate Governance, New York City Bar, November 2006 --- http://online.wsj.com/public/resources/documents/WSJ-CORP-GOV-FINAL_REPORT.pdf
Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/fraud001.htm#Governance
The seamy underside of
asbestos litigation
In
the legal trade, this is
known as "double
dipping"--the process by
which lawyers file claims at
many different bankruptcy
trusts on behalf of a single
plaintiff. Each trust is
told a different story about
how the client got sick, and
the plaintiff collects from
all of them. Of course, the
lawyers collect too. This
practice may well have
remained unexposed had not
Brayton Purcell decided to
cash in on Kananian one more
time. It sued Lorillard
Tobacco, this time claiming
its client had become sick
from smoking Kent
cigarettes, whose filters
contained asbestos for
several years in the 1950s.
That suit has now exploded
on Brayton, exposing one of
the asbestos bar's more
lucrative cash cows.
Kimberley A. Strassel,
"Trusts Busted: The
seamy underside of asbestos
litigation," The Wall
Street Journal, December
5, 2006 ---
http://www.opinionjournal.com/columnists/kstrassel/?id=110009343
Study: Most Audit Committees
Lack Accountant
Then why call them audit
committees?
A
new report says that in 2005
the number of accountants
sitting on audit committees
doubled compared to four
years prior, but that six
out of 10 companies still
did not have at least one
accountant on their
committee. The research from
Huron Consulting
is
based on a sample of more
than 700 audit committee
members at 178 public
companies from the NASDAQ
100 and Fortune 100
listings. The
report analyzed patterns of
audit committee
composition between 2002 and
2005 using information
contained in the companies'
annual proxy statements and
10-K disclosures filed with
the U.S. Securities and
Exchange Commission.
"Study: Most Audit
Committees Lack Accountant
," SmartPros,
November 30, 2006 ---
http://accounting.smartpros.com/x55639.xml
Question
What may be the largest
criminal tax fraud
prosecution in U.S. history?
"Prosecutors in KPMG Tax Shelter Case Offer to Try 2 Groups of Defendants Separately," Lynnley Browning, The New York Times, October 5, 2006 --- Click Here
Last year, 16 former KPMG employees, as well as a lawyer and an outside investment adviser, were indicted by a federal grand jury in Manhattan on charges that they conspired to defraud the Internal Revenue Service by creating and selling certain questionable tax shelters.
The proposal to split the group comes after Judge Kaplan raised concerns about some prosecutorial tactics in the complex case. KPMG narrowly averted criminal indictment last year over certain questionable shelters and instead reached a $456 million deferred-prosecution agreement. Judge Kaplan has criticized prosecutors for pressuring KPMG to cut off the payment of legal fees to the defendants.
His concerns how appear to extend to the indictments of the defendants.
According to a transcript of the hearing on Tuesday, Judge Kaplan said: “The government indicted 18 people knowing that the effect of doing that would be to put economic pressure on people, along with whatever else puts pressure on people to cave and to plead, because they can’t afford to defend themselves and because perhaps there are other risks involved in a joint trial. That is the patent reality of this case.”
A representative for the United States attorney’s office in Manhattan did not have a comment on the letter yesterday.
The letter, which was not filed under seal but did not appear on the court’s docket, was confirmed by two persons close to the proceedings.
Under the proposal, the junior defendants would include Jeffrey Eischeid, the rising star who was in charge of KPMG’s personal financial planning division; John Larson, a former KPMG employee who set up an investment boutique that sold shelters; David Amir Makov, a onetime Deutsche Bank employee who later worked with Mr. Larson’s investment boutique, Presidio Advisory Services; and Gregg Ritchie, a former partner; among others.
The senior defendants would include Jeffrey Stein, a former vice chairman who was the No. 2. executive at the firm; John Lanning, a former vice chairman in charge of tax services; Richard Rosenthal, a former chief financial officer; Steven Gremminger, a former associate in-house lawyer; Robert Pfaff, a former KPMG partner who worked with Mr. Larson to set up Presidio Advisory Services; David Greenberg, a former senior tax partner; and Raymond J. Ruble, a former lawyer at Sidley Austin Brown & Wood; among others.
Lawyers for the defendants maintain that their clients did nothing illegal, while prosecutors contend that they created and sold tax shelters, some involving fake loans, that deprived the Treasury of $2.5 billion in tax revenue.
Bob Jensen's threads on this and other KPMG litigations are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG
Accounting Snags Push Dresser to Restate Problems with derivative
transactions, inventory controls
Dresser Inc. said it will restate its financial
statements for 2001 through 2003 based on a host of accounting errors. In May,
the industrial engineering company had warned that it would restate its 2004
annual filing, its 2004 and 2005 quarterly financial statements, and would be
evaluating the potential need to restate prior periods. The accounting errors
relate to inventory valuation and derivative transactions under the Financial
Accounting Standards Board's FAS 133. Other accounting errors relate to the
company's businesses which were sold in November 2005.
Stephen Taub, "Accounting Snags Push Dresser to Restate Problems with derivative
transactions, inventory controls, keep IPO on hold," CFO Magazine,
November 26, 2006 ---
http://www.cfo.com/article.cfm/8346406/c_8347143?f=FinanceProfessor.com
Dresser Inc. changed its independent auditor to Pricewaterhouse Coopers (PwC) in 2002 and with plans to restate its 2001 financial statements after it changed auditors. The previous auditor was KPMG.
Bob Jensen's threads on KPMG are at --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
"PCAOB Finds Problems At PricewaterhouseCoopers (PwC)," by David Reilly, The Wall Street Journal, December 16, 2006; Page A4 --- http://online.wsj.com/article/SB116622194790551886.html?mod=todays_us_page_one
The Public Company Accounting Oversight Board, in an inspection report released Friday, cited PricewaterhouseCoopers LLP for deficiencies in some of its audits of public companies.
The PCAOB noted the firm had failed in some cases to catch or address errors in the way companies applied accounting rules or lacked sufficient evidence to back up some of its decisions. The PCAOB singled out for criticism nine audits done by PricewaterhouseCoopers, saying in a number of the cases the firm failed to adequately check the value of revenue, inventory and accounts receivable at companies whose books it was approving. The board's inspections entail reviews of a sampling of audits, not every audit done by a firm.
In keeping with the board's policies, the report doesn't identify the companies that had their audits cited. In addition, only a portion of the report is made public. A section that includes criticisms related to an accounting firm's quality-control systems is kept secret and never made public if a firm is able to show that it has corrected the problems cited within 12 months of the report's issuance.
In a comment letter included in the PCAOB report, PricewaterhouseCoopers said, "We have addressed each of the specific findings raised in the report and, where necessary, performed additional procedures or enhanced the related audit documentation." A spokesman for PricewaterhouseCoopers issued a statement saying that the firm believes it is "performing quality audits" and that it "will incorporate the board's findings" into the firm's practices.
The board's inspection reports are the only public assessment of audit firms' work available to investors and the corporate audit committees, which hire, fire and negotiate how much to pay the accounting firms.
The report is the second this year that the PCAOB has issued for a Big Four accounting firm covering inspections conducted last year of the firms' audits of companies' 2004 financial results. Earlier this month the agency issued its 2005 report for Deloitte & Touche LLP.
The PCAOB, which has been criticized for the length of time it is taking to issue annual reports, has yet to issue 2005 inspection reports for Ernst & Young LLP or KPMG LLP, the other two members of the Big Four. The board has until the end of the year to do so.
The PCAOB must issue an annual inspection report for any accounting firm that audits 100 or more public companies. Firms that audit fewer than 100 public companies are inspected every three years, although the PCAOB on Friday said it would look to amend this rule.
PricewaterhouseCoopers' response to its PCAOB report was in contrast to that of Deloitte, which included strong rebuttals of many of the board's findings.
Bob Jensen's threads
on audit incompetence are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits
Bob Jensen's threads
on PwC troubles are at
http://www.trinity.edu/rjensen/Fraud001.htm#PwC
Monster says it made
monster accounting errors
Monster Worldwide Inc. said
on Wednesday it overstated
profit from 1997 to 2005 by
a total of $271.9 million, a
result of its investigation
into historical stock option
grants and accounting. In a
filing with the U.S.
Securities and Exchange
Commission, the parent of
job search Web site
Monster.com recorded a net
charge of $9.2 million for
2005, $14.4 million for
2004, $27 million for 2003,
$44.9 million for 2002,
$65.6 million for 2001, and
$110.8 million for the
cumulative period of 1997
through 2000.
"Monster says overstated
'97-'05 profit by $271.9 m,"
Rueters, December 13,
2006 ---
Click Here
The Independent Auditor for Monster Worldwide is KPMG --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
It just gets deeper and deeper for KPMG
Fannie Mae Sues KPMG
The
mortgage lending company
Fannie Mae filed suit on
Tuesday against its former
auditor KPMG, accusing the
firm of negligence and
breach of contract for its
part in the flawed
accounting that led to a
$6.3 billion restatement of
earnings. Fannie Mae states
in its complaint that KPMG
applied more than 30 flawed
principles and cost it more
than $2 billion in damages.
Fannie Mae fired the
accounting firm in
mid-December 2004, just a
week after the Securities
and Exchange Commission
ordered the company to
restate more than two years
of flawed earnings. A KPMG
spokesman, Tom Fitzgerald,
said the company planned to
“pursue our own claims
against Fannie Mae.”
"Fannie Mae Sues KPMG,"
The New York Times,
December 13, 2006 ---
http://www.nytimes.com/2006/12/13/business/13kpmg.html?_r=1&oref=slogin
KPMG fired back at former
audit client Fannie Mae this
week, saying it would
counter the mortgage giant’s
$2 billion negligence and
breach of contract lawsuit.
KPMG “will pursue our own
claims against Fannie Mae”
in the U.S. District Court
in Washington, D.C.,
spokesman Tom Fitzgerald
told reporters Tuesday.
Fannie Mae filed its lawsuit
Tuesday in the Superior
Court of the District of
Columbia. Fitzgerald said
the issues raised in Fannie
Mae's lawsuit “are already
pending" in shareholder
lawsuits before the federal
district court. He did not
elaborate on what claims
KPMG would make against
Fannie Mae, Reuters
reported.
"KPMG Plans Counter Suit of
Fannie Mae,"
AccountingWeb, February
14, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102902
Bob Jensen's threads on KPMG are at --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
Accounting Snags Push
Dresser to Restate Problems
with derivative
transactions, inventory
controls
Dresser Inc. said it will
restate its financial
statements for 2001 through
2003 based on a host of
accounting errors. In May,
the industrial engineering
company had warned that it
would restate its 2004
annual filing, its 2004 and
2005 quarterly financial
statements, and would be
evaluating the potential
need to restate prior
periods. The accounting
errors relate to inventory
valuation and derivative
transactions under the
Financial Accounting
Standards Board's FAS 133.
Other accounting errors
relate to the company's
businesses which were sold
in November 2005.
Stephen Taub, "Accounting
Snags Push Dresser to
Restate Problems with
derivative transactions,
inventory controls, keep IPO
on hold," CFO Magazine,
November 26, 2006 ---
http://www.cfo.com/article.cfm/8346406/c_8347143?f=FinanceProfessor.com
Dresser Inc. changed its independent auditor to Pricewaterhouse Coopers (PwC) in 2002 and with plans to restate its 2001 financial statements after it changed auditors. The previous auditor was KPMG.
Bob Jensen's threads on KPMG are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG
Federal Regulators
Fine Grant Thornton $300,000
Over Audit of Failed Bank
Federal bank regulators have
fined the accounting firm
Grant Thornton LLP $300,000
for what they called
"reckless conduct" in its
audit of First National Bank
of Keystone, a West Virginia
institution whose collapse
in 1999 was one of the
costliest U.S. bank failures
in the past decade.
Marcy Gordon, "Federal
Regulators Fine Grant
Thornton $300,000 Over Audit
of Failed Bank, SmartPros,
December 11, 2006 ---
http://accounting.smartpros.com/x55776.xml
Grant Thornton LLP said it
will challenge recent
Treasury Department (DoT)
findings and penalties
stemming from the firm’s
audit of a bank that
collapsed in 1999. The
Office of the Comptroller of
the Currency, the Treasury
agency that regulates
nationally chartered banks,
on Friday announced the
telling $300,000 fine
against the Chicago-based
CPA firm that audited First
National Bank of Keystone in
1998.
"Grant Thornton to Fight
Claim of “Reckless” Audit,"
AccountingWeb,
December 12, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102894
Bob Jensen's threads on Grant Thornton (especially the Refco audit failure) are at http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton
Where were the auditors?
Firms cook the books to set
executive pay
And these same executives
are protesting
Sarbanes-Oxley
"Firms cook the books to set executive pay," Editorial, The New York Times, December 19, 23006 --- http://www.sptimes.com/2006/12/19/Opinion/Firms_cook_the_books_.shtml
Among the corporate deceits that buttress America's obscene executive pay is the one about comparability. But a new federal rule may help expose the reality of so-called "peer groups." Far too often, the list of comparable CEOs is cooked.
As the New York Times reported in its latest installment on executive pay, former New York Stock Exchange chairman Richard Grasso was a poster child for the abuse. His $140-million compensation package was rationalized, in part, by comparing his job to those at companies with median revenues 25 times the size of the exchange, assets 125 times and employee bases 30 times the size.
Grasso was hardly alone. Executives have learned that the path to personal riches is paved by "peer groups" that include big and profitable companies. Eli Lilly compared itself to eight companies that had much higher profit margins. Campbell Soup used one set of companies for executive pay and a separate one as a benchmark for stock performance. Ford Motor Co. compared itself to other industries, its proxy statement said, because "the job market for executives goes beyond the auto industry."
The "job market" argument is particularly disingenuous. As the New York Times noted, ousted Hewlett-Packard chief executive Carly Fiorina was replaced by a data processing executive who was earning less than half her pay. His company, NCR, never appeared on the Hewlett-Packard "peer group."
The growth in executive pay has been so meteoric in the past quarter-century that it is demeaning the contributions of average workers and undermining public faith in corporate America. Last year, according to the Corporate Library, the average pay for an S&P 500 chief executive was $13.5-million. The average CEO now earns 411 times the average worker, up from 42 times in 1980.
The new Securities and Exchange Commission disclosure rules went into effect on Friday, and compensation consultants are scrambling to cover their tracks. But stockholders who have been kept mostly in the dark will now at least have a chance to see the playbook. That's the first step toward ending these games of executive greed.
Bob Jensen's fraud updates are at http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
Bob Jensen's threads on fraudulent and incompetent auditing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits
Saudi Arabia's Method
for Terminating Corruption
Investigations
Tony
Blair, the British prime
minister, has said he takes
full responsibility for the
decision to abandon an
investigation into alleged
corruption and bribery. The
decision to abandon a
two-year corruption inquiry
into BAE Systems came after
Saudi Arabia suggested it
might cancel an order for 72
Eurofighter Typhoon jets
from BAE Systems.
"Blair defends Saudi arms
decision," Al Jazeera,
December 16, 2006 ---
http://english.aljazeera.net/NR/exeres/1E0DDA3F-CA29-4CD9-9F9F-53C7A783F6B2.htm
A New Law to Encourage Whistle Blowing
"At Hospitals, Lessons in Detection of Fraud," by Robert Pear, The New York Times, December 24, 2006 --- http://www.nytimes.com/2006/12/24/us/24fraud.html?_r=1&oref=slogin
Most of the nation’s hospitals and nursing homes will have to teach their employees how to ferret out fraud and report it to the government under a federal law that takes effect next month.
The law encourages people in the health care industry to blow the whistle on their employers. Many health care providers said this week that they were unaware of the requirement, and when informed of it, they described it as a burdensome, potentially costly federal mandate.
But Senator Charles E. Grassley, Republican of Iowa, who drafted the law, said it would help ensure that “taxpayer dollars are used to provide care for the most vulnerable people and not to line the pockets of those who seek to defraud the government.”
Starting Jan. 1, companies that do at least $5 million a year in Medicaid business must educate all employees and officers on how to detect fraud, waste and abuse. Moreover, health care providers must tell employees that if they report fraud, they will be protected against retaliation and may be entitled to a share of money recovered by the government.
Under the federal False Claims Act, some whistle-blowers have received millions of dollars in rewards for disclosing large-scale fraud.
Health care providers must also establish policies to make sure that their contractors investigate and report fraud. A large hospital system, whether run by a Fortune 500 company or a group of Roman Catholic nuns, typically has hundreds of contracts with doctors, billing agents and other vendors.
The new requirement will also apply to many pharmacies, health maintenance organizations, home care agencies, suppliers of medical equipment, physician groups and drug manufacturers.
Continued in article
Bob Jensen's threads on whistle blowing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Prison for Chip
Executive
An
executive with Samsung
Electronics will plead
guilty, serve 10 months in
prison and pay a $250,000
fine for conspiring to fix
prices of computer memory
chips, the Justice
Department said on Thursday.
Young-hwan Park participated
in the conspiracy while he
was a vice president for
sales at Samsung, which is
based in South Korea and is
the world’s top maker of
memory chips, the department
said.
"Prison for Chip Executive,"
The New York Times, December
22, 2006 ---
http://www.nytimes.com/2006/12/22/technology/22samsung.html
Congressman's Favors
for Friend Include Help in
Secret Budget
On
a lavish, weeklong Caribbean
cruise last year, software
entrepreneur Warren Trepp
wined and dined friends and
business partners aboard the
560-foot Seven Seas
Navigator. Among Mr. Trepp's
guests on the cruise ship:
Rep. Jim Gibbons of Nevada
and his family. The two men
have enjoyed a long
friendship that has been
good for both. Mr. Trepp has
been a big contributor to
Mr. Gibbons's campaigns, and
the congressman has used his
clout to intervene on behalf
of Mr. Trepp's company,
according to congressional
records, court documents and
interviews. The tiny Reno,
Nev., company, eTreppid
Technologies, has won
millions of dollars in
classified federal software
contracts from the Air
Force, U.S. Special
Operations Command and the
Central Intelligence Agency.
At a time of rising concern
over lawmakers who direct or
"earmark" federal spending
to their supporters and
business partners, a growing
part of the budget is
shielded from scrutiny. This
is the "black budget,"
mostly for defense and
intelligence, which is
disclosed only in the
vaguest terms. The ties
between Mr. Trepp and Mr.
Gibbons raise questions
about an influential
politician in America's
fastest-growing state, and
also offer a rare glimpse of
contracts in this secret
budget being awarded to a
politically connected
businessman without
competitive bidding.
John R. Wilke,
"Congressman's Favors for
Friend Include Help in
Secret Budget With Rep.
Gibbons's Backing, An
Ex-Trader for Milken Wins
Millions in Contracts A
Lawsuit's Sensitive Subject,
The Wall Street Journal,
November 1, 2006; Page A1
---
http://online.wsj.com/article/SB116234941031409783.html?mod=todays_us_page_one
The dubious Pacific
Western distance education
"university" is at it again
lan
Contreras, an administrator
with the Oregon Office of
Degree Authorization, noted
that Pacific Western grants
many of its degrees to
people in Asia, where the
distinction between the
“University of California”
and “California University”
will be lost in translation.
“It’s a perfectly rational
business decision,” he said
of the move by PWU to change
its name. “Because people
who see this are going to
think it is the UC.”
Contreras added that
California’s
Bureau for Private
Postsecondary and Vocational
Education
will
have to approve the switch
in title . . . Meanwhile,
newspapers in Korea report
that lawmakers and police
have opened an inquiry into
more than
150 high-ranking national
figures
who
have received degrees at
unauthorized foreign
colleges. The Korea Times
reported that 34 of those
individuals received
doctorates from Pacific
Western. Those officials
currently work at the
education ministry and an
agency affiliated with the
Ministry of Science and
Technology.
Paul D. Thacker, "What’s in
a Name?" Inside Higher Ed,
December 15, 2006 ---
http://www.insidehighered.com/news/2006/12/15/calu
Guess who's buying fake diplomas?
Lawyers defending those accused in a federal court
of running a diploma mill revealed on October 11 that 135 federal employees,
including a White House official, purchased degrees from the operation, the
Associated Press reported. The names of the
federal officials were not revealed.
Inside Higher Ed, October 13, 2006
Jensen Comment
The largest market for fake diplomas is among K-12 teachers who benefit from
automatic pay raises when receiving graduate degrees.
Bob Jensen's threads
on diploma mills are at
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill
Bob Jensen's threads on non-traditional doctoral degree programs are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#NontraditionalDoctorates
Bob Jensen's threads on legitimate distance education and training alternatives are at http://www.trinity.edu/rjensen/crossborder.htm
"Lender Overcharged U.S. $1 Billion, Audit Finds," by Doug Lederman, Inside Higher Ed, October 2, 2006 --- http://www.insidehighered.com/news/2006/10/02/nelnet
For many months, student loan watchdogs have been charging that lenders have taken advantage of a loophole in federal law to reap billions of dollars in profits to which they were not entitled. Late Friday, the U.S. Education Department’s inspector general strongly backed their view, releasing an audit that accused the National Education Loan Network (Nelnet) of having received $278 million in federal subsidy payments for which it was not eligible and of inappropriately charging the government for as much as $882 million more.
The inspector general’s office urged Education Secretary Margaret Spellings to order Nelnet to return the improper payments it has already received and to instruct the company to revise its estimates for future payments to exclude funds for the contested loans. Meanwhile, officials at Nelnet, a Nebraska-based company, disputed the audit’s findings but said they would work with the department to resolve them.
At issue in the case is Nelnet’s use of an exemption in federal law that allowed lenders that financed the student loans they issued using tax-exempt bonds issued before 1993 to earn a government subsidized interest rate of 9.5 percent. Congress engaged in several aborted attempts to fully close the loophole throughout the 1990s and the early part of this decade, but some lenders continued to find ways to take advantage of it by recycling the pre-1993 loan funds, before Congress, as part of the Higher Education Reconciliation Act, finally closed it permanently this year.
In the audit, the inspector general describes a process by which Nelnet seemed quite purposefully to try to expand its pool of loans that would qualify for the 9.5 percent “special allowance” payments from the federal government. “Through Project 950,” as the company’s effort was called, “Nelnet used a series of transactions to increase the amount of loans ostensibly funded by tax-exempt obligations from approximately $551 million” in March 2003 to $3.66 billion in June 2004, according to the audit.
The company, the inspector general found, moved loans into and then — “as little as one day later” — out of a non-taxable trust estate with the goal of making those loans qualify for the 9.5 percent rate.The audit recounts exchanges in 2003 and 2004 in which Nelnet sought and believed it had gained Education Department approval for its practices regarding the 9.5 percent loans. But the inspector general says that Nelnet’s inquiries did “not appear to reflect a comprehensive disclosure by Nelnet of the nature or effect” of its effort to increase its volume of loans eligible for the higher rate.
A 1993 letter outlining the practice, the audit says, “did not identify the eligible source of funds that would be used to purchase and qualify loans for the 9.5 percent floor, did not state directly that the process would be repeated many times, and did not state that the process would result in a substantial increase in the amount of loans billed under the 9.5 percent floor.”
The audit incorporates a response that Nelnet officials submitted to an earlier draft of the audit this summer, which the inspector general notes “strongly disagrees with our finding and recommendations and requested that our draft report be withdrawn.”
In a prepared statement, Nelnet said company officials believe the inspector general’s report is “incorrect” because it is “inconsistent with the Higher Education Act, applicable laws, policy, department regulations, and the guidance to student loan companies previously issued by the Department.”
Nelnet will “seek a resolution of this matter with the Department and will also examine all other available remedies that prove the merits of our position,” said Mike Dunlap, the company’s chairman and co-chief executive officer.
Critics of the lenders’ continued use of the 9.5 percent loophole heralded the inspector general’s audit. “The depth and breadth of Nelnet’s failure to comply with the law is breathtaking, and the cost to taxpayers is staggering,” said Rep. George Miller (D-Calif.), the senior Democrat on the House of Representatives Committee on Education and the Workforce. “In an era of high budget deficits, we must be vigilant about ensuring that available tax dollars are used to provide affordable college loans to families, not to provide excessive subsidies to banks.”
Miller and others, including Sen. Edward M. Kennedy (D-Mass.), who pushed the Education Department to look into the Nelnet matter, and watchdog groups like the Project on Student Debt, urged Spellings to back the inspector general. “The secretary of education should make sure that Nelnet pays back every penny they’ve wrongly claimed and should use the near $1.2 billion saved to help students and families pay for college,” said Michael Dannenberg of the New America Foundation, who has aggressively criticized the 9.5 percent rate practice.
Continued in article
Pension Fund Accounting Fraud in San Diego
"San Diego Charges," by Nicole Gelinas, The Wall Street Journal, November 27, 2006; Page A12 --- http://online.wsj.com/article/SB116459315111633209.html?mod=todays_us_opinion
The SEC has announced that it has resolved its pension-fund fraud case against San Diego, with the city agreeing not to commit illegal shenanigans in the future and to hire an "independent monitor" to help it avoid doing so. Although the SEC went easy on the residents and taxpayers of San Diego in its settlement, it still has an opportunity to make an example of the former officials who the SEC determined committed the fraud. The feds should seize that chance to show they're serious about policing a sector of the investment world that remains vulnerable to similar fraud.
San Diego ran into legal trouble with its pension fund because elected officials wanted to keep its municipal workers happy by awarding them more generous pension and health-care benefits, but also wanted to keep taxpayers happy by sticking to a lean budget. The two goals were mathematically irreconcilable. So San Diego officials, with the cooperation of the board members of the city employees' retirement system (the majority of whom were also city officials), intentionally underfunded the pension plan for years. They used the "savings" to award workers and retirees more benefits, some retroactive. Because taxpayers couldn't see how much retirement benefits for public employees eventually would cost them, they couldn't protest against those high future costs. The fund also violated sound investment principles by using "surplus" earnings in boom years to pay extra benefits to retirees, including a "13th check" in some years. Trustees should have put such "surpluses" aside for years in which the market was down.
But the alleged escalated in 2002 and 2003, when city officials brushed aside warnings from outside groups, as well as from an analyst it had itself commissioned, about the fund's parlous financial straits. Although figures clearly showed that the pension fund would face a seven-fold increase in its deficit, to more than $2 billion, over less than a decade, San Diego didn't disclose what, according to the SEC, it "knew or was reckless in not knowing" was an inevitability, instead maintaining its charade. City officials disclosed not a word of the fund's financial troubles to potential investors or bond analysts as it raised nearly $300 million in new municipal securities during those two years.
The SEC elected to go easy on the city. The feds won't levy a fine against it, reasoning that it would end up being the taxpayers who would pay. This argument has merit, since these taxpayers are already on the hook for the $1.5 billion deficit -- roughly equal to the city's operating budget -- the pension-fund fraud had concealed. Taxpayers could face fallout if wronged investors sue the city. But while SEC won't punish taxpayers, it can't afford to go so easy on the officials it's still investigating. (The SEC doesn't name the current and former officials under its scrutiny, but former Mayor Dick Murphy, former city manager Michael Uberuaga and former auditor Ed Ryan, as well as members of the City Council, all had degrees of responsibility for and knowledge of the pension fund's operations.) The SEC must demonstrate that it considers the fraud officials committed against the city's bondholders to be just as grave as similar frauds in the private sector.
People who invest in municipal bonds do so because they feel that such investments are safer than investing in the common stocks of corporations. That's why cities and states enjoy access to capital at affordable interest rates. And, for tax reasons, municipal-bond investors often invest in the bonds of the city in which they reside, so they face double jeopardy. In the first place, if city officials are committing fraud, their bonds will turn out not to be as sound (and thus not as valuable) as they thought they were. The second risk is that they will have to pay higher taxes, or suffer lower government services, to cover pension-funding shortfalls in their city's budget if that is the case.
Continued in article
Bob Jensen's threads on pension fund and post-retirement accounting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Pensions
Bristol-Myers Squibb illegal marketing proves costly
Bristol-Myers Squibb has reached a tentative agreement
to pay $499 million to settle a federal investigation into illegal sales and
marketing activities from the late 1990s through 2005, the company said
yesterday. That settlement, and separate special charges the company also
announced yesterday, would wipe out Bristol-Myers fourth-quarter profit. But its
shares rose on the indication that the company was resolving a big legal issue
and tidying up its books, making it a more viable takeover candidate. The United
States attorney’s office in Boston, which first subpoenaed the records of
Bristol-Myers in the matter in 2003, declined to confirm the announcement,
saying it did not comment on such negotiations unless a final settlement has
been signed.
Barnaby J. Feder, "Bristol Says U.S. Inquiry Is Settled," The New York Times,
December 22, 2003 ---
Click Here
Saddam's Kickback Enterprises
In 2,065 pages, Sir Terence Cole and his team unmask
the vast corruption in AWB Ltd., Australia's former wheat board and supplier for
a time of 16% of the world's wheat. That alone is a huge public service. AWB was
the single largest payer of kickbacks to Saddam. From 1999 to 2003, the company
paid $221.7 million to Iraq through "transportation" fees and
"after-sales-service" fees designed to evade U.N. sanctions and Australian law.
Given such compliant partners, it is little wonder Saddam thought the world
would never act against him.
"Oil for Food Justice, The Wall Street Journal, November 30, 2006; Page
A16 ---
http://online.wsj.com/article/SB116483932656336151.html?mod=opinion&ojcontent=otep
Greater Accounting Transparency Sought by the Community College of
Philadelphia
A faculty and staff union at the Community College of
Philadelphia plans to pose one major question to the institution’s
administration at a demonstration scheduled for today: Teachers and students
open their books every day — why won’t administrators? The Faculty & Staff
Federation of the Community College of Philadelphia, an affiliate of the
American Federation of Teachers,
plans to distribute leaflets and circulate a “mobile billboard” around the
college’s main campus starting at 9 a.m. today to draw attention to their calls
for greater financial transparency on the part of the institution, the latest
development in ongoing contract negotiations.Classes will not be interrupted.
Elizabeth Redden, "Open the Books, Professors Plead," Inside
Higher Ed, December 8. 2006 ---
http://www.insidehighered.com/news/2006/12/08/ccp
Major breach of UCLA's
computer files
In
what appears to be one of
the largest computer
security breaches ever at an
American university, one or
more hackers have gained
access to a UCLA database
containing personal
information on about 800,000
of the university's current
and former students, faculty
and staff members, among
others. UCLA officials said
the attack on a central
campus database exposed
records containing the
names, Social Security
numbers and birth dates —
the key elements of identity
theft — for at least some of
those affected. The attempts
to break into the database
began in October 2005 and
ended Nov. 21, when the
suspicious activity was
detected and blocked, the
officials said.
Rebecca Trounson, "Major
breach of UCLA's computer
files: Personal information
on 800,000 students, alumni
and others is exposed;
Attacks lasted a year, the
school says," LA Times,
December 12, 2006 ---
http://www.latimes.com/news/local/la-me-ucla12dec12,0,7111141.story?coll=la-home-headlines
Another Earnings Smoothing Fraud
"SEC CHARGES FORMER CEO AND TWO FORMER EXECUTIVES AFFILIATED WITH RENAISSANCERE HOLDINGS LTD. WITH SECURITIES FRAUD," AccountingEducation.com, October 26, 2006 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=143780
The Securities and Exchange Commission on September 27, 2006 announced securities fraud charges against James N. Stanard and Martin J. Merritt, the former CEO and former controller, respectively, of RenaissanceRe Holdings Ltd. (RenRe) and also against Michael W. Cash, a former senior executive of RenRe's wholly-owned subsidiary, Renaissance Reinsurance Ltd. The complaint, filed in the federal court in Manhattan, alleges that Stanard, Merritt, and Cash structured and executed a sham transaction that had no economic substance and no purpose other than to smooth and defer over $26 million of RenRe's earnings from 2001 to 2002 and 2003. The Commission also announced a partial settlement of its charges against Merritt, who has consented to the entry of an antifraud injunction and other relief.
Mark K. Schonfeld, Director of the Commission's Northeast Regional Office, said, "This is another case arising from our ongoing investigation of the misuse of finite reinsurance to commit securities fraud. The defendants enabled RenRe to take excess revenue from one good year and, in effect, 'park' it with a counterparty so it would be available to bring back in a future year when the company's financial picture was not as bright."
Andrew M. Calamari, Associate Director of the Commission's Northeast Regional Office, said, "The investing public relies upon senior executives of public companies not to engage in transactions that are designed to misstate their companies' financial statements. Today's enforcement action underscores that the Commission will pursue culpable senior officials who are instrumental in constructing fraudulent transactions."
The Defendants
- Stanard, age 57 and a resident of Maryland and Bermuda, was Ren Re's chairman and chief executive officer from 1993 until he resigned in November 2005.
- Merritt, age 43 and a Bermuda resident, held various positions, including that of controller, at both the holding company and the subsidiary.
- Cash, age 38 and a Bermuda resident, was a senior vice president of the subsidiary until he resigned in July 2005.
RenRe's Fraud
The Commission alleges that Stanard, Merritt and Cash committed fraud in connection with a sham transaction that they concocted to smooth RenRe's earnings. The complaint concerns two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round trip of cash. In the first contract, RenRe purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company, Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" or "cookie jar" that RenRe used in later periods to bolster income.
The second contract was a purported reinsurance agreement with Inter-Ocean that was, in fact, a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. This reinsurance agreement was a complete sham. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.
RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean when in fact, the complaint alleges, each of these individuals knew that this was not true. Merritt and Stanard also misrepresented or omitted certain key facts about the transaction to RenRe's auditors. As a result of RenRe's accounting treatment for this transaction, RenRe materially understated income in 2001 and materially overstated income in 2002, at which time it made a "claim" under the "reinsurance" agreement. It then received as apparent reinsurance proceeds the funds it had paid to Inter-Ocean and that Inter-Ocean held in a trust for RenRe's benefit.
On Feb. 22, 2005, RenRe issued a press release announcing that it would restate its financial statements for the years ended Dec. 31, 2001, 2002 and 2003. On March 31, 2005, RenRe filed its Form 10-K for the year ended Dec. 31, 2004, which contained restated financial statements for those years. Stanard signed and certified the 2004 Form 10-K. Both the press release and the Form 10-K attributed the restatement of the Inter-Ocean transaction to accounting "errors" due to "the timing of the recognition of Inter-Ocean reinsurance recoverables." These statements were misleading. In fact, the transaction contained no real reinsurance and the company's restated financial statements accounted for the transaction as if it had never occurred. In short, the entire transaction was a sham, and the company failed to disclose that fact and misrepresented the reasons for the restatement.
The Commission's Charges
The Commission's complaint charges Stanard, Merritt and Cash with securities fraud in violation of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5(a), (b) and (c) of the Exchange Act; with violating the reporting, books-and-records and internal control provisions of Exchange Act Section 13(b)(5) and Rule 13b2-1; and with aiding and abetting RenRe's violations of Exchange Act Sections 10(b), 13(a) and 13(b)(2) and Exchange Act Rules 10b-5(a), (b) and (c), 12b-20, 13a-1 and 13a-13. In addition, the complaint charges Stanard and Merritt with violating Exchange Act Rule 13b2-2 for making materially false statements to RenRe's auditors and charges Stanard with violating Exchange Act Rule 13a-14 for certifying financial statements filed with the Commission that he knew contained materially false and misleading information. The complaint seeks permanent injunctive relief, disgorgement of ill-gotten gains, if any, plus prejudgment interest, civil money penalties, and orders barring each defendant from acting as an officer or director of any public company.
Partial Resolution
Merritt agreed to partially settle the Commission's claims against him. In addition to undertaking to cooperate fully with the Commission, and without admitting or denying the allegations in the complaint, Merritt consented to a partial final judgment that, upon entry by the court, will permanently enjoin him from violating or aiding or abetting future violations of the securities laws, bar him from serving as an officer or director of a public company, and defer the determination of civil penalties and disgorgement to a later date. Merritt also agreed to a Commission administrative order, based on the injunction, barring him from appearing or practicing before the Commission as an accountant, under Rule 102(e) of the Commission's Rules of Practice. Merritt was a certified public accountant licensed to practice in Massachusetts.
The independent
auditor caught up in this
fraud is Ernst & Young. You
can read more about Ernst &
Young's troubles at
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
A Fraudulent Paper
Published in Nature,
a Prestigious Science
Journal
Another Case for Better
Replication in Research
Reporting
"'Grape harvest dates are poor indicators of summer warmth', as well as about scientific publication generally," by Douglas J. Keenan, Informath, November 3, 2006 --- http://www.informath.org/apprise/a3200.htm
That is, the authors had developed a method that gave a falsely-high estimate of temperature in 2003 and falsely-low estimates of temperatures in other very warm years. They then used those false estimates to proclaim that 2003 was tremendously warmer than other years.
The above is easy enough to understand. It does not even require any specialist scientific training. So how could the peer reviewers of the paper not have seen it? (Peer reviewers are the scientists who check a paper prior to its publication.) I asked Dr. Chuine what data was sent to Nature, when the paper was submitted to the journal. Dr. Chuine replied, “We never sent data to Nature”.
I have since published a short note that details the above problem (reference below). There are several other problems with the paper of Chuine et al. as well. I have written a brief survey of those (for people with an undergraduate-level background in science). As described in that survey, problems would be obvious to anyone with an appropriate scientific background, even without the data. In other words, the peer reviewers could not have had appropriate background.
What is important here is not the truth or falsity of the assertion of Chuine et al. about Burgundy temperatures. Rather, what is important is that a paper on what is arguably the world's most important scientific topic (global warming) was published in the world's most prestigious scientific journal with essentially no checking of the work prior to publication.
Moreover—and crucially—this lack of checking is not the result of some fluke failures in the publication process. Rather, it is common for researchers to submit papers without supporting data, and it is frequent that peer reviewers do not have the requisite mathematical or statistical skills needed to check the work (medical sciences largely excepted). In other words, the publication of the work of Chuine et al. was due to systemic problems in the scientific publication process.
The systemic nature of the problems indicates that there might be many other scientific papers that, like the paper of Chuine et al., were inappropriately published. Indeed, that is true and I could list numerous examples. The only thing really unusual about the paper of Chuine et al. is that the main problem with it is understandable for people without specialist scientific training. Actually, that is why I decided to publish about it. In many cases of incorrect research the authors will try to hide behind an obfuscating smokescreen of complexity and sophistry. That is not very feasible for Chuine et al. (though the authors did try).
Finally, it is worth noting that Chuine et al. had the data; so they must have known that their conclusions were unfounded. In other words, there is prima facie evidence of scientific fraud. What will happen to the researchers as a result of this? Probably nothing. That is another systemic problem with the scientific publication process.
Bob Jensen's threads on research replication, or lack thereof in accounting research, are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Replication
Cendant CEO Guilty at
Cendant in 3rd Trial
It
took eight years and three
trials, but federal
prosecutors finally won
their case on Tuesday
against Walter A. Forbes,
the former chairman of the
Cendant Corporation. Mr.
Forbes was convicted here on
charges that he masterminded
an accounting fraud that was
considered at the time it
was discovered — 1998 — to
be the largest on record.
Investors lost $19 billion
when Cendant’s stock fell
after the disclosure. The
Cendant fraud was later
eclipsed by the scandals at
Enron and WorldCom. A jury
of eight men and four women
in Federal District Court
deliberated for two and a
half days before finding Mr.
Forbes, 63, of New Canaan,
Conn., guilty of conspiracy
and of two counts of
submitting false reports to
the Securities and Exchange
Commission in overstating
his company’s earnings by
more than $250 million. He
was acquitted on a fourth
count, securities fraud.
Stacey Stowe, "Chief Guilty
at Cendant in 3rd Trial,"
The New York Times,
November 1, 2006 ---
http://www.nytimes.com/2006/11/01/business/01cendant.html?ref=business
The company's auditor, Ernst & Young, paid $335 million to settle.
"Before Enron, There Was Cendant," by Gretchen Morgenson, The New York Times, May 9, 2004 --- http://www.nytimes.com/2004/05/09/business/yourmoney/09watch.html
|
Bob Jensen's threads on Ernst & Young are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
Ex-Software Officer
Settles With S.E.C
A
former executive of McAfee,
the antiviral software
maker, agreed to pay about
$757,000 to settle charges
that he played a role in the
company’s $622 million
accounting fraud, the
Securities and Exchange
Commission said Tuesday. The
S.E.C. charged in a civil
lawsuit filed Monday in
federal court in San
Francisco that the company’s
former treasurer, Eric
Borrmann, aided in fraud
from mid-1999 until he left
McAfee in July 2000.
"Ex-Software Officer Settles
With S.E.C.," The New
York Times, November 1,
2006 ---
http://www.nytimes.com/2006/11/01/technology/01mcafee.html?ref=business
McAfee's outside auditor is Deloitte and Touche. You can read more about Deloitte's litigations at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte
"Booming Audit Firms
Seek Shield From Suits,"
by David Reilly, The Wall
Street Journal, by
November 1, 2006; Page C1
---
http://online.wsj.com/article/SB116235111161209823.html?mod=todays_us_money_and_investing
Business is booming at the world's biggest accounting firms, so their top lobbying priority may seem ironic: They want government protection from a big financial hit.
Revenues at the Big Four -- PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young and KPMG -- have grown at a double-digit pace in recent years as audit fees soared. Regulatory overhauls enacted in the wake of accounting scandals earlier this decade have led to new work for firms. One of the biggest problems facing the Big Four these days is a lack of staff to meet the huge demand for services.
Yet the Big Four want to limit court damages that investors and others can seek from them for flawed audits of public companies. Without such a shield, the firms say, it's only a matter of time before one of them is felled by a massive court award.
Their argument is being championed by an influential group recently formed to study the competitiveness of U.S. financial markets with the encouragement of Treasury Secretary Henry Paulson. The group is expected to recommend in coming weeks that the government enact new protections for auditors. A panel set up within the powerful U.S. Chamber of Commerce is sounding a similar theme. In Europe, the European Commission is studying the issue and is likely to recommend limitations on the damages accounting firms can face.
How much risk the big firms actually face has been largely absent from the debate over auditor liability. Despite a slew of big-ticket lawsuits that emanated from corporate scandals earlier this decade, none of the firms suffered a fatal blow from those legal actions. The one big firm that folded, Arthur Andersen LLP in 2002, fell victim not to a lawsuit but to a criminal obstruction-of-justice conviction, later overturned on appeal.
"I don't see that auditors have a real need for any kind of special protections," said Bill Kelley, general counsel at the Retirement Systems of Alabama, which has sued accounting firms following corporate blowups. "Auditors need to be held to a high standard. Those are the outsiders we rely on. It's tough to have that responsibility, but that's what they're getting paid for."
Mr. Kelley and likeminded critics say it's also difficult to quantify the risk the firms face from a big court award. That's because the accounting firms are private partnerships that don't, in most cases, disclose their financial condition or results. So outsiders don't know how much capital the firms have, their level of profitability or even how much insurance they carry.
If anything, the risk from class-action lawsuits appears to be dwindling. The number of class actions that cite auditors as defendants declined to five last year from 14 in 2002, according to the Stanford Law School Securities Class Action Clearinghouse.
The bigger threat to firms has stemmed not from civil litigation, but from alleged criminal actions related to their conduct. In addition to the Arthur Andersen case, KPMG LLP suffered a near-death experience last year due to its sale of improper tax shelters; federal prosecutors ultimately decided not to indict the firm, a move that likely would have put it out of business.
The Andersen and KPMG cases have led some lawyers to claim that the Big Four are already seen by government as too big to fail. "The fact is that the government couldn't indict KPMG for policy reasons," said Sean Coffey, a partner at New York law firm Bernstein Litowitz Berger & Grossmann LLP, who has sued several accounting firms. "These folks are effectively immune to being put out of business and now they're trying to find ways to further inoculate themselves from accountability."
The firms also have shown they can weather pretty big hits. Over the past two years, KPMG has agreed to pay out nearly $700 million in fines and settlements related to criminal and civil actions. In 2000, Ernst & Young LLP settled for $335 million a shareholder suit related to its work for Cendant Corp.
Accounting firms argue the danger they face from civil litigation is real and that there are still many scandal-era actions that have yet to work their way through the courts. What is needed, the firms say, are litigation caps similar to those many states have enacted to protect doctors from malpractice suits.
The firms say special protection is warranted because they can be sued not just by the companies whose books they audit, but also by others, such as investors. These investors, the firms add, try to use auditors to recoup stock-market losses.
"The cost of our audits was never built for insuring the capital markets," said William G. Parrett, chief executive of Deloitte Touche Tohmatsu, the international arm of Deloitte & Touche. "I don't think we're saying we shouldn't have any liability, but it has to be in proportion to our participation in any problem."
The firms also say they can't get sufficient insurance because their liability is almost unlimited, encompassing in a worst-case scenario the total stock-market value of the companies they audit. So they are forced to settle lawsuits rather than risk a trial.
A study for the European Commission, released in September, said the total costs of judgments, settlements, legal fees and related expenses for the U.S. audit practices of the Big Four firms had risen to $1.3 billion in 2004, or 14.2% of revenue, up from 7.7% in 1999. In addition, according to a study by insurer Aon, there were 20 claims outstanding against U.S. auditors as of September 2005 where damages sought or estimated losses topped $1 billion. Accounting firms say they couldn't survive an award of that size.
Advocates of liability caps frame the issue around the broader debate over U.S. market competitiveness.
"I think the whole issue of liability is one of the major reasons why foreign companies aren't coming here" to list their stocks on U.S. exchanges, said Hal S. Scott, a Harvard Law School professor and a founding member of the Committee on Capital Markets Regulation, the group formed with Mr. Paulson's blessing to study market competitiveness. Mr. Scott added that while court awards can serve as a deterrent to shoddy audit work, "if we left this to the legal process, we might come up with the right amount of damages to deter bad behavior but have just two or three accounting firms" because one will have gone out of business.
Recognizing, though, that auditor liability overhaul might be a tough sell on Capitol Hill, the committee may suggest that the U.S. Securities and Exchange Commission come up with a solution, Mr. Scott said. "The SEC could modify their own rules regarding liability," he added. One idea under study: Allowing accounting firms to negotiate liability caps with clients, a practice now barred to preserve auditors' independence.
Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Doral Financiali
Settles Financial Fraud
Charges
The
Securities and Exchange
Commission on September 19,
2006 filed financial fraud
charges against Doral
Financial Corporation,
alleging that the
NYSE-listed Puerto Rican
bank holding company
overstated income by 100
percent on a pre-tax,
cumulative basis between
2000 and 2004. The
Commission further alleges
that by overstating its
income by $921 million over
the period, the company
reported an apparent
28-quarter streak of “record
earnings” that facilitated
the placement of over $1
billion of debt and equity.
Since Doral Financial’s
accounting and disclosure
problems began to surface in
early 2005, the market price
of the company’s common
stock plummeted from almost
$50 to under $10, reducing
the company’s market value
by over $4 billion. Without
admitting or denying the
Commission’s allegations,
Doral Financial has
consented to the entry of a
court order enjoining it
from violating the
antifraud, reporting, books
and records and internal
control provisions of the
federal securities laws and
ordering that it pay a $25
million civil penalty. The
settlement reflects the
significant cooperation
provided by Doral in the
Commission’s investigation.
"DORAL FINANCIAL SETTLES
FINANCIAL FRAUD CHARGES WITH
SEC AND AGREES TO PAY $25
MILLION PENALTY,"
AccountingEducation.com,
September 28, 2006 ---
http://accountingeducation.com/index.cfm?page=newsdetails&id=143606
The independent auditor
for Doral Financial is
PricewaterhouseCoopers LLP
(PwC) ---
Click Here for Doral's 10-K
PwC's charges to Doral
increased from $2.2 million
in 2004 to $5.6 million in
2006.
How KB Home CEO's pay went through the roof
KB Home may be the fifth-largest U.S. home builder,
but it was No. 1 when it came to pay for its chief executive. Over the last
three years, former CEO Bruce Karatz made $232.6 million in compensation.
Kathy M. Kristof and Annette Haddad, LA Times, December 17, 2006 ---
http://www.latimes.com/services/site/premium/access-registered.intercept
Jensen Comment
I'd be more impressed if KB
homes bought back the
fundamentally-flawed cracked
foundations of all those
defective homes built in
Texas ---
http://ths.gardenweb.com/forums/load/build/msg0122380524478.html?12
Bob Jensen's threads on outrageous executive compensation are at http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
A Home Valuation Web
Site Is Accused of
Discrimination
Zillow.com, the Web site
that provides free home
valuations, has been accused
by a coalition of community
activist groups of
undervaluing the homes in
black and Latino
neighborhoods. In a letter
sent by the National
Community Reinvestment
Coalition to the Federal
Trade Commission last
Thursday, the group asserted
that Zillow’s Web site
misrepresented home values
and placed residents in
low-income neighborhoods
“more at risk for
discriminatory and predatory
lending practices.” The
organization also asserted,
but would not provide
substantiation for the
accusation, that real estate
and lending industry
professionals use Zillow’s
information to “perpetrate
fraud.” An improper
appraisal could force a
homeowner to borrow more
than the value of the home
and put money invested in
the home at risk, according
to the group. It urged the
F.T.C. to start an
investigation and
permanently restrain Zillow
from providing home value
estimates.
Daman Darlin, "A Home
Valuation Web Site Is
Accused of Discrimination,"
The New York Times,
October 31, 2006 ---
Click Here
"Embezzler Sentenced," The New York Times, October 11, 2006 --- http://www.nytimes.com/2006/10/11/business/11embezzle.html
LUBBOCK, Tex. Oct. 10 (AP) — A former executive who admitted to embezzling millions of dollars from Patterson-UTI Energy Inc., the oil and gas drilling company, was sentenced to 25 years in prison Tuesday.
The executive, Jonathan D. Nelson, 36, was accused of using a bogus invoice scheme to take more than $77 million from the company, a large operator of land-based oil and gas drilling rigs.
The authorities said he spent the money on an airplane, an airfield, a cattle ranch, a truck stop, homes and vehicles.
Mr. Nelson was also fined $200,000 and ordered to pay restitution of about $77 million minus the money that has been recouped from the sale of assets purchased with the stolen money.
“We are at a crossroads in America where malfeasance in corporate America has reached an all-time high,” Judge Sam R. Cummings of United States District Court said in comments to Mr. Nelson. “This type of conduct simply cannot be tolerated in our society.”
The independent external auditor was Pricewaterhouse Coopers --- Click Here
Fees Incurred in Fees Incurred in Fiscal Year Fiscal Year Description
2004 2003
Audit fees $ 419,000 $ 323,000
Audit-related fees 1,141,000 180,000
Tax fees 573,000 81,000
All other fees 19,000 31,000
Totals $2,152,000 $615,000
Bob Jensen's threads on Pricewaterhouse Coopers are at http://www.trinity.edu/rjensen/Fraud001.htm#PwC
Congressional Crooks are
Democrats and Republicans
"Politicians preying on the
public," by Mychal Massie,
WorldNetDaily,
October 3, 2006 ---
http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=52241
Finance
Chief of Refco Is Indicted
The
former finance chief of
Refco, once one of the
world’s largest commodities
brokerage firms, was
indicted yesterday, accused
of helping to hide hundreds
of millions of dollars in
losses. Federal prosecutors
in Manhattan said the former
chief financial officer,
Robert C. Trosten, 37,
helped the firm’s former
chief executive, Phillip R.
Bennett, engage in a complex
series of transactions that
hid customer trading debts
that Mr. Bennett had
assumed. Their actions
defrauded Refco’s investors
of more than $1 billion,
prosecutors said in a
statement.
Michael J. de la Merced,
"Finance Chief of Refco Is
Indicted," The New York
Times, October 25, 2006
---
Click Here
The CEO Who Jousted
With Regulators
The
tumultuous tenure of Robert
P. Cummins as chairman,
president and chief
executive of the medical
device maker Cyberonics has
ended, the company disclosed
yesterday. Mr. Cummins, 52,
who is known as Skip, is a
former venture capitalist
who joined the board of
Cyberonics in 1988 and
became chief executive in
1995. He gained a reputation
as one of nation’s most
passionate and intimidating
business leaders in dealing
with critics, regulators and
investors.
Barnaby J. Feder, "Head of
Cyberonics Resigns as
Options Inquiry Expands,"
The New York Times,
November 21, 2006 ---
http://www.nytimes.com/2006/11/21/business/21device.html?_r=1&oref=slogin
Yet Again the SEC Amends Executive Compensation Disclosure (particularly
regarding stock options)
The US Securities and Exchange Commission has
amended its executive and director compensation disclosure rules to more closely
conform the reporting of stock and option awards to FASB Statement No. 123
(revised 2004) Share-Based Payment. FAS 123R is similar to IFRS 2 Share-based
Payment. The amendment modifies rules that were adopted in July 2006.
SEC Press Release 2006 219 ---
http://www.iasplus.com/usa/0612seccomp.pdf
Bob Jensen's threads on outrageous executive compensation are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation
Bob Jensen's threads
on accounting for employee
stock options are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
Home Depot may see
fallout over options
backdating
Home Depot Inc.'s admission
this week that some stock
option grants were backdated
could spur lawsuits, result
in fines and have tax
implications, analysts and
other experts said. The
disclosure of 19 years of
backdating tops off a
difficult year for the
world's No. 1 home
improvement retailer as it
continues to be dogged by
criticism about executive
pay, a disappointing stock
performance and the fallout
from the slower U.S. housing
market.
"Home Depot may see fallout
over options backdating,"
Reuters, December 8,
2006 ---
Click Here
Jensen Comment
Those that blame back dating
on changes in tax laws
and/or newer options expense
requirements under FAS
123(R) should note the 19
years of backdating by Home
Depot.
Bob Jensen's threads on accounting for employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
"How Backdating Helped Executives Cut Their Taxes: Evidence Suggests Recipients Of Some Stock-Option Grants Manipulated Exercise Dates," by Mark Maremont and Charles Forelle, The Wall Street Journal, December 12, 2006; Page A1 --- http://online.wsj.com/article/SB116589240479347248.html?mod=todays_us_page_one
New evidence suggests that corporate executives may have found another way to manipulate their stock options, this time to cheat on their income taxes.
In a paper that began circulating in recent days, a Securities and Exchange Commission economist concludes there is strong statistical evidence that executives manipulated the exercise dates of their options as part of a tax dodge. And a review of corporate filings turns up some companies with startling options-exercise patterns.
The new information could open another front in the options-backdating scandal. Backdating already has sparked the broadest corporate-fraud probe in decades, with more than 130 companies under investigation by federal authorities. So far, attention has focused on the practice of retroactively selecting favorable dates to grant options. The new wrinkle involves rigging the dates on which options are exercised, sometimes years after they're granted.
The tax dodge related to options, however, almost certainly involves fewer executives than are caught up in the furor over the backdating of grants. (See related article.)
The reason it can be tempting to backdate the exercise of options lies in the way the Internal Revenue Service treats different types of income for tax purposes. Options, a common part of executive pay packages, give the recipient the right to buy a company's stock at a fixed price in the future. That price, known as the strike price, is usually the stock's market price on the day the options were granted.
About three-quarters of the time, executives immediately sell the shares they buy when they exercise options. Under IRS rules that typically apply, those executives must pay ordinary income tax, as well as payroll taxes, on the difference between the stock's value on the date the option was exercised and the option's strike price. The highest federal marginal income tax rate is 35%.
But for a variety of reasons, including corporate rules that require top managers to own a certain amount of stock, some executives don't sell immediately. Those who hold the shares for at least a year pay a much lower capital-gains tax -- currently 15% -- on any profit between the time they exercise and when they eventually dispose of the shares. That lower rate gives the executive an incentive to exercise the options at a relative low point for the stock: The move reduces the amount of money that would be owed at the ordinary income tax rate, and shifts the difference so it is potentially taxed at the much-lower capital gains rate.
Consider an executive who holds options on 100,000 shares with a strike price of $10. If he exercises and sells when the price is $20, he realizes $1 million in income and must pay $350,000 in income taxes.
If he instead can claim an exercise price of $16, he lowers his income tax to $210,000. If he then sells a year later and the stock is at the same price of $20, he pays $60,000 in capital-gains levies, for a total tax bite of $270,000. In other words, he has the same $1 million gain but saves $80,000 in taxes. The problem arises if the executive misrepresents when the exercise occurred to claim a lower exercise price.
Determining which executives or companies might be involved is difficult, and it's impossible to know what information they may have included in their tax returns. But some executives have exhibited unusual timing in their options exercises.
At Maxim Integrated Products Inc., a Sunnyvale, Calif., chip maker, chief executive John F. Gifford exercised options and held shares seven times between 1997 and 2002, according to regulatory filings and insider-trading data from Thomson Financial. In all but one case, Mr. Gifford's reported exercise date was the very day the stock reached its lowest closing price of the month. After the Sarbanes-Oxley corporate-reform law took effect in 2002, drastically reducing the opportunity to backdate by tightening reporting requirements, his fortunate timing vanished.
Maxim is facing investigations by the SEC and federal prosecutors in California over its option-granting practices. A special committee of directors is also probing the matter.
Chuck Rigg, a Maxim vice president, said the company is "looking into" questions about Mr. Gifford's options exercises, but said initial data don't indicate any problems. Mr. Rigg added that the company used an outside broker to handle options exercises. "There's not a way you can backdate that," he said. Mr. Gifford didn't respond to requests for comment.
Continued in article
Bob Jensen's threads on accounting for employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
Hundreds of
old-economy companies also
committed backdating fraud
Abuses of stock option
grants are perceived to have
spread like a virus among
high-technology companies.
But a new study suggests
that hundreds of old-economy
companies may also have
caught the backdating bug.
In a paper to be released
today, researchers estimate
that 590 nontechnology
companies appear to have
manipulated options so their
chief executives received
them at the lowest price of
the month. That compares
with 130 technology
companies that appear to
have backdated their chief
executives’ options to a
monthly low.
Eric Dash, "Study Charts
Broad Manipulation of
Options," The New York
Times, November 17, 2006
---
http://www.nytimes.com/2006/11/17/business/17options.html?_r=1&oref=slogin
Recall when "agency
theory" assumed that CEO's
had personal incentives to
make accounting transparent
without the need for outside
regulation requirements?
This is probably still being
taught in accounting theory
courses where instructors
rely on old textbooks and
journal articles.
In
the latest twist in the
stock options game, some
executives may have changed
the so-called exercise date
— the date options can be
converted to stock — to
avoid paying hundreds of
thousands of dollars in
income tax, federal
investigators say . . . As
those cases have progressed,
at least 46 executives and
directors have been ousted
from their positions.
Companies have taken charges
totaling $5.3 billion to
account for the impact of
improper grants, according
to Glass Lewis & Company, a
research firm that advises
big investors on shareholder
issues. And further
investigations, indictments
and restatements are
expected. Securities
regulators are now focusing
on several cases where it
appears the exercise dates
of the options were
backdated, according to a
senior S.E.C. enforcement
official, who asked not to
be identified because of the
agency’s policy of not
commenting on active cases.
Besides raising disclosure
and accounting problems,
backdating an exercise date
can result in tax fraud.
Eric Dash, "Dodging Taxes Is
a New Stock Options Scheme,"
The New York Times, October
30, 2006 ---
http://www.nytimes.com/2006/10/30/business/30option.html?_r=1&oref=slogin
You can read about agency theory at http://en.wikipedia.org/wiki/Agency_Theory
You can read the following at http://en.wikipedia.org/wiki/Agency_Theory#Incentive-Intensity_Principle
Incentive-Intensity Principle
However, setting incentives as intense as possible is not necessarily optimal from the point of view of the employer. The Incentive-Intensity Principle states that the optimal intensity of incentives depends on four factors: the incremental profits created by additional effort, the precision with which the desired activities are assessed, the agent’s risk tolerance, and the agent’s responsiveness to incentives. According to Prendergast (1999, 8), “the primary constraint on [performance-related pay] is that [its] provision imposes additional risk on workers…” A typical result of the early principal-agent literature was that piece rates tend to 100% (of the compensation package) as the worker becomes more able to handle risk, as this ensures that workers fully internalize the consequences of their costly actions. In incentive terms, where we conceive of workers as self-interested rational individuals who provide costly effort (in the most general sense of the worker’s input to the firm’s production function), the more compensation varies with effort, the better the incentives for the worker to produce.
Monitoring Intensity Principle
The third principle – the Monitoring Intensity Principle – is complementary to the second, in that situations in which the optimal intensity of incentives is high correspond to situations in which the optimal level of monitoring is also high. Thus employers effectively choose from a “menu” of monitoring/incentive intensities. This is because monitoring is a costly means of reducing the variance of employee performance, which makes more difference to profits in the kinds of situations where it is also optimal to make incentives intense.
Bob Jensen's threads on earnings management and agency theory are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#Manipulation
A Plea of Guilty in
Options Case
The
former chief financial
officer of Comverse
Technology pleaded guilty
yesterday to conspiracy and
securities fraud for his
role in a stock options
scheme. David Kreinberg, who
left the top finance job at
Comverse in May, entered his
plea in Federal District
Court in Brooklyn.
Prosecutors have charged Mr.
Kreinberg; Comverse’s former
general counsel, William F.
Sorin; and its former chief
executive, Jacob Alexander,
with engaging in an options
scheme that let them reap
millions of dollars in
profits by altering the
grant dates of stock option
awards. Mr. Kreinberg has
agreed to cooperate with
federal prosecutors. He
faces a possible 15 years in
prison. Sentencing was set
for Feb. 23.
Reuters, "A Plea of Guilty
in Options Case," The New
York Times, October 25,
2006 ---
http://www.nytimes.com/2006/10/25/technology/25comverse.html
Maybe
Apple Corporation will
backdate its 2006 annual
report
Apple Computer Delays Filing
Annual Report With SEC Due
to Ongoing Stock Option
Investigation NEW YORK (AP)
-- Apple Computer Inc. said
Friday it has delayed filing
its annual report with the
Securities and Exchange
Commission due to its
ongoing investigation into
stock option grants. In a
filing with the SEC, the
company said it needs to
restate historical financial
statements to record charges
for compensation related to
past grants. As a result,
Apple was unable to file its
10-K Form for the fiscal
year ended Sept. 30 by the
required filing date of Dec.
14.
"Apple Delays Filing Its
Annual Report," Yahoo
News, December 15, 2006
---
http://biz.yahoo.com/ap/061215/apple_options.html?.v=3
Executive
Compensation Fraud at Apple
Corporation:
Apple's mea culpa on
backdating last week was
eloquently incomplete
Apple's mea culpa on
backdating last week was
eloquently incomplete, and
all the more intriguing
because the gaps seemed
almost Socratically mapped
to invite the media to fill
the holes by asking obvious
questions. The big joke here
is that the logic of the
witch hunt will stop the
media from asking the
obvious questions, not least
because CEO Steve Jobs is a
hero to much of the press
and there's little appetite
for bringing him down. Don't
misunderstand. We believe it
would be a gross injustice
if he were defenestrated
over backdating, just as we
have serious doubts about
the prosecutions launched
against other backdating
CEOS. And Apple's likely
purpose in issuing its
statement, naturally, was
not lexical
comprehensiveness but saving
Mr. Jobs's job.
Holman W. Jenkins, Jr., "A
Typical Backdating
Miscreant, The Wall
Street Journal, October
11, 2006; Page A15 ---
http://online.wsj.com/article/SB116052823194588801.html?mod=opinion&ojcontent=otep
"Apple C.E.O. Apologizes for Stock Practices," The New York Times, October 5, 2006 --- Click Here
Now that an internal investigation over Apple Computer Inc.'s stock-option practices has helped abate investor worries over Steve Jobs' role as CEO, a key lingering concern will be the impact of pending earnings restatements.
Apple said Wednesday its three-month investigation did not uncover any misconduct of any current employees but did raise ''serious concerns'' over the accounting actions of two unnamed former officers.
The iPod and Macintosh maker also said its former chief financial officer, Fred Anderson, had resigned from the company's board of directors.
Jobs -- his position intact -- apologized.
The probe found that Jobs knew that some option grants had been given favorable dates in ''a few instances,'' but he did not benefit from them and was not aware of the accounting implications, the company said.
''I apologize to Apple's shareholders and employees for these problems, which happened on my watch,'' Jobs said in a statement. ''We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again.''
Apple said it will likely have to restate some earnings due to revised tax and stock option-related charges. Auditors are still reviewing the situation, and Apple said it has not yet determined the extent of the financial impact.
The looming restatements could dramatically reduce some of the windfall generated during the company's recent run of record profit, analysts said.
Shares of Apple shed 10 cents to $75.28 in midday trading Thursday on the Nasdaq Stock Market. The stock has traded between $47.87 and $86.40 over the past year.
Apple has reported profit totaling $3.1 billion during the past four years. If the restatements are severe, it could dent Apple's stock, said IDC analyst Richard Shim.
''The restatements have the potential to bite them again depending on how large they end up being,'' Shim said. ''That said, the company is certainly firing on all cylinders so investors may be willing to forgive them, but it's something that will linger in the backs of their minds.''
Piper Jaffray analyst Gene Munster said he and other investors are breathing a sigh of relief that Jobs kept his job throughout the scandal.
''The risk was that if something bizarre happened and Steve Jobs got fired over it,'' Munster said from his office in Minneapolis. ''That could have significantly impacted the company in a negative way. Steve Jobs is Apple. Ultimately, the scope of the backdating was bigger than we thought, but the impact turned out to be less severe.''
Apple is one of the most prominent among more than 100 companies caught in the nationwide stock options mishandling scandal. Cupertino-based Apple initiated its own stock-options investigation in June after problems at other companies began to unravel.
In many instances, the problem has centered on the ''backdating'' of stock options -- a practice in which insiders could make the rewards more lucrative by retroactively pinning the option's exercise price to a low point in the stock's value.
Apple said its probe found irregularities in the recording of stock option grants made on 15 dates between 1997 and 2002, with the last one involving a January 2002 grant, the company said. The grants had dates that preceded the approval of those grants.
Apple spokesman Steve Dowling said the 15 grants represented 6 percent of the total issued during that period. He said he did not have further details regarding the specific grants or whether they were awarded to officers or employees.
The company did not identify the two former officers whose accounting, recording and reporting of option grants raised ''serious concerns'' during the probe.
Apple said Anderson, who served as the company's chief financial officer from 1996 until 2004, resigned from the board, citing he did so in ''Apple's best interest.''
Dowling said the company will provide more details about the probe to the Securities and Exchange Commission.
The company's special committee conducting the investigation examined more than 650,000 e-mails and documents, and interviewed more than 40 current and former employees, directors and advisers.
"Apple Says Jobs Knew of Options," by Laurie J. Flynn, The New York Times, October 5, 2006 --- Click Here
The external auditor for Apple Corporation is KPMG --- http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
They not only teach
about options backdating at
the University of Phoenix
The
Apollo Group, which as owner
of the University of Phoenix
is the largest player in
for-profit higher education
in the United States, on
Thursday
announced
that some former officials
may have concealed
information about the
handling of stock-option
grants, a key issue in light
of ongoing investigations by
various authorities into
stock-option violations at
many top American
corporations. As a result of
Apollo’s continuing
investigation, the company
announced that it would need
to delay the release of
quarterly and annual
financial reports that would
normally be due on December
31.
Bloomberg
reported on some of the
details of the problems at
Apollo.
Inside Higher Ed,
December 15, 2006 ---
http://www.insidehighered.com/news/2006/12/15/qt
Bob Jensen's threads on accounting for employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
"Stock Option Probes Force Out McAfee, CNET Execs," by Howard Schneider, The Washington Post, October 11, 2006 --- Click Here
Top executives at two technology companies quit or were fired today as the repercussions of a broad government investigation into stock option awards continued to expand.
Computer security expert McAfee Inc. announced that chairman and chief executive George Samenuk had retired and that president Kevin Weiss had been terminated following an internal investigation of company stock option awards.
Internet publisher CNET Networks Inc., meanwhile, announced the resignations of three top executives, including company co-founder and current chairman and chief executive Shelby Bonnie.
Continued in article
Timely
Filing of 10-K Reports is
not "Optional"
Corinthian Colleges, Inc.
announced Thursday
that
the staff of the Nasdaq
stock exchange has
threatened the company with
de-listing for its failure
to submit its 2006 annual
financial statements to the
Securities and Exchange
Commission on time.
Corinthian said it has
appealed the staff’s
recommendation and sought a
hearing to challenge the
ruling, noting that the
company had previously told
the SEC that it would be
filing its Form 10-K late
while it conducts an outside
review of its awarding of
historic stock option
grants. The company is one
of several for-profit higher
education companies facing
scrutiny from federal
regulators for their
procedures and practices in
awarding stock options.
Inside Higher Ed,
October 5, 2006
Bob
Jensen's threads on options
accounting scandals are at
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
"Options backdating might never have happened if reasonable options accounting had been required years ago," by Floyd Norris, The New York Times, October 13, 2006 --- http://norris.blogs.nytimes.com/?ref=business
Evidence that options backdating scandals are not uniquely caused by U.S. tax law
"Options backdating: The latest U.S. corporate scandal involves executives falsifying the dates on stock options. A series of reviews in Canada is starting to reveal worrisome patterns," by Janet McFarland and Paul Waldie, The Globe and Mail, January 12, 2006 --- Click Here
In the spring of 2001, the two founders and co-chief executive officers of Research In Motion Ltd. were each granted 100,000 stock options. Back then, the company relied heavily on stock options for its compensation, and often granted its executives 100,000 options at a time.
The timing was fortuitous for the executives. RIM's share price was $33.60 on April 2 when the options were granted -- its lowest point so far that year and its lowest level since the previous May, almost a year earlier.
By the time investors learned of the grant when it was disclosed publicly on June 8, the share price had climbed to $50, an increase of $16.40. That means within five weeks of the grant date, each CEO already had seen a gain of $1.64-million in the value of his options.
It wasn't the first time RIM had granted its CEOs options before a healthy climb in the company's share price. In 1998 and 1999, RIM granted options at a particularly low point, just prior to an increase in the share price.
How did this good luck come about?
This is the question being pondered by investors and regulators. The company itself has launched an internal review of its past stock option grants. RIM is not saying anything about what it is specifically examining, but co-CEO Jim Balsillie has said that RIM is "in the same position as a lot of other companies" these days.
Canadian companies haven't been drawn into the stock option backdating scandal that has swept through the United States, where regulators have launched more than 180 investigations of backdating cases, and many top executives have been forced to resign in disgrace.
But legal and accounting experts believe Canada will not remain immune to the scandal. They say many Canadian companies have quietly launched internal reviews of their options practices to determine whether they have scandals lurking in their corporate closets. And while Canada had tougher rules for options than the U.S., these same experts believe they do not prevent options backdating.
Backdating involves manipulating the date that stock options are granted to executives. Normally options are granted at the price of the company's stock that day. That means the options only have value if the share price climbs in the future. Many companies, including RIM, don't allow executives to cash out options right away, often making them wait several years.
Companies involved in backdating use the benefit of hindsight to look back and choose a date when their share price was low, then falsely claim that the options were granted on that date. It's as if a participant in a hockey pool could retroactively pick winners of games after they were played.
A Report on Business review of option grants to CEOs at more than 30 large Canadian companies between 1997 (when company filings were first available electronically) and 2005 found numerous examples of especially well-timed option grants just before an increase in the company's share price. But it is hard to draw conclusions from individual examples because an outsider cannot easily determine which cases were lucky timing and which, if any, were manipulation.
Some studies have suggested there is a problem in Canada based on a broader market review. Independent analysis firm Veritas Investment Research, for example, looked at all companies comprising the S&P/TSX 60 index and examined their option grants between 2003 and 2006. It concluded option timing "is alive and well in Canada," with stock prices over all tending to drop toward the date of option grants and climb afterward.
University of Manitoba economists have done a more detailed review of the same period, examining 5,644 options granted to senior executives by companies listed in the S&P/TSX 60 between June, 2003, and October, 2006.
According to a preliminary review of the data, "the evidence is suggestive of the occurrence of backdating in Canada," the researchers found.
"We expected to find nothing with that kind of data, and the fact that we found something is sort of like, wow," said Lindsay Tedds, an assistant professor who led the study. Prof. Tedds said the results don't confirm that backdating is necessarily occurring, but she added: "There's something going on. We didn't expect to find much of a pattern in this aggregate data."
Continued in article
The HealthSouth Settlement Does Not Include Ernst & Young
From The Wall Street Journal Accounting Weekly Review on November 10, 2006
TITLE: UnitedHealth
Expects Probe to Result in
'Greater' Charges
REPORTER: Steve Stecklow and
Vanessa Fuhrmans
DATE: Nov 09, 2006
PAGE: B1
LINK:
http://online.wsj.com/article/SB116299996219517252.html?mod=djem_jiewr_ac
TOPICS: Accounting,
Accounting Changes and Error
Corrections, Sarbanes-Oxley
Act, Securities and Exchange
Commission, Stock Options
SUMMARY: "UnitedHealth Group Inc. said it would have to take charges related to its backdated stock options that will be 'significantly greater' than its previous estimates and expects the charges to impact more than 10 years of previously reported earnings."
QUESTIONS:
1.) Describe the options
backdating scandal that has
developed since March, 2006.
If you are unfamiliar with
the issue, you may click on
the link for "Perfect
Payday: Complete coverage"
on the left hand side of the
on-line article.
2.) For how long has options backdating been going on at UnitedHealth? Have the accounting requirements remained the same throughout that period of time? Summarize the required accounting and other financial reporting practices for executive and employee stock options over the last 10 years.
3.) Suppose that, once UnitedHealth finishes its review, the restatement of earnings nearly doubles to $500 million and that the restatement applies equally to each of the preceding 10 years. What accounting entry must be made to correct this $500 million error? What will be the ultimate impact on each year's earnings and on stockholders' equity at the end of each year? How will this correction be disclosed? In your answer, cite the accounting standards which require the treatment you present.
4.) Click on "Read the full text" of UnitedHealth's Nov. 8 filing with the SEC on the right-hand side of the on-line article. What Form number did UnitedHealth file? Summarize the implications of the depth of the options backdating problem found at this company.
5.) Refer to the related article. What role does the Public Accounting Oversight Board fill in assisting accountants to audit companies' accounting for stock options?
Reviewed By: Judy Beckman, University of Rhode Island
--- RELATED ARTICLES ---
TITLE: Guidelines Set for
How to Audit Stock Options
REPORTER: Siobhan Hughes
PAGE: A10 ISSUE: Oct 18,
2006
LINK:
http://online.wsj.com/article/SB116114078518696161.html?mod=djem_jiewr_ac
Bob Jensen's threads on accounting for employee stock options are at http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
"HealthSouth
Agrees to $445 Million
Settlement,"
AccountingWeb, October
2, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102629
HealthSouth Corp. announced on Wednesday that it will pay $445 million to settle several lawsuits that were filed against the company and some of its former directors after an accounting scandal.
HealthSouth will pay $215 million in common stock and warrants, and its insurance carriers will pay $230 million in cash, the company said. Also, federal securities class-action plaintiffs will get 25 percent of any future judgments obtained by or on behalf of HealthSouth regarding certain claims against fired CEO Richard Scrushy, former auditors Ernst & Young, and the company’s former investment bank, UBS. Each party remains a defendant in the derivative actions and the federal securities class actions.
A judge must approve the settlement, which is nearly the same as a preliminary settlement that was reached in February.
"This settlement represents another significant milestone in HealthSouth's recovery and is a powerful symbol of the progress we have made as a company," said HealthSouth President and CEO Jay Grinney. HealthSouth, the Birmingham, Ala.-based rehabilitation and medical services chain, does not admit any wrongdoing in the settlement, nor does any other settling defendant, the company said.
The settlement does not include Ernst & Young, UBS, Scrushy or any former HealthSouth officer who entered a guilty plea or was convicted of a crime in connection with the company's financial reporting activities ending in March 2003.
Scrushy and more than a dozen top executives were accused of recording as much as $2.7 billion in bogus revenues on the company's books over six years. UBS and Ernst & Young have denied knowing about the fraud. Last year, Scrushy was acquitted of all criminal charges in the fraud. He was convicted of conspiracy, bribery and mail fraud charges in a separate government corruption trial.
Scrushy
to Pay HealthSouth $31
Million
Richard
M. Scrushy, founder of the
HealthSouth Corporation, has
agreed to pay the company
$31 million as part of a
settlement of litigation
over his bonuses and legal
fees. Mr. Scrushy dropped a
lawsuit seeking $21 million
for legal fees after
HealthSouth agreed to credit
that amount against the $52
million he owed for inflated
bonuses, said Teresa
Tomlinson, one of his
lawyers. HealthSouth ousted
Mr. Scrushy in 2003 after
auditors uncovered a $2.7
billion accounting fraud at
the chain of rehabilitation
centers.
"Scrushy to Pay HealthSouth
$31 Million," The New
York Times, November 30,
2006 ---
http://www.nytimes.com/2006/11/30/business/30health.html
Bob Jensen's threads on the HealthSouth Corp. fraud are at http://www.trinity.edu/rjensen/Fraud001.htm#Ernst
How dominant
shareholders screw the small
investors
What matters, though, is
that the non-family
shareholders have not fully
benefited from deals over
the years. Moreover, because
of these transactions,
investors have lost
influence over their company
to a dominant shareholder.
In essence, the Bouygues'
financial cunning enabled
the family to acquire stakes
in companies that arguably
should have been entirely in
the hands of Bouygues SA.
But the dealing was
extremely subtle; any
ordinary investor living
through the drawn-out
creation of the Bouygues
family's stake would have
found it almost impossible
to follow. This raises a
broader lesson. Investors
battered by scandals over
stock-options and golden
parachutes sometimes look to
family-run companies for
salvation. Although
professional managers, with
the advantages of time and
inside knowledge, can run a
business to suit their own
interests, family
owner-managers are often
thought to be less prone to
such “agency risk”. Yet the
story of Bouygues SA
suggests that family
capitalism, so common in
continental Europe, can
sometimes backfire as much
as any share-option scheme.
"Creative construction,"
The Economist, November
30, 2006 ---
http://www.economist.com/business/displaystory.cfm?story_id=8348645&fsrc=nwlbtwfree
Skilling Sentenced to
24 Years plus Four Months:
Club Fed is Easier Than
State Prison, But Very Early
Paroles Are Less Likely
Oct-27-2006 - Former Enron
Chief Executive Officer
(CEO) Jeffrey Skilling was
sentenced last Monday to 24
years and four months in
prison for his role in the
corporate accounting scandal
that gave its name to an
era. The Securities and
Exchange Commission (SEC)
announced that it would
begin distributions to
WorldCom investors from the
Fair Fund. And while the
Enron and WorldCom corporate
accounting scandals set the
stage for congressional
action and passage of the
Sarbanes-Oxley Act (SOX) in
2004, criminal prosecutions
in these cases have not
lessened the SEC’s work
load. The current stock
options backdating scandal
threatens to keep the SEC
occupied for years. U.S.
District Court Judge Sim
Lake denied bond while
Skilling appeals his
sentence and ordered him to
home confinement with an
ankle monitor, the
Associated Press reports.
Judge Lake has recommended
that Skilling be sent to a
federal facility in Butner,
North Carolina. There is no
parole in federal
sentencing, but like Bernie
Ebbers, former Chief
Executive Officer of
WorldCom who is serving a
25-year sentence, Skilling
could get two months a year
taken off for good behavior.
AcountingWeb, October
27, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102732
Bob Jensen's threads on the Enron accounting scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm
The Causey of It All --- At Long Last
Of all the Enron accounting executives (Fastow was the CFO who knew epsilon about accounting) I wanted Rick Causey sent up river. Causey was the Chief Accounting Officer who worked out most of the accounting fraud and was the closest conspirator with David Duncan, Andersen's manager of the less-than-independent audit. Causey mysteriously was not called on to testify in the trials of Lay and Skilling, purportedly because he was "not a rat." It appears that he was a bit more of a rat than previously reported.
"Ex-Enron Officer Given 5½ Years in Prison," The New York Times, November 16, 2006 --- http://www.nytimes.com/2006/11/16/business/16enron.html
Richard A. Causey, the last of the top Enron executives to learn his punishment, was sentenced Wednesday to five and a half years in prison for his role in the corporate accounting scandal.
Mr. Causey, 46, the company’s former chief accounting officer, pleaded guilty in December to securities fraud, two weeks before he was to be tried along with the founder of Enron, Kenneth L. Lay, and the former chief executive, Jeffrey K. Skilling, on conspiracy, fraud and other charges related to the company’s collapse.
Mr. Causey had agreed to serve seven years in prison. Prosecutors said they could have recommended it be reduced to five if they were pleased with his cooperation.
Mr. Causey also agreed to pay $1.25 million to the government and to forfeit a claim to about $250,000 in deferred compensation as part of his plea deal. Unlike some others at Enron, he did not skim millions of dollars for himself.
Prosecutors dropped their plan to seize Mr. Causey’s home, a $950,000 two-story red-brick house in a Houston suburb.
Mr. Causey had faced more than 30 counts of conspiracy, fraud, insider trading, lying to auditors and money laundering.
In his guilty plea, made in Federal District Court, he admitted making false public findings and statements.
He did not testify in the Lay-Skilling trial this year, though he was on the defense witness list.
Mr. Skilling and Mr. Lay were convicted in May of conspiracy and fraud. Mr. Lay’s convictions were wiped out with his July death from heart disease. Mr. Skilling was sentenced last month to more than 24 years in prison.
Andrew S. Fastow, Enron’s former chief financial officer, whose schemes helped doom the company, was sentenced in September to six years.
Mark E. Koenig, Enron’s former director of investor relations, and Michael J. Kopper, an Enron managing director and Mr. Fastow’s top aide, are scheduled to be sentenced Friday.
Enron collapsed into bankruptcy in December 2001 after years of accounting tricks could no longer hide billions in debt or make failing ventures appear profitable.
Bob Jensen's threads on Rick Causey are at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Why white collar crime
pays for Chief Enron
Accountant:
Rick Causey's fine for
filing false Enron financial
statements: $1,250,000
Rick Causey's stock sales
benefiting from the false
reports: $13,386,896
That averages out to
winnings of $2,427,379 per
year for each of the five
years he's expected to be in
prison
You can read what others got
at
http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales
Nice work if you can get
it: Club Fed's not so bad
if you earn $6,650 per day
plus all the accrued
interest over the past 15
years.
2006 Update on
WorldCom Fraud
U.S. Judge Denise Cote of
the U.S. Court for the
Southern District of New
York said the distribution
should be made "as soon as
practicable." More than one
dozen investment banks,
including Citigroup Inc. and
JPMorgan Chase & Co., agreed
to pay about $6.15 billion
to resolve allegations that
they helped WorldCom sell
bonds when they should have
known the phone company was
concealing its true
financial condition. The
remaining balance from
available settlement funds
will continue to accrue
interest until other claims
are processed and disputed
claims are resolved, Cote
said in her four-page order.
"Judge OKs $4.52 bln payout
to WorldCom investors,"
Reuters, November 29,
2006 ---
Click Here
2005
Update on WorldCom Fraud
Former WorldCom Investors
can now claim back some of
the billions of dollars they
lost in a massive accounting
fraud, after a federal judge
approved legal settlements
of "historic proportions."
The deal approved Wednesday
by U.S. District Judge
Denise Cote, will divide
payments of $6.1 billion
among approximately 830,000
people and institutions that
held stocks or bonds in the
telecommunications company
around the time of its
collapse in 2002.
Larry Neumeister, "Judge OKs
$6.1B in WorldCom
Settlements," The
Washington Post,
September 22, 2005 ---
http://snipurl.com/WorldcomSettlement
University of
California gets a settlement
from Citigroup as part of
its losses in the WorldCom
accounting scandal
Citigroup has agreed to pay
the University of California
more than $13 million
to
settle a lawsuit over
liability for the
university’s investments in
WorldCom, a company that
collapsed in 2002. The
university sued over
inaccurate analyses of
WorldCom, which led UC to
pay more than it would have
otherwise to buy stock in
the company.
Inside Higher Ed,
April 7, 2006 ---
http://www.insidehighered.com/news/2006/04/07/qt
The WorldCom audit by Andersen is arguably the worst audit in history. Bob
Jensen's threads on the WorldCom scandal are at
http://www.trinity.edu/rjensen/FraudEnron.htm#WorldCom
"PROFILE OF A FRAUDSTER," by Lisa Eversole, LSU Accounting Faculty --- http://www.bus.lsu.edu/accounting/faculty/lcrumbley/fraudster.html
General characteristics of those who commit occupational fraud:
- Male
- Intelligent
- Egotistical
- Inquisitive
- Risk taker
- Rule breaker
- Hard worker
- Under stress
- Greedy
- Financial need
- Disgruntled or a complainer
- Big spender
- Overwhelming desire for personal gain
- Pressured to perform
- Close relationship with vendors/suppliers
Jensen Comment
I think Lisa is excluding
certain types of fraud such
as welfare fraud that is
most often perpetrated by
females. Among persons who
fit the Lisa's above profile
there are, in my viewpoint,
two types persons. The first
is someone who does not
commit fraud unless an
opportunity arises somewhat
serendipitously such as
fraud opportunities that
arose because of the
billions being spent by
government and by private
citizens in the wake of
hurricane Katrina. This type
of person is heavily
influenced by the amount
involved and easy of getting
away with fraud in a
particular circumstance.
This person does not always
fit neatly into Lisa's
profile.
The second type of fraudster is someone who deliberately seeks out opportunities in almost any circumstance. The latter type of fraudsters seem to get thrills apart from monetary rewards. It is in fact a game in which these lowlifes get their kicks win or lose. Some hackers get their thrills this way without intent to cheat or cause great damage.
The problem with profiling is that when using Lisa's list above, this is more likely to be the profile of a hard driving corporate executive who has no intention of committing fraud as well as the an executive intent of committing fraud.
There is also a huge
follow-the-herd mentality
among fraudsters who are not
by nature intent on becoming
fraudsters. If others are
seemingly getting away with
it, there's a huge
temptation to go with the
flow. I think the huge KPMG
tax fraud (the largest
criminal tax fraud in
history) illustrates an
example of where some KPMG
employees simply commenced
to follow along when their
colleagues were having such
seeming success at cheating
the IRS.
"Prosecutors in KPMG Tax
Shelter Case Offer to Try 2
Groups of Defendants
Separately," Lynnley
Browning, The New York
Times, October 5, 2006
---
Click Here
Last year, 16 former KPMG employees, as well as a lawyer and an outside investment adviser, were indicted by a federal grand jury in Manhattan on charges that they conspired to defraud the Internal Revenue Service by creating and selling certain questionable tax shelters.
The proposal to split the group comes after Judge Kaplan raised concerns about some prosecutorial tactics in the complex case. KPMG narrowly averted criminal indictment last year over certain questionable shelters and instead reached a $456 million deferred-prosecution agreement. Judge Kaplan has criticized prosecutors for pressuring KPMG to cut off the payment of legal fees to the defendants.
His concerns how appear to extend to the indictments of the defendants.
According to a transcript of the hearing on Tuesday, Judge Kaplan said: “The government indicted 18 people knowing that the effect of doing that would be to put economic pressure on people, along with whatever else puts pressure on people to cave and to plead, because they can’t afford to defend themselves and because perhaps there are other risks involved in a joint trial. That is the patent reality of this case.”
A representative for the United States attorney’s office in Manhattan did not have a comment on the letter yesterday.
The letter, which was not filed under seal but did not appear on the court’s docket, was confirmed by two persons close to the proceedings.
Under the proposal, the junior defendants would include Jeffrey Eischeid, the rising star who was in charge of KPMG’s personal financial planning division; John Larson, a former KPMG employee who set up an investment boutique that sold shelters; David Amir Makov, a onetime Deutsche Bank employee who later worked with Mr. Larson’s investment boutique, Presidio Advisory Services; and Gregg Ritchie, a former partner; among others.
The senior defendants would include Jeffrey Stein, a former vice chairman who was the No. 2. executive at the firm; John Lanning, a former vice chairman in charge of tax services; Richard Rosenthal, a former chief financial officer; Steven Gremminger, a former associate in-house lawyer; Robert Pfaff, a former KPMG partner who worked with Mr. Larson to set up Presidio Advisory Services; David Greenberg, a former senior tax partner; and Raymond J. Ruble, a former lawyer at Sidley Austin Brown & Wood; among others.
Lawyers for the defendants maintain that their clients did nothing illegal, while prosecutors contend that they created and sold tax shelters, some involving fake loans, that deprived the Treasury of $2.5 billion in tax revenue.
Bob Jensen's threads on this and other KPMG litigations are at http://www.trinity.edu/rjensen/fraud001.htm#KPMG
Perhaps even better examples are the thousands of corporate executives who recently went along with backdating option frauds because these appeared to be such an easy way to steal enormous amounts of money in options timing schemes that were being used so commonly throughout the corporate world. The latter fraudsters did not necessarily fit Lisa's profile very well. They simply followed the heard --- http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
The Enron stuff is
very sexy, but that type of
fraud was not pervasive.
Backdatings of executive
stock option frauds are
another matter.
From Jim Mahar's blog on September 22, 2006 --- http://financeprofessorblog.blogspot.com/
The sleuth who exposed (stock option) backdating scandal
I always like to see finance
professors in the news!
Philadelphia Inquirer |
09/21/2006 | Sleuth who
exposed backdating scandal:
A few "look-ins":
"From his second-floor
office at
"He's uncovered a scandal
that has just mushroomed,"
said Adam C. Pritchard, a
former attorney at the
Securities and Exchange
Commission and now a law
professor at the
and later in the article:
"'The Enron stuff is very
sexy, but that type of fraud
was not pervasive,' said
Andrew Metrick, a professor
of finance and corporate
governance at the
Some Firms Specialize in
Pre-employment Background
Checks ---
http://www.super-solutions.com/criminalbackgroundchecks.asp
Bureau of Justice Statistics --- http://www.ojp.usdoj.gov/bjs/
FBI Crime Statistics --- http://www.fbi.gov/ucr/ucr.htm
White House Crime
Statistics ---
http://www.whitehouse.gov/fsbr/crime.html
(Many links are provided
here)
State Crime Statistics from 1960 - 2005 --- http://www.disastercenter.com/crime/
Sourcebook of Criminal Justice Statistics --- http://www.albany.edu/sourcebook/
White Collar Crime
Pays Big Even If You Get
Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
Bob Jensen's threads
on consumer fraud are at
http://www.trinity.edu/rjensen/FraudReporting.htm
Association of Certified Fraud Examiner's ACFE’s New Fraud Risk Assessment Tool to Aid in Detection, Prevention --- http://www.prweb.com/releases/2006/9/prweb443747.htm
Businesses, agencies, executives, anti-fraud professionals and private practitioners will soon have an effective new weapon in the fight against fraud - the ACFE's Fraud Risk Assessment Tool.
Austin, TX (PRWEB) October 2, 2006 -- Businesses, agencies, executives, anti-fraud professionals and private practitioners will soon have a new weapon in the fight against fraud. The Association of Certified Fraud Examiners (ACFE), the leading provider of anti-fraud training and education worldwide, announced today the acquisition of the Internal Fraud Vulnerability Assessment Tool.
Created by Larry Cook, CFE, president of Cook Receiver Services Inc in Lenexa, Kansas, the IFVAT has assisted users in the US, Canada, and United Kingdom as a web application. The ACFE has enhanced the IFVAT application to develop a comprehensive Fraud Risk Assessment Tool that empowers business owners and private practitioners to assess any organization’s risk factors and vulnerabilities to fraud.
“All organizations have a risk of internal fraud – any organization is susceptible,” Cook said. “A fraud risk assessment is the most effective measure an organization can take to identify its vulnerabilities and make informed, cost-effective decisions on how to prevent and detect employee theft and fraud.”
The Fraud Risk Assessment Tool uses a standard risk assessment methodology to identify an organization's vulnerabilities to fraud; the threats to the organization's assets; the probability of a fraud occurrence in the organization; and the impact of any loss event to the organization. The tool assists the user with developing cost-effective recommendations for measures to mitigate the risks from employee theft and fraud.
Cook created the program after recognizing the need for a standard, comprehensive fraud assessment tool, especially for small-to-mid-size organizations, Certified Fraud Examiners (CFEs) and anti-fraud practitioners. Cook said that to hire an accounting firm for such a risk assessment can cost “five figures and up.” The Fraud Risk Assessment Tool provides a more cost-effective way to address the crucial need for fraud detection and prevention.
The Fraud Risk Assessment Tool is also simple to understand. The application can be used by business owners, auditors, accountants, or loss prevention personnel to self-assess the organization's vulnerabilities to employee theft and fraud. An employee with knowledge of the organization's accounting system and internal controls can complete the assessment. Additionally, the Fraud Risk Assessment Tool is even more effective when applied by an anti-fraud professional who can assist in developing effective measures to reduce, prevent, and detect fraud.
About the ACFE
The ACFE is the world's premier provider of anti-fraud training and education. Together with more than 38,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession. Certified Fraud Examiners (CFEs) on six continents have investigated more than 2 million suspected cases of civil and criminal fraud. www.ACFE.com
Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm
Question
Did the Russian's cheat in
world chess tournaments?
"Cheating in world chess championships is nothing new, study suggests," PhysOrg, October 10, 2006 --- http://physorg.com/news79726823.html
World Chess Championship matches now taking place in Kalmykia, Russia, were suspended late last month amid allegations that Russian chess master Vladimir Kramnik used frequent bathroom breaks to cheat in his match with Bulgarian opponent Veselin Topalov. When play resumed, new allegations surfaced charging that Kramnik's moves seem suspiciously similar to those generated by a computer chess program.
While it's doubtful that these allegations will be proven, new research from economists at Washington University in St. Louis offers strong evidence that Soviet chess masters very likely engaged in collusion to gain unfair advantage in world chess championships held from 1940 through 1964, a politically volatile period in which chess became a powerful pawn in the Cold War.
"We have shown that such collusion clearly benefited the Soviet players and led to performances against the competition in critical tournaments that were noticeably better than would have been predicted on the basis of past performances and on their relative ratings," conclude study co-authors, John Nye, Ph.D., professor of economics, and Charles Moul, Ph.D., assistant professor of economics, both in Arts & Sciences at Washington University.
"The likelihood that a Soviet player would have won every single candidates tournament up to 1963 was less than one out of four under an assumption of no collusion, but was higher than three out of four when the possibility of draw collusion is factored in," the co-authors wrote.
Continued in article