Accounting Scandal Updates and Other Fraud Between October 1 and December 31, 2007
Bob Jensen at Trinity University

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

Other Documents

• Scandal Updates --- http://www.trinity.edu/rjensen/fraud.htm#ScandalUpdates  

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

• What's Right and What's Wrong With SPEs, SPVs, and VIEs --- http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm

• Bob Jensen's Summary of Suggested Reforms --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

• Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 

• Electronic Business Controversies --- http://www.trinity.edu/rjensen/ecommerce/000start.htm

• Bob Jensen's Bottom Line Commentary --- http://www.trinity.edu/rjensen/FraudConclusion.htm 

• The Virginia Tech Overview:  What Can We Learn From Enron? --- http://www.trinity.edu/rjensen/fraudVirginia.htm 

• Fraud References --- http://www.trinity.edu/rjensen/fraud.htm#References 

• Fraudulent Dealer Tricks:  An Interactive DHTML Illustration ---  http://www.trinity.edu/rjensen/FraudDealerTricks.htm 
  This includes a summary of ten unethical tricks of the trade by automobile dealers.

• Selected Scandals in the Largest Remaining Public Accounting Firms --- http://www.trinity.edu/rjensen/fraud.htm#others 

• Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

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

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

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

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

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

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

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

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

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

There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud.
Michael Lewis, "The Evolution of an Investor," Blaine-Lourd Profile, December 2007 ---
http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile#page3
As quoted by Jim Mahar in his Finance Professor Blog at http://financeprofessorblog.blogspot.com/

Questions
What is one of the most frightening thing about universal health care patterned after Medicare/Medicaid at all ages?

Answer
Increased opportunity for massive fraud.

Link forwarded by Rose
"Blatant Medicare fraud costs taxpayers billions Officials say outrageous fraud schemes are 'off the charts'," by Mark Potter, MSNBC, December 11, 2007 --- http://www.msnbc.msn.com/id/22184921/from/ET/

On an FBI undercover tape, the fraud was plain to see: A patient came to a South Florida AIDS clinic, signed some papers, walked into an office and was handed $150 in cash. She politely thanked the workers and left, her visit to the doctor finished without ever receiving any treatment.

According to records seized by investigators, the office staff (who was assured of the patient's cooperation) used her name to fraudulently bill Medicare for a list of expensive treatment and medications.

Law enforcement officials said it's just one of the many widespread, organized and lucrative schemes to bilk Medicare out of an estimated $60 billion dollars a year — a staggering cost borne by American taxpayers.

Officials say the array of criminals running these schemes are stealing blatantly from the social safety net that cares for 43 million seniors and the disabled, and along the way are hurting honest patients, physicians and legitimate businesses.

"These people have absolutely nothing to do with health care," said Kirk Ogrosky, a prosecutor with the U.S. Justice Department. "They're thieves that would be committing other types of crimes if they weren't committing Medicare fraud."

Outrageous fraud called "off the charts" While Medicare fraud is a national scourge, found primarily in large urban areas, federal authorities said the very worst of it these days is in South Florida— particularly in Miami-Dade County.

Most of these schemes, they said, are found in the cities of Miami and Hialeah, where they are often concentrated in parts of the Cuban immigrant community.

After visiting the region, and seeing the extent of the fraud, Michael Leavitt, the U.S. Secretary of Health and Human Services, said, "In a decade and a half of public service, this was the most disheartening, disgusting day I have ever spent. We have to fix this."

A recent report by the inspector general for the Department of Health and Human Services noted that 72 percent of the Medicare claims submitted nationwide for HIV/AIDS treatment in 2005 came from South Florida alone. That percentage is of great concern to authorities, since only eight percent of the country's HIV/AIDS Medicare beneficiaries actually live in South Florida, a clear indication that the level of fraud was, as one official put it, "off the charts."

To attack the fraud, the Justice Department this year set up a strike force at a remote office park near Miami, and in just six months prosecutors filed 74 cases charging 120 people with allegedly trying to steal $400 million from Medicare.

While officials claimed the concentrated law enforcement efforts led to a $1.4 billion drop in Medicare billing in the area (another clear indication of the phony nature of many of the earlier claims), they said they have still barely scratched the surface of the fraud schemes involving bogus clinics, fake medicines, and illegitimate medical supply companies.

"The problem is far from solved," said Timothy Delaney, a supervisor for the FBI's Miami office. "For every one owner we arrest, another one pops up, maybe even two, tomorrow. It's so lucrative that we have yet to turn the tide."

Illegal billing for non-existent medical equipment One of the most common schemes is the illicit billing for DME, or durable medical equipment, such as oxygen generators, breathing machines, air mattresses, walkers, orthopedic braces and wheelchairs. This scheme involves billions of dollars a year in illegal claims.

Raul Lopez, the president of the Florida Association of Medical Equipment and Services and the director of a legitimate medical supply company, said the fraud is so widespread it hurts the many valid DME companies, which are struggling to compete.

"We're here providing services to patients that need healthcare services, and as a result of the fraud our industry is suffering enormously," he said.

Unlike real DME companies, which have showrooms, warehouses, public offices, trained staff and professional record-keeping, the fraudulent companies are usually shell companies with shadowy business practices, hidden owners, and tiny, locked offices which are only there to create the illusion of legitimacy. They rarely have any medical products for actual sale or delivery.

"They're lined up in hallways one after the other, office after office with a locked door, no foot traffic, no employees, no medical equipment," said Ogrosky. "We're talking about billing that goes up in the tens of millions of dollars for places that don't exist."

FBI agents looking for suspected front-companies that Medicare records show are actively billing rarely find much to search. "We often don't see places. We find vacant lots, we see mailboxes, we see an office suite shared by 30 companies. We're not finding legitimate companies where we can go in and do a search warrant," said Delaney.

On a recent trip to some shopping centers and office buildings in the Miami area, FBI agents Brian Waterman and Christopher Macrae knocked on the doors of several purported medical supply companies. Most of the offices were locked during business hours, with no signs of any activity. Calls to the offices went unanswered.

Referring to one of the closed offices, Waterman said, "The amount of money in dollars that this company is billing for in the last month are close to a half million dollars. We're just trying to find out what they're billing for and what they're doing."

Continued in article

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

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

Banking Online Safer Than Checks:  Why you need a Uni-Ball pen!
Phoenix is the city most at risk for identity fraud, according to the Identity Theft Resource Center. Their new survey shows writing a check is not safer than banking online because of a scam called "check washing." The thief erases the ink on a check, fills in whatever he wants, and cleans out your bank account. But never fear. Where there's a scam like check fraud, there's sure to be a company with a profitable solution. Uni-Ball makes a pen filled with a specially formulated ink that can't be washed off. It comes in several elegant designs, for the sophisticated check-writer.
"Banking Online Safer Than Checks," NPR, October 5, 2007 --- http://www.npr.org/templates/story/story.php?storyId=15027414
Jensen Comment
It might be a good idea to simply carry a Uni-Ball or similar "unwashable" ink pen with your check book.

The Uni-Ball home page is at http://www.uniball-na.com/
I think these pens or comparable pens are now carried in most office supply stores.

Pensions and Palm-Greasing
What do you call $154 billion in pension-fund cash that is subject to the investment whim of ambitious politicians? If you answered "an opportunity for corruption," perhaps you're a cynic, or a priest. Or maybe you simply live in New York. If it's the latter, you may be following the news about New York State's public-employee pension system. Former Comptroller Alan Hevesi is alleged to have directed payments to his political consultant, Hank Morris, for arranging investment opportunities for the $154 billion fund. The fees, currently under investigation by the state Attorney General and the Albany County District Attorney, run to the millions of dollars. But New York's public pensioners are, in a sense, fortunate. Their fund's performance in recent years has been good. And at least on paper, the fund has enough money to cover its obligations to current and future retirees despite any political palm-greasing.
"Pensions and Palm-Greasing," The Wall Street Journal, October 3, 2007 --- http://online.wsj.com/article/SB119137865088247317.html

Nigerian Fraud Email Gallery --- http://www.potifos.com/fraud/

 Who are these perpetrators of Nigerian frauds?
A good cyber-scammer can make up to $7,000 a month - 22 times the average Nigerian wage - from milking gullible Westerners. His controlling boss, with an army of trained scammers under his wing in both America and Europe, will be raking in many times more. Though the fraud is apparent to many, some people think they have stumbled on a once-in-a-lifetime deal, and scammers can string them along for months with mythical difficulties. Some victims eventually contribute huge sums of money to save the deal when it is suddenly "at risk". Samuel is 19, handsome, bright, well-dressed and ambitious. He has a special flair for computers and until he quit the game last year was one of Festac's best-known cyber-scam champions.
Robyn Dixon, "Run-down town where scammers target the West," Scotsman, October 30, 2005 --- http://news.scotsman.com/international.cfm?id=2168172005

Paygo:  Nancy Pelosi's Fraud

"Democrats are committed to ending years of irresponsible budget policies that have produced historic deficits. Instead of compiling trillions of dollars of debt onto our children and grandchildren, we will restore pay-as-you-go budget discipline," Speaker Nancy Pelosi, December 12, 2006. Well, as Emily Littela, the half-witted Gilder Radner character on Saturday Night Live, would have put it: "Never mind." Last week Congressional Democrats formally renounced their ballyhooed budget pledge to offset any new tax cuts with other tax increases or spending cuts. We're delighted to see this false promise go, but there's a larger lesson in this failure for the tax and spending battles of 2008. Senate Democrats gave up on "paygo," as it's called, when they realized they lacked the votes to offset the $50.6 billion cost of protecting more than 20 million middle-class taxpayers from getting whacked by the Alternative Minimum Tax this year. They've spent the year floating all kinds of tax increases to make up the difference. But in the end they passed an AMT relief bill without a penny to pay for it. Paygo is now pay gone.
"The Paygo Farce:  Democrats admit it was all a big confidence game," The Wall Street Journal, December 10, 2007 --- http://www.opinionjournal.com/editorial/feature.html?id=110010970
Jensen Comment
In fairness, the problem was almost as bad with the GOP-led Congress under George W. Bush. Bush will go down as the biggest spendthrift president in history until (if?) the Democrats win the presidency in 2008. Then the bottom will fall out of any hope for a balanced budget.

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

Forwarded by Mindy Brent

I'm posting this to my Fraud Updates because the daily level of the fees appears fraudulent to me!
"Rental-Car Customers Criticize Extra Fees For Changeless Tolls," NBC Dallas, December 6, 2007 --- http://www.nbc5i.com/news/14787183/detail.html

Some rental-car companies charge customers extra fees when they drive through the new changeless tollbooths Highway 121 and the Dallas North Tollway.

Adriana Martinez-Holtz rented a car in Dallas last summer when she was in town for a friend's birthday party.

She made three trips down the Dallas North Tollway, passing through the changeless toll plaza at Wycliff Avenue. There is no place to deposit money at the toll. Cameras take pictures of license plates, and the tollway authority mails a bill to the car owner.

The bill goes to the rental-car company if drivers pass through.

When Martinez-Holtz returned home to San Antonio, she received a bill in the mail from a collection agency hired by Advantage Rent-A-Car.

Advantage wanted payment for three 75-cent tolls, plus a $25 late-payment penalty from the tollway authority and a $40 service charge for each time she passed through a tollbooth.

Her total bill was $197.25

"As a matter of fact, it was more than the cost of the rental at this point," she said.

Continued in article

Army knew of cheating on tests for eight years
For eight years, the Army has known that its largest online testing program - which verifies that soldiers have learned certain military skills and helps them amass promotion points - has been the subject of widespread cheating. In 1999, testing officials first noticed that soldiers were turning in many tests over a short period, something that would have been almost impossible without having obtained the answers ahead of time. A survey by the testing office showed that 5 percent of the exams were probably the subject of cheating. At the time, soldiers were filing roughly 200,000 exams per year. But it wasn't until June of this year, when an Army computer contractor complained about a website providing free copies of completed exams, that the Army acknowledged that it had a problem.
"Army knew of cheating on tests for eight years: Hundreds of thousands of exam copies used, Globe probe finds," Boston Globe, December 16, 2007 --- http://www.boston.com/news/nation/articles/2007/12/16/army_knew_of_cheating_on_tests_for_eight_years/

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

New Scam on eBay and Craig's List:  Overpayments
When is a “cleared check” not necessarily a good check?

"eBay, Craig's List Users Targeted in New Scam," by Brian Ross, The Blotter-ABC, October 2, 2007 --- http://www.freerepublic.com/focus/f-news/1906412/posts

Selling something on eBay or Craig's List? Watch out for who's signing the check to buy it.

Tens of thousands of Americans are being targeted by the latest scam sweeping America, many of them targeted online through Craig's List and eBay.

Scammers overpay with counterfeit checks that look so good most banks accept them. It's only after victims have sent the overpayment amount back to the scammers that they learn the checks are no good, and they are out the money.

U.S. Postal Service officials say they have seized more than $2 billion worth of high-quality counterfeit checks coming from Nigeria, England, the Netherlands and Canada.

But, they say, many more phonies are still getting through. . That's the kind of check Jill Parker, a pharmaceutical company manager in Richmond, Va., got in the mail.

Using Craig's List to rent an apartment she owned in Chicago, she was contacted by someone moving from London.

"He was going to send me a check for $25,000," she told ABC News. "I was to deduct what he owned me for the first month's rent and the security deposit, and I was to wire the balance back to his agent, who was handling his furnishing."

She took the check to her bank and called a few days later to see if it had cleared. Told that it had, Jill, as agreed upon, wired the remaining $21,000, thinking she was ahead $4,000.

"Everything looked great; everything went fine until about a week later," she said.

The bank informed her that the check was no good and had been returned not paid. And Jill, not the bank, was out the money.

American banks say they are required by law to make the money available well before a final determination is made as to whether the check is good.

"Certain funds, for example, have to be available on the day after deposit," Nedda Feddis, senior federal counsel for the American Bankers Association, told ABC News. "And the fraudsters are taking advantage of that rule."

Good Morning America Video: Phony Check Scam Hitting America There have been tragic consequences.

Chris Soens, suffering from health problems, thought she got a dose of good news in the mail when she won $90,000 in a supposed European lottery.

Once the check had been deposited and posted to her account, Chris wired back $40,000 for what she was told were fees and taxes.

When the check was discovered to be a phony, the bank told Chris she had to repay the entire amount.

Her sister, Rebecca Woodworth, says it led to suicide.

"I think she was devastated," she said. "I think she was plunged into depths of despair knowing that everything she had was gone."

The problem has grown so large that the U.S. Postal Service is launching a nationwide TV campaign starting tomorrow to warn Americans about the dangers of the bad check scam. The Postal Service has also set up a new Web site to educate the public on check fraud: www.fakechecks.org  .

Bob Jensen's threads on how not to get taken on eBay are at http://www.trinity.edu/rjensen/FraudReporting.htm#eBay

Bob Jensen's threads on Nigerian frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm#NigerianFraud

Work at Home Scams

The general pitch may be built around a sob story, a promise of lottery winnings, a foreign business offer or a work-at-home opportunity. But the bottom-line offer is the same: We'll send you a check, you cash it at your bank, and you keep a portion and send the rest back to us. Americans appear to be increasingly susceptible to such scams, according to U.S. Postal Inspection Service investigators, who yesterday announced a crackdown. They said they intercepted 540,000 checks worth more than $2.1 billion mailed to U.S. residents in the first eight months of the year. They said 77 people had been arrested in connection with the schemes -- 60 in the Netherlands, 16 in Nigeria and one in Canada. Aided by authorities in those countries and in Britain, investigators said, they had traced many of the come-ons to a shifting network of Nigerians who, with a few computers, cellphones and bank routing numbers, have been cashing in on the naivete, goodwill or complicity of Internet users.
Anita Huslin, "Crackdown Takes Aim At Check-Cashing Scams," The Washington Post, October 4, 2007, Page D02 --- Click Here

Bob Jensen's threads on Nigerian frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm#NigerianFraud
 

"Checking on Charities A growing number of online resources provide a starting point for evaluating nonprofit groups before you give," by Jaclyne Badal, The Wall Street Journal, December 10, 2007; Page R5 --- http://online.wsj.com/article/SB119679899080713433.html?mod=todays_us_the_journal_report

Here's a guide to finding -- and interpreting -- charity information on the Web.

WATCHDOG SITES

Your first stop when researching a charity should be a watchdog site. These groups offer information about nonprofits and often rate their efforts.

Remember, though, that these sites come with some important caveats. Many of them rely on information in charities' IRS returns, called Form 990s. And that information can be quite old by the time the watchdogs get it. Charities file their returns as much as 11 months after the end of the fiscal year, and then it can take months for the IRS to process the form and make it available. Meanwhile, if the charities aren't forthcoming on their IRS return, the watchdogs' data and analysis will end up skewed.

With that in mind, here's a look at some of the best information sources out there.

CharityNavigator.org, provided by the nonprofit group Charity Navigator in Mahwah, N.J., rates more than 5,000 U.S.-based charities, using information in their Form 990s. The site is free to people who register.

For an idea of how the rankings work, consider the group's take on United Way of America. The charity, which is based in Alexandria, Va., gets three stars out of four for "Efficiency," in part because 90% of its budget went to programs, and it cost only two cents for the program to raise a dollar.

The organization also gets three stars of four for "Capacity," or its ability to sustain itself over time. The group had annualized revenue growth of 21% from 2002 through 2005 and had enough working capital to operate for about eight months without any income.

If you want to look at the raw data, GuideStar.org, a product of Philanthropic Research Inc., in Williamsburg, Va., is the go-to organization for copies of a charity's Form 990. It covers 1.7 million groups and has about 3.1 million Form 990 images, many of which are available free to people who register.

The site makes money from a combination of donations and subscriber fees, so not all of the content is free. For instance, a prospective donor can see that the March of Dimes Foundation wanted to continue a $75 million education, awareness and research campaign on premature birth in 2006, and that it has more than 1,000 employees.

To get other details, such as the charity's income and assets, you need a subscription. That will run either $30 or $100 a month, depending on the depth of information you want and other factors.

Give.org, operated by the BBB Wise Giving Alliance in Arlington, Va., reports on whether the approximately 1,200 charities it has evaluated meet the alliance's 20 "Standards for Charitable Accountability." It doesn't do ratings or rankings.

The group's free reports provide information on who runs a charity and list its income, expenses, assets and sources of income. The reports also describe the group's programs; in some cases, this includes a breakdown of how much the group spent on them.

To meet the alliance's standards, organizations have to do everything from spend at least 65% of total expenses on programs to provide a clear privacy policy online. Charities that come up short will have a report on exactly where they failed.

The NAACP, for instance, fails on three standards, the site says. Its annual report doesn't include the recommended financial information, it doesn't include financial information or a recent Form 990 on its Web site, and it doesn't have a privacy policy with the recommended information on its Web site. Give.org says it was unable to evaluate six other standards, because it's waiting on an information request to the NAACP.

The NAACP says many of the requested items -- like the annual report and privacy policy -- are on the site, even if they lack the level of detail desired by the alliance. It says the group's Web disclosures are in line with its peers and that more specific information, like a copy of the Form 990, can be obtained by contacting the NAACP directly.

Moreover, an NAACP spokesman points out that each watchdog site has its own criteria and agenda, which can make it difficult for nonprofits to satisfy every set of standards. He recommends checking multiple sources to get a more accurate picture of the organization.

FIGURING IT OUT YOURSELF

So, what if the charity you're interested in hasn't been reviewed by a watchdog group?

First, get some information at the IRS site, IRS.gov. Search for Publication 78, which has a list of nonprofit groups that qualify for tax-deductible donations. Next up: Request a Form 990. The IRS return, required by most organizations with annual revenue of more than $25,000, will have much of the financial information you need.

100% of its money on programs isn't likely to have much longevity, but a program that spends too little could be more interested in enriching staffers then helping the underprivileged.

But be careful when weighing ratios, says Charity Navigator President Trent Stamp, since the expected program expenses vary depending on the work that's being done. Food banks, for instance, devote a higher portion of expenses to programs, say 90% or so. Museums, in contrast, spend about 70% of the budget on programs.

So, if you're investigating a charity, compare its numbers with those of another group that's closely related. For instance, you might compare the Committee for Missing Children in Lawrenceville, Ga., with the National Child Safety Council, since the groups do similar work and have similar revenue. You would find that the two have strikingly different spending ratios: The Committee for Missing Children spends 11% of its budget on programs and 87% on fund raising, according to IRS returns, while the National Child Safety Council spends 81% on programs and 7.8% on fund raising.

David Thelen, chief executive of the Committee for Missing Children, says the fund-raising costs seem disproportionately high because the group has to rely on pricey telemarketing. He says the group doesn't have the same cachet as larger organizations, which has made it difficult to get corporate donations or gifts from individuals that aren't solicited by a third party.

It's also important to make sure the IRS return accurately conveys the organization's behavior, and isn't full of one-time expenses. A charity may have low program spending one year because it's investing in a new computer system that is going to make the organization more productive down the road, for instance.

In the case of the Committee for Missing Children, IRS returns for the past three years show that program expenses were less than 10% of the budget in 2005 and 2004. The National Child Safety Council, by contrast, spent just 58% of the budget on programs in 2004, but the number increased to 75% in 2005 and 81% in 2006.

Mr. Thelen at the Committee for Missing Children says that while the program percentages may seem small, it doesn't change the fact that the money is going to good use. That 10% or so distributes pictures of missing children, provides literature on child recovery and connects parents with help here and abroad. Meanwhile, the National Child Safety Council says it understated program spending prior to 2005, due to a misunderstanding of IRS rules.

If the charity seems to be having an off year, call or email to find out why. The nonprofit may have a great reason. But if it answers with a fuzzy explanation or won't take the call, it may be time to move on.

Checking executive salaries, which are listed on the Form 990, can also be helpful. Donors are sometimes dismayed by what they perceive as exorbitant wages, but it's important to take the numbers in context. Many nonprofits are complex, multimillion-dollar organizations that require experienced managers -- a labor pool that isn't cheap.

If a salary seems high, check salaries at charities that are doing similar work and that are a similar size. The alarm bells shouldn't start ringing unless executive compensation is out of line with comparable organizations.

Donors who check the Form 990 may also want to look at the list of "Officers, Directors, Trustees and Key Employees" toward the middle of the form. An organization that has multiple family members on the payroll as directors, or that pays the president a nominal amount but shells out hundreds of thousands of dollars to someone in a lower-level position, deserves some extra scrutiny.

It's also a good idea to do a Web search on the organization and its officers, since the mainstream media -- along with bloggers and forum members -- often flush out problems before the IRS pulls a charity's tax-exempt status.

A short conversation with a staffer can also be helpful. Ask whether the organization has a written privacy policy that's available for review. (Sometimes nonprofits will sell the names of donors who contribute nominal amounts, say $10 or $50.) Also look into progress the organization made the previous year and check its goals for the year to come. Someone in the group should be able to answer those questions in a clear way.

SHARING THE WORK

Vetting a charity may seem daunting, or too time-consuming. But people with charitable inclinations don't have to go it alone. A number of donors are joining "giving circles." Members generally pool money and divide the research among members of the group. The idea has gained popularity in recent years, with the Forum of Regional Associations of Grantmakers in Washington identifying more than 400 giving circles in 2006, up from about 200 in 2004.

The circle investigates charities as a group and then decides how to distribute the money. In some circles, decisions are made by consensus, while others let majority rule or let individual members vote with their dollars.

Margae Diamond, an executive at a donor-advised fund in San Francisco, joined the Traveling Giving Circle to Kenya, a project of the Clarence Foundation, last year. The group went to Africa and visited six charities in six days. The International Child Resource Institute in Nairobi, Kenya, completed some of the background research, but the 19 members of the circle did plenty of reconnaissance on the ground.

They interviewed the program leaders and talked with many of the people receiving services. They also investigated conditions at the charities, which helped them spot larger needs or areas where the charity might have been looking for a quick fix.

Ms. Diamond says the group made better decisions about giving because it was able to draw on the knowledge and input of so many people. "It was very, very thorough," Ms. Diamond says. "We never stopped talking about it."

Other links to check out charities
Bob Jensen's threads on charity frauds are at http://www.trinity.edu/rjensen/FraudReporting.htm#CharityFrauds

Question
Where are the next frontiers of installing malicious viruses on your computer?
What video sites are the most likely places to catch these bad viruses?

Answer
Since email users have become more cautious about opening email, the next frontiers are bound to be popular downloads outside of email. These include videos and wikis. The most likely place to catch these bad viruses are porn sites, particularly the many porn sites maintained by Russians and former Eastern Bloc countries. But there are many other dangerous porn sites as well.

"Online video players could become new vehicle for malicious code," MIT's Technology Review, October 2, 2007 --- http://www.technologyreview.com/Wire/19469/?nlid=578

Online videos aren't just for bloopers and rants -- some might also be conduits for malicious code that can infect your computer.

As anti-spam technology improves, hackers are finding new vehicles to deliver their malicious code. And some could be embedded in online video players, according to a report on Internet threats released Tuesday by the Georgia Tech Information Security Center as it holds its annual summit.

The summit is gathering more than 300 scholars and security experts to discuss emerging threats for 2008 -- and their countermeasures.

Among their biggest foes are the ever-changing vehicles that hackers use to deliver ''malware,'' which can silently install viruses, probe for confidential info or even hijack a computer.

''Just as we see an evolution in messaging, we also see an evolution in threats,'' said Chris Rouland, the chief technology officer for IBM Corp.'s Internet Security Systems unit and a member of the group that helped draft the report. ''As companies have gotten better blocking e-mails, we see people move to more creative techniques.''

With computer users getting wiser to e-mail scams, malicious hackers are looking for sneakier ways to spread the codes. Over the past few years, hackers have moved from sending their spam in text-based messages to more devious means, embedding them in images or disguised as Portable Document Format, or PDF, files.

''The next logical step seems to be the media players,'' Rouland said.

There have only been a few cases of video-related hacking so far.

One worm discovered in November 2006 launches a corrupt Web site without prompting after a user opens a media file in a player. Another program silently installs spyware when a video file is opened. Attackers have also tried to spread fake video links via postings on YouTube.

That reflects the lowered guard many computer users would have on such popular forums.

''People are accustomed to not clicking on messages from banks, but they all want to see videos from YouTube,'' Rouland said.

Another soft spot involves social networking sites, blogs and wikis. These community-focused sites, which are driving the next generation of Web applications, are also becoming one of the juiciest targets for malicious hackers.

Computers surfing the sites silently communicate with a Web application in the background, but hackers sometimes secretly embed malicious code when they edit the open sites, and a Web browser will unknowingly execute the code. These chinks in the armor could let hackers steal private data, hijack Web transactions or spy on users.

Tuesday's forum gathers experts from around the globe to ''try to get ahead of emerging threats rather than having to chase them,'' said Mustaque Ahamad, director of the Georgia Tech center.

They are expected to discuss new countermeasures, including tighter validation standards and programs that analyze malicious code. Ahamad also hopes the summit will be a launching pad of sorts for an informal network of security-minded programmers.

The California state auditor on Tuesday released a report calling for the California State University to tighten control over executive compensation.
The system lacks effective monitoring procedures and a clearly justified methodology for determining some salaries, adding that some employees had received “questionable compensation.” The system issued a statement noting that the audit did not identify violations of policy. However, the system also pledged to try to carry out the recommendations of the audit.
Inside Higher Ed, November 7, 2007 --- http://www.insidehighered.com/news/2007/11/07/qt

Bob Jensen's threads on financial accountability in higher education are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#Accountability

Voting Fraud
Was the Miss Universe contest rigged? --- http://www.accountingweb.com/cgi-bin/item.cgi?id=104302

Also see http://www.cnn.com/2007/SHOWBIZ/12/04/odd.misscalifornia.ap/index.html

Insider Trading at Bear Stearns
A former broker at Bear Stearns, Ken Okada, is expected to plead guilty in a wide-ranging insider-trading case, becoming the ninth person to admit wrongdoing in a scheme that also involved employees at UBS and Morgan Stanley. An assistant United States attorney, Andrew Fish, revealed the expectation in a letter to a federal judge presiding over a related case brought by the Securities and Exchange Commission. The letter was entered into court records yesterday. Mr. Okada is one of 13 people charged by federal prosecutors in Manhattan in March.
The New York Times, November 15, 2007 --- http://www.nytimes.com/2007/11/15/business/15insider.html?ref=business

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

Kickbacks at Chevron
Chevron has agreed to pay $30 million to settle charges that it had made illegal kickbacks to Iraq for oil purchased in 2001 and 2002 under the United Nations’ oil-for-food program. The Securities and Exchange Commission said Wednesday that Chevron had agreed to the settlement under the Foreign Corrupt Practices Act without admitting or denying the charges. But the United States attorney for the Southern District of New York said Chevron could still be prosecuted for criminal tax violations.
The New York Times, November 15, 2007 --- http://www.nytimes.com/2007/11/15/business/worldbusiness/15chevron.html?ref=business

From The Wall Street Journal on Accounting Weekly Review on December 14, 2007

Deloitte Receives $1 Million Fine by Judith Burns The Wall Street Journal Dec 11, 2007 Page: C8 Click here to view the full article on WSJ.com --- http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac   TOPICS: Accounting, Audit Firms, Auditing, Big Four, PCAOB, Public Accounting, Public Accounting Firms SUMMARY: The PCAOB, the nation's audit watchdog, recently fined Deloitte & Touche $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical. This is the first PCAOB enforcement case against a Big Four accounting firm. CLASSROOM APPLICATION: This article can serve as a basis of discussion of audit firm responsibility and the enforcement process. It also discusses the PCAOB and a little of its history and enforcement, as well as provides information for discussion of Deloitte's response. QUESTIONS:  1.) What firm recently agreed to a fine imposed by the PCAOB? What was the reason for the fine? Is this firm a large, medium, or small firm? 2.) What is the PCAOB? What is its purpose? When was it created? What caused the creation of the PCAOB? 3.) What is Deloitte's response to the fine? How does the firm defend itself against the allegations? What do you think of the firm's comments and actions? 4.) What does it mean that Deloitte settled this case "without admitting or denying claims?" Why would that be a good tactic to take? How could it hurt the firm/ 5.) Is the PCAOB's main focus enforcement? Why or why not? What other responsibilities does the organization have? 6.) Relatively speaking, is this a substantial or minor fine for the firm? Will fines like this change the behavior of the firms? Why or why not?   SMALL GROUP ASSIGNMENT:  Examine the PCAOB's website? What information is offered there? What information are you interested in as an accounting student? What might interest you as an investor? What would interest a businessperson? Does the website offer extensive information or is it general information? What information is offered regarding enforcement? Is the website a good resource for accountants? Why or why not? Is it a valuable resource for businesspeople? Please explain your answers. Offer specific examples of value offered on the website? What would you like to see detailed or offered on the website that is not included? What did you learn from this website that you have not seen elsewhere? Reviewed By: Linda Christiansen, Indiana University Southeast

"Deloitte Receives $1 Million Fine," by Judith Burns, The Wall Street Journal, December 11, 2007; Page C8 --- http://online.wsj.com/article/SB119734046614120346.html?mod=djem_jiewr_ac 

In its first-ever enforcement case against a Big Four accounting firm, the nation's audit watchdog fined Deloitte & Touche LLP $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical company.

Deloitte settled the matter without admitting or denying claims brought by the Public Company Accounting Oversight Board that one of the firm's former audit partners failed to perform appropriate and adequate procedures in a 2004 audit of Ligand Pharmaceuticals Inc.

Deloitte signed off on Ligand's books, finding they fairly presented the firm's results and complied with U.S. generally accepted accounting principles, or U.S. GAAP.

Ligand later restated financial results for 2003 and other periods because its recognition of revenue on product shipments didn't comply with U.S. GAAP.

Ligand's restatement slashed its reported revenue by about $59 million and boosted its net loss in 2003 by more than 2½ times, the oversight board said.

First-Ever Case

The PCAOB's action against Deloitte marked the first time since it was created in 2003 by the Sarbanes-Oxley corporate-reform legislation that it has taken action against one of the Big Four accounting firms -- Deloitte, PricewaterhouseCoopers LLP, KPMG LLP and Ernst & Young LLP.

The PCAOB previously took enforcement actions against 14 individuals and 10 firms, according to a spokeswoman, although they all involved smaller firms.

Oversight-board Chairman Mark Olson told reporters yesterday after a speech to the American Institute of Certified Public Accountants that the board isn't looking to bring a lot of enforcement actions but said "it is reasonable to expect that there will be others" against Big Four firms.

Mr. Olson said in an earlier statement that the board's disciplinary measures are needed to ensure public confidence isn't undermined by firms or individual auditors who fail to meet "high standards of quality and competence."

Competence was lacking in the 2003 Ligand audit, according to the regulatory body. The oversight board said former auditor James Fazio didn't give enough scrutiny to Ligand's reported revenue from sales of products that customers had a right to return, even though Ligand had a history of substantially underestimating such returns.

Deloitte's Response

In a statement yesterday, Deloitte said it is committed to ongoing efforts to improve audit quality and "fully supports" the role of the accounting-oversight board in those efforts.

"Deloitte, on its own initiative, established and implemented changes to its quality control policies and procedures that directly address the PCAOB's concerns," the company said.

It added that it is confident that Deloitte's audit policies and procedures "are among the very best in the profession and that they meet or exceed all applicable standards."

New York-based Deloitte began auditing Ligand in 2000 and resigned in August 2004.

Mr. Fazio, who resigned from Deloitte in October 2005, agreed to be barred from public-company accounting for a minimum of two years, the PCAOB said. Mr. Fazio's lawyer couldn't be reached to comment.

The oversight board also faulted Mr. Fazio for not adequately supervising others working on the audit and faulted Deloitte for leaving him in place even though some managers had determined he should be removed and ultimately asked him to resign from the firm.

Mr. Fazio remained on the job despite the fact that questions about his performance had been raised in the fall of 2003, the oversight board said.

In addition, the oversight board said Deloitte had assigned a greater-than-normal risk to Ligand's 2003 audit but failed to ensure that the partners assigned to the work had sufficient experience to handle it.

"Deloitte Agrees to Pay $38 Million to Ex-Delphi Investors," SmartPros, December 31, 2007

A U.S. Securities and Exchange Commission investigation found that Delphi manipulated its earnings from 2000 to 2004, using several illegal schemes to boost its earnings, including the concealment of a $237 million transaction in 2000 with GM involving warranty costs.

Deloitte & Touche, now part of the privately held Deloitte Touche Tohmatsu, served as Delphi's outside accountant.

The agreement requires approval by Detroit U.S. District Judge Gerald Rosen and completes a $325 million settlement of investor claims over the accounting issue, lawyers for the investors said. Delphi agreed to pay about $205 million, with Delphi's insurers and banks paying the rest.

"It's about holding the gatekeepers accountable," said attorney Stuart Grant of Grant & Eisenhofer, one of four law firms representing public employee pension funds and other Delphi investors in the class action suit. "We're forcing the accountants ... to say, 'I am my brother's keeper.'"

Continued in article

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

"Online Videos May Be Conduits for Viruses," by Greg Bluestein, The Washington Post, October 2, 2007 --- Click Here

Online videos aren't just for bloopers and rants _ some might also be conduits for malicious code that can infect your computer.

As anti-spam technology improves, hackers are finding new vehicles to deliver their malicious code. And some could be embedded in online video players, according to a report on Internet threats released Tuesday by the Georgia Tech Information Security Center as it holds its annual summit

The summit is gathering more than 300 scholars and security experts to discuss emerging threats for 2008 _ and their countermeasures.

Among their biggest foes are the ever-changing vehicles that hackers use to deliver "malware," which can silently install viruses, probe for confidential info or even hijack a computer.

"Just as we see an evolution in messaging, we also see an evolution in threats," said Chris Rouland, the chief technology officer for IBM Corp.'s Internet Security Systems unit and a member of the group that helped draft the report. "As companies have gotten better blocking e-mails, we see people move to more creative techniques."

With computer users getting wiser to e-mail scams, malicious hackers are looking for sneakier ways to spread the codes. Over the past few years, hackers have moved from sending their spam in text-based messages to more devious means, embedding them in images or disguised as Portable Document Format, or PDF, files.

Continued in article

Storm Worm:  The Perfect Email Storm

"The Worm That Roared," by Lev Grossman, Time Magazine, September 27, 2007 --- http://www.time.com/time/magazine/article/0,9171,1666279,00.html

During the week of Jan. 15, an innocuous-looking e-mail appeared in thousands of inboxes around the world. Its subject line read, "230 dead as storm batters Europe." The e-mail came with a file attached, bearing a plausible-sounding name like Full Story.exe or Read More.exe. Plenty of people clicked on it. After all, storms really were battering Europe at the time; that week high winds and rain had killed 14 in the U.K. alone. But all great cons have a grain of truth in them somewhere.

 

The file that arrived with the e-mail was, of course, a computer virus, immediately christened the Storm Worm by the Finnish computer security firm F-Secure, which was among the first to spot it. Since then, the Storm Worm has proved remarkably hard to kill. Nine months later, it's still out there, infecting something like a million computers worldwide. It's not the most damaging virus in history, but it may be the most sophisticated. Whoever created it is to viruses what Michelangelo was to ceilings.

The Storm Worm is a marvel of social engineering. Its subject line changes constantly. Whoever produced it--and its many later variants--has a lively feel for the seductive come-on and a thorough grounding in human nature. It preys on shock ("Saddam Hussein Alive!") and outrage ("A killer at 11, he's free at 21 and ...") and prurience ("Naked teens attack home director") and romance ("You Asked Me Why"). It mutates at a ferocious rate, constantly changing its size and tactics to evade virus filters, and finds evolving ways to exploit other online media like blogs and bulletin boards. Newer versions might contain, instead of a file, a single link to a fake YouTube page, which crashes your browser while quietly slipping the virus into your computer. "I've heard people talk about this like virus 2.0, just like people talk about Web 2.0, because it's so different from the traditional attacks," says Mikko Hypponen, chief research officer of F-Secure. "It's probably the largest collection of infected machines we've ever seen."

Like any good parasite, the Storm Worm doesn't kill its host. In fact, most of the victims--some of whom are undoubtedly reading this article--will never know their machines are infected. It doesn't cripple your computer (and can be removed once identified), but the Storm Worm does give its authors the power to quietly control your computer. What do they do with this power? Mostly they send out spam. Back in the day, computer viruses were a relatively innocent affair, written as pranks by teenagers with too much time on their hands between Star Wars sequels. Now they're written by organized criminals looking to make money from fake offers.

Nobody knows who's behind the Storm Worm. F-Secure suspects a group based in Russia, but there's no way to be sure, and recent Storm Worm subject lines referring to Labor Day and the start of the football season suggest that those involved have an American connection. What is certain is that they are very smart--prodigious innovators engaged in a cat-and-mouse game with security firms that so far they're winning. "I don't think these guys have day jobs," says Hypponen. "They're really active and really closely watching us. I don't see them stopping anytime soon."

It's also clear that they've been pulling their punches. Right now the Storm Worm gang controls a massive amount of computing power, as much as some of the world's largest supercomputers, and all they do with it is send out spam and conduct the occasional denial-of-service attack (bombarding a specific server with traffic until it shuts down). We're lucky: so far they haven't gone in for more lucrative, damaging activities like online gambling, stock scams and stealing passwords and credit-card information. Is it possible that even a worm can have a conscience?

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

Bob Jensen's best advice at this point --- Buy a Mac!

Dental School Alleged Cheating at Loma Linda University, New York University, and UCLA
The American Dental Association is investigating allegations of possible cheating by students at four dental schools on an exam that leads to licensure for dentists, the Los Angeles Times reported. The probe involves students at Loma Linda University, New York University, the University of California at Los Angeles and the University of Southern California.
Inside Higher Ed, November 14, 2007 --- http://www.insidehighered.com/news/2007/11/14/qt

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

Tax Whistleblower 7623:  More Trouble for Ernst & Young Tax Shelter Clients
The Ferraro Law Firm has submitted the first known $1 billion Tax Whistleblower submission to the newly created IRS Whistleblower Office. The IRS specifically created the Whistleblower Office to assist in identifying and capturing uncollected tax revenue from individuals and corporations typically assisted by clever law firms, accounting firms and banks. Tax whistleblower cases under section 7623 are a new arrow in the Commissioner's quiver to close the tax gap, which the GAO estimates to be approximately $345 billion each year. The submission involves a Fortune 500 company that entered into a series of transactions to improperly reduce its taxes by over $1 billion. The company was represented by Ernst & Young LLP, an established law firm and multiple name-brand banks. The identity of the whistleblower is strictly confidential to protect the individual and the identities of the law firm, banks and company are confidential at this stage to aid in the evaluation of the submission. This submission comes after an E&Y employee pled guilty to one count of conspiracy to commit tax fraud, and four E&Y tax partners have been indicted for their role in the sale of fraudulent tax shelters. "The tax law is not always black and white and taxpayers are all too often more than willing to use an extreme interpretation that drastically reduces taxes. There is not necessarily an element of fraud and people at these companies know the weak spots in their positions," said founding partner, James L. Ferraro. Given the recent modifications made to section 7623 of the Internal Revenue Code, the potential award in this case could exceed $300 million.
Accounting Education, October 25, 2007 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=145675

Bob Jensen's threads on whistle blowing are at http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing

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

Congress Opens the Way for More Union Fraud
Last Thursday, the Senate voted 47-46 to cut $2 million from the budget of the Office of Labor Management Standards, which among other things collects so-called LM-2 forms. Revised in 2003 to require greater detail on union finances, these forms require unions to account for how they spend the tens of millions of dollars they collect each year. Under the Supreme Court's Beck decision, for example, union members can't be compelled to contribute to political causes they don't support. So the LM-2s are a way to shine the light of accountability on union leaders.
"Union Blinders," The Wall Street Journal, October 22, 2007; Page A18 --- http://online.wsj.com/article/SB119301682537566616.html

Conrad Black's Business Partner Sentenced
F. David Radler, former publisher of The Chicago Sun-Times and No. 2 man in the once-powerful Hollinger International newspaper empire, was sentenced Monday to 29 months in prison for his role in stealing millions of dollars from Hollinger shareholders. “I’m sorry for what I’ve done,” said Mr. Radler, 65, who pleaded guilty to fraud and testified against Conrad M. Black, his longtime business partner and the head of Hollinger, in return for a lenient sentence. Mr. Radler, who already has paid millions in restitution, also was fined $250,000.
"Former Publisher Sentenced," The New York Times, December 18, 2007 ---  http://www.nytimes.com/2007/12/18/business/media/18black.html?ref=business

Conrad Black's sentence was 78 months plus fines --- http://en.wikipedia.org/wiki/Conrad_Black

"SEC's technology limits hurt efforts against insider trading, congressional auditors find," MIT's Technology Review, December 17, 2007 --- http://www.technologyreview.com/Wire/19959/?nlid=758

Deficiencies in its computer system hamper the Securities and Exchange Commission's efforts to ferret out insider trading and other securities-law violations, congressional auditors found in a report issued Monday.

The Government Accountability Office, Congress' investigative arm, found that the SEC receives many referrals from the exchanges' internal inspectors concerning suspected insider trading. However, the agency's computer systems for receiving such investigative referrals and tracking cases don't allow its investigators to electronically search all the referral information, the report said.

As a result, it said, that ''may limit SEC's ability to monitor unusual market activity, make decisions about opening investigations and allow management to assess case activities.''

Sen. Charles Grassley of Iowa, who requested the GAO study, said that if the SEC investigators can't easily search the data, ''it's like working with one hand tied behind their backs.''

''It's a no-brainer that the (SEC) ought to be at least looking at this information and have a computer system that can spot trends and let investigators review the data as effectively and efficiently as possible,'' Grassley, the senior Republican on the Senate Finance Committee, said in a statement.

Grassley also asked SEC Chairman Christopher Cox in a letter why the agency does not use the internal audits made by the exchanges' inspectors to plan and conduct its own investigations, as noted in the GAO report.

SEC spokesmen didn't immediately return telephone calls seeking comment.

Cox, in a letter to the GAO included in the report, noted its suggestion that technological changes be made in the SEC's computer systems to give the agency's investigators electronic access to the referrals from the exchanges.

''We agree that additional information-technology changes such as these may help the (SEC) enforcement staff to effectively analyze trends, manage current caseloads and focus areas of investigation,'' Cox wrote. ''We will assess the feasibility of the recommended system improvements.''

"NORTEL NETWORKS PAYS $35 MILLION TO SETTLE FINANCIAL FRAUD CHARGES," AccountingEducation.com, November 22, 2007 --- http://accountingeducation.com/index.cfm?page=newsdetails&id=145832

The Securities and Exchange Commission recently filed civil fraud charges against Nortel Networks Corporation and its principal operating subsidiary Nortel Networks Limited (Nortel) alleging that Nortel engaged in accounting fraud from 2000 through 2003 to close gaps between its true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment.

Without admitting or denying the Commission's charges, filed in the U.S. District Court for the Southern District of New York, Nortel has agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying a $35 million civil penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Nortel also has agreed to report periodically to the Commission's staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.

"This is an important fraud case involving conduct from 2000 through 2003," said Linda Thomsen, Director of the Commission's Division of Enforcement. "Since that time, under new leadership, Nortel has undertaken significant efforts to address the wrongdoing, remedy the harm and implement a remediation plan to prevent recurrence of the misconduct."

Christopher Conte, an Associate Director of the Commission's Division of Enforcement, stated, "The settlement reached today reflects the seriousness of the company's past activity. Nortel's fraud was long-running, intentional and pervasive."

According to the Commission's complaint, from late 2000 through January 2001, Nortel made changes to its revenue recognition policies that were not in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The changes were made to fraudulently accelerate revenue into 2000 to meet its publicly announced revenue targets for the fourth quarter of 2000 and for that year. The complaint alleges that Nortel also selectively reversed certain revenue entries during the 2000 year-end closing process when its acceleration efforts pulled in more revenue than necessary to meet its targets. These actions, the complaint alleges, inflated Nortel's fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion.

The complaint further alleges that Nortel had improperly established, and was improperly maintaining, over $400 million in excess reserves by the time it announced its fiscal year 2002 financial results. According to the complaint, these reserve manipulations erased Nortel's fourth quarter 2002 pro forma profit and allowed it to report a loss instead so that Nortel would not show a profit earlier than it had previously forecast to the market. The complaint alleges that in the first and second quarters of 2003, Nortel improperly released approximately $500 million in excess reserves to boost its earnings and fabricate a return to profitability. These efforts turned Nortel's first quarter 2003 loss into a reported profit under GAAP, and largely erased its second quarter loss while generating a pro forma profit. According to the complaint, in both quarters Nortel's inflated earnings allowed it to pay tens of millions of dollars in so called "return to profitability" bonuses, largely to a select group of senior managers.

In settling the matter, the Commission acknowledges Nortel's substantial remedial efforts and cooperation. After Nortel announced its first restatement, the Audit Committee of Nortel's Board of Directors launched an independent investigation which later uncovered the improper accounting. Nortel's Board took extensive remedial action that included promptly terminating employees responsible for the wrongdoing, restating its financial statements four times over four years, replacing its senior management, and instituting a comprehensive remediation program designed to ensure proper accounting and reporting practices. Nortel also shared the results of its independent investigation with the Commission.

As part of the settlement, Nortel agrees to report to the Commission staff every quarter until it fully implements its remediation program, and the company and its outside auditor agree that the existing material weakness has been resolved.

Nortel is a KPMG client. You can read more about KPMG at http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

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

CEOs are rewarded hundreds of millions of dollars even when they fail. This is not competitive capitalism!

"Stanley O'Neal who is leaving Merrill Lynch after giving it a big fat gift of a $8 billion dollar write-off thanks to risky investments. The board just can't help but feed this obesity epidemic. They're giving him $160 million plus in severance for his troubles as he heads for the door. At some point, the nation's corporations, or most pointedly, their corporate boards, will realize throwing money at their CEOs is probably not the best idea"
"Obesity Epidemic Among CEO Pay," The Huffington Post, November 1, 2007 --- http://www.huffingtonpost.com/eve-tahmincioglu/obesity-epidemic-among-ce_b_70810.html

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

The Estrada Effect
It took more than six years to try former Philippine President Joseph Estrada for plunder. It took barely six weeks for current President Gloria Macapagal Arroyo to pardon him after his conviction. While that's her prerogative, the signal it sends about the battle on corruption in Manila isn't encouraging. Mr. Estrada was charged in 2001 with enriching himself to the tune of $93 million through various schemes such as kickbacks from an illegal gambling operation while he was president from 1998 to 2001. The verdict handed down in September by Manila's special anti-corruption court stretched to 183 pages. The judges found Mr. Estrada guilty of most, although not all, of the counts laid against him and sentenced him to 40 years in jail, effectively a life term for the 70-year-old.
"The Estrada Effect," The Wall Street Journal, October 31, 2007 --- http://online.wsj.com/article/SB119377821028276694.html

Professors Who Cheat --- http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

"Arguing Against Free-Market Plagiarism Prevention," by Doug Lederman, Inside Higher Ed, December 17, 2007 --- http://www.insidehighered.com/news/2007/12/17/econ

Most academic disciplines largely trust a decentralized approach to policing potential instances of plagiarism, counting on scholars to report situations when they occur, and journal editors or academic administrators to respond to and punish breaches upon learning about them. The assumption that wrongdoing will eventually become known, and that a cheater’s reputation will be destroyed (along, not unimportantly, with fears of legal dangers for getting involved) has led most scholarly societies to avoid playing a direct role in policing academic misconduct. (One disciplinary group that did investigate charges of plagiarism, the American Historical Association, gave up doing so in 2003.)

That approach makes sense if the appropriate people are fulfilling their appropriate roles in that informal system, says Gary A. Hoover, an associate professor of economics at the University of Alabama at Tuscaloosa. But Hoover, whose personal experiences as a victim of academic piracy have led him to study the state of plagiarism within his chosen field, argues that the system falls down if incidents don’t get reported to those with the power to punish the perpetrators, or if those with that power don’t act.

And too often they don’t, Hoover argued in a presentation made to a group of government economists in Washington on Friday, based on a series of surveys and papers he has produced on the subject of economics plagiarism.

At the core of Hoover’s argument to the Society of Government Economists are data from two surveys he conducted with Walter Enders, a fellow economist at Alabama. One, conducted in 2004, was of about 110 editors of economics journals; the other, from 2006, sought the views of about 1,200 rank and file economists, about 80 percent of them academics. While there was significant overlap on many points, the views of the editors and of likely authors diverged in a few key ways. As seen in the table below, for example, 64.7 percent of rank and file economists said that using another scholar’s idea without attribution was “likely” or “definitely” plagiarism, compared to 52.4 percent of journal editors.

Proportion of Journal Editors and Economists Who View Certain Practices as Plagiarism

Practice	Not at All		Not Likely		Likely		Definitely
	Economists	Editors	Econ.	Editors	Econ.	Editors	Econ.	Editors
Unattributed sentences	2.8%	1.8%	16.6%	19.8%	41.7%	44.3%	38.9%	34%
Unattributed proof from working paper	2.5%	0%	16.6%	9.3%	41.7%	32.4%	38.9%	58.3%
Unattributed proof from published paper	2.2%	0%	4.8%	4.6%	27.5%	29.4%	65.5%	66.1%
Unattributed idea	3.0%	3.9%	32.3%	43.7%	46.1%	35.9%	18.6%	16.5%
Use of privately collected data	7.7%	2.8%	16.8%	16.8%	31.4%	32.7%	44.0%	47.7%

And when asked for the appropriate responses when clear cases of plagiarism are identified, nearly three-quarters of rank and file economists said they thought a plagiarist’s department chair, dean or provost should be notified, while fewer than half of journal editors thought so, as seen in the following table:

Proportion of Economists and Editors Who See Certain Responses to Plagiarism as Appropriate

Practice	Not at All		Not Likely		Likely		Definitely
	Economists	Editors	Econ.	Editors	Econ.	Editors	Econ.	Editors
Notify original author (if possible)	1.8%	1.8%	4.1%	8.2%	24.5%	19.1%	69.2%	70.9%
Notify department chair, dean, provost	4.0%	11%	21.9%	42%	43.3%	23%	30.1%	24%
Ban future submissions to journal by plagiarist	4.9%	1%	23.0%	21.5%	39.9%	35.5%	32.2%	42.1%
Public notice of plagiarism	9.3%	19.2%	41.0%	50.5%	32.0%	17.2%	17.8%	13.1%

Hoover sees it as a problem that journal editors, who are arguably most likely to be in a position to come across potential instances of plagiarism, are less likely to view the theft of ideas as plagiarism and to see it as appropriate to report potential wrongdoing to the superiors of someone they caught.

“If we as a profession are going to say, we’re not going to have an overall policy, so the way we’re going to police this is through reporting, you have to be able to hurt somebody’s reputation” if they get caught, Hoover said. “But if editors are not willing to [report to someone’s bosses], where’s the bite? Where’s the fear of damage to reputation if nobody’s going to find out about it?”

(If Hoover sounds passionate about the subject, that may be because he encountered it personally. In 2003, he says, he and Enders were surprised when they were asked to referee a paper that applied time-series econometrics to poverty research. It was remarkably similar to a paper they had co-written that was awaiting publication in another journal — which had been disseminated via the Social Science Research Network — and to previous papers they had published separately. When they raised the issue with the editor of the journal that had asked them to peer review the offending paper, the editor checked with colleagues and lawyers and reported back “they and I are both concerned about possible liability for the journal of any aggressive course of action.” The editor ultimately sent the plagiarizing scholar an e-mail message rejecting the paper but inviting him to submit materials to the journal in the future.)

Continued in article

Professors Who Plagiarize

In one of the rare surveys conducted about plagiarism, two University of Alabama asked 1,200 of their colleagues if they believed their work had been stolen.  A startling 40 percent answered yes.
Thomas Bartlett and Scott Smallwood, "Professor Copycat," The Chronicle of Higher Education, December 17, 2004, Page A8.
The number of articles in this particular issue of the Chronicle make it a must reference for anybody studying plagiarism by college faculty.

In Germany and other parts of Europe, professors get credit for passages or even entire works written by their students citing the original author and, in most cases, without giving any form of credit whatsoever.  The work of the student, including that student's writing, is deemed the property of his or her professor.  Although this practice is not ver botten in Europe, it is considered unethical in North America.  But is does happen on this side of the globe and is sometimes not punished as heavily as plagiarism if the original writer is a student assistant.  
See Thomas Bartlett and Scott Smallwood, "Mentor vs. Protégé," The Chronicle of Higher Education, December 17, 2004, Page A14

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

Billionaires Who Cheat

"California Billionaire Developer Admits Filing False Tax Return, Pays $52 Million to IRS," SmartPros, December 14, 2007 --- http://accounting.smartpros.com/x60075.xml

A billionaire accused of stashing a fortune in foreign bank accounts pleaded guilty to filing a false tax return and has paid more than $52 million in back taxes, penalties and interest, the Internal Revenue Service said.

Igor Olenicoff entered the plea Wednesday in federal court, according to the IRS.

He could face up to three years in prison but is likely to serve less than six months when he is sentenced in April, said his attorney, Edward M. Robbins Jr.

"I'm pleased with the outcome," Olenicoff said after the hearing. "I'm not happy about it."

Olenicoff is a developer whose Newport Beach company, Olen Properties, owns more than 10,000 apartments and 33 residential communities, mainly in Las Vegas and Florida, along with 65 commercial and industrial properties in Orange County.

He was charged with filing a 2002 tax statement denying he had offshore accounts.

Continued in article

More on the Study Abroad Conflict of Interest Frauds
 

Elizabeth Redden, "Study Abroad Policies and Practices," Inside Higher Ed, October 9, 2007 --- http://www.insidehighered.com/news/2007/10/09/abroad

Bob Jensen's threads on the study abroad scandals --- http://www.trinity.edu/rjensen/HigherEdControversies.htm#StudyAbroadAccountability

Economics Professor (who called himself "Economan") Pleads Guilty to Fraud
A former Charleston Southern University economics professor, who was accused of defrauding the university and hundreds of other investors out of $90-million, pleaded guilty on Friday in federal court in Charleston, S.C. The professor, Albert E. Parish Jr., who authorities say spent the proceeds on cars, clothing, and a world-class pen collection, could face 45 years in jail when he is sentenced, at a date that is not yet determined. For many years, Mr. Parish was a high-flying symbol of success in Charleston, a "shining star" who did well as an investor and was "highly respected," as his lawyer put it on Friday. He even dubbed himself "Economan," a financial superhero, on the Web site of one of his companies. But last April, the U.S. Securities and Exchange Commission filed a complaint alleging that Mr. Parish was not registered with the commission to deal in securities. The SEC cited Mr. Parish for five counts of fraud, including misrepresenting investors' assets and returns, and dissipating the assets he had under management (The Chronicle, April 9).
Mary Andom, Chronicle of Higher Education, October 8, 2007 --- http://chronicle.com/subscribe/login?url=/daily/2007/10/2007100807n.htm

Al Parish, who was for years a prominent economist at Charleston Southern University known for his flashy wardrobe and big spending, on Friday admitted that he engaged in fraud with investments, effectively using millions from investors (including the university) on himself rather than investing the money, The Post and Courier reported. In a deal with prosecutors, he admitted guilt in 3 counts of an 11-count indictment, and faces a jail term of up to 20 years, plus fines. Parish’s indictment stunned many in Charleston, and many at the university, which saw its endowment shrink as a result of the fraud.
Inside Higher Ed, October 8, 2007 --- http://www.insidehighered.com/news/2007/10/08/qt

Woman Stole $2.89 Million, Bought Clothes, Shoes, Jewelry Former CFO Stole Money Over Eight Years
A Greenville County woman is going to prison after pleading guilty to stealing millions from her employer to finance her shopping addiction. Brenda Rivard pleaded guilty to eight counts of breach of trust and two counts of credit card fraud. The crimes took place between January 1998 and December 2005 when Rivard was CFO of Lube USA. Rivard stole the money by transferring more funds than necessary into the payroll account. She would then spend the excess money by writing herself checks from the payroll account. She also spent about $180,000 using the corporate American Express card on personal items, most notably purchased from Nieman Marcus. Lube USA is a privately-owned company headquartered in Japan that was formed in 1987. The company makes lubricating equipment for the manufacturing industry. The Greenville company is a distributor of the company. Prosecutor Sylvia Harrison said, "She then falsified the bank statements that were sent back to Japan. They had no idea that she was taking this money." . . . To recoup their losses, Lube USA found liquidators to buy the clothing, jewelry, purses and shoes. Rivard was also able to return one piece of jewelry for a refund, and she paid some restitution by taking a second mortgage on her home.
WYFF Greenville, October 31, 2007 --- http://www.wyff4.com/news/14463172/detail.html

"Ex-CPA convicted of not paying taxes," by Bill Rankin The Atlanta Journal-Constitution , October 31, 2007 --- http://www.ajc.com/metro/content/printedition/2007/10/31/irs1031.html

Sherry Peel Jackson, a former IRS revenue agent and certified public accountant, told a federal jury Tuesday she was sure she did not have to file income tax returns.

But after less than 30 minutes of deliberations, the jury convicted Jackson of failing to file income tax returns from 2000 through 2004. The Stone Mountain woman faces a maximum of four years in prison. She will be sentenced early next year.

Jackson, 45, did not fit the typical profile of a criminal defendant. She worked as a revenue agent from 1988 to 1995 and then as an accountant.

But in July 2000, Jackson testified, she began to question whether she had to pay income taxes. By the following year, she decided she was not going to file a tax return.

Sitting at the witness stand, with large books of federal regulations and the tax code in front of her, Jackson said she could not find any section of the tax code that held her liable for income taxes.

"I'd done a lot of research and I was just about sure," she testified. "I did not have to file an income tax return."

During cross-examination, assistant U.S. Attorney Richard Langway read Section 1 of the tax code to Jackson, who is married. A tax is imposed on "every married individual," Langway read, asking Jackson how she could not be an individual.

"I couldn't find the definition of 'individual,' " Jackson replied.

Lowell H. Becraft Jr., one of Jackson's attorneys, told jurors they should not convict her of willfully disobeying the law because Jackson had a "good faith" reason to believe she did not have to file taxes. He reminded the jury Jackson attended Tuskegee University in Alabama and the University of Georgia, raised a family and lived the life of an ordinary American.

"You may have never heard of this before," Becraft said. "To you, it may sound wild. It may sound crazy. ... But she believes she's not required to file tax returns."

Langway called Jackson's reasoning "cockamamie" and "absurd."

"She's an 'individual' —- she knows that," Langway said. "You should disbelieve everything she said."

"Faculty Theft," by Carolyn Foster Segal, Inside Higher Ed, November 6, 2007 --- http://www.insidehighered.com/views/2007/11/05/segal

Thus, just as the final decision regarding Glenn Poshard, president of Southern Illinois University (yes, he plagiarized; no, he won’t be fired) was setting off yet another round of blogging, I found myself starting the day with The Great Gatsby and ending with Oedipus Rex, thus neatly pairing a novel in which “Everybody lies” (the line is Gregory House’s, although it might easily be Nick Carraway’s) and a play in which the tragic hero — driving the plot toward his own destruction — argues that “the truth must be made known.”

About a year or so ago, I put out a call at an online forum for tales about faculty plagiarists. What was driving my interest was the sneaking suspicion that in the case of plagiarism, colleges often have a double standard: one standard for students and another for faculty and administrators. If it is sometimes amusing (note that I said sometimes — more often it is disheartening and aggravating) to listen to the excuses that students will argue in defense of their cheating ways, it is nothing less than appalling to hear a tenured administrator plead that he wasn’t adequately schooled in the meaning of plagiarism or to listen to a faculty member justify her appropriation of another’s work under the headings of forgetfulness, ignorance, or the impossibility of original thought in the 21st century. If one has already committed one egregious act — that of stealing — is it surprising that he or she would attempt to lie his or her way out of it? And most appalling of all is how many instances of faculty plagiarism are simply left alone by administrators.

My correspondents in the forum answered my query with examples of faculty plagiarists great and small: some offenders had been outed and severely penalized; still other perpetrators of the crime had triumphed with no punishment at all. A number of forum participants advised against becoming involved in bringing any sorts of charges, and, based on the sagas of revenge cited by several individuals, this began to seem like very good advice.

Formal grievances filed against them, bad teaching schedules, being shrouded by other departmental members, seeing no recourse but to leave: These are some of the repercussions not for faculty members who cheat, but for those who uncover the evidence. Having once or twice stolen the good work of others, some plagiarists’ line of defense is to go after the good names of those who cried “foul.”

Plagiarism, I was beginning to understand, was only part of the story. This fact was reinforced for me by one of the final postings (readers having already begun to move on to other forums and forms of discontent). Why not, my anonymous source proposed, broaden the topic to faculty theft? Why not indeed? As the writer — a veteran of academe, who gave me permission to quote his response — pointed out:

“Plagiarism” is a somewhat narrowly-understood term — i.e. the verbatim incorporation of another’s words without acknowledgment — and the more general defining principle, theft, sometimes gets lost in the parsing. I would argue that other academic thefts — in particular the hijackings of ideas, proposals, (co-)credit, publishing opportunities, support funds, courses, students, lab space — are equally — if not more pernicious.

The writer was indeed correct: plagiarism is just one category of the theft that’s practiced within the halls of academe. I’ve also observed that individuals rarely commit one isolated act of thievery — there’s usually a pattern. And to my generous correspondent’s catalog, I would add the losses of time, concentration, reputation, joy, and friendships with colleagues.

What explains the lists above? Is it simply, as in the maxim attributed to Henry Kissinger, that university politics are so vicious because the stakes are so small? Do academic departments breed this behavior, or is there something in the makeup of the offender that led him or her to choose — and abuse — this line of professional work? In an outside, follow-up e-mail, my anonymous correspondent continued: “I think you will find that the most egregious serial offenders in academe fall under the DSM-IV category of Narcissistic Personality Disorder.... The essence of the disorder is an inability to distinguish between substance and grandiose facade.”

If that’s the case, then a proposal regarding the faculty self-evaluation form at my college would be of even less use that it originally appeared to be. Several years ago, a provost and subcommittee of the curricular/academic policy committee suggested that we add a question involving a statement of ethics: Faculty members would be asked to describe and assess in detail their ethical performance. The introduction of this question provoked a lively debate. The conundrum it posed was similar to that of the sink-or-swim test for witchcraft. If a faculty member composed a lengthy screed on his/her ethical behavior, wasn’t he/she protesting too much? If, on the other hand, a faculty member refused to answer the question, was that an indication that he/she was in fact guilty of unethical behavior? Wasn’t the question an insult to anyone striving to live a moral, ethical life? And finally, what would a serial offender do with this opportunity? How likely was it that a faculty member who had misbehaved would seek atonement on the front page of the yearly self-evaluation?

As for what constituted unethical behavior, our discussion never reached the heights or depths of plagiarism. The one example that I can recall went something like this: If you bring cookies for your students on the day that they fill out the course evaluations, is that ethical? It’s certainly food for thought — and we reflected on that dilemma for a bit, while gazing at the plates of cookies that are always provided for faculty meetings. (We were, in fact, ahead of our time, at least on this issue — see “Sweetening the Deal” and the accompanying commentary on Inside Higher Ed.)

The question on ethics was cut from the faculty evaluation forms — not for any philosophical reason but because the subcommittee had neglected to follow the procedure for such revisions that is mandated by the faculty handbook. When the topic surfaced several months later, there was general agreement that just as the students must follow an honor code, so too do faculty members everywhere have an implicit code. We all know, however, that there is no honor among thieves.

Plagiarism: Judge Posner Builds a Reputation Cutting and Pasting Opinions Written by Others
THE club of people accused of plagiarism gets ever larger. High-profile members include Stephen Ambrose, Doris Kearns Goodwin, Kaavya Viswanathan — of chick-lit notoriety — and now even Ian McEwan, whose best-selling novel “Atonement” has recently been discovered to harbor passages from a World War II memoir by Lucilla Andrews. Plagiarism is apparently so rife these days that it would be extremely satisfying to discover that “The Little Book of Plagiarism,” by Richard A. Posner, has itself been plagiarized. The watchdogs have been caught before. The section of the University of Oregon handbook that deals with plagiarism, for example, was copied from the Stanford handbook. Mr. Posner, moreover, is a judge on the United States Court of Appeals for the Seventh Circuit and a law professor at the University of Chicago who turns out books and articles with annoying frequency and facility. Surely, under deadline pressure, he is tempted every now and then to resort to a little clipping and pasting, especially since he cuts members of his own profession a good deal of slack on the plagiarism issue. In the book he readily acknowledges that judges publish opinions all the time that are in fact written by their clerks, but he excuses the practice on the ground that everyone knows about it and therefore no one is harmed. What he doesn’t consider much is whether a judge who gains a reputation for particularly well-written opinions or for seldom being reversed — or, for that matter, who is freed from his legal chores to do freelance writing — doesn’t benefit in much the same way as a student who persuades one of the smart kids to do his homework for him.
Charles McGrath, "Plagiarism: Everybody Into the Pool," New York Times Book Review, January 6 2007 --- http://www.nytimes.com/2007/01/07/education/edlife/07books.html?_r=1&oref=slogin

Jensen Comment
My question is why it is so inconvenient for Judge Posner to add citations to his plagiarisms?

Medical Professors Who Accept Kickbacks
Two Harvard-affiliated doctors are among the nearly 50 orthopedic surgeons who each have earned more than $1-million annually in consulting contracts and royalties from companies that make artificial knees and hips, according to an article published today by the Center for Science in the Public Interest, a nonprofit organization. The payments were disclosed as part of a settlement between four of the companies and the U.S. attorney for northern New Jersey, who had accused them of participating in an illegal kickback scheme to get the surgeons to use their products.
"Orthopedic Surgeons at Harvard Accused of Taking Kickbacks From Company," The Chronicle of Higher Education, November 5, 2007 --- Click Here

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

Bob Jensen's threads on authoring and faculty ethics or lack thereof are at http://www.trinity.edu/rjensen/HigherEdControversies.htm#AuthoringEthics
Note especially the lack of originality in content of textbooks.

Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years.

It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged.

In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker. The palm-tree-lined mansion they purchased with Bear Stearns's $1.8 million recently sold out of foreclosure for just $1.1 million. Bear Stearns, meanwhile, posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets yesterday. (See related article.)

Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

Skyrocketing foreclosures are a testament to how easy it was to borrow from mortgage lenders in recent years.

It may also have been easy to steal from them, to judge from a multimillion-dollar fraud scheme that federal prosecutors unraveled here in Atlanta. The criminals obtained $6.8 million in mortgages from Bear Stearns Cos., including a $1.8 million mortgage to Calvin Wright, a New Yorker who told the investment bank that he and his wife earned more than $50,000 a month as the top officers of a marketing firm. Mr. Wright submitted statements showing assets of $3 million, a federal indictment alleged.

In fact, Mr. Wright was a phone technician earning only $105,000 a year, with assets of only $35,000, and his wife was a homemaker. The palm-tree-lined mansion they purchased with Bear Stearns's $1.8 million recently sold out of foreclosure for just $1.1 million. Bear Stearns, meanwhile, posted the first quarterly loss in its 84-year history as it wrote down $1.9 billion of mortgage assets yesterday. (See related article.)

Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

Continued in article

Creative Accounting at Freddie Mac and the SEC Unhappiness Over This Creativity

"The Accounting Cycle Freddie Mac's Scandal and the SEC's Judgment," by: J. Edward Ketz, SmartPros, November 2007 --- http://accounting.smartpros.com/x59491.xml

The financial reporting lies in the statements of Federal Home Loan Mortgage Corporation (Freddie Mac) came to light in 2003. The Securities and Exchange Commission recently issued a litigation release that attempts to put the affair behind us. Unfortunately, the SEC still cannot meet its goal of meting out punishment against the bad guys and only the bad guys.

The SEC issued Litigation Release No. 20304 on Sept. 27. The SEC alleges that the corporation engaged in an accounting fraud from 2000 to 2002. The manipulation of earnings occurred by incorrectly accounting for various derivative instruments of the firm as well as manipulating the accounting for loan origination costs and reserves for losses. Freddie Mac will pay a $50 million fine. The four executives who conceived and executed this fraud were also punished. Their fines ranged from $65,000 to $250,000; they paid out disgorgement amounts that ranged from $29,227 to $150,000. More details are laid out in the SEC complaint in this matter.

The fascinating thing about this accounting scandal is that it involved the understating of net income. In particular, the SEC contrasts the reported income with the restated net income (in billions of dollars):

 

Year	Reported Net Income	Restated Net Income	Difference
2000	$2.547	$3.666	$ 1.119
2001	4.147	3.158	(0.989)
2002	5.764	10.090	4.326

 

This fraud creates three problems for investors and creditors:

The first consequence of the fraud is that it misleads capital providers with respect to the firm; the investment community will not think it as deserving as other organizations. The economy suffers a misallocation of resources.

The second consequence of the fraud is that it supplies the corporate executives with incentives to engage in insider trading. The market thinks the business entity has the lower income and may bid down the stock price and the bond prices. The managers who are partaking in the fraud know that the earnings stream is actually higher and can profit from this knowledge illegally.

The third consequence is that the market may misestimate the risk of the corporation and, in this case, that seems to provide the motivation for the accounting fraud. Corporate managers wanted to portray a picture of a steady, reliable company that was ever growing in resources and income. That picture was phony inasmuch as the true income stream is far more volatile than the reported earnings would indicate.

This case is fascinating for another reason. The SEC continues to give miscreants a slap on the wrist while hitting the innocents with a massive fine. Yes, I said that the SEC continues to dote on the bad guys by only slapping their wrist. The largest fine plus disgorgement is only $400,000. For the salaries and stock options and perquisites that these guys got while working at Freddie Mac, the fines plus disgorgement amounts to a speeding ticket for those mortals with at most six-digit incomes. The fines are trivial. If the SEC wants to dissuade managers from committing accounting frauds, then they must impose meaningful and enormous fines and prison sentences. Petty and insubstantial fines imply that the SEC no longer cares for investors and creditors. And managers at other entities surely take notice.

Continued in article

Jensen Comment
In the early days of FAS 133, Freddie Mac was not understating income. It did in fact do a terrible job of implementing accounting for derivative financial instruments, and Freddie has lots and lots of derivatives mostly for hedging interest rate risk ---
http://www.trinity.edu/rjensen/caseans/000index.htm#FreddieMac

How to funnel subsidies to a few politically connected

October 29, 2007 message from David Cay Johnston [davidcay@mac.com]

Professor Jensen,

You have cited some of my work at your web pages and so I wanted to make you aware of my forthcoming book FREE LUNCH, which follows on the work in PERFECTLY LEGAL, a national best seller, winner of the Investigative Book of the Year award and widely used as a college text in accounting, business and law schools.

FREE LUNCH examines money flows that would not be captured by following the flow of funds across government and corporate books. It shows entire industries that derive all of their profits from these subtle and sometimes hidden subsidies and how policies that supposedly opened markets to competition and "deregulated" thwarted the market, induced higher prices and funneled money from the many to the few. For example, I show how a single major company gets a half billion dollars a year in free labor which is delivered in a way that, unintentionally, benefits criminals.

I hope you will take an interest in FREE LUNCH, which will be out Dec. 27, and consider it for your students.

Allbests,

David Cay Johnston Reporter The New York Times
212.556.3605 office 585.473.8704 home office
davidcay@nytimes.com 
davidcay@mac.com 

**********************************
Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill) Coming Dec. 27 from Portfolio Books

Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich and Cheat Everybody Else NYTimes Bestseller 2004 Book of the Year medal awarded by Investigative Reporters & Editors (IRE)

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

"American Electric Power Settles $4.6B Pollution Suit," NPR, October 9, 2007 --- http://www.npr.org/templates/story/story.php?storyId=15117556

American Electric Power Co. is required to:
- Spend $4.6 billion on so-called scrubbers and other pollution controls to reduce emissions of nitrogen oxide and sulfur dioxide, which cause acid rain and smog.
- Cut nitrogen oxide emissions by 69 percent by 2016, and reduce sulfur dioxide emissions by 79 percent by 2018.
- Pay civil fines of $15 million.
- Pay $60 million in mitigation measures. The money includes $21 million to reduce emissions from barges and trucks in the Ohio River Valley; $24 million for projects to conserve energy and produce alternative energy; and $3 million for the Chesapeake Bay, $2 million for Shenandoah National Park and $10 million to acquire ecologically sensitive lands in Appalachia.

CPA Firms Have a Stake in Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc

"Can Shareholders Sue Third Parties?" by Nick Timiraos, The Wall Street Journal,  October 6, 2007; Page A19 --- http://online.wsj.com/article/SB119163353051650981.html?mod=todays_us_page_one

Wall Street's attention turns to the Supreme Court this coming week when it considers whether shareholders can sue third parties accused of aiding a U.S. corporation that defrauds its investors.

The case, Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., pits defrauded investors of a cable company against two of the company's suppliers and could be worth billions of dollars to U.S. businesses by defining the liability of third parties -- accountants, bankers, lawyers or suppliers.

Stoneridge presents the biggest securities-litigation court clash in a generation. The case may also determine the fate of Enron Corp. investors' $40 billion lawsuit against the failed company's bankers.

The Securities and Exchange Commission sided with investors and warned that a ruling against them could make it harder for shareholders to recoup losses from securities frauds. But the Department of Justice, at President Bush's urging, supported businesses in a brief that cited the chilling effect a deluge of litigation would have on investment in U.S. companies.

Here's a closer look:

What prompted the lawsuit? Charter Communications Inc. used transactions with two suppliers, Scientific-Atlanta and Motorola Inc., in a manner that inflated the cable provider's revenue. That helped land three senior Charter executives in jail and prompted lawsuits against both Charter and the suppliers. Stoneridge, a Charter investor, says the suppliers should be held liable for being involved in the scheme, but the suppliers say they didn't directly deceive the market and had no say in how Charter accounted for the transactions.

Last year, the Eighth Circuit Court of Appeals dismissed Stoneridge's claims against the suppliers, citing "potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings." Meanwhile, the SEC reached a settlement with Scientific-Atlanta and Motorola of $20 million and $25 million, respectively, for similar transactions they made with another cable company.

The Supreme Court ruled in a 1994 case that only primary actors directly involved in making fraudulent statements could be held liable in private class-action lawsuits. Six of the current justices were on the court then, and they split evenly.

What implications could the ruling have on U.S. markets? On the plaintiffs side are the SEC, prominent congressional leaders of both parties, more than 30 state attorneys general, labor unions and several state pension funds who warn that, should they lose, third parties will face little consequence no matter how reprehensible their conduct.

The Justice Department, the U.S. Chamber of Commerce, and groups representing 600 banks and financial-services firms have taken the opposite side. They argue that the SEC, which can still sue third parties to recover investors' losses, provides enough of a check against wrongdoing.

How has securities-litigation risk increased? The number of class-action securities lawsuits has decreased in each of the past four years, but the value of settlements nearly tripled last year, excluding the Enron settlement, according to data from Stanford Law School's Securities Class Action Clearinghouse. Companies have paid nine to 10 times more to investors in private class-action lawsuits than they have to federal regulators.

How has the court treated similar cases? Last term, the Roberts Court made rulings in favor of businesses that limited damages and shielded corporations from the costs of litigation or made it harder to bring lawsuits against companies.

* * * Facts

• In their Supreme Court filing, 33 state attorneys general sided with investors and referenced the Enron scandal 55 times.

• A win for Stoneridge Investment Partners could be ironic: one of its funds remains heavily invested in Cisco Systems Inc., the parent company of Scientific-Atlanta.

• Nearly one-third of all securities lawsuits were filed against the high-tech sector last year, making it the most-frequently sued industry group.

• Kansas became the first state to pass a comprehensive securities law in 1911, called a "blue-sky law" because nothing backed up fraudulent schemes except miles of blue sky.

• Fourteen cases settled for amounts of $100 million or more last year, compared with nine cases in 2005 and seven cases in 2004. Settlements against Enron ($7.2 billion), WorldCom ($6.2 billion) and Cendant ($3.5 billion) account for nearly half of all "megasettlements," or lawsuits in excess of $100 million.