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

What Accountants Need to Know --- http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow

Global Corruption (in legal systems) Report 2007 --- http://www.transparency.org/content/download/19093/263155

Tax Fraud Alerts from the IRS --- http://www.irs.gov/compliance/enforcement/article/0,,id=121259,00.html

White Collar Fraud Site --- http://www.whitecollarfraud.com/
Note the column of links on the left.

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

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

"The odds are better in Las Vegas than on Wall Street"
This is the same fraud as the one committed by Max in the Broadway show called The Producers (watch the Bloomberg video of how the fraud works)
Max sold over 100% of the shares in his play.
A fraudulent market manipulation contributed to the Wall Street meltdown
Phantom Shares and Market Manipulation (Bloomberg News video on naked short selling) --- http://video.google.com/videoplay?docid=4490541725797746038

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

"A Model Curriculum for Education in Fraud and Forensic Accounting," by Mary-Jo Kranacher, Bonnie W. Morris, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education, November 2008. pp. 505-518  (Not Free) --- Click Here

There are other articles on fraud and forensic accounting in this November edition of IAE:

Incorporating Forensic Accounting and Litigation Advisory Services Into the Classroom Lester E. Heitger and Dan L. Heitger, Issues in Accounting Education 23(4), 561 (2008) (12 pages)]

West Virginia University: Forensic Accounting and Fraud Investigation (FAFI) A. Scott Fleming, Timothy A. Pearson, and Richard A. Riley, Jr., Issues in Accounting Education 23(4), 573 (2008) (8 pages)

The Model Curriculum in Fraud and Forensic Accounting and Economic Crime Programs at Utica College George E. Curtis, Issues in Accounting Education 23(4), 581 (2008) (12 pages)

Forensic Accounting and FAU: An Executive Graduate Program George R. Young, Issues in Accounting Education 23(4), 593 (2008) (7 pages)

The Saint Xavier University Graduate Program in Financial Fraud Examination and Management William J. Kresse, Issues in Accounting Education 23(4), 601 (2008) (8 pages)

Also see
"Strain, Differential Association, and Coercion: Insights from the Criminology Literature on Causes of Accountant's Misconduct," by James J. Donegan and Michele W. Ganon, Accounting and the Public Interest 8(1), 1 (2008) (20 pages)

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

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

A great blog on securities and accounting fraud --- http://lawprofessors.typepad.com/securities/

A Primer on Derivatives

I think there are two CBS Sixty Minutes television modules by Steve Kroft that the entire world should view. These are great videos for college students to view while keeping in mind that both videos are negatively biased. What follows is my primer in defense of derivative financial instruments and hedging activities.

Related to the above television programs is "The Trillion Dollar Bet" video from PBS Nova --- http://www.trinity.edu/rjensen/2008Bailout.htm#LTCM
 

Bob Jensen's Primer on Derivatives
Although the roots of the sub-prime mortgage scandal lie in Main Street lending or more money for housing than borrowers could ever afford to pay off, the opportunity to do so was afforded by lenders like Countrywide Financial (a mortgage lending company owned by Bank of America) being able to pass on the default risk by selling the high risk mortgages to Fannie Mae and Freddie Mac, quasi government corporations that took the brunt of the loan losses. But some banks like Washington Mutual (WaMu became the largest bank failure in the history of the world) were greedy and kept huge portfolios of these high-return and high-risk mortgage investments.

Fannie, Freddie, WaMu and the other risk takers assumed that the value of the real estate (the mortgage loan collateral) would be sufficient to pay back the loans in case of mortgage default foreclosures. But they underestimated the fraud going on on Main Street where property appraisers were fraudulently estimating real estate values way above market value and mortgage companies were lending way above amounts that borrowers would ever be able to pay back. My essay on the sub-prime mortgage scandal along with an alphabet soup set of appendices can be found at http://www.trinity.edu/rjensen/2008Bailout.htm

In addition much of the current scandal also is attributed to Wall Street writing of credit derivative contracts that essentially "insured" against default of debt with counterparties investing in debt instruments that were "insured" by credit derivatives written by such giant firms as Bear Stearns and American Insurance Group (AIG). But unlike insurance where sufficient capital reserves are required, Congress passed legislation in Year 2000 that allowed Wall Street to write credit derivative insurance without having any capital reserves to cover the losses. Congress and the Wall Street firms just never anticipated the massive amount of mortgage defaults attributable to Main Street's lending frauds. When the magnitude of the amounts owing to counterparties on credit derivatives became known, giant firms like Bear Stearns and AIG would've defaulted due to credit derivative obligations to counterparties. This would have led, in turn,  to counterparty failure of many giants in the world banking system. The Federal Reserve decided early on to bail out Bear Stearns credit derivative losses, and the first $70 billion given to AIG by Hank Paulsen in the new Bailout Bill went to pay off AIG's counterparties to AIG's credit derivative contracts --- http://www.trinity.edu/rjensen/2008Bailout.htm#SEC

So what is a derivative financial instrument? Consider first a financial debt instrument that historically was a contract in which a borrower borrowed money from a lender and the risk for the entire notional (the loan principal) passed from borrower to lender. For example, if Company B sold bonds for $100 million to Company C, the entire notional ($100 million) is at risk of being paid back to Company B. Credit rating companies, in turn, rate those bonds as to financial risk with such ratings as AAA (virtually certain to be paid back) all the way down to junk bonds (very high risk of default) of the entire notional amount. Credit ratings greatly impact the price received by Company B for its bond sales.

A derivative financial instrument is similar except that the notional amount is often not at risk because these contracts "net settle." For example, if Airline A enters into futures contracts to buy a million gallons of jet fuel one year from now at a forward price of $4 per gallon, the notional full value of a million gallons of fuel never changes hands. After a year passes, Airline A net settles with the counterparties on the net difference between the current spot price and the contracted forward price. Although in some cases a purchase/sale contract can specify physical delivery of the notional, most derivative contracts net settle without putting the entire notional amount at risk.

Hence, a derivative financial instrument has a notional (a quantity such a a million bushels of corn), an underlying (such as the market price of a particular grade of corn), and net settlement provisions that do not put the value of the entire notional amount at risk. Only the difference between forward and spot prices on the notional is at risk. The entire notional becomes at risk only if the future spot prices fall to zero or nearly zero. This is not likely to happen in the case of commodities like corn, oil, copper, gold, silver, etc. It can happen in the case of credit ratings where $100 million in AAA bonds fall to zero when the debtor is declared to be hopelessly bankrupt. This is why credit derivatives are much more risky than commodity derivatives. If a credit derivative is written on a $100 million bond contract, the entire $100 million might be lost. The probability of losing the entire value of the notional is much greater with credit derivatives than with commodities that are almost certain not to decline to $0 in value.

The underlying is generally called an index. Examples include corn prices, oil prices, interest rates (e.g., Treasury rates or LIBOR rates), and credit ratings (AAA, AAB, BBB, etc.). A huge difference between commodity versus credit derivatives lies in the depth (number of buyers and sellers) and the frequency of trades in the market. For example, in the derivatives markets for corn futures or corn options (puts and calls) there are thousands upon thousands of buyers and sellers and the market prices (e.g., futures, option, and spot prices) change by the minute each trading day. In the case of a credit derivative written on the bond rating by a credit rating agency there is no deep market and the credit rating rarely changes. There is no underlying "market" in the case of a credit derivative. Hence a credit derivative differs fundamentally from a commodity derivative in the depth of the market and the frequency of trading on the market. Its a mistake to lump credit derivatives and commodity derivatives in the same a single type of contracting called derivatives.

By any other name, a credit derivative is an insurance contract where risk of default is not market based but depends upon some disaster just like casualty insurance protects against such disasters as fire, wind, and flood. The entire value of the notional (the entire value of each bond insured for credit risk or each house insured for fire loss) is at risk.

In contrast, a commodity derivative is market based and does not in general put the the entire notional at risk because commodity values are not likely to be wiped out entirely. Commodities may move up and down in value, thereby generating variations in the basis (which is the difference between spot and forward prices), but it would be extremely rare for the a commodity to fall to zero in value. It is much more common for an insured house to be burned down entirely or an insured (with a credit derivative) bond notional to fall into junk bond status.

AIG and Allstate and State Farm are required by insurance laws to have capital reserves to cover a large number of houses burning down at the same time. However, if all insured houses burned down at the same time, insurance companies could not possibly cover all the losses. This is why a single insurance company might refuse to insure more than a certain percentage of houses in a give geographic area. Insurance written above a company's limit is spread to other companies by a process called reinsurance. Insurance companies are subject to regulation that requires capital reserves to cover actuary-determined expected losses and contract clauses that limit risk in case of catastrophes such as nuclear holocaust.

Credit derivative insurers could not write insurance contracts for credit default without capital reserves and other catastrophe clauses until Congress in Year 2000 allowed investment banks like Bear Stearns and insurance underwriters like AIG to enter into credit derivative insurance without capital reserves and catastrophe clauses. The fraudulent sub-prime loan market became a catastrophe in terms of real estate loans covered against default by credit derivatives. Bear Stearns, AIG, and the other credit derivative underwriters had insufficient capital reserves and would've defaulted on their credit derivatives if the U.S. government had not stepped in to cover amounts owed to credit derivative counterparties. The government justified bailing out these obligations by stating that the domino effect would've otherwise brought down the entire banking system. On this I'm a cynic, but that's another matter entirely. History is history at this point.

What is sad today is that derivatives in general are getting a bad name!
Commodity derivatives (including interest rate risk derivatives) are great vehicles for managing financial risk provided the commodities and their derivatives are both traded in deep markets with virtually zero probability that commodity values will fall to zero. Sadly, most people in the world just do not appreciate the importance of maintaining active commodity derivative markets for managing risk.

Ignorant people, especially ignorant members of Congress, may move to ban or severely restrain all derivative markets rather than to merely reclassify credit derivatives as insurance contracts subject to insurance laws. This does not mean, however, that I think that commodity derivative contracting should be more regulated for protection against unscrupulous sellers of derivative contracts. Like my hero Frank Partnoy, I've argued for years that there should be more regulation of sellers of derivative contracts.

I have a detailed history of derivative instrument contract scandals and the evolution of accounting rules (national and international) for derivative contracts at http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
At each point in the way I've applauded Frank Partnoy's appeal for both expanded use of derivative instruments for managing risk and expanded regulations to stop firms like Merrill Lynch, Morgan Stanley, and other unscrupulous outfits from writing derivatives with built-in financial complexity intended to obscure risk and screw fund investors who did not understand what they were buying into.

Bob Jensen's free tutorials and videos on complex accounting rules for accounting for derivative financial instruments and hedging activities --- http://www.trinity.edu/rjensen/caseans/000index.htm

Bob Jensen's glossary on derivative financial instruments --- http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

If Greenspan Caused the Subprime Real Estate Bubble, Who Caused the Second Bubble That's About to Burst?
Answer:  See http://www.trinity.edu/rjensen/2008Bailout.htm#LiquidityBubble

Bob Jensen's Essay on the Bailout Mess --- http://www.trinity.edu/rjensen/2008Bailout.htm

This is scary because you don't have to be a mastermind engraver or have the Treasury of a rogue nation such as North Korea or Iran to print money
"Money Factory:  The Rise of Counterfeit Money," National Geographic Channel (video) ---
http://www.hulu.com/watch/42967/national-geographic-channel-money-factory?c=News-and-Information

This is important in accountancy, because all organizations need internal controls to detect counterfeit currency
Read more about counterfeit currency from a very good module at http://en.wikipedia.org/wiki/Counterfeit
Probably the biggest fear of worldwide criminals is that world economies will go cashless.

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

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

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

Hannaford is a large New England-based supermarket chain with a good reputation until now.
Recently, Hannaford compromised credit card information on 4.2 million customers at all 165 stores in the eastern United States.
When over 1,800 of customers started having fraudulent charges appearing on credit card statements, the security breach at Hannaford was discovered.
Hannaford made a press announcement, although the Hannaford Website is seems to overlook this breach entirely --- http://www.hanaford.com/
My opinion of Hannaford dropped to zero because there is no help on the company's Website for customers having ID thefts from Hannaford.
I can't find any 800 number to call for customer help directly from Hannaford (even recorded messages might help)

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

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

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

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

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

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

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

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

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

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

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

Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was arrested and charged with securities fraud Thursday in what federal prosecutors called a Ponzi scheme that could involve losses of more than $50 billion.

It is bigger than Enron, bigger than Boesky and bigger than Tyco

"Madoff Scandal: 'Biggest Story of the Year'," Seeking Alpha, December 12, 2008 ---
http://seekingalpha.com/article/110402-madoff-scandal-biggest-story-of-the-year?source=wildcard

According to RealMoney.com columnist Doug Kass, general partner and investment manager of hedge fund Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd., today's late-breaking report of an alleged massive fraud at a well known investment firm could be "the biggest story of the year." In his view,

it is bigger than Enron, bigger than Boesky and bigger than Tyco.
It attacks at the core of investor confidence -- because, if true, and this could happen ... investors might think that almost anything imaginable could happen to the money they have entrusted to their fiduciaries.

Here are some excerpts from the Bloomberg report, entitled "Madoff Charged in $50 Billion Fraud at Advisory Firm":

Bernard Madoff, founder and president of Bernard Madoff Investment Securities, a market-maker for hedge funds and banks, was charged by federal prosecutors in a $50 billion fraud at his advisory business.

Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was granted release on a $10 million bond guaranteed by his wife and secured by his apartment. Madoff’s wife was present in the courtroom.

"It’s all just one big lie," Madoff told his employees on Dec. 10, according to a statement by prosecutors. The firm, Madoff allegedly said, is "basically, a giant Ponzi scheme." He was also sued by the Securities and Exchange Commission.

Madoff’s New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co (GE). and Citigroup Inc. (C).

...

SEC Complaint

The SEC in its complaint, also filed today in Manhattan federal court, accused Madoff of a "multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm."

The SEC said it’s seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Ira Sorkin, another defense lawyer for Madoff, couldn’t be immediately reached for comment.

...

Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two individuals listed on regulatory records as "direct owners and executive officers."

Peter Madoff was a board member of the St. Louis brokerage firm A.G. Edwards Inc. from 2001 through last year, when it was sold to Wachovia Corp (WB).

$17.1 Billion

The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.

...

Madoff’s Web site advertises the "high ethical standards" of the firm.

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door," according to the Web site. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."

...

"These guys were one of the original, if not the original, third market makers," said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. "They had a great business and they were good with their clients. They were around for a long time. He’s a well-respected guy in the industry."

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan)

Continued in article

And here is the SEC press release

Also see http://lawprofessors.typepad.com/securities/

What was the auditing firm of Bernard Madoff Investment Securities, the auditor who gave a clean opinion, that's been insolvent for years?
Apparently, Mr Madoff said the business had been insolvent for years and, from having $17 billion of assets under management at the beginning of 2008, the SEC said: “It appears that virtually all assets of the advisory business are gone”. It has now emerged that Friehling & Horowitz, the auditor that signed off the annual financial statement for the investment advisory business for 2006, is under investigation by the district attorney in New York’s Rockland County, a northern suburb of New York City.
"The $50bn scam: How Bernard Madoff allegedly cheated investors," London Times, December 15, 2008 ---
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5345751.ece

It was at the Manhattan apartment that Mr Madoff apparently confessed that the business was in fact a “giant Ponzi scheme” and that the firm had been insolvent for years.

To cap it all, Mr Madoff told his sons he was going to give himself up, but only after giving out the $200 - $300 million money he had left to “employees, family and friends”.

All the company’s remaining assets have now been frozen in the hope of repaying some of the companies, individuals and charities that have been unfortunate enough to invest in the business.

However, with the fraud believed to exceed $50 billion, whatever recompense investors could receive will be a drop in the ocean.

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

"Why We Take Risks — It's the Dopamine," Alice Park, Time Magazine, December 30, 2008 --- http://www.time.com/time/health/article/0,8599,1869106,00.html
As quoted by Jim Mahar on January 2, 2008 --- http://financeprofessorblog.blogspot.com/

A new study by researchers at Vanderbilt University in Nashville and Albert Einstein College of Medicine in New York City suggests a biological explanation for why certain people tend to live life on the edge — it involves the neurotransmitter dopamine, the brain's feel-good chemical. 

Dopamine is responsible for making us feel satisfied after a filling meal, happy when our favorite football team wins ....It's also responsible for the high we feel when we do something daring,...skydiving out of a plane. In the risk taker's brain, researchers report in the Journal of Neuroscience, there appear to be fewer dopamine-inhibiting receptors — meaning that daredevils' brains are more saturated with the chemical, predisposing them to keep taking risks and chasing the next high.....

The findings support Zald's theory that people who take risks get an unusually big hit of dopamine each time they have a novel experience, because their brains are not able to inhibit the neurotransmitter adequately. That blast makes them feel good, so they keep returning for the rush from similarly risky or new behaviors, just like the addict seeking the next high...."It's a piece of the puzzle to understanding why we like novelty, and why we get addicted to substances ... Dopamine is an important piece of reward.

Continued in article

Jensen Comment
Be that as it may, some risk takers are merely trying to recover or at least average out losses which, if successful, is more of a relief than a thrill. The St. Petersburg Paradox may be more as a recovery strategy than a thrill --- http://en.wikipedia.org/wiki/St._Petersburg_paradox
Bernie Madoff probably got dopamine surges from his villas, Penthouses, and thrills of scamming investors, but at some point he might've been speculating recklessly in options derivatives in a panic to save his butt. The same might be said for any gambling addict who first gets "doped up" on the edge, and then bets more recklessly by betting the farm at miserable odds when "sobered up."

Apparently Bernie is now going to plead insanity. I think that's great defense as long as the court insists on long-term confinement as a pauper in Belleview rather than a posh psychiatric hospital --- http://en.wikipedia.org/wiki/Bellevue_Hospital

This may be a reason why some students, certainly not all, cheat for a better grade. Just the thrill of getting away with breaking the rules may lead to a dopamine surge just like a person who shoplifts an item that she/he neither needs nor wants. In my small hometown in Iowa, the wife of a high school coach, an other very dignified woman, was addicted to shop lifting items that she really didn't need or want. Our coach made an arrangement with downtown merchants to simply bill him for items that she thought she purloined without payment. The merchants kept a sharp and silent watch on her whenever she entered their stores.

Psychology of Cheaters versus Non-cheaters --- http://www.trinity.edu/rjensen/Plagiarism.htm#CheatingPsychology

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

Robert Edward Rubin (born August 29, 1938) is Director and Senior Counselor of Citigroup where he was the architect of Citigroup's strategy of taking on more risk in debt markets, which by the end of 2008 led the firm to the brink of collapse and an eventual government rescue [1]. From November to December 2007, he served temporarily as Chairman of Citigroup.[2][3] From 1999 to present, he earned $115 million in pay at Citigroup[4]. He served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations.
Wikipedia --- http://en.wikipedia.org/wiki/Robert_Rubin

A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged Ponzi-style scheme that's now choking world banking. Director Rubin and ousted CEO Prince - and their lieutenants over the past five years - are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.
Paul Tharp, "'PONZI SCHEME' AT CITI SUIT SLAMS RUBIN," The New York Post, December 5, 2008 --- http://www.nypost.com/seven/12042008/business/ponzi_scheme_at_citi_142511.htm

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

"Feds Now Say Dreier Bilked Investors Of $380 Million," Liz Moyer, Forbes, December 12, 2008 ---
http://www.forbes.com/2008/12/11/legal-fraud-dreier-biz-wall-cx_lm_1211dreier_print.html

Prosecutors have expanded their investigation of prominent New York attorney Marc Dreier, uncovering hundreds of millions more of missing funds in what they characterize as an "extraordinary" fraud played out over two years.

A federal magistrate judge ordered Dreier to remain behind bars Thursday, denying bail because of the "enormous risk of flight." Dreier was arrested in New York Sunday evening and has been charged with fraud in an alleged brazen scheme to bilk sophisticated hedge funds.

Assistant U.S. Attorney Jonathan Streeter said in court Thursday the loss from the alleged fraud is $380 million, well more than the $113 million cited in criminal charges filed Monday because of new information pouring into the prosecutor's office.

The alleged fraud has been carried out since at least January 2006, Streeter said, and targeted some of the most sophisticated institutional investors. Dreier, a Harvard and Yale-educated litigator with a roster of celebrity clients at the 238-attorney firm he founded in 1996, is a "Houdini of impersonation and false pretenses," Streeter said at Thursday's bail hearing.

Dreier's lawyer, Gerald Shargel, had asked that Dreier be released on a $10 million bond signed by Dreier's 19-year-old son and 85-year-old mother and allowed to live under house arrest at his beach home in Quogue, N.Y., or at his Manhattan apartment.

Shargel also told Judge Douglas Eaton that Dreier was prepared to meet with the court-appointed receiver of the Dreier LLP law firm Thursday evening to help identify and locate assets and would provide a complete financial statement. None of Dreier's money is overseas, he said.

But Streeter successfully argued the government's case that Dreier could have squirreled away substantial assets overseas. Much of the $380 million is unaccounted for, he said. With his firm in tatters and his U.S. property to be seized--and with overwhelming evidence against him--Dreier had nothing to lose by skipping out of the country, he said.

Prosecutors initially accused Dreier of selling $113 million of fake notes to two hedge funds in October in an elaborate scheme that involved forgery and ruse. Canadian law enforcement arrested Dreier last week alleging he impersonated the senior counsel of a major Canadian pension fund to effect a similar scheme.

The evidence now shows the activity may have targeted many more hedge funds over a far longer period of time, Streeter says.

On top of that, employees and partners of the Dreier law firm learned last week that tens of millions were missing from client escrow accounts and other firm accounts.

Dreier even managed to transfer $10 million by telephone from escrow accounts to his personal account last Thursday while sitting in a Canadian jail awaiting a bail hearing, the documents say.

Dreier, the only equity partner, is the only person authorized to make transfers from the escrow accounts, according to court documents. A statement by a Dreier law partner says $37.5 million of $38 million attributed to a single client had been transferred from the firm's escrow accounts into an account controlled by Dreier, but the statement didn't give a time frame for that transfer.

The tip-off about the missing funds was a request by a Dreier partner, Norman Kinel, to Dreier to disburse $38 million in client escrow funds for unsecured creditors of 360 Networks, a Seattle telecommunications company that emerged from bankruptcy in 2002. The Dreier firm represents the unsecured creditors.

Kinel first requested the funds on Dec. 1. On Dec. 2, when he realized the transfer hadn't been made, he twice requested the funds again. He learned of Dreier's arrest on Dec. 3 and, through a lawyer, contacted the Federal Bureau of Investigation and the U.S. attorney.

John Provenzano, the law firm's controller, said in the court documents that at the time of Kinel's request, the escrow accounts had only $19 million in them.

Dreier was in contact with partners at the firm last week, according to the court documents. Asked about the missing escrow funds for 360 Networks, Dreier is reported to have said he could have sold some of the art collection to return the money if he had been allowed to return to New York.

"I understood from his conversation that Mr. Dreier was implicitly admitting he had improperly used client escrow funds," says the court declaration by Joel Chernov, one of the partners at Dreier who was on that phone call.

Dreier's world started collapsing in October, his lawyer said, when an accounting firm employee told him he would go to the police after finding out Dreier allegedly falsified accounting materials using the firm's name as part of his scheme.

Even then, his lawyer argued, Dreier left the U.S. a few times and came back, compelling evidence that he was not a flight risk. He traveled to Dubai on business in October and to St. Bart's in the Caribbean right before Thanksgiving, "knowing full well his life was unraveling," Shargel said. He had a private plane available to him in Canada last week but decided to fly commercial back to the U.S., where authorities were waiting at LaGuardia Airport to arrest him.

Dreier led an opulent, jet-setting life by most reports, with several homes and a 120-foot yacht. Now he sits in a maximum security wing of the federal prison in Manhattan, where he has no books, no television and no visitors. His lawyer asked the judge Thursday to at least have him moved to a more suitable part of the prison. "You could lose your mind in there," Shargel argued.

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

Lawyers Like the Subprime Litigation Cash Cow

"The finger of suspicion," The Economist, December 19, 2007 --- http://www.economist.com/finance/displaystory.cfm?story_id=10337884

FINANCIAL firms have already been drenched by mortgage-related losses. Now a wave of litigation threatens to assail them. According to RiskMetrics, a consulting firm, between August and October federal securities class-action lawsuits were filed in America at an annualised pace of around 270—more than double last year's total and well above the historical average. At this rate, claims could easily exceed those of the dotcom bust and options-backdating scandal combined.

At most risk are banks that peddled mortgages or mortgage-backed securities. Investors have handed several writs to Citigroup and Merrill Lynch. Bear Stearns has received dozens over the collapse of two leveraged hedge funds. A typical complaint accuses it of failing to make adequate reserves or to explain the risks of its subprime investments, and of dubious related-party transactions with the funds. Several firms, including E*Trade, a discount broker with a banking arm sitting on a radioactive pile of mortgage debt, are being sued for allegedly failing to disclose problems as they became apparent to managers.

But one thing that sets the subprime litigation wave apart from that of the 2001-03 bear market is its breadth. After the collapses of Enron and WorldCom, lawsuits were targeted at a fairly narrow range of parties: bust internet firms, their accountants and some banks. This time, investors are aiming not only at mortgage lenders, brokers and investment banks but also insurers (American International Group), bond funds (State Street, Morgan Keegan), rating agencies (Moody's and Standard & Poor's) and homebuilders (Beazer Homes, Toll Brothers et al).

Borrowers, too, are suing both their lenders and the Wall Street firms that wrapped up their loans. Several groups of employees and pension-fund participants have filed so-called ERISA/401(k) suits against their own firms. Local councils in Australia are threatening to sue a subsidiary of Lehman Brothers over the sale of collateralised-debt obligations (CDOs), the Financial Times has reported. Lenders are even turning on each other; Deutsche Bank has filed large numbers of lawsuits against mortgage firms, claiming they owe money for failing to buy back loans that soured within months of being made.

“It seems that everyone is suing everyone,” says Adam Savett of RiskMetrics' securities-litigation group. “It surely can't be long before we get the legal equivalent of man bites dog, where a lender sues its borrowers for some breach of contract.”

Continued in article

Crooked Lawyers --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawyers

State Department officials have suspended a program that allows refugees in the U.S. to bring family members into the country after an investigation revealed widespread fraud in the system. Since the 1980's, the State Department has granted refugee family members who are left behind in war-torn countries priority-3 access to the U.S. Refugee Admissions Program on a case-by-case basis. After suspicions of fraud were raised last year – often involving unrelated children being claimed as family – the State Department conducted DNA testing of 3,000 applicants to the program, to see if they were actually related to the family members they claimed. In more than 80 percent of the cases, the applicants either refused to take the tests or were discovered to have DNA that didn't match their reported family members.
"Rampant fraud puts stop to U.S. refugee program:  DNA confirms fewer than 20% telling truth about family ties," WorldNetDaily, December 13, 2008 --- http://www.worldnetdaily.com/index.php?fa=PAGE.view&pageId=83580

"5 Reasons I Hope Classmates.com Gets Sued Into Oblivion:  It's time for Classmates.com to change or close up shop. A lawsuit against the company might just prompt some movement" by JR Raphael, PC World via The Washington Post, November 13, 2008 --- Click Here

Have you heard? Someone's suing Classmates.com over those e-mails it's been blasting the world with for the past decade. My reaction? It's about damned time.

Here's the scoop: A man from San Diego says he received e-mails from Classmates.com claiming his former classmates were "trying to contact him" through the site. (Surely you've received one or 100 of those, too -- I know I have.) Our guy joined the service, paying for a premium membership ($15 for 3 months) to gain access. Then, he said, he discovered that no old friends had attempted to get in touch or even looked up his name.

"Of those www.classmates.com users who were characterized ... as members who viewed Plaintiff's profile, none were former classmates of Plaintiff or persons familiar with or known to Plaintiff for that matter," the lawsuit says.

The suit claims Classmates.com has pulled similar tricks on countless other unsuspecting users. It demands the company refund subscriptions fees and pay an additional fine for deceptive advertising.

I, for one, hope the suit is a massive success. Why, you might ask? Allow me to explain.

How happy are people who get Classmates.com e-mails? A quick glance at the Consumer Affairs complaints page for the company will give you an idea. I found dozens of complaints from the past month alone. The BBB gives Classmates a C+ rating. The reason for the rating is "number of complaints filed."

"I have called them several times to stop sending me junk e-mail, and they keep telling me to unsubscribe, which I have done 10 times," writes Jeff from Michigan.

"I have tried many times to have them remove my name from their mailing list and they do not acknowledge my request," notes Skip from Arizona.

Look through the consumer complaints on ConsumerAffairs.com and see just how many people say they're being billed without authorization. Many users say they gave a credit card number for a trial and kept getting charged long after the trial's end, despite numerous cancellations. Many users also say they can't even login to the site, and no one will answer their requests for help.

When I tried Classmates.com I couldn?t even look at my high school class list (or any other class) without first giving my personal information, including e-mail address. See a connection here?

I can see how Classmates.com might have been appealing back in 1995, when it first launched. But nowadays, you can find better and easier ways to connect with old classmates -- ones that are both cost- and spam-free. (Facebook, anyone? MySpace?) The company's audacity in continuing to lure curious people into paying money to find out what "mysterious person" is interested in them just floors me.

Continued in article

Bob Jensen's threads on Internet and credit card frauds are at
http://www.trinity.edu/rjensen/FraudReporting.htm#ConsumerFraud

"Former Diebold Sales Rep Settles Inside Trading Charges," Securities Law Prof Blog, November 26, 2008 ---
http://lawprofessors.typepad.com/securities/ 

On November 19, 2008, the United States District Court for the Western District of Oklahoma entered final judgment against Robert G. Cole in SEC v. Cole, Civ 08-265 C (W.D. Okla.), an insider trading case the Commission filed on March 13, 2008. The Commission’s complaint alleged that Cole, a former sales representative for Diebold, Inc., made over $500,000 in illegal profits by using material, nonpublic information to trade Diebold securities. Diebold is an Ohio-based public company that manufactures and sells automated teller machines, bank security systems, and electronic voting machines.

The Commission’s complaint alleged that on September 15, 2005, shortly after learning from his sales manager that revenues and orders in Diebold’s North American regional bank business were significantly below target, Cole began purchasing hundreds of soon-to-expire Diebold put options contracts, at a total cost of $70,110, anticipating that Diebold would lower its earnings forecast and the price of Diebold stock would fall. As alleged in the complaint, on September 21, 2005 — one day after Cole completed purchasing these Diebold put option contracts — Diebold announced that it was lowering its earnings forecasts, primarily because of a revenue shortfall in the company’s North American regional bank business. After this public announcement, Diebold’s stock price dropped sharply, closing at $37.27 per share, which was a 16% drop from the previous day’s closing price of $44.13. As the complaint alleged, Cole immediately sold the Diebold put option contracts for $579,190, realizing illicit profits of $509,080 (a 700% return).

The Commission alleged that Cole violated Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. Without admitting or denying the allegations in the complaint, Cole consented to the entry of a final judgment that permanently enjoins him from future violations of these provisions, and orders him to disgorge his illicit profits of $509,080, which will be deemed satisfied by a forfeiture order entered in a related criminal case. In that case, U.S. v. Robert Cole, No. 5:08-CR-327 (N.D. Ohio), Cole pled guilty to a felony charge of securities fraud, and was sentenced to a prison term of 1 year and 1 day, two years of supervised release, forfeiture of $509,080, and a $180,000 fine.

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

Question
When is the Nobel Price not a Noble (or even an ethical) prize?

A very serious developing story is being heavily covered by German media, but Sweden's two major daily newspapers remain conspicuously and Swedishly silent: The Nobel Prize Committee is coming under scrutiny for possible criminal charges of bribery and corruption in connection with this year's award in medicine. On Monday, December 8th, two days before the award ceremony, it came to light that two Nobel affiliated corporations—Nobel Media and Nobel Webb—have in the past six months received an undisclosed amount said to be "many millions" from Swedish/American pharmaceutical giant Astra Zeneca, which benefits financially from the award given to German Harald zur Hauser for his discovery of Human Papilloma Virus, claimed to cause cervical cancer. AstraZeneca, which holds patents on and collects royalties for both human papillomavirus (HPV) vaccines currently available—Gardasil in the U.S. and Cerverix in Europe (he latter of which has been linked to at least 16 deaths in young girls)—stands to benefit greatly from the 2008 Nobel Prize given to German Harald zur Hauser for his discovery of HPV and its link to cervical cancer.
Celia Farber, Splice Today, December 11, 2008 --- Click Here

Nobel Prize Selection Committees Investigated for Bribery --- http://www.freerepublic.com/focus/f-news/2152165/posts

From the Securities Law Professor Blog on December 18, 2008 --- http://lawprofessors.typepad.com/securities/

SEC Files Insider Trading Charges Against Former Lehman Broker and Others

The SEC filed insider trading charges in another "pillow-talk" case, alleging that a former registered representative at Lehman Brothers misappropriated confidential information from his wife, a partner in an international public relations firms, and tipped a number of clients and friends. The SEC's complaint alleges that from at least March 2004 through July 2008, Matthew Devlin, then a registered representative at Lehman Brothers, Inc. ("Lehman") in New York City, traded on and tipped at least four of his clients and friends with inside information about 13 impending corporate transactions. According to the complaint, some of Devlin's clients and friends, three of whom worked in the securities or legal professions, tipped others who also traded in the securities. The complaint alleges that the illicit trading yielded over $4.8 million in profits.  Because the inside information was valuable, some of the traders referred to Devlin and his wife as the "golden goose." The complaint further alleges that by providing inside information, Devlin curried favor with his friends and business associates and, in return, was rewarded with cash and luxury items, including a Cartier watch, a Barneys New York gift card, a widescreen TV, a Ralph Lauren leather jacket and Porsche driving lessons.

The complaint alleges that, based on the information provided by Devlin, the defendants variously purchased the common stock and/or options of the following public companies: InVision Technologies, Inc.; Eon Labs, Inc.; Mylan, Inc.; Abgenix, Inc.; Aztar Corporation; Veritas, DGC, Inc.; Mercantile Bankshares Corporation; Alcan, Inc.; Ventana Medical Systems, Inc.; Pharmion Corporation; Take-Two Interactive Software, Inc.; Anheuser-Busch, Inc.; and Rohm and Haas Company. At the time that Devlin tipped the other defendants about these companies, each company was confidentially engaged in a significant transaction that involved a merger, tender offer, or stock repurchase.

The SEC's complaint names nine defendants as well as three relief defendants.  The U.S. Attorney's Office for the Southern District of New York filed related criminal charges today against some of the defendants named in the SEC's complaint.

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

"Union Linked to Corruption Scandal," by Steven Greenhouse, The New York Times, December 11, 2008 --- http://www.nytimes.com/2008/12/12/us/politics/12union.html?_r=1

The Service Employees International Union has long boasted that it is on the cutting edge of the labor movement. But it found itself badly embarrassed this week when it was linked by name to Gov. Rod R. Blagojevich’s maneuvering to secure some financial gain from picking the next Senator from Illinois.

The federal criminal complaint filed against Mr. Blagojevich said his chief of staff, John Harris, had suggested to a service employees’ official that the union should help make the governor the head of Change to Win, the federation of seven unions that broke away from the A.F.L.-C.I.O. The complaint said Mr. Blagojevich was seeking a position that paid $250,000 to $300,000 a year.

In exchange, the complaint strongly suggested, the service employees union and Change to Win would help persuade Mr. Blagojevich to name Valerie Jarrett, President-elect Barack Obama’s first choice, as the state’s new senator. And the union would get help from the Obama administration, presumably for its legislative agenda.

Several union officials in Chicago and Washington said that the service employees official approached by Mr. Harris was Tom Balanoff, the president of the union’s giant janitors’ local in Chicago and head of the union’s Illinois state council. Mr. Balanoff, one of the union officials closest to Mr. Obama, is widely seen as an aggressive, successful labor leader, who has helped unionize thousands of janitors not just in the Chicago area but also in Texas.

Reached by telephone on Tuesday, Mr. Balanoff said, “I can’t comment on anything right now.”

The Illinois branch of the service employees issued a statement on Wednesday night saying, “We have no reason to believe that S.E.I.U. or any S.E.I.U. official was involved in any misconduct.” It added that the union and Mr. Balanoff “are fully cooperating with the federal investigation.”

Greg Denier, Change to Win’s spokesman, said the federation “had no involvement, no discussion, no contact” with Mr. Blagojevich or his staff. “The idea of a position at Change to Win was totally an invention of the governor, and his stance has no basis in reality,” Mr. Denier said.

Mr. Denier noted that the presidency of Change to Win was an unsalaried position. The federation’s president, Anna Burger, is the service employees’ secretary treasurer and receives only her S.E.I.U. salary.

Continued in article

Question
How did a grandmother help build the corruption case against the Democratic Party political machine in Illinois?

"Secret Tapes Helped Build Graft Cases In Illinois:  Hospital CEO Reported Shakedown, Wore Wire," by Carrie Johnson and Kimberly Kindy, The Washington Post, December 22, 2008 --- http://www.washingtonpost.com/wp-dyn/content/article/2008/12/21/AR2008122102334.html?hpid=topnews

The wide-ranging public corruption probe that led to the arrest of Illinois Gov. Rod Blagojevich got its first big break when a grandmother of six walked into a breakfast meeting with shakedown artists wearing an FBI wire.

Pamela Meyer Davis had been trying to win approval from a state health planning board for an expansion of Edward Hospital, the facility she runs in a Chicago suburb, but she realized that the only way to prevail was to retain a politically connected construction company and a specific investment house. Instead of succumbing to those demands, she went to the FBI and U.S. Attorney Patrick J. Fitzgerald in late 2003 and agreed to secretly record conversations about the project.

Her tapes led investigators down a twisted path of corruption that over five years has ensnared a collection of behind-the-scenes figures in Illinois government, including Joseph Cari Jr., a former Democratic National Committee member, and disgraced businessman Antoin "Tony" Rezko.

On Dec. 9, that path wound up at the governor's doorstep. Another set of wiretaps suggested that Blagojevich was seeking to capitalize on the chance to fill the Senate seat just vacated by President-elect Barack Obama.

Many of the developments in Operation Board Games never attracted national headlines. They involved expert tactics in which prosecutors used threats of prosecution or prison time to flip bit players in a tangle of elaborate schemes that Fitzgerald has called pay-to-play "on steroids."

But now, Fitzgerald's patient strategy has led to uncomfortable questions not only for Blagojevich but also for the powerful players who privately negotiated with him, unaware that their conversations were being monitored. Democratic Rep. Jesse L. Jackson Jr. faces queries about his interest in the Senate seat, and key players in the Obama presidential transition team -- White House Chief of Staff-designate Rahm Emanuel and adviser Valerie Jarrett -- are being asked about their contacts with the governor on the important appointment.

Pamela Meyer Davis had been trying to win approval from a state health planning board for an expansion of Edward Hospital, the facility she runs in a Chicago suburb, but she realized that the only way to prevail was to retain a politically connected construction company and a specific investment house. Instead of succumbing to those demands, she went to the FBI and U.S. Attorney Patrick J. Fitzgerald in late 2003 and agreed to secretly record conversations about the project.

Her tapes led investigators down a twisted path of corruption that over five years has ensnared a collection of behind-the-scenes figures in Illinois government, including Joseph Cari Jr., a former Democratic National Committee member, and disgraced businessman Antoin "Tony" Rezko.

On Dec. 9, that path wound up at the governor's doorstep. Another set of wiretaps suggested that Blagojevich was seeking to capitalize on the chance to fill the Senate seat just vacated by President-elect Barack Obama.

Many of the developments in Operation Board Games never attracted national headlines. They involved expert tactics in which prosecutors used threats of prosecution or prison time to flip bit players in a tangle of elaborate schemes that Fitzgerald has called pay-to-play "on steroids."

But now, Fitzgerald's patient strategy has led to uncomfortable questions not only for Blagojevich but also for the powerful players who privately negotiated with him, unaware that their conversations were being monitored. Democratic Rep. Jesse L. Jackson Jr. faces queries about his interest in the Senate seat, and key players in the Obama presidential transition team -- White House Chief of Staff-designate Rahm Emanuel and adviser Valerie Jarrett -- are being asked about their contacts with the governor on the important appointment.

Continued in article

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

"The Most Criminal Class Writes the Laws" --- http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers

Old Fashioned Purchasing Executive Kickback Fraud:  Where were the auditors

I've had difficulty discovering what firm audited this company. Both external and internal auditors generally give more attention to the purchasing departments companies than any other department, because this department historically in companies is the source of more frauds than most any other department. In this particular company, the internal controls are blatantly out of line. I wonder who audited this company.

"Executive Stole $65M to Pay Gambling Debts," AccountingWeb, December 23, 2008 --- http://accounting.smartpros.com/x64198.xml

A Ferrari-driving vice president of Fry's Electronics Inc. who was allegedly such a heavyweight gambler that casinos chartered private planes to fly him to Las Vegas, has been arrested on charges he embezzled more than $65 million from the retailer to fuel his lavish lifestyle and pay off debts.

Ausaf Umar Siddiqui is accused by the Internal Revenue Service of concocting an incredibly profitable scheme in which he cut side deals with some of Fry's suppliers, buying their goods at higher prices than they would normally get, and buying more of them than he normally would, in exchange for kickbacks of up to 31 percent of the total sales price.

The IRS alleges in a criminal complaint filed against Siddiqui that he set up a shell company that hid $65.6 million in kickback payments from five Fry's vendors from January 2005 to November 2008. Of that amount, $17.9 million was paid to subsidiaries of Las Vegas Sands Corp., which operates the Venetian Casino Resort, according to the criminal complaint and regulatory filings. Authorities confirmed the payments went to the casino.

Siddiqui, who lives in Palo Alto, California, was ordered held on $300,000 bond Monday at a hearing in U.S. District Court in San Jose. He has been in custody since Friday, when agents arrested him at Fry's headquarters in San Jose in front of stunned co-workers. The details about his Ferrari and the private jets came out during the hearing Monday.

His home phone number is unlisted, and it was not immediately clear whether Siddiqui had a defense lawyer. A criminal complaint is one of the preliminary investigative steps for arresting someone and securing an indictment.

A Fry's spokesman did not return a phone call from The Associated Press left after-hours.

Siddiqui has not been formally charged yet with the wire-fraud allegations laid out in the criminal complaint. Arlette Lee, spokeswoman for the IRS' Criminal Investigation division, said the judge in the case has given the government 20 days to file formal charges, which she said prosecutors intend to do.

As Fry's vice president of merchandising and operations, Siddiqui pulled down a legitimate annual salary of $225,000, supervised a staff of 120 and his team was responsible for buying all the merchandise sold in Fry's 34 stores around the U.S., according to the criminal complaint. The stores are mostly located in California and Texas.

The IRS alleges Siddiqui was able to amass so much illegal money by convincing Fry's executives that he alone should be responsible for a job that is typically handled by independent contractors - the job of the sales representative that brokers deals with the suppliers and the stores for a cut of the total sales price.

The reps are kept independent so they're not seen as favoring one side or the other in sales negotiations, and their job can be lucrative if they're good at it, with commissions ranging from 3 to 8 percent of the total sales they bring in, according to the complaint.

The IRS claims Siddiqui started striking side deals with some of the suppliers, in which he would guarantee he'd keep their products stocked on Fry's shelves, in exchange for kickbacks in the form of steep commissions paid to a company he set up called PC International.

The alleged scheme unraveled when another Fry's executive walked into Siddiqui's office in October and saw spreadsheets on his desk outlining the payments and alleged kickbacks, according to the complaint. Siddiqui was not there, so the executive took the documents, contacted the IRS and handed over the evidence.

The IRS later examined Siddiqui's bank records and found that a total of $167.8 million was deposited into the bogus company's bank account. Seventy wire transfers totaling $65.6 million came from five Fry's suppliers, who were not named as defendants in the case.

Fry's Electronics Home Page --- http://www.frys.com/

For Years Dallas Schools Issued Fake Social Security Numbers

"Dallas Schools Used False Hiring Data," by Gretle C. Kovach, The New York Times, November 14, 2008 --- http://www.nytimes.com/2008/11/15/us/15dallas.html

Eager to hire teachers for bilingual education programs, the Dallas public school system assigned fake Social Security numbers to newly hired foreigners so it could get them on the payroll quickly, an internal investigation found.

The district continued the practice for years, the investigation found, even after it was admonished by a state agency. It was only halted this summer.

“The inappropriate procedure of assigning false SSNs has been systemic,” investigators with the school district’s Office of Professional Responsibility wrote in a report on the matter dated Sept. 25.

The Dallas Morning News ran an article on Friday after obtaining the report, marked “highly confidential,” through a records request.

A state education official said an investigation of the practice was under way and that the Social Security Administration and district attorney’s office were likely to be involved.

Jon Dahlander, a Dallas schools spokesman, said Friday that the practice “was obviously inappropriate.” He added: “I think the intention was good — they wanted to help the employees get paid. But you cannot use inappropriate procedures to do that.”

The investigation identified 26 foreign citizens in an alternative teacher-certification program who were given fake Social Security numbers, contrary to district and state procedure, which called for other identification measures.

The new employees were expected to apply for their own Social Security numbers and to provide them to the school district as soon as they received them.

The procedure was begun “as an expediency,” the report said, “without consideration or thought of the impact of generating false data.”

The false numbers prevented the state from accurately performing criminal background checks, and Dallas school employees routinely entered the false data on Department of Homeland Security and Internal Revenue Service forms held in employee personnel files, the investigators found.

The information would have been provided to federal agencies if requested, but the investigators found no evidence that the false numbers were given to the I.R.S. or the Social Security Administration.

A state education official processing fingerprint and background checks on the new teachers had discovered the practice in 2004 and advised the Dallas district that it was illegal.

“So we were shocked to learn today that Dallas I.S.D. has continued to issue fraudulent Social Security numbers after we admonished them to stop,” said Debbie Ratcliffe, communications director for the Texas Education Agency.

The agency is updating its teacher records and “examining applicable statutes to determine which, if any of them, have been broken and what appropriate action to take,” Ms. Ratcliffe said.

“We think it’s certainly wrong,” she said. “Whether it’s illegal, I’m not sure.”

The practice finally stopped in July, Mr. Dahlander said. That was when the state teacher-certification board reported it to the school district’s Office of Professional Responsibility.

It is unclear if the Dallas schools employees realized the temporary numbers, all with a “200” prefix, had been assigned to Pennsylvania residents. Mr. Dahlander said he did not believe any Pennsylvania residents were affected.

Selling New Equity to Pay Dividends:  Reminds Me About the South Sea Bubble of 1720 ---
http://en.wikipedia.org/wiki/South_Sea_bubble

"Fooling Some People All the Time"

"Melting into Air:  Before the financial system went bust, it went postmodern," by John Lanchester, The New Yorker, November 10, 2008 --- http://www.newyorker.com/arts/critics/atlarge/2008/11/10/081110crat_atlarge_lanchester

This is also why the financial masters of the universe tend not to write books. If you have been proved—proved—right, why bother? If you need to tell it, you can’t truly know it. The story of David Einhorn and Allied Capital is an example of a moneyman who believed, with absolute certainty, that he was in the right, who said so, and who then watched the world fail to react to his irrefutable demonstration of his own rightness. This drove him so crazy that he did what was, for a hedge-fund manager, a bizarre thing: he wrote a book about it.

The story began on May 15, 2002, when Einhorn, who runs a hedge fund called Greenlight Capital, made a speech for a children’s-cancer charity in Hackensack, New Jersey. The charity holds an annual fund-raiser at which investment luminaries give advice on specific shares. Einhorn was one of eleven speakers that day, but his speech had a twist: he recommended shorting—betting against—a firm called Allied Capital. Allied is a “business development company,” which invests in companies in their early stages. Einhorn found things not to like in Allied’s accounting practices—in particular, its way of assessing the value of its investments. The mark-to-market accounting that Einhorn favored is based on the price an asset would fetch if it were sold today, but many of Allied’s investments were in small startups that had, in effect, no market to which they could be marked. In Einhorn’s view, Allied’s way of pricing its holdings amounted to “the you-have-got-to-be-kidding-me method of accounting.” At the same time, Allied was issuing new equity, and, according to Einhorn, the revenue from this could be used to fund the dividend payments that were keeping Allied’s investors happy. To Einhorn, this looked like a potential Ponzi scheme.

The next day, Allied’s stock dipped more than twenty per cent, and a storm of controversy and counter-accusations began to rage. “Those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie,” Allied’s C.E.O. said. Einhorn would be the first to admit that he wanted Allied’s stock to drop, which might make his motives seem impure to the general reader, but not to him. The function of hedge funds is, by his account, to expose faulty companies and make money in the process. Joseph Schumpeter described capitalism as “creative destruction”: hedge funds are destructive agents, predators targeting the weak and infirm. As Einhorn might see it, people like him are especially necessary because so many others have been asleep at the wheel. His book about his five-year battle with Allied, “Fooling Some of the People All of the Time” (Wiley; $29.95), depicts analysts, financial journalists, and the S.E.C. as being culpably complacent. The S.E.C. spent three years investigating Allied. It found that Allied violated accounting guidelines, but noted that the company had since made improvements. There were no penalties. Einhorn calls the S.E.C. judgment “the lightest of taps on the wrist with the softest of feathers.” He deeply minds this, not least because the complacency of the watchdogs prevents him from being proved right on a reasonable schedule: if they had seen things his way, Allied’s stock price would have promptly collapsed and his short selling would be hugely profitable. As it was, Greenlight shorted Allied at $26.25, only to spend the next years watching the stock drift sideways and upward; eventually, in January of 2007, it hit thirty-three dollars.

All this has a great deal of resonance now, because, on May 21st of this year, at the same charity event, Einhorn announced that Greenlight had shorted another stock, on the ground of the company’s exposure to financial derivatives based on dangerous subprime loans. The company was Lehman Brothers. There was little delay in Einhorn’s being proved right about that one: the toppling company shook the entire financial system. A global cascade of bank implosions ensued—Wachovia, Washington Mutual, and the Icelandic banking system being merely some of the highlights to date—and a global bailout of the entire system had to be put in train. The short sellers were proved right, and also came to be seen as culprits; so was mark-to-market accounting, since it caused sudden, cataclysmic drops in the book value of companies whose holdings had become illiquid. It is therefore the perfect moment for a short-selling advocate of marking to market to publish his account. One can only speculate whether Einhorn would have written his book if he had known what was going to happen next. (One of the things that have happened is that, on September 30th, Ciena Capital, an Allied portfolio company to whose fraudulent lending Einhorn dedicates many pages, went into bankruptcy; this coincided with a collapse in the value of Allied stock—finally!—to a price of around six dollars a share.) Given the esteem with which Einhorn’s profession is regarded these days, it’s a little as if the assassin of Archduke Franz Ferdinand had taken the outbreak of the First World War as the timely moment to publish a book advocating bomb-throwing—and the book had turned out to be unexpectedly persuasive.

Heavy Insider Trading --- http://investing.businessweek.com/research/stocks/ownership/ownership.asp?symbol=ALD

Allied's independent auditor is KPMG
KPMG has a lot of problems with litigation --- http://www.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on the collapse of the Banking System are at http://www.trinity.edu/rjensen/2008Bailout.htm

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/Fraud.htm
Also see Fraud Rotten at http://www.trinity.edu/rjensen/FraudRotten.htm

Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory01.htm
Also see the theory of fair value accounting at http://www.trinity.edu/rjensen/theory01.htm#FairValue

Siemens to Pay $1.34 Billion in Bribery Settlement
One major question spiraling out of all this is what roll Siemens' auditor, KPMG played in allowing all this to come to pass.
The Daily Caveat, November 26, 2008 --- http://www.michaeldavidthomas.com/dailycaveat/labels/Siemens.html

The American settlement includes a $350 million payment to the Securities and Exchange Commission to settle allegations of accounting rule violations, which Siemens neither admitted nor denied. Siemens falls under American jurisdiction because its shares are listed in New York. Siemens pleaded guilty to circumventing and failing to maintain adequate internal controls, a requirement of the antibribery law, and will pay $450 million to the Justice Department. Three Siemens subsidiaries also pleaded guilty to more specific charges.

"Siemens to Pay $1.34 Billion in Bribery Settlement," by Carter Dougherty, The New York Times, December 15, 2008 --- http://www.nytimes.com/2008/12/16/business/worldbusiness/16siemens.html

Siemens, the German engineering conglomerate, closed the book on Monday on wide-ranging criminal investigations in the United States and Germany by agreeing to pay a record $1.34 billion in fines to settle cases accusing it of bribery around the world.

In Washington, Siemens’s general counsel, Peter Solmssen, signed an $800 million settlement with the Department of Justice and the Securities and Exchange Commission to end an inquiry into possible violations of the Foreign Corrupt Practices Act. The fine is, by a colossal margin, the largest ever imposed under the antibribery legislation, now 31 years old.

Munich prosecutors, whose trailblazing work revealed the outlines of a huge system of slush funds and illegal payments, also announced a deal with Siemens that would cost the company 395 million euros , or $540 million.

German authorities are still looking into potential wrongdoing by former Siemens employees that could result in criminal charges.

Crucially, Siemens avoided either a guilty plea or a conviction for bribery, allowing it to maintain its status as a “responsible contractor” with the United States Defense Logistics Agency. Without this benchmark certification, Siemens could have been excluded from public procurement contracts in the United States and elsewhere. German authorities are preparing a similar certification.

The fine in the United States was nearly 17 times more than the next-largest imposed for overseas commercial bribery. Yet it still represents victory for Siemens, because it is far below what might have been levied under the Justice Department’s guidelines.

With $1.36 billion identified as potentially corrupt payments worldwide, a fine of up to $2.7 billion would have been possible. But American authorities said in court papers filed in Washington that they were impressed by the company’s efforts to identify wrongdoing and prevent new occurrences.

“Compared to other cases that have been brought, we have been dealt with very fairly,” Mr. Solmssen of Siemens said in a telephone interview.

The next-highest fine imposed by American authorities for bribery was $48 million, paid by the oil field services company Baker Hughes in 2007.

Shares of Siemens, based in the southern German city of Munich, initially rallied on the news, which was lower than what investors had anticipated as settlement talks entered their final phase this autumn. But the shares later fell lower in Frankfurt, ending at 47.15 euros, down 23 euro cents. On the New York Stock Exchange, the American depository receipts of Siemens gained 55 cents, to $64.47.

“Before Siemens started giving hints, we would have expected much more,” said Roland Pitz, an analyst at UniCredit in Munich. “The employees must be celebrating.”

Gerhard Cromme, the Siemens chairman — who had to juggle the sudden departure of a chief executive as a result of the crisis, and a two-year distraction from its core business of manufacturing energy, medical and other industrial equipment, — allowed himself just a few smiles as he announced the deals in Munich.

“Siemens is closing a painful chapter in its history,” Mr. Cromme said at a news conference.

The American settlement includes a $350 million payment to the Securities and Exchange Commission to settle allegations of accounting rule violations, which Siemens neither admitted nor denied. Siemens falls under American jurisdiction because its shares are listed in New York.

Siemens pleaded guilty to circumventing and failing to maintain adequate internal controls, a requirement of the antibribery law, and will pay $450 million to the Justice Department. Three Siemens subsidiaries also pleaded guilty to more specific charges.

The Siemens approach was also striking for its alacrity. The Baker Hughes settlement took five years to reach, but Siemens, determined to end a persistent distraction to a new management team, pulled off a settlement in less than two.

Munich prosecutors are still investigating former Siemens employees and say they have not ruled out criminal charges. So far, they have leveled only minor charges of failing to effectively supervise the company against two former chief executives, Heinrich von Pierer and Klaus Kleinfeld, which could result at most in fines.

“This investigation will continue as planned and might take considerable time,” Christian Schmidt-Sommerfeld, the lead Munich prosecutor, said in a statement on Monday.

But the company itself is no longer in danger of being charged.

“We have wrapped up all of the potential claims against Siemens arising out of the alleged conduct in both countries,” Mr. Solmssen said.

Continued in article

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

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

"SEC Bars Adviser's Former Managing Director for Conversion, Fraud," Securities Law Professor Blog, November 21, 2008 --- http://lawprofessors.typepad.com/securities/

The SEC imposed sanctions on Brendan E. Murray, formerly a managing director of registered investment advisor Cornerstone Equity Advisers, Inc. (Cornerstone) and secretary to Cornerstone's advisory clients the Cornerstone Funds, Inc. (Funds), for willfully aiding and abetting, and being a cause of, Cornerstone's violations of antifraud provisions of the Investment Advisers Act of 1940. Cornerstone, a fiduciary to the Funds, misappropriated client funds by knowingly inflating and falsifying vendor invoices, directing the payments of the inflated amounts to an intermediary, and instructing the intermediary to pay the vendors lesser amounts (or nothing) while keeping the overage. The Commission found that Murray participated in the scheme by creating, submitting, and authorizing payment of the inflated invoices. The Commission also found that Murray, who as secretary owed a fiduciary duty to the Funds, converted corporate funds by knowingly submitting inflated invoices for reimbursement. The Commission concluded that it is in the public interest to bar Murray from associating with any investment adviser or investment company, to impose a cease-and-desist order, to impose a civil money penalty in the amount of $60,000, and to order disgorgement in the amount of $21,157 plus prejudgment interest.

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

"Major Source of Internet Spam Yanked Offline:  Web Hosting Firm Shuttered After Connection to Spammers is Exposed," by Brian Krebs, The Washington Post, November 12, 2008 --- http://www.washingtonpost.com/wp-dyn/content/article/2008/11/12/AR2008111200658.html?wpisrc=newsletter

The gleaming, state-of-the-art, 30-story office tower in downtown San Jose, Calif., hardly looks like the staging ground for a full-scale cyber crime offensive against America. But security experts say a relatively small Web hosting firm at that location is home to servers that help manage the distribution of the majority of the world's junk e-mail.

The servers are owned by McColo Corp, a Web hosting company that has emerged as a major U.S. base of operations for a host of international cyber-crime syndicates, involved in everything from the remote management of millions of compromised PCs to the sale of counterfeit pharmaceuticals and designer goods, fake security products and child pornography.

Multiple security researchers have recently published data naming McColo as a mother ship for all of the top robot networks or "botnets," which are vast collections of hacked computers that are networked together to blast out spam or attack others online.

Joe Stewart, director of malware research for Atlanta based SecureWorks, said that these known criminal botnets: "Mega-D," "Srizbi," "Pushdo,""Rustock" and "Warezov," have their master servers hosted at McColo.

Collectively, these botnets are responsible for sending roughly 75 percent of all spam each day, according to the latest stats from Marshal, a security company in the United Kingdom that tracks botnet activity.

Vincent Hanna, a researcher for the anti-spam group Spamhaus.org, said Spamhaus sees roughly 1.5 million computers infected with either Srizbi or Rustock sending spam over an average one-week timeframe.

Hanna said McColo has for years been the source of botnet and other cyber-criminal activity, and that it has a reputation as one of the most dependable players in the so-called "bulletproof hosting" business, which are Web servers that will remain online regardless of complaints.

"These are serious issues, almost all relating to the very core of spammer infrastructure," he said.

Officials from McColo did not respond to multiple e-mails, phone calls and instant messages left at the contact points listed on the company's Web site. But within hours of being presented with evidence from the security community about illegal activity coming from McColo's network, the two largest Internet providers for the company decided to pull the plug on McColo late Tuesday.

Global Crossing, a Bermuda-based company with U.S. operations in New Jersey, declined to discuss the matter, except to say that Global Crossing communicates and cooperates fully with law enforcement, their peers, and security researchers to address malicious activity.

Benny Ng, director of marketing for Hurricane Electric, the Fremont, Calif., company that was the other major Internet provider for McColo, took a much stronger public stance.

"We shut them down," Ng said. "We looked into it a bit, saw the size and scope of the problem [washingtonpost.com was] reporting and said 'Holy cow!' Within the hour we had terminated all of our connections to them."

Continued in article

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

Enron Executive Belatedly Pleads Guilty and Receives Jail Time Plus a fine of $8.7 Million

For years I've maintained an active timeline on events connected with the Enron scandal. With the final payout to shareholders and creditors, I thought this timeline came to an end. But it just seems to go on and on --- http://www.trinity.edu/rjensen/FraudEnron.htm#EnronTimeline

"Former Enron Exec Pleads Guilty," USA Today, October 15, 2008 ---
http://blogs.usatoday.com/ondeadline/2008/10/ex-enron-execut.html?loc=interstitialskip

The former chief executive of Enron Broadband Services pleaded guilty today to one felony count of wire fraud rather than risk a second jury trial.

Joseph Hirko, 52, of Portland, Ore., will serve no more than 16 months in prison and must pay $8.7 million in restitution for Enron victims. He also agreed to cooperate in other broadband prosecutions. Sentencing is set for March 3.

Hirko admitted to allowing press releases to be distributed in 2000 that said a groundbreaking operating system had been embedded in Enron's broadband network that would allow users to pay only for bandwidth they used instead of a flat monthly fee. The operating system was still being developed, however, and never materialized.

In accepting the plea deal, U.S. District Judge Vanessa Gilmore issued a stern, civics reminder to Hirko, the Houston Chronicle said.

''Mr. Hirko, let me remind you that as a convicted felon, you may not vote in the upcoming election,'' Gilmore said. ''Don't make that mistake.''

Bob Jensen's threads on the Enron scandal are at http://www.trinity.edu/rjensen/FraudEnron.htm

"Judge Rules In Favor Of CCSU Student Expelled For Cheating," by Leretta Waldman, The Hartford Courant, December 4, 2008 --- http://www.courant.com/news/education/hcu-cheating-1204,0,4033428.story

A Waterbury Superior Court judge has ruled in favor of a New Milford man expelled from Central Connecticut State University in 2006 for cheating. In a decision issued late Wednesday, Judge Jane Scholl cited a preponderance of evidence supporting Matthew Coster's claim that it was another student, Cristina Duquette of Watertown, who took Coster's term paper on the holocaust, not the other way around.

Coster and his family brought the civil suit against Duquette to clear his name and recoup the over $25,000 they spent pursuing the case. CCSU officials have said they would reconsider their decision pending the outcome of the suit but to date nothing has been scheduled.

Continued in article

Jensen Comment
What I found interesting is the fact that the student named Matthew Costner was expelled for a first-time offense. Most colleges are not currently expelling a student for the first-time plagiarizing of a term paper.

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

Labor Unions Want Less Financial Disclosure and accountability:  Why?

From day one of the Obama era, union leaders want the lights dimmed on how they spend their mandatory member dues. The AFL-CIO's representative on the Obama transition team for Labor is Deborah Greenfield, and we're told her first inspection stop was the Office of Labor-Management Standards, or OLMS, which monitors union compliance with federal law. Ms. Greenfield declined to comment, citing Obama transition rules, but her mission is clear enough. The AFL-CIO's formal "recommendations" to the Obama team call for the realignment of "the allocation of budgetary resources" from OLMS to other Labor agencies. The Secretary should "temporarily stay all financial reporting regulations that have not gone into effect," and "revise or rescind the onerous and unreasonable new requirements," such as the LM-2 and T-1 reporting forms. The explicit goal is to "restore the Department of Labor to its mission and role of advocating for, protecting and advancing the interests of workers." In other words, while transparency is fine for business, unions are demanding a pass for themselves.
"Quantum of Solis Big labor wants Obama to dilute union disclosure rules," The Wall Street Journal, December 21, 2008 --- http://online.wsj.com/article/SB122990431323225179.html?mod=djemEditorialPage

"Feds: Huffman Confesses to Scam:  500 investors scammed out of $25 million over 17 years, officials says," SmartPros, November 14, 2008 --- http://accounting.smartpros.com/x63808.xml

J.V. Huffman Jr. confessed to scamming hundreds of investors out of millions of dollars, according to documents released Thursday by the U.S. Securities and Exchange Commission.

In a civil action lawsuit filed in federal court Wednesday by the SEC against the Huffman and his company, the Biltmore Financial Group Inc., the SEC said Huffman conducted a Ponzi scheme, pulling in 500 people in North Carolina and other states since 1991.

He raised about $25 million from these investors, who initially believed they were investing in a mutual fund. After Sept. 11, 2001, Huffman expanded his claims, and told investors the Biltmore Financial pooled investors' money to purchase and sell mortgages for a profit.

Huffman confessed to authorities a week ago, when the N.C. Secretary of State's office searched his home on Wishing Well Lane in Claremont, according to a release from the SEC. He told authorities he never invested the funds the investors gave his company, Biltmore Financial, and said he used new investor funds to pay the profits of earlier investors. Some funds were used for his lavish lifestyle, including an Aston Martin convertible, a $1 million RV, renovations to his home, vacations and rental properties.

"In a tragic example of the way a fraudster operates a Ponzi scheme, Huffman deceived neighbors and members of his church and religious community, as well as strangers, to finance his extravagant way of life," said Katherine Addleman, director of the SEC's Atlanta, Ga., regional office. "Huffman lied to get investors' trust and then spent their invested funds on fancy cars and vacation homes."

Huffman's wife, Gilda, was named as a relief defendant in the civil suit, so assets filed under both names could be attained, according to officials with the SEC.

An order also was filed in federal court Wednesday to appoint a receiver and freeze all of Huffman's and Biltmore Financial's assets. These include assets, money, securities and properties. A receiver's job is to take control of assets and ensure they're protected. Walt Pettit, of Kellam and Pettit in Charlotte, was appointed as the receiver.

According to the order, Pettit has the authority to manage, control and operate Huffman's estate. He can use the income, earnings and profits of the estate to take into possession any goods, money, lands, books or record of accounts, data or materials, conduct the business operations of Biltmore Financial and the properties they control and make any payments or dispose of assets as necessary. Pettit also can receive and collect money owed to Biltmore Financial and Huffman, and can renew or cancel lease agreements.

As the receiver, Pettit must file a preliminary report with the court within 45 days of the order, identifying the location and values of Huffman's and Biltmore Financial's assets, and any liabilities he had.

The receiver also is the individual who will ultimately decide how Huffman's profits will be divided up.

The order also states that funds be frozen, with the exception of $15,000 for living expenses for the Huffmans for one month. After one month, Huffman can apply to the court with a signed, sworn statement of financial condition for the amount they need for ordinary living expenses.

The scheme:

Since 1991, J.V. Huffman Jr. operated Biltmore Financial Group Inc. Investors gave him $1,000 or more, and were told the money would be invested in a mutual fund.

After Sept. 11, 2001, Huffman changed his claims to investors by saying profits were generated by buying and selling mortgages. Profits fluctuated at market rates, but were guaranteed "never to drop below 0.00 percent."

Investors received monthly or quarterly reports, and were told they could withdraw their money without penalty in no more than 30 days. Biltmore Financial said its "approach is very conservative and tries to provide a healthy return at no risk."

According to the Biltmore Financial Group Company Dossier, which was sent to investors, interest rates paid to investors ranged from 8.02 percent one year to as high as 16.54 percent in 2007. In Huffman's first year, 1991, interest was 10.15 percent.

Other information provided to investors stated that "measures are taken to insure against any loss. Included but not limited to various forms of insurance from: State Farm, Thrivent Financial, American Express, Asset Guarantee, Securities Investor Protection Corporation." It also states the company's assets are insured and secured by the FDIC, SIPC and Thrivent Financial Services.

Will the large auditing firms survive the lawsuits by the destroyed shareholders of failed banks? ---
http://www.trinity.edu/rjensen/2008bailout.htm#Auditors

Deloitte is Included in the Shareholder Lawsuit Against Washington Mutual

"Feds Investigating WaMu Collapse," SmartPros, October 16, 2008 --- http://accounting.smartpros.com/x63521.xml

Oct. 16, 2008 (The Seattle Times) — U.S. Attorney Jeffrey Sullivan's office [Wednesday] announced that it is conducting an investigation of Washington Mutual and the events leading up to its takeover by the FDIC and sale to JP Morgan Chase.

Said Sullivan in a statement: "Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated."

Sullivan's task force includes investigators from the FBI, Federal Deposit Insurance Corp.'s Office of Inspector General, Securities and Exchange Commission and the Internal Revenue Service Criminal Investigations division.

Sullivan's office asks that anyone with information for the task force call 1-866-915-8299; or e-mail fbise@leo.gov.

"For more than 100 years Washington Mutual was a highly regarded financial institution headquartered in Seattle," Sullivan said. "Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, its leaders, and others to determine if any federal laws were violated."

WaMu was seized by the FDIC on Sept. 25, and its banking operations were sold to JPMorgan Chase, prompting a Chapter 11 bankruptcy filing by Washington Mutual Inc., the bank's holding company. The takeover was preceded by an effort to sell the entire company, but no firm bids emerged.

The Associated Press reported Sept. 23 that the FBI is investigating four other major U.S. financial institutions whose collapse helped trigger the $700 billion bailout plan by the Bush administration.

The AP report cited two unnamed law-enforcement officials who said that the FBI is looking at potential fraud by mortgage-finance giants Fannie Mae and Freddie Mac, and insurer American International Group (AIG). Additionally, a senior law-enforcement official said Lehman Brothers Holdings is under investigation. The inquiries will focus on the financial institutions and the individuals who ran them, the senior law-enforcement official said.

FBI Director Robert Mueller said in September that about two dozen large financial firms were under investigation. He did not name any of the companies but said the FBI also was looking at whether any of them have misrepresented their assets.

"Federal Official Confirms Probe Into Washington Mutual's Collapse," by Pierre Thomas and Lauren Pearle, ABC News, October 15, 2008 --- http://abcnews.go.com/TheLaw/story?id=6043588&page=1

 

The federal government is investigating whether the leadership of shuttered bank Washington Mutual broke federal laws in the run-up to its collapse, the largest in U.S. history.

. . .

Eighty-nine former WaMu employees are confidential witnesses in a shareholder class action lawsuit against the bank, and some former insiders spoke exclusively to ABC News, describing their claims that the bank ignored key advice from its own risk management team so they could maximize profits during the housing boom.

In court documents, the insiders said the company's risk managers, the "gatekeepers" who were supposed to protect the bank from taking undue risks, were ignored, marginalized and, in some cases, fired. At the same time, some of the bank's lenders and underwriters, who sold mortgages directly to home owners, said they felt pressure to sell as many loans as possible and push risky, but lucrative, loans onto all borrowers, according to insiders who spoke to ABC News.

Continued in article

 

Allegedly "Deloitte Failed to Audit WaMu in Accordance with GAAS" (see Page 351) --- Click Here
Deloitte issued unqualified opinions and is a defendant in this lawsuit (see Page 335)
In particular note Paragraphs 893-901 with respect to the alleged negligence of Deloitte.

Bob Jensen's threads on Deloitte's lawsuits and its $1 million PCAOB fine are at http://www.trinity.edu/rjensen/Fraud001.htm#Deloitte

Ten Times More Complex Than Enron

"The Creditors of Lehman Can Do Little but Wait," by Julia Werdigier, The New York Times, November 14, 2008 --- http://www.nytimes.com/2008/11/15/business/worldbusiness/15lehman.html?_r=2&oref=slogin&oref=slogin

Creditors of Lehman Brothers’ international business, arriving at London’s gigantic O2 concert hall on Friday, had no illusions about getting their money back any time soon.

In a three-hour meeting in a hall usually reserved for rock bands like the Who, Lehman’s administrators explained to about 1,000 creditors that dismantling the bank’s European business would take “many years.”

This is at least “ten times more complex than Enron,” the administrators from PricewaterhouseCoopers said, adding that they had no idea what the company’s total liabilities may be.

“It’s frustrating that after nine weeks, we still haven’t come to any clarity,” especially on how much counterparties hold with Lehman’s European business, said Tony Lomas, the PricewaterhouseCoopers partner leading the administration. “The prospect is that the creditors will lose money.”

PricewaterhouseCoopers identified 11,500 creditors and counterparties of Lehman’s European business, ranging from the coffee machine maker Nespresso and taxi companies in Milan and Zurich to Bulgari hotels and resorts and the financial news company Bloomberg.

From Lehman’s glass and steel offices in London’s Canary Wharf, the administrators are working through the bank’s $1 trillion of assets and said they cannot pay creditors until they have a “reasonable grip” on liabilities.

Continued in article

Investigators have subpoenaed Ernst & Young LLP, Lehman's auditor; U.K.-based bank Barclays Plc, which bought Lehman's North American brokerage; and the New Jersey Division of Investments, which runs a pension fund that lost $115.6 million on a $180 million investment in the June stock sale, according to people familiar with the case.
Linda Sandler and Christopher Scinta, "Lehman's Collapse, Stock Sale Probed by Three U.S. Prosecutors ," Bloomberg, October 18, 2008 ---
http://www.bloomberg.com/apps/news?pid=20601087&sid=ai0XSrkkEKEM&refer=worldwide

"Calif County Accuses Lehman Executives, Auditor Of Fraud In Suit," CNN, November 13, 2008 --- Click Here  http://money.cnn.com/news/newsfeeds/articles/djf500/200811131743DOWJONESDJONLINE000915_FORTUNE5.htm

The San Mateo County (Calif.) Investment Pool sued executives of bankrupt Lehman Brothers Holdings Inc. (LEHMQ) and their accountants, accusing them of fraud, deceit and misleading accounting practices that led to the loss of more than $150 million in county funds.

The suit, filed in San Francisco Superior Court, said executives of the former Wall Street investment bank made repeated public statements about its financial strength while privately scrambling to save it from collapse.

The suit names former Lehman Chief Executive Richard S. Fuld Jr., former Chief Financial Officers Christopher M. O'Meara and Erin Callan, former President Joseph M. Gregory, certain directors and Ernst & Young, Lehman's auditor.

It accused Lehman of hiding its exposure to mortgage-related losses while reporting record profits for fiscal year 2007 and giving bonuses to its executives.

"The defendants focused their efforts on trying to save their company and their jobs with little or no regard to how their egregious actions harmed those who in good faith invested in Lehman Brothers," said San Mateo County Counsel Michael Murphy. "In our view, their actions were blatantly illegal."

The San Mateo County Investment Pool consists of the county, school districts, special districts and other public agencies in the county.

San Mateo County Supervisors Richard Gordon and Rose Jacobs Gibson called for a federal investigation of the allegations in the suit, and Supervisor Jerry Hill, newly elected to the state Assembly, will request hearings on how many California public entities face similar losses.

Representatives of Lehman and of Ernst & Young were not immediately available to comment.

This is but one of many lawsuits and criminal investigations to be faced Ernst & Young and the other large auditing firms. Survival of the Big Four will be precarious --- http://www.trinity.edu/rjensen/Fraud001.htm

Also see Appendix H

Most Common Resume Lies (Forbes) --- http://www.forbes.com/fdc/welcome_mjx.shtml

From foolish fibs to full-on fraud, lying on your résumé is one of the most common ways that people stretch the truth. But think twice before you ship off your next half-baked job application. Even if your moral compass doesn't keep you from deceit, the fact that human resources is on to the game should.

The percentage of people who lie to potential employers is substantial, says Sunny Bates, CEO of New York-based executive recruitment firm Sunny Bates Associates. She estimates that 40% of all résumés aren't altogether aboveboard.

And this game of employment Russian roulette is getting riskier and riskier. Almost 40% of human resources professionals surveyed last year by the Society for Human Resource Management reported they've increased the amount of time they spend checking references over the past three years.

View a slide show of the most common résumé lies.

Truth of Fiction:  Top Resume Lies (Strategic HR Lawyer) --- http://www.strategichrlawyer.com/weblog/2006/07/truth_or_fictio.html 

Resume lies you can't get away with (CNN) --- http://edition.cnn.com/2007/US/Careers/01/19/cb.lies/index.html

The 10 Most Memorable and Outrageous Resume Lies (DIGG) ---
http://digg.com/business_finance/The_10_Most_Memorable_and_Outrageous_Resume_Lies

Executive Lies About His MBA from the University of Southern California
Officials at the University of Southern California -- responding to an inquiry from the Journal -- told the company it had no record that Mr. Lanni had earned a master's degree in business administration from the school. A corporate biography of Mr. Lanni on MGM Mirage's Web site says he holds an MBA in finance from USC. Mr. Lanni is a longtime patron of USC, joining boards and speaking at the school over the years, Mr. Murren and others said. For example, he is currently a member of the Board of Overseers of USC's Keck School of Medicine. The university contacted MGM Mirage on Wednesday following the Journal's inquiries about a recent discovery by Barry Minkow, a private fraud investigator in San Diego, of a discrepancy between Mr. Lanni's corporate biography and a database of college degrees accessible to private investigators. (Please see related article.) Mr. Minkow said he has no investment position in MGM Mirage, but one of his employees has bought "put" options betting against the company's stock.
"MGM Mirage CEO to Resign Amid Questions About MBA," by Keith J. Winstein and Tamara Audi, The Wall Street Journal, The Wall Street Journal, November 14, 2008 --- http://online.wsj.com/article_email/SB122661583489225999-lMyQjAxMDI4MjE2NDYxMTQ1Wj.html

Jensen Comment
An anonymous tip revealed that Lanni was a major fund raiser at one time for the USC School of Accountancy. Although Lanni has claimed on his resume that he has a BS in speech, it turns out that he does have a BS in Business (not from the USC School of Accountancy where he was a fund raiser).

In terms of wealth Lanni can still claim he gambled and won at the MGM Mirage in Las Vegas.

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

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

A CPA Auditor in Deloitte Commits Felony Fraud Over Years of Managing Audits
Question
How should his fraud be disclosed on a victim's financial statements?

October 31, 2008 message from Dennis Beresford [dberesfo@terry.uga.edu]

Deloitte Says Partner Traded Illegally

WILMINGTON, DEL. (CN) -
Deloitte & Touche says a 30-year partner traded on inside information he got from audits, and lied about it for years. It sued Thomas P. Flanagan in Chancery Court. Flanagan "for 30 years was a partner" in Deloitte & Touche or a predecessor "until his abrupt resignation less than two months ago," Deloitte claims. It says he betrayed his trust and violated company policy by trading in securities of audit clients, including some of his own accounts, since 2005. "Compounding his wrongdoing, Flanagan repeatedly lied to Deloitte about his clandestine trading activities in annual written certifications, going to far as to conceal the existence of a number of his brokerage accounts to avoid detection of his improper conduct," Deloitte says. It says that both Deloitte and its clients have had to pay legal costs to investigate Deloitte's ability to continue as independent auditor, due to Flanagan's shenanigans. It seeks monetary damages. The complaint does not state, or estimate, how much Flanagan made from his alleged inside trades. Deloitte says that it still does not know the extent of them. Deloitte & Touche is represented by Paul Lockwood with Skadden Arps.

http://www.courthousenews.com/2008/10/30/Deloitte_Says_Partner_Traded_Illegally.htm

 

October 31, 2008 message from Dennis Beresford [dberesfo@terry.uga.edu]

Bob,

Here's a little more information. This is from the most recent 10-Q for USG. I understand that similar approaches were used in the other cases where this occurred.

Note that the person in question was the "advisory partner" rather than engagement partner or concurring partner. Most of the large firms use senior partners in a similar "relationship management" way. So the person wouldn't necessarily have been involved in detailed auditing or review, but he might have been involved if there were significant judgmental issues that the engagement team needed to resolve. In this case it looks like D&T decided that wasn't the case.

Denny

ITEM 5. OTHER INFORMATION
Since 2002, Deloitte & Touche LLP has served as the independent registered public accountants with respect to our financial statements. In September 2008, Deloitte advised us that they believed a member of Deloitte’s client service team that serves us had entered into two option trades involving our securities in July 2007. This individual had served as the advisory partner on Deloitte’s client service team for us from 2004 until September 2008. The advisory partner is no longer an active partner at Deloitte. Under the Deloitte client service model as we understand it, the role of an advisory partner is primarily to serve in a client-relationship maintenance and assessment role. Securities and Exchange Commission rules require that we file annual financial statements that are audited by registered independent public accountants. SEC rules also provide that when a partner serving in a capacity such as that of this advisory partner has an investment in securities of an audit client, the audit firm should not be considered independent with respect to that client. Based on our review of the former advisory partner’s role and activities, we do not believe that he had any substantive role or influenced any substantive portion of any audit or review of our financial statements. The former advisory partner attended many, but not all, of our audit committee meetings. At these meetings, he reviewed with the committee reports of the annual inspection of Deloitte conducted by the Public Company Accounting Oversight Board as well as Deloitte’s annual client service assessments. He did not review any substantive audit matters with the committee at any of these meetings or at any other time. The former advisory partner also met once or twice a year with our audit committee chair and once per year with the other members of our audit committee as well as our chief executive officer and chief financial officer. The stated purpose of these meetings was to foster and strengthen Deloitte’s ongoing relationship with us. The former advisory partner attended our annual meetings of shareholders as one of the Deloitte representatives attending those meetings. Neither the former advisory partner nor any other Deloitte representatives spoke at any of these meetings and no questions were asked of Deloitte. At the direction of our audit committee, we conducted an extensive investigation into the facts and circumstances of the extent of any involvement of the former advisory partner with our audit. We retained outside counsel and a consulting firm specializing in accounting issues to assist in this investigation. Outside counsel led the process and conducted personal interviews with the current and former lead client service partners, the concurring review partner, the current and former senior managers on our account and the tax matters partner, as well as the members of our audit committee and key members of our internal finance and accounting departments, including our chief financial

 

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

Agency Theory Question
Why do corporate executives like fair value accounting better than shareholders?

Answer
Cash bonuses on the upside are not returned after the downturn that wipes out the previous unrealized paper profits.

Phantom (Unrealized) Profits on Paper, but Real Cash Outflows for Employee Bonuses and Other Compensation
Rarely, if ever, are they forced to pay back their "earnings" even in instances of earnings management accounting fraud

"On Wall Street, Bonuses, Not Profits, Were Real," by Louise Story, The New York Times, December 17, 2008 --- http://www.nytimes.com/2008/12/18/business/18pay.html?partner=permalink&exprod=permalink

"Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”

— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

A Bonus Bonanza

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”

A Money Machine

Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.

Skip to next paragraph

Bloomberg News Dow Kim received $35 million in 2006 from Merrill Lynch.

The Reckoning Cashing In Articles in this series are exploring the causes of the financial crisis.

Previous Articles in the Series » Multimedia Graphic It Was Good to Be a Mortgage-Related Professional . . . Related Times Topics: Credit Crisis — The Essentials

Patrick Andrade for The New York Times Brian Lin is a former mortgage trader at Merrill Lynch who lost his job at Merrill and now works at RRMS Advisors. Readers' Comments Share your thoughts. Post a Comment »Read All Comments (363) »

Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.

After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.

Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.

Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.

Continued in article

Bob Jensen's threads on fair value accounting are a http://www.trinity.edu/rjensen/Theory01.htm#FairValue

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

Hilarious at First --- and Then You Think About It
Link forwarded by Jim Fuehrmeyer [jfuehrme@nd.edu]

"Proposed new Bailout Plan," by Andreas Hippin, Bloomberg, November 20, 2008 ---
http://www.wallstreetoasis.com/forums/proposed-new-bailout-plan

The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.

The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ``You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS's are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody's and S&P have already issued their top investment grade ratings for the PRBS's.

Head pirate, Ubu Kalid Shandu, said "we need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster." Shandu added, "We don't call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better."

I'm suspicious that Andreas Hippin, in the above tidbit, was inspired by "The End" by Michael Lewis
"The End," by Michael Lewis December 2008 Issue The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true
Also see http://www.trinity.edu/rjensen/2008Bailout.htm#TheEnd 

From the Financial Clippings Blog on October 22, 2008 --- http://financeclippings.blogspot.com/

I wrote earlier that credit rating agencies seem to be run like protection rackets..

from CNBC

In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.

Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.

Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."

Fraud and incompetence among credit rating agencies --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

Liars Poker II is called "The End"
The Not-Funny Punch Line is Not Until Page 9 of This Tongue in Cheek Explanation of the Meltdown on Wall Street!

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public (beg for a government bailout) and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

This is a must read to understand what went wrong on Wall Street --- especially the punch line!
"The End," by Michael Lewis December 2008 Issue The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

The New Order The crash did more than wipe out money. It also reordered the power on Wall Street. What a Swell Party A pictorial timeline of some Wall Street highs and lows from 1985 to 2007. Worst of Times Most economists predict a recovery late next year. Don’t bet on it. Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

From that moment, Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of ­borrowed money, and imagine what they’d fetch in a fire sale. The vast assemblages of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.

Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it’s true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.’s themselves didn’t know.

Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

At some point, I could no longer contain myself: I called Whitney. This was back in March, when Wall Street’s fate still hung in the balance. I thought, If she’s right, then this really could be the end of Wall Street as we’ve known it. I was curious to see if she made sense but also to know where this young woman who was crashing the stock market with her every utterance had come from.

It turned out that she made a great deal of sense and that she’d arrived on Wall Street in 1993, from the Brown University history department. “I got to New York, and I didn’t even know research existed,” she says. She’d wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.

Eisman had moved on, but they kept in touch. “After I made the Citi call,” she says, “one of the best things that happened was when Steve called and told me how proud he was of me.”

Having never heard of Eisman, I didn’t think anything of this. But a few months later, I called Whitney again and asked her, as I was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

Steve Eisman entered finance about the time I exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It’s not pretty, but that’s what happened.”

He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the ­documents and that I hadn’t understood a word of the fucking things.”

Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a prick in a way, but he’s smart and honest and fearless.”

“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

Continued in article
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?tid=true

Michael Lewis, Liar's Poker: Playing the Money Markets (Coronet, 1999, ISBN 0340767006)

Lewis writes in Partnoy’s earlier whistleblower style with somewhat more intense and comic portrayals of the major players in describing the double dealing and break down of integrity on the trading floor of Salomon Brothers.

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

Bob Jensen's timeline of Derivatives Financial Instruments scams --- http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

Bob Jensen's essay with its alphabet soup of appendices --- http://www.trinity.edu/rjensen/2008Bailout.htm

Grant Thornton is Being Sued Separately

"Jury Finds Parmalat Defrauded Citigroup," by Eric Dash, The New York Times, October 20, 2008 --- Click Here

A New Jersey jury found that Parmalat, the Italian food and dairy company, had defrauded Citigroup and awarded the bank $364.2 million in damages.

The 6-to-1 verdict cleared Citigroup of any wrongdoing after a five-month civil trial that delved into complex, off-balance-sheet accounting that enabled Parmalat to artificially raise its earnings.

The verdict was returned on Monday in New Jersey Superior Court in Hackensack.

For Citigroup, the decision will most likely be the last in several accounting scandals that entangled it earlier this decade. The bank previously reached settlements over its roles in Enron and WorldCom. But more litigation is coming.

The bank is expected to face billions of dollars in legal claims over its role in the subprime mortgage market and is engaged in another battle with Wells Fargo over the takeover of the Wachovia Corporation.

Parmalat’s new management, including its chief executive, Enrico Bondi, had sought up to $2.2 billion in damages from Citigroup, contending its bankers designed a series of complex transactions that helped Parmalat “mask their systemic looting of the company” while collecting tens of millions in fees. The Italian company collapsed in 2003 under billions of dollars of debt.

Citigroup said it was a victim of Parmalat’s fraud and countersued for damages. On Monday, Citigroup said it was delighted that a jury had vindicated its position. “We have said from the beginning that we have done nothing wrong,” the bank said. “Citi was the largest victim of the Parmalat fraud and not part of it.”

Officials from Parmalat could not be reached, but the company is expected to appeal the decision.

Citigroup was the first financial services firm to go to trial in the United States over Parmalat’s accusations. Parmalat is pursuing separate claims against the Bank of America and Grant Thornton, the accounting firm, in Manhattan federal court. That case is expected to go to trial next year; both companies have denied any wrongdoing.

More on Grant Thornton and Parmalat --- http://www.trinity.edu/rjensen/Fraud001.htm#GrantThornton

In-Substance Defeasance and Other Off-Balance Sheet Contracting --- http://www.trinity.edu/rjensen/theory01.htm#OBSF2

Top UBS Banker Faces Jail Time in Tax Shelter Scheme
U.S. prosecutors charged one of the world's top private bankers, a senior executive of UBS AG, with helping rich clients evade federal income taxes, the latest U.S. move aimed at pressuring Swiss banking officials to reveal the names of their American account holders. Raoul Weil, a member of the Swiss banking giant's executive board, is accused of organizing a phalanx of private bankers to help hide from U.S. tax authorities about $20 billion in assets belonging to about 20,000 clients, according to an indictment filed in U.S. District Court in Fort Lauderdale, Fla. The alleged offenses occurred between 2002 and 2007, when Mr. Weil was the bank's top international wealth management executive. Mr. Weil, according to federal prosecutors, referred to the offshore business as "toxic waste" because of the risks it posed to the bank, but oversaw the expansion of the accounts because they were so profitable. If convicted on the felony charge of conspiring to defraud the U.S. government, Mr. Weil could serve a maximum of five years in jail.
"Top Banker Cited In Tax-Dodge Case," by Evan Perez and Carrick Mollenk, The Wall Street Journal, November 13m 2008 --- http://online.wsj.com/article/SB122650872732121043.html?mod=todays_us_page_one