Accounting Scandal Updates and Other
Fraud Between October 1 and December 31, 2009
Bob Jensen at
Trinity University
Bob Jensen's Main Fraud Document ---
http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's Enron Quiz (and answers) ---
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Bob Jensen's Enron Updates are at ---
http://www.trinity.edu/rjensen/FraudEnron.htm#EnronUpdates
Other Documents
Richard Campbell notes a nice white collar crime blog edited by some law
professors ---
http://lawprofessors.typepad.com/whitecollarcrime_blog/
A Personal Experience
Why many physicians will turn away their Medicare patients just like my wife was
turned away by her surgeon in the South Texas Spinal Clinic in San Antonio
because she was on Medicare ---
http://www.trinity.edu/rjensen/Health.htm#SpinalClinic
Lexis Nexis Fraud Prevention Site ---
http://risk.lexisnexis.com/prevent-fraud
Many of the scandals are documented at
http://www.trinity.edu/rjensen/fraud.htm
Resources to prevent and discover fraud
from the Association of Fraud Examiners ---
http://www.cfenet.com/resources/resources.asp
Self-study training for a career in
fraud examination ---
http://marketplace.cfenet.com/products/products.asp
PwC's Global Economic Crime Survey ---
http://www.pwc.com/en_GX/gx/economic-crime-survey/pdf/global-economic-crime-survey-2009.pdf
Bob Jensen's threads on Fraud Detection and Reporting ---
http://www.trinity.edu/rjensen/FraudReporting.htm
Source for United Kingdom
reporting on financial scandals and other news ---
http://www.financialdirector.co.uk
Updates on the leading books on the
business and accounting scandals ---
http://www.trinity.edu/rjensen/Fraud.htm#Quotations
I love Infectious Greed by Frank
Partnoy ---
http://www.trinity.edu/rjensen/Fraud.htm#Quotations
Bob Jensen's
American History of Fraud ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
Future of Auditing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#FutureOfAuditing
"What’s Your Fraud IQ? Think you
know enough about corruption to spot it in any of its myriad forms? Then rev up
your fraud detection radar and take this (deceptively) simple test." by Joseph
T. Wells, Journal of Accountancy, July 2006 ---
http://www.aicpa.org/pubs/jofa/jul2006/wells.htm
What Accountants Need to Know ---
http://www.trinity.edu/rjensen/FraudReporting.htm#AccountantsNeedToKnow
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 motto of Judicial Watch is "Because
no one is above the law". To this end, Judicial Watch uses the open records or
freedom of information laws and other tools to investigate and uncover
misconduct by government officials and litigation to hold to account politicians
and public officials who engage in corrupt activities.
Judicial Watch ---
http://www.judicialwatch.org/
Judicial Watch
Announces List of Washington's "Ten Most Wanted Corrupt Politicians"
for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009
Judicial Watch, the public interest group that investigates and
prosecutes government corruption, today released its 2009 list of
Washington's "Ten Most Wanted Corrupt Politicians." The list, in
alphabetical order, includes:
- Senator Christopher Dodd (D-CT): This marks two
years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt"
list for his corrupt relationship with Fannie Mae and Freddie Mac and
for accepting preferential treatment and loan terms from
Countrywide Financial, a scandal which still dogs him. In 2009, the
scandals kept coming for the Connecticut Democrat. In 2009, Judicial
Watch filed a
Senate ethics complaint against Dodd for undervaluing a property he
owns in Ireland on his Senate Financial Disclosure forms. Judicial
Watch's complaint forced Dodd to amend the forms. However, press reports
suggest the property to this day remains undervalued. Judicial Watch
also alleges in the complaint that Dodd obtained a sweetheart deal for
the property in exchange for his assistance in obtaining a presidential
pardon (during the Clinton administration) and other favors for a
long-time friend and business associate. The false financial disclosure
forms were part of the cover-up. Dodd remains the head the Senate
Banking Committee.
- Senator John Ensign (R-NV): A number of scandals
popped up in 2009 involving public officials who conducted illicit
affairs, and then attempted to cover them up with hush payments and
favors, an obvious abuse of power. The year's worst offender might just
be Nevada Republican Senator John Ensign. Ensign admitted in June to an
extramarital affair with the wife of one of his staff members, who then
allegedly obtained special favors from the Nevada Republican in exchange
for his silence. According to
The New York Times: "The Justice Department and the Senate
Ethics Committee are expected to conduct preliminary inquiries into
whether Senator John Ensign violated federal law or ethics rules as part
of an effort to conceal an affair with the wife of an aide…" The former
staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately
upon leaving his congressional job, despite the fact that he was subject
to a one-year lobbying ban. Ensign seems to have ignored the law and
allowed Hampton lobbying access to his office as a payment for his
silence about the affair. (These are potentially criminal offenses.) It
looks as if Ensign misused his public office (and taxpayer resources) to
cover up his sexual shenanigans.
- Rep. Barney Frank (D-MA): Judicial Watch is
investigating a
$12 million TARP cash injection provided to the Boston-based
OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As
reported in the January 22, 2009, edition of the Wall Street Journal,
the Treasury Department indicated it would only provide funds to healthy
banks to jump-start lending. Not only was OneUnited Bank in massive
financial turmoil, but it was also "under attack from its regulators for
allegations of poor lending practices and executive-pay abuses,
including owning a Porsche for its executives' use." Rep. Frank admitted
he spoke to a "federal regulator," and Treasury granted the funds. (The
bank continues to flounder despite Frank's intervention for federal
dollars.) Moreover, Judicial Watch
uncovered documents in 2009 that showed that members of Congress for
years were aware that Fannie Mae and Freddie Mac were playing fast and
loose with accounting issues, risk assessment issues and executive
compensation issues, even as liberals led by Rep. Frank continued to
block attempts to rein in the two Government Sponsored Enterprises (GSEs).
For example,
during a hearing on September 10, 2003, before the House Committee
on Financial Services considering a Bush administration proposal to
further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin
by saying that I am glad to consider the legislation, but I do not think
we are facing any kind of a crisis. That is, in my view, the two
Government Sponsored Enterprises we are talking about here, Fannie Mae
and Freddie Mac, are not in a crisis. We have recently had an accounting
problem with Freddie Mac that has led to people being dismissed, as
appears to be appropriate. I do not think at this point there is a
problem with a threat to the Treasury." Frank received $42,350 in
campaign contributions from Fannie Mae and Freddie Mac between 1989 and
2008. Frank also
engaged in a relationship with a Fannie Mae Executive while serving
on the House Banking Committee, which has jurisdiction over Fannie Mae
and Freddie Mac.
- Secretary of Treasury Timothy Geithner: In 2009,
Obama Treasury Secretary Timothy Geithner admitted that he
failed to pay $34,000 in Social Security and Medicare taxes from
2001-2004 on his lucrative salary at the International Monetary Fund
(IMF), an organization with 185 member countries that oversees the
global financial system. (Did we mention Geithner now runs the IRS?) It
wasn't until President Obama tapped Geithner to head the Treasury
Department that he paid back most of the money, although the IRS kindly
waived the hefty penalties. In March 2009, Geithner also came under fire
for his handling of the AIG bonus scandal, where the company used $165
million of its bailout funds to pay out executive bonuses, resulting in
a massive public backlash. Of course as head of the New York Federal
Reserve, Geithner helped craft the AIG deal in September 2008. However,
when the AIG scandal broke, Geithner claimed he knew nothing of the
bonuses until March 10, 2009. The timing is important.
According to CNN: "Although Treasury Secretary Timothy Geithner told
congressional leaders on Tuesday that he learned of AIG's impending $160
million bonus payments to members of its troubled financial-products
unit on March 10, sources tell TIME that the New York Federal Reserve
informed Treasury staff that the payments were imminent on Feb. 28. That
is ten days before Treasury staffers say they first learned 'full
details' of the bonus plan, and three days before the [Obama]
Administration launched a new $30 billion infusion of cash for AIG."
Throw in another embarrassing disclosure in 2009 that Geithner employed
"household help" ineligible to work in the United States, and it becomes
clear why the Treasury Secretary has earned a spot on the "Ten Most
Corrupt Politicians in Washington" list.
- Attorney General Eric Holder: Tim Geithner can be
sure he won't be hounded about his tax-dodging by his colleague Eric
Holder, US Attorney General. Judicial Watch
strongly opposed Holder because of his terrible ethics record, which
includes: obstructing an FBI investigation of the theft of nuclear
secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests
for an independent counsel to investigate alleged fundraising abuses by
then-Vice President Al Gore in the Clinton White House; undermining the
criminal investigation of President Clinton by Kenneth Starr in the
midst of the Lewinsky investigation; and planning the violent raid to
seize then-six-year-old Elian Gonzalez at gunpoint in order to return
him to Castro's Cuba. Moreover, there is his soft record on terrorism.
Holder bypassed Justice Department procedures to push through Bill
Clinton's scandalous presidential pardons and commutations, including
for 16 members of FALN, a violent Puerto Rican terrorist group that
orchestrated approximately 120 bombings in the United States, killing at
least six people and permanently maiming dozens of others, including law
enforcement officers. His record in the current administration is no
better. As he did during the Clinton administration, Holder continues to
ignore serious incidents of corruption that could impact his political
bosses at the White House. For example, Holder has refused to
investigate charges that the Obama political machine traded VIP
access to the White House in exchange for campaign contributions – a
scheme eerily similar to one hatched by Holder's former boss, Bill
Clinton in the 1990s. The Holder Justice Department also came under fire
for dropping a voter intimidation case against the
New Black Panther Party. On Election Day 2008, Black Panthers
dressed in paramilitary garb threatened voters as they approached
polling stations. Holder has also failed to initiate a comprehensive
Justice investigation of the notorious organization ACORN (Association
of Community Organizations for Reform Now), which is closely tied to
President Obama. There were allegedly more than 400,000 fraudulent ACORN
voter registrations in the 2008 campaign. And then there were the
journalist videos catching ACORN Housing workers advising undercover
reporters on how to evade tax, immigration, and child prostitution laws.
Holder's controversial decisions on new rights for terrorists and his
attacks on previous efforts to combat terrorism remind many of the fact
that his former law firm has provided and continues to provide pro bono
representation to terrorists at Guantanamo Bay. Holder's politicization
of the Justice Department makes one long for the days of Alberto
Gonzales.
- Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris
(D-IL): One of the most serious scandals of 2009 involved a
scheme by former Illinois Governor Rod Blagojevich to sell President
Obama's then-vacant Senate seat to the highest bidder. Two men caught
smack dab in the middle of the scandal: Senator Roland Burris, who
ultimately got the job, and Rep. Jesse Jackson, Jr. According to the
Chicago Sun-Times, emissaries for Jesse Jackson Jr., named
"Senate Candidate A" in the Blagojevich indictment, reportedly offered
$1.5 million to Blagojevich during a fundraiser if he named Jackson Jr.
to Obama's seat. Three days later federal authorities arrested
Blagojevich. Burris, for his part, apparently lied about his contacts
with Blagojevich, who was arrested in December 2008 for trying to sell
Obama's Senate seat. According to
Reuters: "Roland Burris came under fresh scrutiny…after
disclosing he tried to raise money for the disgraced former Illinois
governor who named him to the U.S. Senate seat once held by President
Barack Obama…In the latest of those admissions, Burris said he looked
into mounting a fundraiser for Rod Blagojevich -- later charged with
trying to sell Obama's Senate seat -- at the same time he was expressing
interest to the then-governor's aides about his desire to be appointed."
Burris changed his story five times regarding his contacts with
Blagojevich prior to the Illinois governor appointing him to the U.S.
Senate. Three of those changing explanations came under oath.
- President Barack Obama: During his presidential
campaign, President Obama promised to run an ethical and transparent
administration. However, in his first year in office, the President has
delivered corruption and secrecy, bringing Chicago-style political
corruption to the White House. Consider just a few Obama administration
"lowlights" from year one: Even before President Obama was sworn into
office, he was interviewed by the FBI for a criminal investigation of
former Illinois Governor Rod Blagojevich's scheme to sell the
President's former Senate seat to the highest bidder. (Obama's Chief of
Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are
also tangled up in the Blagojevich scandal.) Moreover, the Obama
administration made the startling claim that the
Privacy Act does not apply to the White House. The Obama White
House believes it can violate the privacy rights of American citizens
without any legal consequences or accountability. President Obama
boldly proclaimed that "transparency and the rule of law will be the
touchstones of this presidency," but his administration is addicted to
secrecy, stonewalling far too many of Judicial Watch's
Freedom of Information Act requests and is refusing to make public
White House visitor logs as federal law requires. The Obama
administration turned the National Endowment of the Arts (as well as the
agency that runs the AmeriCorps program) into
propaganda machines, using tax dollars to persuade "artists" to
promote the Obama agenda. According to documents uncovered by Judicial
Watch, the idea
emerged as a direct result of the Obama campaign and enjoyed White
House approval and participation. President Obama has installed a record
number of "czars" in positions of power. Too many of these individuals
are
leftist radicals who answer to no one but the president. And too
many of the czars are not subject to Senate confirmation (which raises
serious constitutional questions). Under the President's bailout
schemes, the federal government continues to appropriate or control --
through fiat and threats -- large sectors of the private economy,
prompting conservative columnist George Will to write: "The
administration's central activity -- the political allocation of wealth
and opportunity -- is not merely susceptible to corruption, it is
corruption." Government-run healthcare and car companies, White House
coercion, uninvestigated ACORN corruption, debasing his office to help
Chicago cronies, attacks on conservative media and the private sector,
unprecedented and dangerous new rights for terrorists, perks for
campaign donors – this is Obama's "ethics" record -- and we haven't even
gotten through the first year of his presidency.
- Rep. Nancy Pelosi (D-CA): At the heart of the
corruption problem in Washington is a sense of entitlement. Politicians
believe laws and rules (even the U.S. Constitution) apply to the rest of
us but not to them. Case in point: House Speaker Nancy Pelosi and her
excessive and
boorish demands for military travel. Judicial Watch obtained
documents from the Pentagon in 2008 that suggest Pelosi has been
treating the Air Force like her own personal airline. These documents,
obtained through the Freedom of Information Act, include internal
Pentagon email correspondence detailing attempts by Pentagon staff to
accommodate Pelosi's numerous requests for military escorts and military
aircraft as well as the speaker's 11th hour cancellations and changes.
House Speaker Nancy Pelosi also came under fire in April 2009, when she
claimed she was never briefed about the CIA's use of the waterboarding
technique during terrorism investigations. The CIA produced a report
documenting a briefing with Pelosi on September 4, 2002, that suggests
otherwise. Judicial Watch also obtained documents, including a
CIA Inspector General report, which further confirmed that Congress
was fully briefed on the enhanced interrogation techniques. Aside from
her own personal transgressions, Nancy Pelosi has ignored serious
incidents of corruption within her own party, including many of the
individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)
- Rep. John Murtha (D-PA) and the rest of the PMA Seven:
Rep. John Murtha made headlines in 2009 for all the wrong reasons. The
Pennsylvania congressman is under federal investigation for his corrupt
relationship with the now-defunct defense lobbyist PMA Group. PMA,
founded by a former Murtha associate, has been the congressman's largest
campaign contributor. Since 2002, Murtha has raised $1.7 million from
PMA and its clients. And what did PMA and its clients receive from
Murtha in return for their generosity? Earmarks -- tens of millions of
dollars in earmarks. In fact, even with all of the attention surrounding
his alleged influence peddling, Murtha kept at it. Following an FBI raid
of PMA's offices earlier in 2009, Murtha continued to seek congressional
earmarks for PMA clients, while also hitting them up for campaign
contributions. According to
The Hill, in April, "Murtha reported receiving contributions
from three former PMA clients for whom he requested earmarks in the
pending appropriations bills." When it comes to the PMA scandal, Murtha
is not alone. As many as six other Members of Congress are currently
under scrutiny according to
The Washington Post. They include: Peter J. Visclosky (D-IN.),
James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W.
Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than
investigate this serious scandal, according to
Roll Call House Democrats circled the wagons, "cobbling
together a defense to offer political cover to their rank and file." The
Washington Post also reported in 2009 that Murtha's nephew received $4
million in Defense Department
no-bid contracts: "Newly obtained documents…show Robert Murtha
mentioning his influential family connection as leverage in his business
dealings and holding unusual power with the military."
- Rep. Charles Rangel (D-NY): Rangel, the man in
charge of writing tax policy for the entire country, has yet to
adequately explain how he could possibly
"forget" to pay taxes on $75,000 in rental income he earned from his
off-shore rental property. He also faces allegations that he improperly
used his influence to maintain ownership of highly coveted
rent-controlled apartments in Harlem, and misused his congressional
office to fundraise for his private Rangel Center by preserving a tax
loophole for an oil drilling company in exchange for funding. On top of
all that, Rangel recently amended his financial disclosure reports,
which doubled his reported wealth. (He somehow "forgot" about $1 million
in assets.) And what did he do when the House Ethics Committee started
looking into all of this? He apparently resorted to making "campaign
contributions" to dig his way out of trouble. According to
WCBS TV, a New York CBS affiliate: "The reigning member of Congress'
top tax committee is apparently 'wrangling' other politicos to get him
out of his own financial and tax troubles...Since ethics probes began
last year the 79-year-old congressman has given campaign donations to
119 members of Congress, including three of the five Democrats on the
House Ethics Committee who are charged with investigating him." Charlie
Rangel should not be allowed to remain in Congress, let alone serve as
Chairman of the powerful House Ways and Means Committee, and he knows
it. That's why he felt the need to disburse campaign contributions to
Ethics Committee members and other congressional colleagues.
"A Low, Dishonest Decade: The press and
politicians were asleep at the switch.," The Wall Street Journal,
December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage
Stock-market indices are not
much good as yardsticks of social progress, but as another low, dishonest
decade expires let us note that, on 2000s first day of trading, the Dow
Jones Industrial Average closed at 11357 while the Nasdaq Composite Index
stood at 4131, both substantially higher than where they are today. The
Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the
first great Wall Street disaster of this unhappy decade. The Dow got north
of 14000 before the real-estate bubble imploded.
And it was supposed to have
been such an awesome time, too! Back in the late '90s, in the crescendo of
the Internet boom, pundit and publicist alike assured us that the future was
to be a democratized, prosperous place. Hierarchies would collapse, they
told us; the individual was to be empowered; freed-up markets were to be the
common man's best buddy.
Such clever hopes they were.
As a reasonable anticipation of what was to come they meant nothing. But
they served to unify the decade's disasters, many of which came to us
festooned with the flags of this bogus idealism.
Before "Enron" became
synonymous with shattered 401(k)s and man-made electrical shortages, the
public knew it as a champion of electricity deregulation—a freedom fighter!
It was supposed to be that most exalted of corporate creatures, a "market
maker"; its "capacity for revolution" was hymned by management theorists;
and its TV commercials depicted its operations as an extension of humanity's
quest for emancipation.
Similarly, both Bank of
America and Citibank, before being recognized as "too big to fail," had
populist histories of which their admirers made much. Citibank's long
struggle against the Glass-Steagall Act was even supposed to be evidence of
its hostility to banking's aristocratic culture, an amusing image to
recollect when reading about the $100 million pay reportedly pocketed by one
Citi trader in 2008.
The Jack Abramoff lobbying
scandal showed us the same dynamics at work in Washington. Here was an
apparent believer in markets, working to keep garment factories in Saipan
humming without federal interference and saluted for it in an op-ed in the
Saipan Tribune as "Our freedom fighter in D.C."
But the preposterous
populism is only one part of the equation; just as important was our failure
to see through the ruse, to understand how our country was being disfigured.
Ensuring that the public
failed to get it was the common theme of at least three of the decade's
signature foul-ups: the hyping of various Internet stock issues by Wall
Street analysts, the accounting scandals of 2002, and the triple-A ratings
given to mortgage-backed securities.
The grand, overarching theme
of the Bush administration—the big idea that informed so many of its sordid
episodes—was the same anti-supervisory impulse applied to the public sector:
regulators sabotaged and their agencies turned over to the regulated.
The public was left to read
the headlines and ponder the unthinkable: Could our leaders really have
pushed us into an unnecessary war? Is the republic really dividing itself
into an immensely wealthy class of Wall Street bonus-winners and everybody
else? And surely nobody outside of the movies really has the political clout
to write themselves a $700 billion bailout.
What made the oughts so
awful, above all, was the failure of our critical faculties. The problem was
not so much that newspapers were dying, to mention one of the lesser
catastrophes of these awful times, but that newspapers failed to do their
job in the first place, to scrutinize the myths of the day in a way that
might have prevented catastrophes like the financial crisis or the Iraq war.
The folly went beyond the
media, though. Recently I came across a 2005 pamphlet written by historian
Rick Perlstein berating the big thinkers of the Democratic Party for their
poll-driven failure to stick to their party's historic theme of economic
populism. I was struck by the evidence Mr. Perlstein adduced in the course
of his argument. As he tells the story, leading Democratic pollsters found
plenty of evidence that the American public distrusts corporate power; and
yet they regularly advised Democrats to steer in the opposite direction, to
distance themselves from what one pollster called "outdated appeals to class
grievances and attacks upon corporate perfidy."
This was not a party that
was well-prepared for the job of iconoclasm that has befallen it. And as the
new bunch muddle onward—bailing out the large banks but (still) not
subjecting them to new regulatory oversight, passing a health-care reform
that seems (among other, better things) to guarantee private insurers
eternal profits—one fears they are merely presenting their own ample
backsides to an embittered electorate for kicking.
Video: Fora.Tv on Institutional Corruption & The Economy Of
Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/
Climategate on Finnish TV ---
http://climateaudit.org/2009/12/29/climategate-on-finnish-tv/
The motto of Judicial Watch is "Because
no one is above the law". To this end, Judicial Watch uses the open records or
freedom of information laws and other tools to investigate and uncover
misconduct by government officials and litigation to hold to account politicians
and public officials who engage in corrupt activities.
Judicial Watch ---
http://www.judicialwatch.org/
Judicial Watch
Announces List of Washington's "Ten Most Wanted Corrupt Politicians"
for 2009 ---
http://www.judicialwatch.org/news/2009/dec/judicial-watch-announces-list-washington-s-ten-most-wanted-corrupt-politicians-2009
Judicial Watch, the public interest group that investigates and
prosecutes government corruption, today released its 2009 list of
Washington's "Ten Most Wanted Corrupt Politicians." The list, in
alphabetical order, includes:
- Senator Christopher Dodd (D-CT): This marks two
years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt"
list for his corrupt relationship with Fannie Mae and Freddie Mac and
for accepting preferential treatment and loan terms from
Countrywide Financial, a scandal which still dogs him. In 2009, the
scandals kept coming for the Connecticut Democrat. In 2009, Judicial
Watch filed a
Senate ethics complaint against Dodd for undervaluing a property he
owns in Ireland on his Senate Financial Disclosure forms. Judicial
Watch's complaint forced Dodd to amend the forms. However, press reports
suggest the property to this day remains undervalued. Judicial Watch
also alleges in the complaint that Dodd obtained a sweetheart deal for
the property in exchange for his assistance in obtaining a presidential
pardon (during the Clinton administration) and other favors for a
long-time friend and business associate. The false financial disclosure
forms were part of the cover-up. Dodd remains the head the Senate
Banking Committee.
- Senator John Ensign (R-NV): A number of scandals
popped up in 2009 involving public officials who conducted illicit
affairs, and then attempted to cover them up with hush payments and
favors, an obvious abuse of power. The year's worst offender might just
be Nevada Republican Senator John Ensign. Ensign admitted in June to an
extramarital affair with the wife of one of his staff members, who then
allegedly obtained special favors from the Nevada Republican in exchange
for his silence. According to
The New York Times: "The Justice Department and the Senate
Ethics Committee are expected to conduct preliminary inquiries into
whether Senator John Ensign violated federal law or ethics rules as part
of an effort to conceal an affair with the wife of an aide…" The former
staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately
upon leaving his congressional job, despite the fact that he was subject
to a one-year lobbying ban. Ensign seems to have ignored the law and
allowed Hampton lobbying access to his office as a payment for his
silence about the affair. (These are potentially criminal offenses.) It
looks as if Ensign misused his public office (and taxpayer resources) to
cover up his sexual shenanigans.
- Rep. Barney Frank (D-MA): Judicial Watch is
investigating a
$12 million TARP cash injection provided to the Boston-based
OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As
reported in the January 22, 2009, edition of the Wall Street Journal,
the Treasury Department indicated it would only provide funds to healthy
banks to jump-start lending. Not only was OneUnited Bank in massive
financial turmoil, but it was also "under attack from its regulators for
allegations of poor lending practices and executive-pay abuses,
including owning a Porsche for its executives' use." Rep. Frank admitted
he spoke to a "federal regulator," and Treasury granted the funds. (The
bank continues to flounder despite Frank's intervention for federal
dollars.) Moreover, Judicial Watch
uncovered documents in 2009 that showed that members of Congress for
years were aware that Fannie Mae and Freddie Mac were playing fast and
loose with accounting issues, risk assessment issues and executive
compensation issues, even as liberals led by Rep. Frank continued to
block attempts to rein in the two Government Sponsored Enterprises (GSEs).
For example,
during a hearing on September 10, 2003, before the House Committee
on Financial Services considering a Bush administration proposal to
further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin
by saying that I am glad to consider the legislation, but I do not think
we are facing any kind of a crisis. That is, in my view, the two
Government Sponsored Enterprises we are talking about here, Fannie Mae
and Freddie Mac, are not in a crisis. We have recently had an accounting
problem with Freddie Mac that has led to people being dismissed, as
appears to be appropriate. I do not think at this point there is a
problem with a threat to the Treasury." Frank received $42,350 in
campaign contributions from Fannie Mae and Freddie Mac between 1989 and
2008. Frank also
engaged in a relationship with a Fannie Mae Executive while serving
on the House Banking Committee, which has jurisdiction over Fannie Mae
and Freddie Mac.
- Secretary of Treasury Timothy Geithner: In 2009,
Obama Treasury Secretary Timothy Geithner admitted that he
failed to pay $34,000 in Social Security and Medicare taxes from
2001-2004 on his lucrative salary at the International Monetary Fund
(IMF), an organization with 185 member countries that oversees the
global financial system. (Did we mention Geithner now runs the IRS?) It
wasn't until President Obama tapped Geithner to head the Treasury
Department that he paid back most of the money, although the IRS kindly
waived the hefty penalties. In March 2009, Geithner also came under fire
for his handling of the AIG bonus scandal, where the company used $165
million of its bailout funds to pay out executive bonuses, resulting in
a massive public backlash. Of course as head of the New York Federal
Reserve, Geithner helped craft the AIG deal in September 2008. However,
when the AIG scandal broke, Geithner claimed he knew nothing of the
bonuses until March 10, 2009. The timing is important.
According to CNN: "Although Treasury Secretary Timothy Geithner told
congressional leaders on Tuesday that he learned of AIG's impending $160
million bonus payments to members of its troubled financial-products
unit on March 10, sources tell TIME that the New York Federal Reserve
informed Treasury staff that the payments were imminent on Feb. 28. That
is ten days before Treasury staffers say they first learned 'full
details' of the bonus plan, and three days before the [Obama]
Administration launched a new $30 billion infusion of cash for AIG."
Throw in another embarrassing disclosure in 2009 that Geithner employed
"household help" ineligible to work in the United States, and it becomes
clear why the Treasury Secretary has earned a spot on the "Ten Most
Corrupt Politicians in Washington" list.
- Attorney General Eric Holder: Tim Geithner can be
sure he won't be hounded about his tax-dodging by his colleague Eric
Holder, US Attorney General. Judicial Watch
strongly opposed Holder because of his terrible ethics record, which
includes: obstructing an FBI investigation of the theft of nuclear
secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests
for an independent counsel to investigate alleged fundraising abuses by
then-Vice President Al Gore in the Clinton White House; undermining the
criminal investigation of President Clinton by Kenneth Starr in the
midst of the Lewinsky investigation; and planning the violent raid to
seize then-six-year-old Elian Gonzalez at gunpoint in order to return
him to Castro's Cuba. Moreover, there is his soft record on terrorism.
Holder bypassed Justice Department procedures to push through Bill
Clinton's scandalous presidential pardons and commutations, including
for 16 members of FALN, a violent Puerto Rican terrorist group that
orchestrated approximately 120 bombings in the United States, killing at
least six people and permanently maiming dozens of others, including law
enforcement officers. His record in the current administration is no
better. As he did during the Clinton administration, Holder continues to
ignore serious incidents of corruption that could impact his political
bosses at the White House. For example, Holder has refused to
investigate charges that the Obama political machine traded VIP
access to the White House in exchange for campaign contributions – a
scheme eerily similar to one hatched by Holder's former boss, Bill
Clinton in the 1990s. The Holder Justice Department also came under fire
for dropping a voter intimidation case against the
New Black Panther Party. On Election Day 2008, Black Panthers
dressed in paramilitary garb threatened voters as they approached
polling stations. Holder has also failed to initiate a comprehensive
Justice investigation of the notorious organization ACORN (Association
of Community Organizations for Reform Now), which is closely tied to
President Obama. There were allegedly more than 400,000 fraudulent ACORN
voter registrations in the 2008 campaign. And then there were the
journalist videos catching ACORN Housing workers advising undercover
reporters on how to evade tax, immigration, and child prostitution laws.
Holder's controversial decisions on new rights for terrorists and his
attacks on previous efforts to combat terrorism remind many of the fact
that his former law firm has provided and continues to provide pro bono
representation to terrorists at Guantanamo Bay. Holder's politicization
of the Justice Department makes one long for the days of Alberto
Gonzales.
- Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris
(D-IL): One of the most serious scandals of 2009 involved a
scheme by former Illinois Governor Rod Blagojevich to sell President
Obama's then-vacant Senate seat to the highest bidder. Two men caught
smack dab in the middle of the scandal: Senator Roland Burris, who
ultimately got the job, and Rep. Jesse Jackson, Jr. According to the
Chicago Sun-Times, emissaries for Jesse Jackson Jr., named
"Senate Candidate A" in the Blagojevich indictment, reportedly offered
$1.5 million to Blagojevich during a fundraiser if he named Jackson Jr.
to Obama's seat. Three days later federal authorities arrested
Blagojevich. Burris, for his part, apparently lied about his contacts
with Blagojevich, who was arrested in December 2008 for trying to sell
Obama's Senate seat. According to
Reuters: "Roland Burris came under fresh scrutiny…after
disclosing he tried to raise money for the disgraced former Illinois
governor who named him to the U.S. Senate seat once held by President
Barack Obama…In the latest of those admissions, Burris said he looked
into mounting a fundraiser for Rod Blagojevich -- later charged with
trying to sell Obama's Senate seat -- at the same time he was expressing
interest to the then-governor's aides about his desire to be appointed."
Burris changed his story five times regarding his contacts with
Blagojevich prior to the Illinois governor appointing him to the U.S.
Senate. Three of those changing explanations came under oath.
- President Barack Obama: During his presidential
campaign, President Obama promised to run an ethical and transparent
administration. However, in his first year in office, the President has
delivered corruption and secrecy, bringing Chicago-style political
corruption to the White House. Consider just a few Obama administration
"lowlights" from year one: Even before President Obama was sworn into
office, he was interviewed by the FBI for a criminal investigation of
former Illinois Governor Rod Blagojevich's scheme to sell the
President's former Senate seat to the highest bidder. (Obama's Chief of
Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are
also tangled up in the Blagojevich scandal.) Moreover, the Obama
administration made the startling claim that the
Privacy Act does not apply to the White House. The Obama White
House believes it can violate the privacy rights of American citizens
without any legal consequences or accountability. President Obama
boldly proclaimed that "transparency and the rule of law will be the
touchstones of this presidency," but his administration is addicted to
secrecy, stonewalling far too many of Judicial Watch's
Freedom of Information Act requests and is refusing to make public
White House visitor logs as federal law requires. The Obama
administration turned the National Endowment of the Arts (as well as the
agency that runs the AmeriCorps program) into
propaganda machines, using tax dollars to persuade "artists" to
promote the Obama agenda. According to documents uncovered by Judicial
Watch, the idea
emerged as a direct result of the Obama campaign and enjoyed White
House approval and participation. President Obama has installed a record
number of "czars" in positions of power. Too many of these individuals
are
leftist radicals who answer to no one but the president. And too
many of the czars are not subject to Senate confirmation (which raises
serious constitutional questions). Under the President's bailout
schemes, the federal government continues to appropriate or control --
through fiat and threats -- large sectors of the private economy,
prompting conservative columnist George Will to write: "The
administration's central activity -- the political allocation of wealth
and opportunity -- is not merely susceptible to corruption, it is
corruption." Government-run healthcare and car companies, White House
coercion, uninvestigated ACORN corruption, debasing his office to help
Chicago cronies, attacks on conservative media and the private sector,
unprecedented and dangerous new rights for terrorists, perks for
campaign donors – this is Obama's "ethics" record -- and we haven't even
gotten through the first year of his presidency.
- Rep. Nancy Pelosi (D-CA): At the heart of the
corruption problem in Washington is a sense of entitlement. Politicians
believe laws and rules (even the U.S. Constitution) apply to the rest of
us but not to them. Case in point: House Speaker Nancy Pelosi and her
excessive and
boorish demands for military travel. Judicial Watch obtained
documents from the Pentagon in 2008 that suggest Pelosi has been
treating the Air Force like her own personal airline. These documents,
obtained through the Freedom of Information Act, include internal
Pentagon email correspondence detailing attempts by Pentagon staff to
accommodate Pelosi's numerous requests for military escorts and military
aircraft as well as the speaker's 11th hour cancellations and changes.
House Speaker Nancy Pelosi also came under fire in April 2009, when she
claimed she was never briefed about the CIA's use of the waterboarding
technique during terrorism investigations. The CIA produced a report
documenting a briefing with Pelosi on September 4, 2002, that suggests
otherwise. Judicial Watch also obtained documents, including a
CIA Inspector General report, which further confirmed that Congress
was fully briefed on the enhanced interrogation techniques. Aside from
her own personal transgressions, Nancy Pelosi has ignored serious
incidents of corruption within her own party, including many of the
individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)
- Rep. John Murtha (D-PA) and the rest of the PMA Seven:
Rep. John Murtha made headlines in 2009 for all the wrong reasons. The
Pennsylvania congressman is under federal investigation for his corrupt
relationship with the now-defunct defense lobbyist PMA Group. PMA,
founded by a former Murtha associate, has been the congressman's largest
campaign contributor. Since 2002, Murtha has raised $1.7 million from
PMA and its clients. And what did PMA and its clients receive from
Murtha in return for their generosity? Earmarks -- tens of millions of
dollars in earmarks. In fact, even with all of the attention surrounding
his alleged influence peddling, Murtha kept at it. Following an FBI raid
of PMA's offices earlier in 2009, Murtha continued to seek congressional
earmarks for PMA clients, while also hitting them up for campaign
contributions. According to
The Hill, in April, "Murtha reported receiving contributions
from three former PMA clients for whom he requested earmarks in the
pending appropriations bills." When it comes to the PMA scandal, Murtha
is not alone. As many as six other Members of Congress are currently
under scrutiny according to
The Washington Post. They include: Peter J. Visclosky (D-IN.),
James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W.
Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than
investigate this serious scandal, according to
Roll Call House Democrats circled the wagons, "cobbling
together a defense to offer political cover to their rank and file." The
Washington Post also reported in 2009 that Murtha's nephew received $4
million in Defense Department
no-bid contracts: "Newly obtained documents…show Robert Murtha
mentioning his influential family connection as leverage in his business
dealings and holding unusual power with the military."
- Rep. Charles Rangel (D-NY): Rangel, the man in
charge of writing tax policy for the entire country, has yet to
adequately explain how he could possibly
"forget" to pay taxes on $75,000 in rental income he earned from his
off-shore rental property. He also faces allegations that he improperly
used his influence to maintain ownership of highly coveted
rent-controlled apartments in Harlem, and misused his congressional
office to fundraise for his private Rangel Center by preserving a tax
loophole for an oil drilling company in exchange for funding. On top of
all that, Rangel recently amended his financial disclosure reports,
which doubled his reported wealth. (He somehow "forgot" about $1 million
in assets.) And what did he do when the House Ethics Committee started
looking into all of this? He apparently resorted to making "campaign
contributions" to dig his way out of trouble. According to
WCBS TV, a New York CBS affiliate: "The reigning member of Congress'
top tax committee is apparently 'wrangling' other politicos to get him
out of his own financial and tax troubles...Since ethics probes began
last year the 79-year-old congressman has given campaign donations to
119 members of Congress, including three of the five Democrats on the
House Ethics Committee who are charged with investigating him." Charlie
Rangel should not be allowed to remain in Congress, let alone serve as
Chairman of the powerful House Ways and Means Committee, and he knows
it. That's why he felt the need to disburse campaign contributions to
Ethics Committee members and other congressional colleagues.
"A Low, Dishonest Decade: The press and
politicians were asleep at the switch.," The Wall Street Journal,
December 22, 2009 ---
http://online.wsj.com/article/SB10001424052748703478704574612013922050326.html?mod=djemEditorialPage
Stock-market indices are not
much good as yardsticks of social progress, but as another low, dishonest
decade expires let us note that, on 2000s first day of trading, the Dow
Jones Industrial Average closed at 11357 while the Nasdaq Composite Index
stood at 4131, both substantially higher than where they are today. The
Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the
first great Wall Street disaster of this unhappy decade. The Dow got north
of 14000 before the real-estate bubble imploded.
And it was supposed to have
been such an awesome time, too! Back in the late '90s, in the crescendo of
the Internet boom, pundit and publicist alike assured us that the future was
to be a democratized, prosperous place. Hierarchies would collapse, they
told us; the individual was to be empowered; freed-up markets were to be the
common man's best buddy.
Such clever hopes they were.
As a reasonable anticipation of what was to come they meant nothing. But
they served to unify the decade's disasters, many of which came to us
festooned with the flags of this bogus idealism.
Before "Enron" became
synonymous with shattered 401(k)s and man-made electrical shortages, the
public knew it as a champion of electricity deregulation—a freedom fighter!
It was supposed to be that most exalted of corporate creatures, a "market
maker"; its "capacity for revolution" was hymned by management theorists;
and its TV commercials depicted its operations as an extension of humanity's
quest for emancipation.
Similarly, both Bank of
America and Citibank, before being recognized as "too big to fail," had
populist histories of which their admirers made much. Citibank's long
struggle against the Glass-Steagall Act was even supposed to be evidence of
its hostility to banking's aristocratic culture, an amusing image to
recollect when reading about the $100 million pay reportedly pocketed by one
Citi trader in 2008.
The Jack Abramoff lobbying
scandal showed us the same dynamics at work in Washington. Here was an
apparent believer in markets, working to keep garment factories in Saipan
humming without federal interference and saluted for it in an op-ed in the
Saipan Tribune as "Our freedom fighter in D.C."
But the preposterous
populism is only one part of the equation; just as important was our failure
to see through the ruse, to understand how our country was being disfigured.
Ensuring that the public
failed to get it was the common theme of at least three of the decade's
signature foul-ups: the hyping of various Internet stock issues by Wall
Street analysts, the accounting scandals of 2002, and the triple-A ratings
given to mortgage-backed securities.
The grand, overarching theme
of the Bush administration—the big idea that informed so many of its sordid
episodes—was the same anti-supervisory impulse applied to the public sector:
regulators sabotaged and their agencies turned over to the regulated.
The public was left to read
the headlines and ponder the unthinkable: Could our leaders really have
pushed us into an unnecessary war? Is the republic really dividing itself
into an immensely wealthy class of Wall Street bonus-winners and everybody
else? And surely nobody outside of the movies really has the political clout
to write themselves a $700 billion bailout.
What made the oughts so
awful, above all, was the failure of our critical faculties. The problem was
not so much that newspapers were dying, to mention one of the lesser
catastrophes of these awful times, but that newspapers failed to do their
job in the first place, to scrutinize the myths of the day in a way that
might have prevented catastrophes like the financial crisis or the Iraq war.
The folly went beyond the
media, though. Recently I came across a 2005 pamphlet written by historian
Rick Perlstein berating the big thinkers of the Democratic Party for their
poll-driven failure to stick to their party's historic theme of economic
populism. I was struck by the evidence Mr. Perlstein adduced in the course
of his argument. As he tells the story, leading Democratic pollsters found
plenty of evidence that the American public distrusts corporate power; and
yet they regularly advised Democrats to steer in the opposite direction, to
distance themselves from what one pollster called "outdated appeals to class
grievances and attacks upon corporate perfidy."
This was not a party that
was well-prepared for the job of iconoclasm that has befallen it. And as the
new bunch muddle onward—bailing out the large banks but (still) not
subjecting them to new regulatory oversight, passing a health-care reform
that seems (among other, better things) to guarantee private insurers
eternal profits—one fears they are merely presenting their own ample
backsides to an embittered electorate for kicking.
Video: Fora.Tv on Institutional Corruption & The Economy Of
Influence ---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/
Bob Jensen's threads on corrupt
politicians can be found at
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
Never ending fraud in Medicare billings:
Unaudited overpayments, unqualified items, and criminal vendors
One spending sinkhole can be traced to large
medical-equipment suppliers, device makers, and pharmaceutical companies, which
government auditors and industry veterans describe as a recalcitrant bunch.
Medical manufacturers know public agencies generally pay first and ask questions
later—if ever. Medicare receives 4.4 million claims
daily; fewer than 3% are reviewed before being paid within the legally required
30 days.
"A Hole in Health-Care Reform: Overbilling by medical-equipment suppliers,
device makers, and drug companies has cost taxpayers billions.
New legislation will do little to stem the tide,"
by Chad Terhune, Business Week, December 10, 2009 ---
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3
President Barack Obama and his Democratic allies on
Capitol Hill say that a vast expansion of health coverage can be funded by
squeezing out waste and fraud rather than cutting benefits. Whether that
turns out to be true may help determine the success of the sweeping reform
package being debated by Congress. Slashing costs is no easy task, and
stopping fraud is even tougher. No less than $47 billion in Medicare
spending went to dubious claims in the year ended Sept. 30, according to the
U.S. Health & Human Services Dept. That's 10.7% of the $440 billion program
that subsidizes care for the elderly. Medicaid, the government program for
the poor, lets billions trickle away at roughly the same rate. The $10
million annual increase that Congress is allocating to fight fraud may not
be enough to do the trick.
One spending sinkhole can be traced to large
medical-equipment suppliers, device makers, and pharmaceutical companies,
which government auditors and industry veterans describe as a recalcitrant
bunch. Medical manufacturers know public agencies generally pay first and
ask questions later—if ever. Medicare receives 4.4 million claims daily;
fewer than 3% are reviewed before being paid within the legally required 30
days.
One way to get a sense of the scale of the
seepage—and the challenge facing the Administration—is to look at
whistleblower lawsuits filed under the federal False Claims Act. That law
allows company employees to sue on behalf of the government to recover
improperly claimed federal funds.
A suit filed by William A. Thomas, a former senior
sales manager at Siemens Medical Solutions USA, one of the nation's largest
medical suppliers and a unit of German engineering giant Siemens (SI),
offers a case study in the difficulty of containing costs. Thomas, a 15-year
Siemens Medical veteran, alleges in federal court in Philadelphia that for
years the company overbilled the Veterans Affairs Dept. and other government
agencies by hundreds of millions of dollars for MRI and CT scan machines and
other expensive equipment. These high-tech systems—used to examine
everything from damaged knees to suspected cancers—cost $500,000 to $3
million apiece, sometimes more. Thomas, who retired from Siemens in 2008,
claims that with no justification other than larger profits, his former
employer charged its government customers far more than private-sector
buyers for the same equipment.
"Billions and billions could be saved with the
right government regulation and oversight applied to health care," Thomas,
56, says in an interview. "But I think corporations will continue running
circles around the federal government."
In court filings, Siemens has denied any wrongdoing
and has sought to have the Thomas suit dismissed. A company spokesman, Lance
Longwell, declined to elaborate for this article, citing the litigation.
The Thomas suit illustrates some of the vagaries of
False Claims Act cases, hundreds of which are filed every year against
government contractors in a range of industries. As the plaintiff, Thomas
stands to pocket up to 30% of any court recovery, with the rest going to the
Treasury. The Justice Dept., which can intervene in such suits to help steer
them, announced last year that it will stay out of the case against Siemens
for now. Yet Thomas' allegations have helped drive a parallel criminal
investigation of Siemens' equipment marketing practices by the Defense Dept.
and the U.S. Attorney's Office in Philadelphia.
In April federal investigators searched for records
at the headquarters of Siemens Medical in Malvern, Pa., a suburb of
Philadelphia. Ed Bradley, special agent-in-charge of the Defense Criminal
Investigative Service, confirmed that the investigation is continuing but
declined to comment further.
Longwell, the Siemens Medical spokesman, says the
company is cooperating with criminal investigators. In March, just weeks
before the search of its offices, Siemens won a new $267 million contract to
provide radiology equipment to the U.S.
Page 1 2 Next Page Reader Discussion
BW Extras Podcasts Mandel on Economics Behind the
Cover CEO Guide to Tech more… RSS Feeds Most Popular Top News Innovation
Trends more… E-mails Asia Insider MBA Express BW.com Insider more… Blogs
Blogspotting Hot Property Tech Beat more… Business ExchangeTrack and share
business topics across the Web. Advertising in a Recession Entrepreneurship
in a Recession Enterprise Rent-A-Car Buying a Foreclosed Home Plug-in
Hybrids Most Popular Stories Read E-mailed Discussed Apple Sues Nokia,
Claims Infringement Why Tech Bows to Best Buy If You Don't Buy a House Now,
You're Stupid or Broke Forecast for 2010: The Coming Cloud 'Catastrophe'
Kindle vs. Nook RSS Feed: Most Read Stories
If You Don't Buy a House Now, You're Stupid or
Broke - BusinessWeek Can KKR Make Like Berkshire Hathaway? - BusinessWeek
Why Tech Bows to Best Buy - BusinessWeek GM Will Sell Opel to Magna After
All - BusinessWeek A Vehicle for Your Business - BusinessWeek RSS Feed: Most
E-mailed Stories
Why Tech Bows to Best Buy Tiger Woods' Handicap as
a Pitchman AT&T Possible Price Moves May Backfire Americans Are Furious at
Wall Street China's 'Made in China' Problem RSS Feed: Most Discussed Stories
Most Popular Multimedia Slide Shows 25 Products
That Might Just Change The World Fifty Ugliest Cars of the Past 50 Years
Best Internships of 2009 The 25 Coolest Sneaker Designs of 2009 Best Places
to Raise Your Kids: 2010 RSS Feed: Most Popular Slide Shows
Ads by Google Medicare Health Plans Introducing
AARP® MedicareComplete® Provided Through SecureHorizons®.
AARPMedicarePlans.com/Advantage Whistleblower Reward How to claim your share
for fighting fraud on the government www.FraudFighters.net Declined Qui Tam?
FCA attorneys with outstanding verdicts and settlements. Info at:
www.Whistleblower.info Health Care Petition Don't Let Special Interests
Derail Reform. Sign the Official Petition! www.DSCC.org
BW Mall - Sponsored Links Recruiting in the Finance
Industry? Software for Recruiting, Applicant Tracking, Onboarding, CRM and
more! FREE DEMO Secure Recruiting Platfrom Complete SaaS Talent Platform
Software (Pre/Post-Hire) View a FREE DEMO now! Free Polycom
Videoconferencing Webinar On December 16 Learn How Polycom Can Help You
Improve Business Collaboration. Sign up - Microsoft Dynamics CRM Online Get
up to 6 months of Microsoft Dynamics CRM at NO CHARGE! Sign up Today! Online
PHR Certificate Program w/ Villanova Univ SHRM Approved HR Certificate
Program from Villanova University. 100% Online - Find Out More Now! Buy a
link now!
Ontario. The world's most highly skilled workforce.
Jensen Comment
The GAO has declared that many huge sink holes for fraud and waste are
unauditable --- the Pentagon, the IRS, Medicare, and the list goes on and on.
But the Congress that funds these programs is manipulated by special interest
groups who do not want these audits. The new sink hole on the block is almost
anything green.
What is happening to America?
Bob Jensen's threads on health care are at
http://www.businessweek.com/magazine/content/09_51/b4160046945722.htm?link_position=link3
Video: FRONTLINE: The Credit Card Game [Flash Player]
---
http://www.pbs.org/wgbh/pages/frontline/creditcards/
Bob Jensen's threads on Dirty Secrets of Credit Card
Companies ---
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO
The
Greatest Swindle in the History of the World
Paulson and Geithner Lied Big Time
"The
Ugly AIG Post-Mortem: The TARP Inspector General's report has a lot more to say
about the rating agencies than it does about Goldman Sachs," by Holman
Jenkins, The Wall Street Journal, November 24m 2009 ---
Click Here
A year later, the myrmidons of the media have gotten around to the question of
why, after the government took over AIG, it paid 100 cents on the dollar to
honor the collateral demands of AIG's subprime insurance counterparties.
By all means, read TARP Inspector General Neil Barofsky's report on the AIG
bailout—but read it honestly.
It does not say AIG's bailout was a "backdoor bailout" of Goldman Sachs. It does
not say the Fed was remiss in failing to require Goldman and other
counterparties to settle AIG claims for pennies on the dollar.
It does not for a moment doubt the veracity of officials who say their concern
was to stem a systemic panic that might have done lasting damage to the U.S.
standard of living.
To be sure, Mr. Barofsky has some criticisms to offer, but the biggest floats
inchoate between the lines of a widely overlooked section headed "lessons
learned," which focuses on the credit rating agencies. The section notes not
only the role of the rating agencies, with their "inherently conflicted business
model," in authoring the subprime mess in the first place—but also the role of
their credit downgrades in tipping AIG into a liquidity crisis, in undermining
the Fed's first attempt at an AIG rescue, and in the decision of government
officials "not to pursue a more aggressive negotiating policy to seek
concessions from" AIG's counterparties.
Though not quite spelling it out, Mr. Barofsky here brushes close to the last
great unanswered question about the AIG bailout. Namely: With the government now
standing behind AIG, why not just tell Goldman et al. to waive their collateral
demands since they now had the world's best IOU—Uncle Sam's?
Congress might not technically have put its full faith and credit behind AIG,
but if banks agreed to accept this argument, and Treasury and Fed insisted on
it, and the SEC upheld it, the rating agencies would likely have gone along. No
cash would have had to change hands at all.
This didn't happen, let's guess, because the officials—Hank Paulson, Tim
Geithner and Ben Bernanke—were reluctant to invent legal and policy authority
out of whole cloth to overrule the ratings agencies—lo, the same considerations
that also figured in their reluctance to dictate unilateral haircuts to holders
of AIG subprime insurance.
Of course, the thinking now is that these officials, in bailing out AIG, woulda,
shoulda, coulda used their political clout to force such haircuts, but quailed
when the banks, evil Goldman most of all, insisted on 100 cents on the dollar.
This story, in its gross simplification, is certainly wrong. Goldman and others
weren't in the business of voluntarily relinquishing valuable claims. But the
reality is, in the heat of the crisis, they would have acceded to any terms the
government dictated. Washington's game at the time, however, wasn't to
nickel-and-dime the visible cash transfers to AIG. It was playing for bigger
stakes—stopping a panic by asserting the government's bottomless resources to
uphold the IOUs of financial institutions.
What's more, if successful, these efforts were certain to cause the
AIG-guaranteed securities to rebound in value—as they have. Money has already
flowed back to AIG and the Fed (which bought some of the subprime securities to
dissolve the AIG insurance agreements) and is likely to continue to do so for
the simple reason that the underlying payment streams are intact.
Never mind: The preoccupation with the Goldman payments amounts to a misguided
kind of cash literalism. For the taxpayer has assumed much huger liabilities to
keep homeowners in their homes, to keep mortgage payments flowing to investors,
to fatten the earnings of financial firms, etc., etc. These liabilities dwarf
the AIG collateral calls, inevitably benefit Goldman and other firms, and
represent the real cost of our failure to create a financial system in which
investors (a category that includes a lot more than just Goldman) live and die
by the risks they voluntarily take without taxpayers standing behind them.
No, Moody's and S&P are not the cause of this policy failure—yet Mr. Barofsky's
half-articulated choice to focus on them is profound. For the role the agencies
have come to play in our financial system amounts to a direct, if feckless and
weak, attempt to contain the incentives that flow from the government's
guaranteeing of so many kinds of private liabilities, from the pension system
and bank deposits to housing loans and student loans.
The rating agencies' role as gatekeepers to these guarantees is, and was,
corrupting, but the solution surely is to pare back the guarantees themselves.
Overreliance on rating agencies, with their "inherently conflicted business
model," was ultimately a product of too much government interference in the
allocation of credit in the first place.
The Mother
of Future Lawsuits Directly Against Credit Rating Agencies and I, ndirectly
Against Auditing Firms
It has
been shown how Moody's and some other credit rating agencies sold AAA ratings
for securities and tranches that did not deserve such ratings ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Also see
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
My friend
Larry sent me the following link indicating that a lawsuit in Ohio may shake up
the credit rating fraudsters.
Will 49 other states and thousands of pension funds follow suit?
Already facing a spate of private lawsuits, the
legal troubles of the country’s largest credit rating agencies deepened on
Friday when the attorney general of Ohio sued
Moody’s Investors Service,
Standard & Poor’s and
Fitch, claiming that they had cost state
retirement and pension funds some $457 million by approving high-risk Wall
Street securities that went bust in the financial collapse.
http://www.nytimes.com/2009/11/21/business/21ratings.html?em
Jensen
Comment
The credit raters will rely heavily on the claim that they relied on the
external auditors who, in turn, are being sued for playing along with fraudulent
banks that grossly underestimated loan loss reserves on poisoned subprime loan
portfolios and poisoned tranches sold to investors ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Bad things happen in court where three or more parties start blaming each other
for billions of dollars of losses that in many cases led to total bank failures
and the wiping out of all the shareholders in those banks, including the pension
funds that invested in those banks. A real test is the massive lawsuit against
Deloitte's auditors in the huge Washington Mutual (WaMu) shareholder lawsuit.
"Ohio Sues
Rating Firms for Losses in Funds," by David Segal, The New York Times,
November 20m 2009 ---
Click Here
Already facing a spate of private lawsuits, the legal troubles of the country’s
largest credit rating agencies deepened on Friday when the attorney general of
Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that
they had cost state retirement and pension funds some $457 million by approving
high-risk Wall Street securities that went bust in the financial collapse.
Already facing a spate of private lawsuits, the legal troubles of the country’s
largest credit rating agencies deepened on Friday when the attorney general of
Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that
they had cost state retirement and pension funds some $457 million by approving
high-risk Wall Street securities that went bust in the financial collapse.
The case could test whether the agencies’ ratings are constitutionally protected
as a form of free speech.
The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league
with the banks and other issuers, helping to create an assortment of exotic
financial instruments that led to a disastrous bubble in the housing market.
“We believe that the credit rating agencies, in exchange for fees, departed from
their objective, neutral role as arbiters,” the attorney general, Richard
Cordray, said at a news conference. “At minimum, they were aiding and abetting
misconduct by issuers.”
He accused the companies of selling their integrity to the highest bidder.
Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the
lawsuit had no merit and that the company would vigorously defend itself.
“A recent Securities and Exchange Commission examination of our business
practices found no evidence that decisions about rating methodologies or models
were based on attracting market share,” he said.
Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is
unfortunate that the state attorney general, rather than engaging in an
objective review and constructive dialogue regarding credit ratings, instead
appears to be seeking new scapegoats for investment losses incurred during an
unprecedented global market disruption,” he said.
A spokesman for Fitch said the company would not comment because it had not seen
the lawsuit.
The litigation adds to a growing stack of lawsuits against the three largest
credit rating agencies, which together command an 85 percent share of the
market. Since the credit crisis began last year, dozens of investors have sought
to recover billions of dollars from worthless or nearly worthless bonds on which
the rating agencies had conferred their highest grades.
One of those groups is largest pension fund in the country, the California
Public Employees Retirement System, which filed a lawsuit in state court in
California in July, claiming that “wildly inaccurate ratings” had led to roughly
$1 billion in losses.
And more litigation is likely. As part of a broader financial reform, Congress
is considering provisions that make it easier for plaintiffs to sue rating
agencies. And the Ohio attorney general’s action raises the possibility of
similar filings from other states. California’s attorney general, Jerry Brown,
said in September that his office was investigating the rating agencies, with an
eye toward determining “how these agencies could get it so wrong and whether
they violated California law in the process.”
As a group, the attorneys general have proved formidable opponents, most notably
in the landmark litigation and multibillion-dollar settlement against tobacco
makers in 1998.
To date, however, the rating agencies are undefeated in court, and aside from
one modest settlement in a case 10 years ago, no one has forced them to hand
over any money. Moody’s, S.& P. and Fitch have successfully argued that their
ratings are essentially opinions about the future, and therefore subject to
First Amendment protections identical to those of journalists.
But that was before billions of dollars in triple-A rated bonds went bad in the
financial crisis that started last year, and before Congress extracted a number
of internal e-mail messages from the companies, suggesting that employees were
aware they were giving their blessing to bonds that were all but doomed. In one
of those messages, an S.& P. analyst said that a deal “could be structured by
cows and we’d rate it.”
Recent cases, like the suit filed Friday, are founded on the premise that the
companies were aware that investments they said were sturdy were dangerously
unsafe. And if analysts knew that they were overstating the quality of the
products they rated, and did so because it was a path to profits, the ratings
could forfeit First Amendment protections, legal experts say.
“If they hold themselves out to the marketplace as objective when in fact they
are influenced by the fees they are receiving, then they are perpetrating a
falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and
Lee University School of Law. “The First Amendment doesn’t extend to the
deliberate manipulation of financial markets.”
The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the
Ohio Public Employees Retirement System and other groups, claims that in recent
years the rating agencies abandoned their role as impartial referees as they
began binging on fees from deals involving mortgage-backed securities.
At the root of the problem, according to the complaint, is the business model of
rating agencies, which are paid by the issuers of the securities they are paid
to appraise. The lawsuit, and many critics of the companies, have described that
arrangement as a glaring conflict of interest.
“Given that the rating agencies did not receive their full fees for a deal
unless the deal was completed and the requested rating was provided,” the
attorney general’s suit maintains, “they had an acute financial incentive to
relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their
clients.”
To complicate problems in the system of incentives, the lawsuit states, the
methodologies used by the rating agencies were outdated and flawed. By the time
those flaws were obvious, nearly half a billion dollars in pension and
retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk
securities that both issuers and rating agencies knew to be little more than a
house of cards,” the complaint states.
"Rating
agencies lose free-speech claim," by Jonathon Stempel, Reuters,
September 3, 2009 ---
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE5824KN20090903
There are two superpowers in the world today in my opinion. There’s the United
States and there’s Moody’s Bond Rating Service. The United States can destroy
you by dropping bombs, and Moody’s can destroy you by down grading your bonds.
And believe me, it’s not clear sometimes who’s more powerful. The most that we
can safely assert about the evolutionary process underlying market equilibrium
is that harmful heuristics, like harmful mutations in nature, will die out.
Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert
of Financial Matters: Two Thumbs Down for Credit Reporting Agencies,"
Washington University Law Quarterly, Volume 77, No. 3, 1999 ---
http://www.trinity.edu/rjensen/FraudCongressPartnoyWULawReview.htm
Credit rating agencies gave AAA ratings to mortgage-backed securities that
didn't deserve them. "These ratings not only gave false comfort to investors,
but also skewed the computer risk models and regulatory capital computations,"
Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at
http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html
"How
Moody's sold its ratings - and sold out investors," by Kevin G. Hall,
McClatchy Newspapers, October 18, 2009 ---
http://www.mcclatchydc.com/homepage/story/77244.html
Paulson
and Geithner Lied Big Time: The Greatest Swindle in the History of the
World
What was their real motive in the greatest fraud conspiracy in the history of
the world?
Bombshell: In 2008 and early 2009, Treasury Secretary leaders
Paulson
and Geithner
told the media and Congress that
AIG needed a
global bailout due to not having cash reserves to meet credit default swap
(systematic risk) obligations and insurance policy payoffs. On November 19, 2009
in Congressional testimony Geithner now admits that all this was a pack of lies.
However, he refuses to resign as requested by some Senators.
"AIG and
Systemic Risk Geithner says credit-default swaps weren't the problem, after
all," Editors of The Wall Street Journal, November 20, 2009 ---
Click Here
TARP Inspector General Neil Barofsky keeps committing flagrant acts of political
transparency, which if nothing else ought to inform the debate going forward
over financial reform. In his latest bombshell, the IG discloses that the New
York Federal Reserve did not believe that AIG's credit-default swap (CDS)
counterparties posed a systemic financial risk.
Hello?
For the last year, the entire Beltway theory of the financial panic has been
based on the claim that the "opaque," unregulated CDS market had forced the Fed
to take over AIG and pay off its counterparties, lest the system collapse. Yet
we now learn from Mr. Barofsky that saving the counterparties was not the reason
for the bailout.
In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's
credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden
Lane III, bought out the counterparties' mortgage-backed securities at 100 cents
on the dollar, effectively canceling out the CDS contracts. This was miles above
what those assets could have fetched in the market at that time, if they could
have been sold at all.
The New York Fed president at the time was none other than Timothy Geithner, the
current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in
deciding to make the counterparties whole, "the financial condition of the
counterparties was not a relevant factor."
This is startling. In April we noted in these columns that Goldman Sachs, a
major AIG counterparty, would certainly have suffered from an AIG failure. And
in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr.
Geithner now says the AIG bailout wasn't driven by a need to rescue CDS
counterparties, then what was the point? Why pay Goldman and even foreign banks
like Societe Generale billions of tax dollars to make them whole?
Both Treasury and the Fed say they think it would have been inappropriate for
the government to muscle counterparties to accept haircuts, though the New York
Fed tried to persuade them to accept less than par. Regulators say that having
taxpayers buy out the counterparties improved AIG's liquidity position, but why
was it important to keep AIG liquid if not to protect some class of creditors?
Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might
not have been able to pay claims to its insurance policy holders: "AIG was
providing a range of insurance products to households across the country. And if
AIG had defaulted, you would have seen a downgrade leading to the liquidation
and failure of a set of insurance contracts that touched Americans across this
country and, of course, savers around the world."
Yet, if there is one thing that all observers seemed to agree on last year, it
was that AIG's money to pay policyholders was segregated and safe inside the
regulated insurance subsidiaries. If the real systemic danger was the condition
of these highly regulated subsidiaries—where there was no CDS trading—then the
Beltway narrative implodes.
Interestingly, in Treasury's official response to the Barofsky report, Assistant
Secretary Herbert Allison explains why the department acted to prevent an AIG
bankruptcy. He mentions the "global scope of AIG, its importance to the American
retirement system, and its presence in the commercial paper and other financial
markets." He does not mention CDS.
All of this would seem to be relevant to the financial reform that Treasury
wants to plow through Congress. For example, if AIG's CDS contracts were not the
systemic risk, then what is the argument for restructuring the derivatives
market? After Lehman's failure, CDS contracts were quickly settled according to
the industry protocol. Despite fears of systemic risk, none of the large banks,
either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself,
turned out to have major exposure.
More broadly, lawmakers now have an opportunity to dig deeper into the nature of
moral hazard and the restoration of a healthy financial system. Barney Frank and
Chris Dodd are pushing to give regulators "resolution authority" for struggling
firms. Under both of their bills, this would mean unlimited ability to spend
unlimited taxpayer sums to prevent an unlimited universe of firms from failing.
Americans know that's not the answer, but what is the best solution to the
too-big-to-fail problem? And how exactly does one measure systemic risk? To
answer these questions, it's essential that we first learn the lessons of 2008.
This is where reports like Mr. Barofsky's are valuable, telling us things that
the government doesn't want us to know.
In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's
report, Mr. Geithner said, "It's a great strength of our country, that you're
going to have the chance for a range of people to look back at every decision
made in every stage in this crisis, and look at the quality of judgments made
and evaluate them with the benefit of hindsight." He added, "Now, you're going
to see a lot of conviction in this, a lot of strong views—a lot of it untainted
by experience."
Mr. Geithner has a point about Monday-morning quarterbacking. He and others had
to make difficult choices in the autumn of 2008 with incomplete information and
often with little time to think, much less to reflect. But that was last year.
The task now is to learn the lessons of that crisis and minimize the moral
hazard so we can reduce the chances that the panic and bailout happen again.
This means a more complete explanation from Mr. Geithner of what really drove
his decisions last year, how he now defines systemic risk, and why he wants
unlimited power to bail out creditors—before Congress grants the executive
branch unlimited resolution authority that could lead to bailouts ad infinitum.
Jensen
Comment
One of the first teller of lies was the highly respected Gretchen Morgenson of
The New York Times who was repeating the lies told to her and Congress by
the Treasury and the Fed. This was when I first believed that the problem at AIG
was failing to have capital reserves to meet CDS obligations. I really believed
Morgenson's lies in 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
Here's
what I wrote in 2008 ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Credit Default Swap (CDS)
This is an insurance policy that essentially "guarantees" that if a CDO goes bad
due to having turds mixed in with the chocolates, the "counterparty" who
purchased the CDO will recover the value fraudulently invested in turds. On
September 30, 2008 Gretchen Morgenson of The New York Times aptly
explained that the huge CDO underwriter of CDOs was the insurance firm called
AIG. She also explained that the first $85 billion given in bailout money by
Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also
explained that, unlike its casualty insurance operations, AIG had no capital
reserves for paying the counterparties for the the turds they purchased from
Wall Street investment banks.
"Your
Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York
Times, September 20, 2008 ---
http://www.nytimes.com/2008/09/21/business/21gret.html
Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times,
March 7, 2009 ---
http://www.nytimes.com/2009/03/08/business/08gret.html
What Ms.
Morgenson failed to explain, when Paulson eventually gave over $100 billion for
AIG's obligations to counterparties in CDS contracts, was who were the
counterparties who received those bailout funds. It turns out that most of them
were wealthy Arabs and some Asians who we were getting bailed out while Paulson
was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat
their turds.
You tube
had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit
default swap" ---
http://www.youtube.com/results?search_query=Credit+Default+Swaps&search_type=&aq=f
In particular note this video by Paddy Hirsch ---
http://www.youtube.com/watch?v=kaui9e_4vXU
Paddy has some other YouTube videos about the financial crisis.
Bob
Jensen’s threads on accounting for credit default swaps are under the C-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#C-Terms
The
Greatest Swindle in the History of the World
"The
Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---
http://www.thenation.com/doc/20090608/kroll/print
Bob Jensen's threads on why the infamous
"Bailout" won't work ---
http://www.trinity.edu/rjensen/2008Bailout.htm#BailoutStupidity
Bob Jensen's "Rotten to the Core" threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Third Disgraced Pennsylvania Revenue Secretary to Resign in the Rendell
Administration.
"Whip DeWeese, revenue chief Stetler charged in corruption probe," by Brad
Bumsted, Pittsburgh Tribune Review, December 15, 2009 ---
http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_657829.html
Former state House Speaker H. William DeWeese,
former Revenue Secretary Steve Stetler and DeWeese aide Sharon Rodavich were
charged today in an ongoing legislative corruption investigation led by
Attorney General Tom Corbett.
DeWeese, D-Greene County, Stetler and Rodavich were
charged with theft, conspiracy and conflict of interest. The charges against
DeWeese and Rodavich stem from their allegedly raising money for DeWeese's
campaigns with state-paid workers, resources and time.
"The grand jury showed that DeWeese's legislative
dstaff and campaign staff were virtually one and the same," Corbett said.
DeWeese aides testified to the grand jury that "campaign work for DeWeese
was expected" from legislative staff.
They are the latest ensnared in a nearly 3-year-old
probe, which has resulted in charges against 22 other current and former
Democrat and Republican staffers and lawmakers. DeWeese is the second former
speaker charged in the investigation. Republican John Perzel of Philadelphia
was charged Nov. 12 with spending millions of taxpayer dollars on campaigns.
DeWeese saw his former chief of staff, Mike Manzo,
and former right-hand man Mike Veon charged in the first round of
indictments, handed down in July 2008. DeWeese, a 33-year veteran of the
House, has been a force in state politics for nearly two decades, including
a stint in 1993 as Speaker.
Stetler, a former House member from York who
oversaw Democratic campaigns, resigned this morning as a member of Gov. Ed
Rendell's Cabinet, a senior administration official said.
Corbett's announcement comes as the General
Assembly is in the midst of approving table games at casinos. The charges
could create chaos in a legislature stung by a series of disclosures since
the investigation began in February 2007. Recent polls show public opinion
of the body at its lowest level ever, after earlier charges and a 101-day
budget impasse.
The Tribune-Review reported last week that DeWeese
met three times with the attorney general's investigative team and his
attorney Walter Cohen said he was cooperating fully. DeWeese was not seeking
immunity, Cohen said.
Cohen said today he received no information about
Corbett's charges.
Last week, the attorney general's office lost the
first corruption case to go to trial. Former Rep. Sean Ramaley of Baden was
acquitted on six felony counts of holding a sham job in Veon's Beaver Falls
office.
Prosecutors alleged Ramaley used the job to
campaign. A Dauphin County jury cleared him after his lawyer Philp Ignelzi
of Pittsburgh told jurors there was reasonable doubt about each charge.
Five Democrats in that case have agreed to plead
guilty. Veon, facing multiple charges of theft, conflict of interest and
conspiracy, is slated for trial Jan. 19 along with aides. That case revolves
around the use of millions of dollars in taxpayer-financed bonuses to reward
staffers who worked campaigns. Veon, Annamarie Peretta-Rosepink and Brett
Cott, strongly maintain their innocence.
Last month, former House Speaker John Perzel,
R-Philadelphia, was accused with 9 other Republicans of directing a scheme
to divert $10 million in tax money to pay for sophisticated computer
equipment and programs that Perzel allegedly wanted to give Republicans an
edge in elections. Perzel through his attorney says he is innocent of all
charges.
Through the Banking Glass Darkly
"FASB to Propose More Flexible Accounting Rules for Banks," by
Floyd Norris, The New York Times, December 7, 2009 ---
http://www.nytimes.com/2009/12/08/business/08account.html?_r=2&ref=business
Facing political pressure to abandon “fair value”
accounting for banks, the chairman of the board that sets American
accounting standards will call Tuesday for the “decoupling” of bank capital
rules from normal accounting standards.
His proposal would encourage bank regulators to
make adjustments as they determine whether banks have adequate capital while
still allowing investors to see the current fair value — often the market
value — of bank loans and other assets.
In the prepared text of a speech planned for a
conference in Washington, Robert H. Herz, the chairman of the
Financial Accounting Standards Board, called on
bank regulators to use their own judgment in allowing banks to move away
from Generally Accepted Accounting Principles, or GAAP, which his board
sets.
“Handcuffing regulators to GAAP or distorting GAAP
to always fit the needs of regulators is inconsistent with the different
purposes of financial reporting and prudential regulation,” Mr. Herz said in
the prepared text.
“Regulators should have the authority and
appropriate flexibility they need to effectively regulate the banking
system,” he added. “And, conversely, in instances in which the needs of
regulators deviate from the informational requirements of investors, the
reporting to investors should not be subordinated to the needs of
regulators. To do so could degrade the financial information available to
investors and reduce public trust and confidence in the capital markets.”
Mr. Herz said that Congress, after the
savings and loan crisis, had required bank
regulators in 1991 to use GAAP as the basis for capital rules, but said the
regulators could depart from such rules.
Banks have argued that accounting rules should be
changed, saying that current rules are “pro-cyclical” — making banks seem
richer when times are good, and poorer when times are bad and bank loans may
be most needed in the economy.
Mr. Herz conceded the accounting rules can be
pro-cyclical, but questioned how far critics would go. Consumer spending, he
said, depends in part on how wealthy people feel. Should
mutual fund statements be phased in, he asked, so
investors would not feel poor — and cut back on spending — after markets
fell?
The House Financial Services Committee has approved
a proposal that would direct bank regulators to comment to the S.E.C. on
accounting rules, something they already can do. But it stopped short of
adopting a proposal to allow the banking regulators to overrule the S.E.C.,
which supervises the accounting board, on accounting rules.
“I support the goal of financial stability and do
not believe that accounting standards and financial reporting should be
purposefully designed to create instability or pro-cyclical effects,” Mr.
Herz said.
He paraphrased
Barney Frank, the chairman of the House committee,
as saying that “accounting principles should not be viewed to be so
immutable that their impact on policy should not be considered. I agree with
that, and I think the chairman would also agree that accounting standards
should not be so malleable that they fail to meet their objective of helping
to properly inform investors and markets or that they should be purposefully
designed to try to dampen business, market, and economic cycles. That’s not
their role.”
Banks have argued that accounting rules made the
financial crisis worse by forcing them to acknowledge losses based on market
values that may never be realized, if market values recover.
Mr. Herz said the accounting board had sought
middle ground by requiring some unrealized losses to be recognized on bank
balance sheets but not to be reflected on income statements.
Banking regulators already have capital rules that
differ from accounting rules, but have not been eager to expand those
differences. One area where a difference may soon be made is in the
treatment of off-balance sheet items that the accounting board is forcing
banks to bring back onto their balance sheets. The banks have asked
regulators to phase in that change over several years, to slow the impact on
their capital needs.
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen/theory01.htm#FairValue
Please don't blame the accountants for the banking meltdown ---
http://www.trinity.edu/rjensen/2008Bailout.htm#FairValue
Bob Jensen's threads on banking frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
This is the way most fraud arises on Wall Street and it does not take even
a high school education to understand how it works
"Former RNC Finance Chair pleads guilty to $1 million bribery," by Mark
Hemingway, Washington Examiner, December 4, 2009 ---
http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Former-RNC-Finance-Chair-pleads-guilty-to-1-million-bribery-78554297.html
Elliott Broidy, the former Finance Chairman of the
Republican National Committee, plead guilty yesterday to offering $1 million
bribes to officials with New York state's pension funds. In return, Broidy
got a $250 million investement in the Wall Street firm he worked for:
Broidy, who also resigned as chairman of
Markstone Capital Partners, the private equity firm, admitted that he
had paid for luxury trips to hotels in Israel and Italy for pension
staffers and their relatives -- including first-class flights and a
helicopter tour. Broidy funneled the money through charities and
submitted false receipts to the state comptroller's office to cover his
tracks.
The California financier, who was the GOP
finance chairman in 2008, also paid thousands of dollars toward rent and
other expenses for former "Mod Squad" star Peggy Lipton, who was dating
a high-ranking New York pension official at the time.
Broidy now faces up to four years in jail and has
to return some $18 million. Since the scandal with New York's pension fund
broke, it has so far led to five guilty pleas and $100 million in public
funds have been returned. However, Pro-Publica -- which has been doggedly
covering the story -- notes that nothing has been done to prevent future
corruption:
The system that allowed corruption to flourish
in New York, where $110 billion in retirement savings are controlled by
a sole trustee with no board oversight, is still in place.
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Are there any truly honest local, state, and Federal officials ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
"Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine
McKenna, re: The Auditors, September 18, 2009 ---
http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/
Lehman Brothers. Bear Stearns. Washington Mutual.
AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill
Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland.
Lloyds TSB. HBOS. Northern Rock.
When each of the notorious “financial crisis”
institutions collapsed, were bailed out/nationalized by their governments or
were acquired/rescued by “healthier” institutions, they were all carrying in
their wallets non-qualified, clean opinions on their financial statements
from their auditors. In none of the cases had the auditors warned
shareholders and the markets that there was “ a substantial doubt about the
company’s ability to continue as a going concern for a reasonable period of
time, not to exceed one year beyond the date of the financial statements
being audited.”
Continued in a very good article by Francine (she talks with some major
players)
http://retheauditors.com/2009/09/18/going-concern-audit-opinions-why-so-few-warning-flares/
A New One from Francine
"Continuing The Conversation: If Auditors Weren’t There, Why Not?" by
Francine McKenna, re: The Auditors, Decmeber 14, 2009 ---
http://retheauditors.com/2009/12/14/continuing-the-conversation-if-auditors-werent-there-why-not/
Jim Peterson and I talk often.
It was my lucky day when I found him writing for the
International Herald Tribune about auditors and
litigation and the future of the profession. There’s
quite an archive there to draw from. Jim not only has
the experience but the chops to write about the subjects
that I feel strongly about. Albeit I’m a little more
fun, but…I told a mutual admirer recently not to judge
me more beautiful than Jim. He hasn’t seen Jim in
stilettos nor me in a bow tie…
Jim opened a dialogue with me and
the others who write
frequently on this topic, like Dennis Howlett and
Richard Murphy, via his post
today at Re: Balance. The subject is, “If not, why
not…” We’re talking about the auditors’ failure to be a
force either before, during, or after the financial
crisis.
“Here – in response to the always tart-tongued
Francine — is why the auditors weren’t there:
The simple if
depressing reason is that their core product has
long since been judged irrelevant. The standard
auditor’s report is an anachronism — having lost any
value it may once have had, except for
legally-required compliance (here).
If that single page disappeared from corporate
annual reports, no honest user of financial
information would admit to missing it. Nor, offered
the choice, would any rational CFO pay the fees to
obtain it.”
If no one but me asks, since
no one cares, then what are we
doing here? Only legally required compliance keeps us
walking like dizzy children through this hall of
mirrors, never reaching sunshine.
“…the fundamental issue of trustworthiness –
on which the entire value of the auditors’ franchise
perilously rests – is put under scrutiny when they
are effectively sidelined for want of influence and
capacity to persuade.”
Continued in article
Where Were the Auditors as Poison Was Being Added to Mortgage Loans on
Main Street ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Will the Big Auditing Firms Survive the Shareholder/Pension Fund Lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
Francine maintains an outstanding auditing blog at
http://retheauditors.com/
Bob Jensen's threads on "Where Were the Auditors?" ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
Some auditing firms are now being hauled into court in bank shareholder
and pension fund lawsuits ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
Video: Fora.Tv on Institutional Corruption & The Economy Of Influence
---
http://www.simoleonsense.com/video-foratv-on-institutional-corruption-the-economy-of-influence/
Community Organizers of Fraud
An internal review by ACORN's board of directors found that $5 million was
embezzled from the community organization, far more than a previously reported
sum of $1 million, according to documents from the Louisiana attorney general's
office.
Michael Kunzelman, "La. prosecutor
probes ACORN after embezzlement," Yahoo News, October 6, 2009 ---
http://news.yahoo.com/s/ap/20091006/ap_on_re_us/us_acorn_missing_money
"Going to School on Revenue Recognition," by Tom Selling, The
Accounting Onion, December 5, 2009 ---
Click Here
Jensen Comment
Another question is consistency and whether inconsistencies suggest earnings
management.
"Strategic Revenue Recognition to Achieve Earnings Benchmarks," Marcus L.
Caylor, Marcus L. Caylor, SSRN, January 14, 2008 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=885368
This paper is a free download.
Abstract:
I examine whether managers use discretion in the two accounts related to
revenue recognition, accounts receivable and deferred revenue, to avoid
three common earnings benchmarks. I find that managers use discretion in
both accounts to avoid negative earnings surprises. I find that neither of
these accounts is used to avoid losses or earnings decreases. For a common
sample of firms with both deferred revenue and accounts receivable, I show
that managers prefer to exercise discretion in deferred revenue vis-ŕ-vis
accounts receivable. I provide a reason for why managers might prefer to
manage a deferral rather than an accrual: lower costs to manage (i.e., no
future cash consequences). My results suggest that if given the choice,
managers prefer to use accounts that incur the lowest costs to the firm.
Fraudulent Revenue Accounting
"Detecting Circular Cash Flow: Healthy doses of skepticism and due care
can help uncover schemes to inflate sales," by John F. Monhemius and Kevin
P. Durkin, Journal of Accountancy, December 2009 ---
http://www.journalofaccountancy.com/Issues/2009/Dec/20091793.htm
Following an initial customer confirmation request
with no response, a first-year auditor mails a second and third request, all
under the supervision of the auditor-in-charge assigned to the account.
Field work begins on the audit, but there is still no response from the
customer. Another auditor scanning the cash journal from the beginning of
the year through the current date notes that all outstanding invoices have
subsequently been paid from this customer during this period. Customer check
copies are provided, and remittances indicate that payment has been received
in settlement of all outstanding invoices at fiscal year-end for this
customer. But has the existence of accounts receivable from this customer at
fiscal year-end really been established?
Fraudsters have been creating increasingly complex
and sophisticated schemes designed to rely on potential weaknesses in the
execution of audit procedures surrounding key assertions such as existence.
A financial statement auditor can use his or her professional judgment while
carrying out audit procedures to detect such a scheme.
Given the difficult economic times of the past
year, special care should be given to consider fraud while performing audit
engagements. One fraud scheme that has been encountered with increasing
frequency involves the inflation of accounts receivable and sales through
the creation of a circular flow of cash through a company to give the
appearance of increasing revenue and existence of accounts receivable. This
article addresses this fraud technique when used to materially overstate
assets and inflate borrowing capacity under an asset-based revolving line of
credit. This article also points out red flags that may help uncover such a
scheme.
BACKGROUND
A typical asset-based revolving line of credit
allows a company to borrow funds for working capital. The borrowing limit is
based on a formula that takes into account various working capital assets
and related advance rates. A typical availability formula allows for loan
advances equal to a set percentage of asset balances.
This article focuses on an accounts receivable-
backed line of credit, an asset that is prone to manipulation in this
specific fraud scheme. Typical advances against accounts receivable range
from 75% to 85% of eligible accounts receivable. Items excluded from
eligible collateral would include invoices aged over 90 days, affiliate
receivables or any other invoice that would create a nonprime receivable
from the lender’s perspective. The loan agreement in an asset-based loan
facility requires management to submit an availability calculation
periodically. This allows the lender to monitor collateral levels and
exposure. A generic accounts receivable availability calculation is
illustrated in Exhibit 1.
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on revenue recognition frauds are at
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Creative Earnings Management, Agency Theory, and Accounting
Manipulations to Cook the Books
The Controversy Over Earnings Smoothing and Other Manipulations ---
http://www.trinity.edu/rjensen/theory01.htm#Manipulation
TIAA-CREF Goes Political: Is it spending on political causes without
informing its own members?
Message from my friend Larry
I ran across this
entry in the
Center for Public Integrity's investigation of the
climate lobby. I fail to see why TIAA-CREF should be using participant's
retirement funds to lobby Congress on climate change? Course,
TIAA-CREF's CEO Roger Ferguson is on Obama's economic advisory committee.
Maybe it's a payback?
Larry
Jensen Comment
Cap and Trade will create high costs and profit losses to many companies. Is
this good for the CREF portfolio value in your lifetime?
TIAA-CREF offers "socially responsible" portfolio investing as an option, but
this is entirely a different matter than spending member money on lobbying for
political causes.
Nowhere in the TIAA-CREF Website could I find where your funds were being
spent for the climate lobby.
"Another Bogus ACORN Lawsuit," by Michelle Malkin, Townhall,
November 13, 2009 ---
http://townhall.com/columnists/MichelleMalkin/2009/11/13/another_bogus_acorn_lawsuit
ACORN is doing what it does best: playing
the victim, blaming everyone else for its self-inflicted wounds,
perpetuating false narratives and defending the entitlement industry to the
death.
On Thursday, the disgraced welfare rights
organization filed suit over a congressional funding ban passed in September
after nationwide undercover sting videos exposed ACORN's criminal element.
The group and its web of nonprofit,
tax-exempt affiliates have collected an estimated $53 million in government
funds since 1994. This pipeline is apparently a constitutionally protected
right. According to ACORN's lawyers at the far-left Center for
Constitutional Rights, the congressional funding ban constitutes a "bill of
attainder" -- an act of the legislature declaring a person(s) guilty of a
crime without trial.
Now cue the world's smallest violin and
pass the Kleenex: ACORN's lawyers say the group has suffered cutbacks and
layoffs as a result of the punitive funding ban. The congressional
persecution means ACORN can no longer teach first-time-homebuyer
indoctrination classes and -- gasp -- the loss of an $800,000 contract to
conduct "outreach" on "asthma."
Message: The demons in the House who
defunded ACORN (345 of them, including 172 Democrats) are cutting off oxygen
to poor people!
"It's not the job of Congress to be the
judge, jury and executioner," CCR lawyer Jules Lobel moaned as he equated
the House's act of fiscal responsibility with the death penalty.
"It is outrageous to see Congress
violating the Constitution for purposes of political grandstanding," CCR
Legal Director Bill Quigley seethed without a shred of irony.
"Congress bowed to FOX News and joined in
the scapegoating of an organization that helps average Americans going
through hard times to get homes, pay their taxes and vote. Shame on them,"
ACORN head Bertha Lewis piled on in an affidavit lamenting the loss of
state, local and private foundation grants, which she blamed on the
resolution. It "gave the green light for others to terminate our funds, as
well."
What ACORN's sob-story tellers leave out
is the inconvenient fact that nonprofits were bailing on ACORN long before
undercover journalists Hannah Giles and James O'Keefe and BigGovernment.com
publisher Andrew Breitbart entered the scene. Internal ACORN records from a
Washington, D.C., meeting held last August noted that more than $2 million
in foundation money was being withheld as a result of the group's
embezzlement scandal involving founder Wade Rathke's brother, Dale --
reportedly involving upward of $5 million.
Rathke admitted he suppressed disclosure
of his brother's massive theft -- first discovered in 2000 -- because "word
of the embezzlement would have put a 'weapon' into the hands of enemies of
ACORN." In other words: The protection of ACORN's political viability came
before the protection of members' dues (and taxpayers' funds).
A small group of ACORN executives helped
cover up Dale Rathke's crime by carrying the amount he embezzled as a "loan"
on the books of Citizens Consulting Inc. CCI, the accounting and financial
management arm of ACORN and its affiliates, is housed in the same building
as the national ACORN headquarters in New Orleans. It's also home to ACORN
International, now operating under a different name, which Wade Rathke
continues to head.
ACORN brass cooked up a "restitution" plan
to allow the Rathkes to pay back a measly $30,000 a year in exchange for
secrecy about the deal. ACORN's lawyers issued a decree to its employees to
keep their "yaps" shut. Dale Rathke kept his job and his $38,000 annual
salary until the story leaked to donors and board members outside the Rathke
circle.
In June 2008, the left-wing Catholic
Campaign for Human Development cut off grant money to ACORN "because of
questions that arose about financial management, fiscal transparency and
organizational accountability of the national ACORN structures." In November
2008 -- ahem, more than a year before the congressional ACORN funding ban
was passed -- CCHD voted unanimously to extend and make permanent its ban on
funding of ACORN organizations. "This decision was made because of serious
concerns regarding ACORN's lack of financial transparency, organizational
performance and questions surrounding political partisanship," according to
Bishop Roger Morin.
Did ACORN's lawyers call that withdrawal
of funding "political grandstanding" and "scapegoating," too?
The lawsuit over the congressional funding
ban is just the latest desperate legal measure to distract from ACORN's
long-festering ethics and financial scandals. ACORN's attorneys have sued
Giles, O'Keefe, Breitbart and former ACORN/Project Vote whistleblower Anita
MonCrief. And they'll sue anyone else who gets in the way of rehabilitating
the scandal-plagued enterprise's image.
It took decades to build up its massive
coffers and intricate web of affiliates across the country. It will take
months and years to untangle the entire operation. And it will take time,
money and relentless sunshine to dismantle the government-subsidized
partisan racket.
ACORN can never be "reformed." It is
constitutionally corrupt. Sue me.
Bob Jensen's threads on ACORN are at
http://www.trinity.edu/rjensen/2008Bailout.htm
Search for "ACORN"
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Note especially the last paragraph in the article below concerning alleged
frauds of accountants he employed!
"Joe Francis free: Was he a victim of accountants gone wild?"
AccountingWeb, November 11, 2009 ---
http://www.accountingweb.com/topic/watchdog/joe-francis-free-was-he-victim-accountants-gone-wild
In spite of a future that looked pretty dismal,
“Girls Gone Wild” producer Joe Francis will not serve another day of jail
time for tax evasion. The charges against him included underreporting his
income by about $20 million, and later, bribing jail workers in Nevada while
he was being held on the tax charges. For awhile it looked like he might end
up with ten years in prison. Now, he's free, having been sentenced by U.S.
District Judge James Otero to 301 days in jail -- which happens to be the
amount of time he has already served -- plus a year of probation, and a
quarter million dollar fine. In an unusual twist, just as Francis has worked
out his IRS problems, the official spotlight has turned on the guy who blew
the whistle on him.
Francis's trouble started in 2005 when the Internal
Revenue Service began looking into his tax returns for 2002 and 2003. His
accountant, Michael Barrett, turned Francis into the IRS under the
Whistleblower program, hoping to collect a multi-million dollar reward.
Oddly enough, the information Barrett gave the IRS related to tax returns
which he himself prepared, signed, and filed, without showing them to
Francis. Barrett said the tax returns showed $20 million in bogus business
expenses, including $3.78 million used to build a home in Mexico, $10.4
million in false consulting expenses, and a half million dollar phony
insurance claim. In addition, Francis is accused of transferring $15 million
from an offshore bank account to a California brokerage account in the name
of a Cayman Islands Company under his control.
At first the video producer denied the charges and
claimed the IRS was targeting him because they were jealous of his youth and
enormous success. His defense attorney, Robert Bernhoff, told the Los
Angeles Times, "This ain't 'Girls Gone Wild.' This is the IRS gone wild. The
American taxpayers should be outraged that an IRS program is being abused
like this."
Then, after years of fighting the charges, Francis
appeared in a Los Angeles court on September 23, 2009 to plead guilty to two
misdemeanors, agreeing to pay $249,705. Judge Otero accepted the plea
bargain on the misdemeanor charges after it was learned that a key witness
withheld information from prosecutors.
As part of the plea, Francis agreed to admit that
he underreported income by about $563,000 and also that he gave more than
$5,000 worth of items to two jail workers in exchange for food during his
incarceration at Washoe County, Nevada.
Brad Brian, Francis's lead trial attorney, said in
a statement, "It took us seven months, but in the end we demonstrated that
the felony tax charges never should have been brought in the first place."
After the hearing, Francis kissed his mother and
told reporters simply, "I think we won that one."
His tax woes may be over. But in recent weeks, the
IRS is turning up the heat on his accountant, Michael Barrett. For a long
time, Francis maintained that his tax failures were caused not by his own
wrongdoing, but by Barrett. Barrett, in fact, was scheduled to be a key
witness for the prosecution against Francis. But as the IRS delved more
deeply into the case against Francis, some of the scrutiny turned on Barrett
himself and two other employees of Francis's production company, Mantra
Films. The accountant is accused - among other things - of setting up shadow
corporations and then using them to bilk Mantra out of hundreds of thousands
of dollars. No arrests have yet been made.
Question
Can a clever cost accountant save Intel from Attorney General of New York State?
"N.Y. files antitrust lawsuit against Intel: Chipmaker used bribes,
coercion to get PC makers to shun its rivals, Cuomo says," by Tomoeh
Murakami Tse and Cecilia Kang, The Washington Post, November 5, 2009 ---
Click Here
New York Attorney General Andrew M. Cuomo filed an
antitrust suit against Intel on Wednesday, accusing the world's largest
chipmaker of illegally threatening computer makers and paying them billions
of dollars in kickbacks to stop using chips made by rivals.
The lawsuit comes amid increased scrutiny of the
company's business practices and adds to a growing chorus of complaints by
overseas regulators who have accused the chipmaker of anti-competitive
behavior.
Intel has repeatedly denied wrongdoing, and a
company spokesman did so again Wednesday. "We disagree with the New York
attorney general," Chuck Mulloy said. "Neither consumers who have
consistently benefited from lower prices and increased innovation nor
justice are being served by the decision to file a case now. Intel will
defend itself."
Cuomo's suit, filed in the U.S. District Court of
Delaware, claims that Intel violated state and federal antitrust laws by
"engaging in a worldwide, systematic campaign of illegal conduct" that
involved threatening and bribing executives at firms with such household
names as Hewlett-Packard, Dell and IBM.
According to the lawsuit, Intel persuaded computer
makers to use its chips in exchange for billions of dollars of payments
masked as "rebates." The company also threatened to retaliate against
manufacturers that worked with Intel's competitors, in a particular Advanced
Micro Devices.
For example, Cuomo said, Intel paid nearly $2
billion in 2006 to Dell, which agreed to refrain from marketing AMD
products. Intel also paid IBM $130 million not to launch a product using AMD
chips and threatened to derail a joint development project with
Hewlett-Packard if the computer maker promoted AMD products, Cuomo said.
A history of scrutiny
"Rather than compete fairly, Intel used bribery and
coercion to maintain a stranglehold on the market," Cuomo said in a
statement. "Intel's actions not only unfairly restricted potential
competitors, but also hurt average consumers who were robbed of better
products and lower prices."
As part of the lawsuit, Cuomo presented internal
e-mails between Intel executives as well as between Intel executives and
those at computer makers.
According to Cuomo, for example, Intel chief
executive Paul S. Otellini wrote a 2005 e-mail to Dell chief executive
Michael S. Dell, who had complained that his company's business performance
was suffering. Otellini reminded him that Intel had paid more than $1
billion to Dell. " This was judged by your team to be more than sufficient
to compensate for the competitive issues," Otellini allegedly wrote.
Hewlett Packard, Dell and IBM either declined to
comment or did not return phone calls and e-mail.
While numerous foreign regulators have filed
lawsuits against Intel, which is based in Santa Clara, Calif., Cuomo's is
the first formal antitrust action against Intel by U.S. regulators in more
than a decade. In 1998, the Federal Trade Commission filed an administrative
complaint, which was later settled.
Continued in article
Jensen Comment
One gray zone in such lawsuits is where the "bribes" in reality are volume
discount pricings. Accountants often teach cost-volume-profit decision making
with one of the decision variables being how to set prices on the basis of
expected sales volumes at each of the various pricing alternatives (that affect
contribution margins over variable costs). We seldom, however, bring into the
CVP equation the possibility that certain types of discount pricing restrains
competition. Also giving a $2 billion "bribe" is not quite the same as setting a
lower price per unit that can be justified on the basis of economies of scale in
production. A fixed $2 billion bribe falls more into the realm of a "fixed
cost." Fixed costs are included in CVP analysis, but they're usually assumed, in
our courses, to be legitimate fixed costs and not illegal bribes. It will be
interesting to see how Intel (an Dell) presents a defense to this lawsuit. Ken
Lay (at Enron) personally paid over a million dollars for an accounting
professor from USC to be his expert witness. It did not do any good in Ken's
trial where Lay was found guilty.
In the testimony below, defense witnesses for Skilling and Lay (Walter Rush
and Jerry Arnold) "attribute Enron's descent into bankruptcy proceedings to a
combination of bad publicity and lost market confidence" rather than accounting
fraud. This places the Professor Arnold's opinion in conflict with that of
Professors Hartgraves and Benston earlier analyses based upon the lengthy Powers
Report commissioned by the former Chairman of the Board of Enron ---
http://www.trinity.edu/rjensen/FraudEnron.htm
Accounting Teachers About Cooking the Books Get Caught ... er ... Cooking
the Books
The media and blogs are conveniently pinning the
Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled
into Huron.
What I find ironic below is that the Huron Consulting Group is itself a
consulting group on technical accounting matters, internal controls, financial
statement restatements, accounting fraud, rules compliance, and accounting
education. If any outfit should've known better it was Huron Consulting Group
---
http://www.huronconsultinggroup.com/about.aspx
Huron Consulting Group was formed in May of 2003 in Chicago with a core set
of 213 following the implosion of huge Arthur Andersen headquartered in Chicago.
The timing is much more than mere coincidence since a lot of Andersen
professionals were floating about looking for a new home in Chicago. In the past
I've used the Huron Consulting Group published studies and statistics about
financial statement revisions of other companies. I never anticipated that Huron
Consulting itself would become one of those statistics. I guess Huron will now
have more war stories to tell clients.
The media and blogs are conveniently pinning the
Huron debacle on its Andersen roots, and hinting that the Enron malfeasance bled
into Huron.
Big Four Blog, August 5, 2009 ---
http://www.blogcatalog.com/blog/life-after-big-four-big-four-alumni-blog/eae8a159803847f6a73af93c063058f9
"Can hobbled Huron Consulting survive this scandal?" by Steven R.
Strahler, Chicago Business, August 4, 2009 ---
http://www.chicagobusiness.com/cgi-bin/news.pl?id=35019&seenIt=1
An accounting mess at Huron Consulting Group Inc.
that led to the decapitation of top management and the collapse in its share
price puts the survival of the Chicago-based firm in jeopardy.
Huron’s damaged reputation imperils its ability to
provide credible expert witnesses during courtroom proceedings growing out
of its bread-and-butter restructuring and disputes and investigations
practices. Rivals are poised to capture marketshare.
“These types of firms have to be squeaky clean with
no exceptions, and this was too big of an exception,” says Allan Koltin, a
Chicago-based accounting industry consultant. “I respect the changes they
made and the speed (with which) they made them. I’m not sure they can
recover from this.”
Huron executives declined to comment.
Late Friday, Huron said it would restate results
for the three years ended in 2008 and for the first quarter of 2009,
resulting in a halving of its profits, to $63 million from $120 million, for
the 39-month period. Revenue projections for 2009 were cut by more than 10%,
to a range of $650 million to $680 million from $730 million to $770
million.
The company said its hand was forced by its recent
discovery that holders of shares in acquired firms had an agreement among
themselves to reallocate a portion of their earn-out payments to other Huron
employees. The company said it had been unaware of the arrangement.
“The employee payments were not ‘kickbacks’ to
Huron management,” the company said.
Whatever the description, the fallout promises to
shake Huron to its core. The company’s stock plunged 70% Monday to about $14
per share, and law firms were preparing to mount class-action shareholder
litigation.
“If the public doesn’t buy that the house is clean,
my guess is some of the senior talent will start to move very quickly,” says
William Brandt, president and CEO of Chicago-based restructuring firm
Development Specialists Inc. “Client retention is all that matters here.”
Publicly traded competitors like Navigant
Consulting Inc. are unlikely to make bids for Huron because of the potential
for damage to their own stock. Private enterprises like Mesirow Financial
stand as logical employers as Huron workers jump ship.
“There certainly is potential out there for clients
and employees who may be looking at different options, but at this point in
the process it’s a little early to tell what impact this will have,” says a
Navigant spokesman.
Huron’s woes led to the resignation last week of
Chairman and CEO Gary Holdren and Chief Financial Officer Gary Burge, both
of whom will stay on with the firm for a time, and the immediate departure
of Chief Accounting Officer Wayne Lipski.
Mr. Holdren, 59, has a certain amount of
familiarity with turmoil.
He was among co-founders of Huron in 2002, when
their previous employer, Andersen, folded along with its auditing client
Enron Corp. He told the Chicago Tribune in 2007, “Initially, when we’d call
on potential clients, they’d say, ‘Huron? Who are you? That sounds like
Enron,’ or ‘Aren’t you guys supposed to be in jail? Why are you calling us?’
”
This year, it’s been money issues dogging Huron. In
the spring, shareholders twice rejected proposals to sweeten an employee
stock compensation plan.
Mr. Holdren’s total compensation in 2008 was $6.5
million, according to Securities and Exchange Commission filings. Mr. Burge
received $1.2 million.
A Huron unit in June sued five former consultants
and their new employer, Sonnenschein Nath & Rosenthal LLP, alleging that the
defendants were using trade secrets to lure Huron clients to the law firm.
The defendants denied the charges. The case is pending in Cook County
Circuit Court.
"3 executives at Huron Consulting Group resign over accounting missteps
Consulting firm announces it will restate financial results for the past 3
fiscal years,"by Wailin Wong, Chicago Tribune, August 1, 2009 ---
http://archives.chicagotribune.com/2009/aug/01/business/chi-sat-huron-0801-aug01
Chief Executive Gary Holdren and two other top
executives are resigning from Chicago-based management consultancy Huron
Consulting Group as the company announced Friday it is restating financial
statements for three fiscal years.
Holdren’s resignation as CEO and chairman was
effective Monday and he will leave Huron at the end of August, the company
said in a statement. Chief Financial Officer Gary Burge is being replaced in
that post but will serve as treasurer and stay through the end of the year.
Chief Accounting Officer Wayne Lipski is also leaving the company. None of
the departing executives will be paid severance, Huron said.
Huron will restate its financial results for 2006,
2007, 2008 and the first quarter of 2009. The accounting missteps relate to
four businesses that Huron acquired between 2005 and 2007.
According to Huron’s statement and a filing with
the Securities and Exchange Commission, the selling shareholders of the
acquired businesses distributed some of their payments to Huron employees.
They also redistributed portions of their earnings “in amounts that were not
consistent with their ownership percentages” at the time of the acquisition,
Huron said.
A Huron spokeswoman declined to give the number of
shareholders and employees involved, saying the company was not commenting
beyond its statement.
“I am greatly disappointed and saddened by the need
to restate Huron’s earnings,” Holdren said in the statement. He acknowledged
“incorrect” accounting.
Huron said the restatement’s total estimated impact
on net income and earnings before interest, taxes, depreciation and
amortization for the periods in question is $57 million.
“Because the issue arose on my watch, I believe
that it is my responsibility and my obligation to step aside,” said Holdren.
Huron said the board’s audit committee had recently
learned of an agreement between the selling shareholders to distribute some
of their payments to a company employee. The committee then launched an
inquiry into all of Huron’s prior acquisitions and discovered the
involvement of more Huron employees.
Huron said it is reviewing its financial reporting
procedures and expects to find “one or more material weaknesses” in the
company’s internal controls. The amended financial statements will be filed
“as soon as practicable,” Huron said.
James Roth, one of Huron’s founders, is replacing
Holdren as CEO. Roth was previously vice president of Huron’s health and
education consulting business, the company’s largest segment. George Massaro,
Huron’s former chief operating officer who is the board of directors’ vice
chairman, will succeed Holdren as chairman.
James Rojas, another Huron founder, is now the
company’s CFO. Rojas was serving in a corporate development role. Huron did
not announce a replacement for Lipski, the chief accounting officer.
The company’s shares sank more than 57 percent in
after-hours trading. The stock had closed Friday at $44.35. Huron said it
expects second-quarter revenues between $164 million and $166 million, up
about 15 percent from the year-earlier quarter.
The company, founded by former partners at the
Andersen accounting firm including Holdren, also said that it is conducting
a separate inquiry into chargeable hours in response to an inquiry from the
SEC.
Bob Jensen's threads on accounting firm frauds are at
http://www.trinity.edu/rjensen/fraud001.htm
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Cybercrime Capitalizes on Swine-Flu Fears," by Marisa Taylor, The
Wall Street Journal, November 18, 2009 ---
http://blogs.wsj.com/digits/2009/11/18/cybercrime-capitalizes-on-swine-flu-fears/?mod=
Cybercriminals are capitalizing on swine-flu fears
by pitching sales of fake Tamiflu, security firm Sophos said.
Networks of fraudsters use spam and malware to
direct Web traffic to phony pharmaceutical sites,
wrote Graham Cluley, a technology consultant for
Sophos.
“Although unwitting buyers do often receive some
kind of drug as result of the transactional exchange, at best the drug
doesn’t work and at worse it can pose serious health risks,” he added.
Cybercriminals are “putting their customers’ health, personal information
and credit card details at risk” with these counterfeit versions of Tamiflu.
Many of these fraudulent pharmaceutical sites
originate in Russia, Sophos’s Dmitry Samosseiko noted in a
paper on the topic. One network called GlavMed,
for example, has more than 120,000 online pharmacy sites selling generic
drugs under the name of Canadian Pharmacy. Each GlavMed spammer uses
e-commerce software to create new domains or direct traffic to colleagues’
domains, and charge a 40% commission on each sale.
A log file of purchases made on Canadian Pharmacy
showed about 200 drug purchases per day per site, meaning a domain owner can
earn up to an estimated $16,000 in a day, Mr. Samosseiko wrote. The top five
countries that have been purchasing Tamiflu and other drugs from so-called
Canadian Pharmacy sites are the United States, Germany, the United Kingdom,
Canada and France.
The Federal Trade Commission
said earlier
this week that it issued warnings to 10 Web sites
making questionable claims that their products could be used to treat swine
flu. The FTC said that these remedies, which included homeopathic remedies
and air-filtration systems, were violating federal law unless they can back
up their claims with scientific proof.
The agency conducted a sweep in late September
targeting Web operators who take advantage of natural disasters or financial
crises. “As consumers grow increasingly anxious about obtaining the H1N1
vaccine for their children and other vulnerable family members, scam artists
take advantage by selling them bogus remedies online,” said David Vladeck,
director of the FTC’s bureau of consumer protection, in a statement.
I'm sorry David Friehling, when you say you were duped I don't believe a
single word of your plea for leniency!
Madoff's CPA only pleads guilty to one (wink, wink) professional failure
apart from the crimes to which he confessed.
He should get 150 years in the same cell as Bernie.
From The Wall Street Journal Accounting Weekly Review on November 5,
2009
Madoff Auditor Says He Was Duped, Too
by Chad
Bray
Nov 04, 2009
Click here to view the full article on WSJ.com
TOPICS: Audit
Quality, Auditing, Auditing Services, Auditor Independence, Fraudulent
Financial Reporting
SUMMARY: David
Friehling, former accountant for the Bernard L. Madoff Investment
Securities, LLC, pleaded guilty to fraud and other charges in connection
with his auditing work for the firm of convicted swindler Bernard Madoff.
CLASSROOM APPLICATION: The
article can be used in an auditing class to cover topics of collecting
sufficient competent evidential matter, auditor responsibilities for
detecting fraud, business risk associated with taking on personal tax work
associated with corporate clients, and overall ethical conduct of an
accounting practice.
QUESTIONS:
1. (Introductory)
According to the article, what work did Mr. Friehling do for Bernard L.
Madoff Investment Securities LLC and for people related to those businesses?
List all work that you see identified in the article.
2. (Introductory)
Of what professional failure did Mr. Friehling plead guilty at a hearing
before U.S. District Judge in Manhattan?
3. (Advanced)
Mr. Friehling states that he "took the information given to him by Mr.
Madoff or Mr. Madoff's employees at 'face value.'" How does that statement
imply a failure to conduct adequate audit procedures?
4. (Advanced)
Is it evident from the results of the Madoff fraud case that the firm's
auditors must have been guilty of some audit failure? In your answer,
comment on an auditor's responsibility to detect fraud and on the likelihood
of detecting fraud in cases of collusion.
5. (Introductory)
How is the tax work done by Mr. Friehling for persons related to the Madoff
firm resulting in even greater violations of the law and ethical conduct of
his practice?
6. (Advanced)
Refer to the second related article. Is it a "GAAP rule" that prevents an
auditor or accountant from "just accepting what a client tells you about his
financial statements, without doing more..."?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Bernie Madoff's Small-Town CPA
by Thomas Coyle
Nov 04, 2009
Online Exclusive
Is Friehling's Guilty Plea A Warning Shot to Madoff's Family?
by Ashby Jones
Nov 04, 2009
Online Exclusive
"Madoff Auditor Says He Was Duped, Too: Friehling Pleads
Guilty, but Denies Knowing About the Scheme; 'Biggest Mistake of My Life',"
by Chad Bray, The Wall Street Journal, November 4, 2009 ---
http://online.wsj.com/article/SB125725853747925287.html?mod=djem_jiewr_AC
David Friehling, the former accountant to convicted
Ponzi-scheme operator Bernard Madoff, pleaded guilty to fraud and other
charges Tuesday in connection with his auditing work for Madoff's firm, but
denied knowing about the underlying Ponzi scheme.
Mr. Friehling pleaded guilty to securities fraud,
aiding or abetting investment advisor fraud, three counts of obstructing or
impeding the administration of Internal Revenue laws, and four counts of
making false filings with the Securities and Exchange Commission at a
hearing before U.S. District Judge Alvin K. Hellerstein in Manhattan.
Mr. Friehling, 49 years old, admitted that he
failed to conduct independent audits of Bernard L. Madoff Investment
Securities LLC's financial statements, saying he took the information given
to him by Mr. Madoff or Madoff's employees at "face value."
However, he denied any knowledge of Mr. Madoff's
Ponzi scheme and said he entrusted his own retirement and his family's
investments to Mr. Madoff, saying he had about $500,000 with the firm.
In what was "the biggest mistake of my life, I
placed my trust in Bernard Madoff," Mr. Friehling said.
Mr. Friehling, who is cooperating with prosecutors,
faces a statutory maximum of 114 years in prison on the charges.
He was previously charged in the matter in March.
Mr. Friehling will be allowed to remain free on $2.5 million bail pending
sentencing, which is tentatively set for February.
Separately, Mr. Friehling, without admitting or
denying wrongdoing, agreed to a partial settlement in the SEC's separate
civil case. Mr. Friehling, sole practitioner at Friehling & Horowitz CPAs
PC, agreed to a permanent injunction restraining him or his accounting firm
from violating securities laws.
Disgorgement, prejudgment interest and civil
penalties will be determined at a later date. Mr. Friehling and his firm
will be precluded from arguing that they didn't violate federal securities
laws as alleged by the SEC for the purposes of determining disgorgement and
any penalties.
Prosecutors from the U.S. Attorney's office in
Manhattan alleged that Mr. Friehling, from 1991 to 2008, created false and
fraudulent certified financial statements for Madoff's firm.
Mr. Friehling, who is married and has three
children, said Tuesday that he was introduced to Mr. Madoff by Mr.
Friehling's father-in-law, Jerome Horowitz.
Mr. Friehling, a certified public accountant, said
Mr. Horowitz retired in 1991 but continued to assist him with Madoff's
audits until 1998. Mr. Horowitz, who served as Madoff's auditor until the
1990s, died in March.
Prosecutors also alleged that Mr. Friehling failed
to conduct independent audits of Madoff's firm that complied with generally
accepted auditing standards and conformed with generally accepted accounting
principles, and falsely certified that he had done so.
At the hearing, Assistant U.S. Attorney Lisa Baroni
said Mr. Friehling prepared false tax returns for Mr. Madoff and others, but
declined to say who those others are. "Just 'others' at this time," Ms.
Baroni said.
The court-appointed trustee in charge of
liquidating Madoff's firm said recently that he had identified $21.2 billion
in cash investor losses.
Mr. Friehling is the third person to plead guilty
to criminal charges in the case, including Mr. Madoff himself.
Mr. Madoff, 71, admitted in March to running a
decades-long Ponzi scheme that bilked thousands of investors out of billions
of dollars and is serving a 150-year sentence in a federal prison in North
Carolina.
Frank DiPascali Jr., a key lieutenant to Mr. Madoff,
pleaded guilty to criminal charges in August. Mr. DiPascali, who also is
cooperating with prosecutors, has been jailed pending sentencing.
Mr. Madoff ran the scam for years through the
investment advisory arm of his business by promising steady returns and by
presenting an air of exclusivity by not taking all comers and recruiting
investors via friends and associates.
Mr. Madoff claimed to have as much as $65 billion
in his firm's accounts at the end of last November, but prosecutors said the
accounts only held a small fraction of that.
Charles Ponzi (1882-1949) ---
http://en.wikipedia.org/wiki/Charles_Ponzi
Ponzi Frauds ---
http://en.wikipedia.org/wiki/Ponzi_game
Bernard Madoff ---
http://en.wikipedia.org/wiki/Madoff
Ponzi Schemes Where Bernie Madoff Was King and the SEC was at best
negligent and at worst fraudulent ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi
Bob Jensen's threads on index and mutual fund frauds are at
http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds
A close-up look at the IT infrastructure behind the Madoff affair
December 17, 2009 message from Scott Bonacker
[lister@BONACKERS.COM]
There is an article in the new Bank Technology News
that might be of interest to anyone teaching internal controls or fraud
detection. Or if you're just curious.
http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html
"Special Feature The IT Secrets from the Liar's
Lair Two years ago, IT executive Bob McMahon wondered why his
highly-profitable employer, Bernard L. Madoff Investment Services, didn't
replace antiquated systems with more modern and efficient off-the-shelf
technology. On Dec. 11, 2008, when Madoff was arrested, he got his answer.A
close-up look at the IT infrastructure behind the Madoff affair."
Scott Bonacker CPA
Springfield, MO
"The IT Secrets from the Liar's Lair," by John Dodge, Bank Technology News,
December 2009 ---
http://www.americanbanker.com/btn_issues/22_12/the-it-secrets-1004419-1.html
Two years ago, IT executive Bob McMahon
wondered why his highly-profitable employer, Bernard L. Madoff Investment
Services, didn't replace antiquated systems with more modern and efficient
off-the-shelf technology. The Madoff systems were expensive to maintain and
made it difficult to grow the business by expanding into new classes of
securities. McMahon's job: To organize and document projects that would
create custom technology for the firm's trading operations.
On Dec. 11, 2008, he got his answer.
That day, Bernie Madoff was arrested and
charged with stealing tens of billions of his clients' money over decades.
McMahon realized if "technologists" had replaced the proprietary systems
with more modern and open computers, they would have invariably found the
absence of data on countless stock trades that supposedly took place. In a
sense, the preservation of old computer technology helped Madoff
successfully go undetected for years until his massive Ponzi scheme
collapsed that day.
Over the past six weeks, Securities
Industry News, a sister publication of Bank Technology News, has dug into
and beyond the court records to construct an extensive picture of how Madoff
actually operated: The systems and technology he and underlings used to
create - or fake - the most detailed set of customer accounts underlying a
fraud in the history of the securities industry.
Included are details of a declaration
filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard,
investigating the case, and information filed in court when two IT employees
were arrested in mid-November. The documents, and subsequent interviews,
describe how the real and the fake trading floors worked, and why the
securities investors believed they owned are never going to be declared
"missing." The answer: Because they never existed in the first place.
LEGITIMATE AND ILLEGITIMATE
"I asked myself how Bernie could have
hidden and maintained this for so long. A lot of it was because he had
proprietary and legacy systems. And he relied on IT people he hired and
paid," to not upset the status quo, says McMahon.
As a project manager, he always felt like
an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit
which seemed to lack standards and procedures routine at former employers of
his such as the International Securities Exchange and CheckFree Investment
Services (now Fiserv, Inc.). Little was documented and the company seemed to
be overwhelmed keeping the older systems from breaking down.
"I immediately recognized there was
massive institutional chaos in the way the place was managed. No one found
value in participating in project management meetings or in writing things
down. There was no documentation," says McMahon, today an operational
performance consultant for Standard & Poors.
McMahon lasted less than a year at
Madoff's firm. He was hired in February 2007, by long-time BLMIS chief
information officer Elizabeth Weintraub. She died in September of that year.
Differences over updating the systems and formalizing procedures with
Weintraub's two successors led to his dismissal the following January, by
McMahon's account.
Nader Ibrahim, who was on the support desk
from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department
was often tense and unusual.
"We did not have titles, which was
definitely suspicious to me. We all knew who each other worked for, but
nobody knew what the other person was doing," he said. "Everything was on a
need-to-know basis. There was a lot of secrecy."
But the real secret about Madoff's
purported trading for thousands of investment advisory clients,
investigators say, is that it never happened.
To be fair, it's not as if Madoff didn't
have a real trading floor. Madoff's legitimate market-making business was
located on the 19th floor of 885 Third Ave., in New York, using one IBM
Application System/400 computer, known within the firm as "House 5.'' BLMIS'
information technology operation was located on the 18th floor, where
McMahon had his cube and was supposed to organize and document projects
involving custom technology for the trading operation.
What was on the 17th floor? The fake
trading floor where a second IBM AS/400 known internally as "House 17"
processed historical price information on securities allegedly bought for
clients. The end result was phony trade confirmations and wholly
manufactured-but official-looking-statements for 4,903 investment advisory
clients.
OPEN AND CLOSED
Madoff's legitimate traders used a mix of
green-screen and "M2" Windows-based desktop computers. These ran in-house
trading software referred to as MISS, which McMahon recalled standing for
something like "Madoff Investment Systems and Services." The
internally-named and developed M2s ran MISS as a Windows application and
were used by younger traders who wanted familiar software instead of the
rigid green screen system, developed around 1985, where only text appeared
on screen and instructions were in almost cryptic codes entered into command
lines.
Support for House 5 was almost like that
of a large investment bank's support of its trading operations. Nothing was
too good, in theory, for the Madoff trading operation on the 19th floor.
Even if it was not necessary.
"Madoff did not buy anything off the
shelf. The IT team was doing proprietary software development. Maybe J.P.
Morgan Chase needs all this heavy technology, but a hedge fund with 120
people doesn't have to be in systems development," says McMahon, adding that
a similarly-sized firm might have a half dozen IT people. Both McMahon and
Ibrahim pegged the number of people actively supporting technology at BLMIS
at between 40 and 50.
But large staff and support for House 5
has not thrown off investigators. Court-appointed trustee Irving Picard, who
is charged with liquidating Madoff's remaining assets, has instead focused
on "House 17,'' where the daily administration of the Ponzi scheme was
executed.
Picard hired an investigator, Joseph Looby,
an accounting forensics expert who probably knows the most about the
technology that aided Madoff in stealing client funds other than former
members of Madoff's staff. Looby is an expert in electronic fraud and senior
managing partner with FTI Consulting Inc. in New York.
Looby's 20-page declaration on Picard's
behalf with the U.S. Bankruptcy Court for Southern District of New York on
Oct. 16 amounts to the deepest examination yet of the foundational
technology behind Madoff's fraud. The declaration seeks to deny paying
Madoff's victims based on their last statements, dated Nov. 30, 2008,
because the values stated were based on investments that were allegedly
never bought or sold (see graphic at right).
Reached in his Times Square office, Looby,
like Picard, said he could not elaborate on his examination of "House 17.
But in the declaration, he reported that "House 5" supported Madoff's
market-making operation and was networked to third parties outside the firm
that would logically support a trading operation. One, for example, was the
depository and clearing firm Depository Trust & Clearing Corp. (DTCC).
"[House 5] was an AS/400, consistent with
a legitimate securities trading business," Looby wrote. In the declaration,
he often compares House 5's legitimacy to House 17's illegitimacy.
House 17, for reasons that are now
obvious, was shut off to anyone but Madoff's former chief finance officer
and right-hand-man Frank DiPascali Jr. as well as his alleged accomplices.
That list now includes Jerome O'Hara, 46, and George Perez, 43, who have
both been charged in civil and criminal complaints with helping DiPascali
create the phoney statements that supported the Ponzi scheme. O'Hara and
Perez face 30 years in prison and more than $5 million in fines if
convicted. DiPascali sits in a New York jail awaiting sentencing after
pleading guilty to 10 felony counts on Aug. 11. He faces 125 years and his
sentencing is scheduled for May 2010. In the interim, investigators are
hoping to get his cooperation to implicate others.
"They want to squeeze him for more than
what he's giving now so he can avoid 125 years in prison," says Erin
Arvedlund, author of "Too Good to be True: The Rise and Fall of Bernie
Madoff." The former reporter for Barron's in a widely-cited 2001 story
challenged Madoff's implausible if not impossible returns and asked why
hundreds of millions in uncollected commissions were left on the table. It
appears now there were no trades made, from which to derive commissions.
"[House 17] was a closed system, separate and distinct from any computer
system utilized by the other BLMIS business units; consistent with one
designed to mass produce fictitious customer statements," according to
Looby's declaration. House 17's expressed purpose was to maintain phony
records and crank out millions of phony IRS 1099s on capital gains and
dividends, trade confirmations, management reports and customer statements.
"The AS/400 was like a giant Selectric typewriter. When you're making up
numbers like that, you're using your computer as a typewriter," says
computer consultant Judith Hurwitz, president of Hurwitz & Associates in
Newton, Mass.
ON THE HOUSE
House 17 held 4,659 active accounts
overseen by DiPascali where Madoff purportedly executed a "split strike
conversion" strategy on large cap stocks. In basic terms, it's a "collar,"
putting a floor and a ceiling on returns. A floor on potential losses is
created by purchasing a put on a stock. The sale of a call then puts a
ceiling on the returns. The "split" in "strike" prices is considered a
"vacation trade.'' The trader doesn't worry about what happens until the
expiration dates on the put or call options arrive.
The strategy was allegedly applied for the
thousands of customers on "baskets" of large cap stocks. According to the
faked BLMIS statements, these accounts typically yielded 11 to 17 percent
returns annually.
Another 244 "non-split strike" accounts
produced phony returns in excess of 100 percent and were managed by BLMIS
employees other than DiPascali.
The "non-split strike" accounts included
many "long time" Madoff customers and feeder funds such as those operated by
Stanley Chais or Jeffry Picower and against whom Picard has filed civil
suits to reclaim billions in profits alleged to be illegal. Picower of Palm
Beach was found dead in his pool Oct. 25. Chais maintains he's innocent.
In the declaration, Looby repeatedly
asserts that no securities were ever bought for BLMIS investment advisory
customers. Proceeds sent in by clients for that purpose were "instead
primarily used to make distributions to or payments on behalf of, other
investors as well as withdrawals and payments to Madoff family members and
employees," the declaration states.
Here's how it worked: BLMIS employees fed
the AS/400 constantly with stock data, enough to support trades that would
satisfy the expectations promised to Madoff's thousands of eventual victims.
To support the fantasy returns, so-called "baskets" of S&P100 stocks would
be bought and sold, on behalf of clients. Looby did not specify the typical
size of a basket, but they were proportional to the proceeds a client had
remitted to BLMIS. "If a basket was $400,000 and a customer had $800,000
available, two baskets of securities and options would be purportedly
"purchased" for the account," Looby wrote. The types of stocks can be seen
in a Madoff statement. Proceeds from purported basket sales existed only on
"House 17" and on the paper it put out, which indicated the funds were put
into safe U.S. Treasury bonds. Meanwhile, funds remitted by clients were
being diverted to a JPMorgan Chase & Co. bank account known as "703."
The complaints against O'Hara and Perez
add further rich detail to how Madoff and his accomplices used aging but
extensive computer technology to maintain the fraud. They also seem to
confirm what common sense suggests about such a massive and enduring fraud:
Madoff and DiPascali had to have technical help.
"O'Hara and Perez wrote programs that
generated many thousands of pages of fake trade blotters, stock records,
Depository Trust Corp. reports and other phantom books and records to
substantiate nonexistent trading. They assigned names to many of these
programs that began with "SPCL," which is short for "special," according to
an SEC press announcement about the civil complaint.
The "special" programs were found on
backup tapes, according to an official close to the investigation and who
asked not to be identified. He added that the pair has not been cooperating
with authorities. The evidence in the complaints is from BLMIS computers and
documents, according to the source.
Among 10 fraudulent functions detailed in
the criminal complaint, the special programs altered trade details by using
"algorithms that produced false and random results;" created "false and
fraudulent execution reports;" and "generated false and fraudulent
commission reports." The criminal complaint also charges the pair with
helping Madoff and DiPascali create misleading reports between 2004-08 to
throw off SEC investigators and a European accounting firm hired by a Madoff
client.
In 2006, O'Hara and Perez cashed out their
BLMIS accounts worth "hundreds of thousands of dollars" and told Madoff they
would no longer "generate any more fabricated books and records." O'Hara's
handwritten notes from the encounter allegedly say "I won't lie any longer."
However, the "crisis of conscience" did
not stop them from asking for a 25 per cent bump in salary and a $60,000
bonus to keep quiet, the complaints allege.
"DiPascali then managed to convince O'Hara
and Perez to modify computer programs to he and other 17th floor employees
could create the necessary reports," according to the SEC complaint. The
reference to "other 17th floor employees" suggests that O'Hara and Perez
will not be the last to be charged.
A sharp eye could have detected that funds
weren't where they were supposed to be: 2008 customer statements showed
funds in a "Fidelity Spartan U.S. Treasury Money Market Fund" that hadn't
been offered since 2005. The fabulous returns had lulled BLMIS clients to
sleep. While some trading data was input by hand, DiPascali cleverly used
"essentially a mail merge program" to replicate the same stock trading
information across multiple accounts, according to the declaration.
Stocks in a basket were "priced" after the
market closed (i.e., with the knowledge of the prior published price
history). Customer statements were then fabricated by BLMIS staff on House
17 which appeared to outsiders to keep track of customer investments and
funds in a manner typical of any investment advisor. "BLMIS staff confirmed
it, the system facilitated it and consistent returns could not have been
achieved without it," Looby's declaration states.
Indeed, the customer statements had been
perfected as an instrument in the deception. Madoff investor Ronnie Sue
Ambrosino, a former computer analyst who ironically had worked on an AS/400,
told Securities Industry News that she never suspected a thing. After all,
the Securities and Exchange Commission had given Madoff a clean bill of
health on several occasions since 1992 by not digging deeply into his
operations or just plain neglect.
"The statements were always perfect, neat
and immaculately presented. They came on time and everything was like
clockwork," says Ambrosino, 56, a victim and now activist representing a
group of about 400 Madoff investors. She bristles when the AS/400 is called
old or outdated. "I know the 400 and it's a pretty powerful machine." It was
powerful enough to convince investors that whatever proceeds they sent to
Madoff were being invested in the stocks cited on their statements. "Key
punch operators were provided with the relevant basket information that they
manually entered into House 17. The basket trade was then routinely
replicated in selected BLMIS split strike customer accounts automatically
and proportionally according to each customer's purported net equity,"
Looby's declaration says.
The situation was largely the same for
non-split strike clients except that the purported trades were in single
equities, not baskets. "Thousands of documents including customer
statements, IA (investment advisory) staff notes, account folders and
programs in the AS/400 were reviewed, and these documents confirm the fact
that such statements were prepared on an account-by-account basis (i.e. not
basket trading)," Looby wrote.
Looby verified that trades between 2002
and 2008 were phantom by cross-checking with various clearing houses such as
DTCC, Clearstream Banking S.A. in Luxembourg, the Chicago Board of Options
Exchange (CBOE) and four other clearing firms. He also compared the cleared
trades on the AS/400 "House 5" and "99.9 percent" of the fake trades on
"House 17" did not match. The only connection he found is what looked like a
small portion of a single client's trades, which were directed by the client
and recorded on House 5.
Madoff employees monitored the "baskets"
for split strike accounts in an Excel spreadsheet to make sure "the prices
chosen after-the-fact obtained returns that were neither too high or low."
However, such monitoring was far from
perfect. Looby cited several examples where daily trading volumes at BLMIS
exceeded the entire daily volume for several stocks.
For instance, Madoff reported the purchase
of 17.8 million shares of Exxon Mobil on Oct. 16, 2002. This amounted to 131
percent of the company's trading volume for that day. BLMIS's actual Exxon
Mobil holdings that October were verified by the DTCC at 5,730 shares.
Similar discrepancies for Amgen, Microsoft and Hewlett Packard were found on
Nov. 30, 2008, the date for the final batch of BLMIS customer statements, as
it turned out.
BLMIS data for options puts and calls was
even more blatantly unreal. On Oct. 11, 2002, Looby found that BLMIS
"applied an imaginary basket to 279 accounts with a volume of 82,959 OEX
(S&P 100 options) calls and 82,959 puts." That amounted to 13 times the OEX
volume at the CBOE that day.
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
"Ernst & Young Prevails in $140 Million Case Brought by Frontier Creditors
Trust Andrew Longstreth," The American Lawyer, December 14, 2009 ---
http://www.law.com/jsp/article.jsp?id=1202436290441&rss=newswire&utm_source=twitterfeed&utm_medium=twitter
When the creditors of bankrupt companies draw up
lists of litigation targets, auditing firms are often right there at the
top. So it was for the creditors trust of the bankrupt insurer, Frontier
Insurance Group. The trust, represented by John McKetta III of Graves
Dougherty Hearon & Moody, alleged that Ernst & Young underestimated the
reserves Frontier needed to hold, making the company look healthy when it
was actually insolvent. It claimed $140 million in damages, plus interest.
But E&Y decided to make a stand. It refused to chip
up, and instead headed for a jury trial before White Plains, N.Y., federal
district court Judge Cathy Seibel. On Wednesday, after 12 days of trial,
jurors needed only two hours to exonerate the auditor.
"This case shows that E&Y is willing to go to trial
in a case it believes has no merit, even where the threatened damages are
substantial," said Ernst & Young's outside counsel, Dennis Orr of Morrison &
Foerster. Orr told us that Ernst & Young hopes other potential litigants get
the message.
Trust counsel McKetta said no decision had been
made about the trust's next move in the case. But he was gracious in defeat,
complimenting Seibel, the jury, and even the team at Morrison & Foerster.
"They did a terrific job," McKetta said.
"EY Settles SEC Charges Re:
Bally’s Fraud-Lives To Audit Another Day," by Francine McKenna,
re: The Auditors, Decenber 17, 2009 ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
Rueters News Item via Forbes
---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
Ernst
& Young has agreed to pay $8.5 million to settle civil charges that
it violated accounting rules in connection with a fraud at Bally
Total Fitness Holding Corp, the
U.S. Securities and Exchange Commission
said Thursday.
The SEC
accused the accounting firm of issuing unqualified audit opinions
that said that Bally's 2001 and 2003 financial statements conformed
with U.S. accounting rules.
Continued in article
Francine's Commentary ---
http://retheauditors.com/2009/12/17/ey-settles-sec-charges-re-ballys-fraud-lives-to-audit-another-day/
“These
opinions were false and misleading,” the SEC said in a statement.
“Ernst &
Young has agreed to pay $8.5 million to settle civil charges that it
violated accounting rules in connection with a fraud at Bally Total
Fitness Holding Corp, theU.S. Securities and Exchange Commission
said Thursday.
The SEC
accused the accounting firm of issuing unqualified audit opinions
that said that Bally’s 2001 and 2003 financial statements conformed
with U.S. accounting rules.
Six of the
accounting firm’s current and former partners also agreed to settle
SEC accounting violation charges as part of this investigation, the
SEC said.
In settling
the allegations, Ernst & Young and the former and current partners
did not admit to any wrongdoing, the SEC said.
“These settlements allow us and several of our partners to put this
matter behind us and resolve issues that arose more than five years
ago,” Ernst & Young said.”
What none
of the stories that just hit tell you, though, is that at least two
of the EY partners charged, Fletchall and Sever, held leadership
positions with the AICPA in the past.
Three of
the partners were members of EY’s leadership team/national office,
giving advice, guidance, and making decisions about accounting
standards on behalf of engagement teams nationwide.
Did Mr.
Fletchall get off with a slap on the wrist given his AICPA
leadership position, AICPA PAC contributions and significant
campaign contributions to Senator Christopher Dodd? Mr. Fletchall is
used to telling the SEC what it should do. Quite used to it.
EY can put
an old case behind them… Yes, of course, since it’s December of 2009
and it’s taken the SEC six years to resolve a case from 2001-2003.
No wonder the firms’ answer to any settlement or disciplinary
proceeding is always, “that’s in the past.”
EY had
independence issues recently and was supended from taking on new
audit clients for six months. How many strikes does a firm get? Why
no strong statement, sanction or other disciplinary action from the
PCAOB for the partners or the firm in relation to this case? Maybe
because Mr. Fletchall was also a member of the PCAOB’s Standang
Advisory Group.
Bob Jensen's threads on E&Y litigation ---
http://www.trinity.edu/rjensen/fraud001.htm#Ernst
Will the big international auditing firms survive the subprime mortgage
litigation ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Auditors
Where were the auditors?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
"FDIC: Uptick in 'money mule' scams," by Brian Krebs, The
Washington Post, November 3, 2009 ---
http://voices.washingtonpost.com/securityfix/2009/11/fdic_uptick_in_money_mule_scam.html?wprss=securityfix
The Federal Deposit Insurance Corporation
(FDIC) is warning financial institutions about an uptick in scams involving
unauthorized funds transfers from hacked online bank accounts to so-called
"money mules," people hired through work-at-home scams to help cyber
criminals overseas launder money.
According to the FDIC, the following are examples
of events that may indicate money mule account activity:
-A customer who just opened a new account suddenly
receives one or several deposits, each totaling a little less than $10,000,
and then withdraws all but approximately eight to 10 percent of the total
(the mule's "commission").
-A foreign exchange student with a J-1 Visa and
fraudulent passport opening a student account with a high volume of
incoming/outgoing money transfer/wire activity.
In tracking more than 50 companies over the past
five months that have been victimized with the help of willing or unwitting
money mules, I've spoke to dozens of folks who got caught up in these scams.
While a majority of mules I interviewed received a
single fraudulent payment from only one victimized company, some were sent
money from multiple victims, or signed up with more than one mule
recruitment firm. In fact, one mule I tracked down recently admitted to
receiving funds from at least two hacked companies. This individual also was
among the phantom employees added to a company's payroll after a breach last
month at payroll processing giant PayChoice.
"The FDIC alert and reporting by the Washington
Post suggest that cyber criminals are increasingly using money mules to
target banks and related financial databases," PayChoice chief executive
Robert Digby said in an e-mailed statement. "The recent attack on PayChoice
appears to fit that pattern."
On Sept. 23, unknown
hackers broke into Moorestown, N.J.-based PayChoice,
a company that provides direct payroll processing
services and licenses its online employee payroll management product to at
least 240 other payroll processing firms, serving 125,000 organizations. The
thieves stole the names, e-mail addresses, user names and passwords that a
large number of PayChoice's customers used to access onlinemployer.com,
PayChoice's service portal. Not long after that, the attackers then included
that information in spoofed e-mails to PayChoice's clients, addressing each
recipient by name and warning them that they needed to download a Web
browser plug-in in order to maintain uninterrupted access to
onlineemployer.com. The supposed plug-in was instead malicious software
designed to steal the victim's user names and passwords.
When I first got wind of that breach, I immediately
wondered if the culprits might be the same individuals responsible for a
rash of incidents I've investigated this year in which attackers used
password-stealing Trojans to swipe the banking credentials of small to
mid-sized firms. In every case, the attackers used that access to put money
mules on the payrolls of those companies and then send the mules sub-$10,000
bank transfers.
PayChoice responded to that breach by forcing
customers to change their passwords. But sometime during the week of Oct.
12, some PayChoice customers reported seeing
phantom employees added to their outgoing payroll.
PayChoice alerted its customers that hackers had again breached its systems,
and urged customers to be on the lookout for unauthorized payroll transfers
to four specific people and associated bank accounts. PayChoice said one of
those individuals was named Ronald Cutshall, and that an
account associated with Cutshall ended in the numbers 7766.
Security Fix recently caught up a
Ronnie Cutshall from Greeneville, N.C. who acknowledged having an account at
the local GreenBank ending in those four digits.
Cutshall, 48, runs a small horse carriage service
called
Greeneville Carriage Co.. Cutshall said he had
never heard of PayChoice, but he did admit to receiving $9,600 from a
company called American Realty on Oct. 6. At least, that
was the name of the company on the receipt his erstwhile employers sent him
(see the screenshot below). The bank routing number on the $9,600 payment
Cutshall said he received from American Realty traced back to Georgia, but
attempts to reach the victim were unsuccessful (there are more than 100
companies in Georgia with some approximation of that name).
According to Cutshall, approximately three weeks
prior to receiving that $9,600 bank transfer, he had been recruited over the
Internet as a finance manager by a company called the Fairline Group
(the company's Web site is at fairline-group.cn), which said it had found
his resume on a popular job search site.
Madoff Accountant to Plead Guilty
The former accountant to convicted Ponzi-scheme
operator Bernard Madoff is expected to plead guilty to fraud and other charges
at a hearing next week, prosecutors said Friday. In a letter to U.S. District
Judge Alvin K. Hellerstein, prosecutors from the U.S. Attorney's office in
Manhattan said they expect David G. Friehling to plead guilty at a hearing Nov.
3 under a cooperation agreement with the government. Assistant U.S. Attorney
Lisa Baroni, in her letter, said the charges Mr. Friehling is expected to plead
guilty to are securities fraud, investment advisor fraud, obstructing or
impeding the administration of Internal Revenue laws, and four counts of making
false filings with the U.S. Securities and Exchange Commission.
Chad Bray, The Wall Street Journal, October 30, 2009 ---
http://online.wsj.com/article/SB125691406152218719.html?mod=WSJ_hps_LEFTWhatsNews
The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26,
2009 ---
http://www.thenation.com/doc/20090608/kroll/print
Taibbi vs. Goldman Sachs: Whose side are you on?
The Greatest Swindle in the History of the World
"The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26,
2009 ---
http://www.thenation.com/doc/20090608/kroll/print
Place a barf bag in your lap before watching
these videos!
But are they accurate?
In June and July Goldman Sachs put up a pretty good defense.
Now I'm not so sure.
Questions
Why is the SEC still hiding the names of these tremendously lucky naked short
sellers in Bear Sterns and Lehman Bros.?
Was it because these lucky speculators were such good friends of Hank Paulson
and Timothy Geithner?
Or is Matt Taibbi himself a fraud as suggested last summer by Wall Street media
such as
Business Insider?
Jensen Comment
Evidence suggests that the SEC may be protecting these Wall Street thieves!
Or was all of this stealing perfectly legal? If so why the continued secrecy on
the part of the SEC?
Suspicion: The stealing may have taken place in top investors needed by
the government for bailout (Goldman Sachs?)
"Wall Street's Naked Swindle" by Matt
Taibbi
Watch the Video at one of the following sites:
You Tube ---
http://www.youtube.com/watch?v=OqZUbe9KIMs
Google video ---
Click Here
Read the complete article ---
Click Here
Video Updates for Matt Taibbi
GRITtv: Matt Taibbi & Michael Lux: Goldman's Coup
---
http://www.youtube.com/watch?v=nFWjXQLDkXg
"Matt Taibbi's Goldman Sachs Story Is A Joke,"
Joe Weisenthal, Business Insider, July 13, 2009 ---
http://www.businessinsider.com/matt-taibbis-goldman-sachs-story-is-a-joke-2009-7
"Goldman Sachs responds to Taibbi Post," by:
Felix Salmon, Rueters, June 26, 2009 ---
Calls Taibbi "Hysterical" ---
http://blogs.reuters.com/felix-salmon/2009/06/26/goldman-sachs-responds-to-taibbi/
Others Now Argue it Is Not a Joke
"Taibbi's Naked-Shorting Rage: Goldman's Lobbying, SEC's Fail,"l by bobswern.
Daily Kohs, September 30, 2009 ---
http://www.dailykos.com/story/2009/9/30/787963/-Taibbis-Naked-Shorting-Rage:-Goldmans-Lobbying,-SECs-Fail
Now, off we go to Goldman Sachs' notorious lobbying
hubris, the historically-annotated, umpteenth oversight failure of the
Securities Exchange Commission ("SEC"), and what I'm quickly realizing may
well turnout to be the story with regard to it becoming the poster
child for regulatory capture and supervisory breakdown as far as our Wall
Street-based corporatocracy/oligarchy is concerned. Here's the link to
Taibbi's preview blog post: "An
Inside Look at How Goldman Sachs Lobbies the Senate."
Yesterday, as described in this lead-in piece from
the Wall Street Journal, the SEC held a public roundtable discussion
on "New Rules for Lending of Securities." (See link here: "SEC
Weighs New Rules for Lending of Securities.")
SEC Weighs New Rules for Lending of Securities
BY KARA SCANNELL AND CRAIG KARMIN
Wall Street Journal
Saturday, September 26th, 2009
Securities regulators are exploring new
regulations for the multitrillion-dollar securities-lending market, the
first major step regulators have taken in the area in decades.
Securities and Exchange Commission Chairman
Mary Schapiro said she wants to shine a light on the "opaque market."
After many large investors lost millions in last year's credit crunch,
she said, "we need to consider ways to enhance investor-oriented
oversight."
The SEC is holding a public round table Tuesday
to explore several issues around securities lending, which has expanded
into a big moneymaker for Wall Street firms and pension funds.
Regulation hasn't kept pace, some industry participants...
Enter Taibbi: "An
Inside Look at How Goldman Sachs Lobbies the Senate."
An Inside Look at How Goldman Sachs Lobbies the
Senate
Matt Taibbi
TruSlant.com
(very early) Tuesday, September 29th, 2009
The SEC is holding a public round table Tuesday
to explore several issues around securities lending, which has expanded
into a big moneymaker for Wall Street firms and pension funds.
Regulation hasn't kept pace, some industry participants contend.
Securities lending is central to the practice of short selling, in which
investors borrow shares and sell them in a bet that the price will
decline. Short sellers later hope to buy back the shares at a lower
price and return them to the securities lender, booking a profit.
Lending and borrowing also help market makers keep stock trading
functioning smoothly.
--SNIP--
Later on this week I have a story coming out in
Rolling Stone that looks at the history of the Bear Stearns and Lehman
Brothers collapses. The story ends up being more about naked
short-selling and the role it played in those incidents than I had
originally planned -- when I first started looking at the story months
ago, I had some other issues in mind, but it turns out that there's no
way to talk about Bear and Lehman without going into the weeds of naked
short-selling, and to do that takes up a lot of magazine inches. So
among other things, this issue takes up a lot of space in the upcoming
story.
Naked short-selling is a kind of counterfeiting
scheme in which short-sellers sell shares of stock they either don't
have or won't deliver to the buyer. The piece gets into all of this, so
I won't repeat the full description in this space now. But as this week
goes on I'm going to be putting up on this site information I had to
leave out of the magazine article, as well as some more timely material
that I'm only just getting now.
Included in that last category is some of the
fallout from this week's SEC "round table" on the naked short-selling
issue.
The real significance of the naked
short-selling issue isn't so much the actual volume of the behavior,
i.e. the concrete effect it has on the market and on individual
companies -- and that has been significant, don't get me wrong -- but
the fact that the practice is absurdly widespread and takes place right
under the noses of the regulators, and really nothing is ever done about
it.
It's the conspicuousness of the crime that is
the issue here, and the degree to which the SEC and the other financial
regulators have proven themselves completely incapable of addressing the
issue seriously, constantly giving in to the demands of the major banks
to pare back (or shelf altogether) planned regulatory actions. There
probably isn't a better example of "regulatory capture," i.e. the
phenomenon of regulators being captives of the industry they ostensibly
regulate, than this issue.
Taibbi continues on to inform us that none of the
invited speakers to this government-sponsored event represented stockholders
or companies that could, or have, become targets/victims of naked
short-selling. Also "...no activists of any kind in favor of tougher rules
against the practice. Instead, all of the invitees are (were) either banks,
financial firms, or companies that sell stuff to the first two groups."
Taibbi then informs us that there is only one
panelist invited that's in favor of what may be, perhaps, the most basic
level of regulatory control with regard to this industry practice: a "simple
reform" called "pre-borrowing." Pre-borrowing requires short-sellers to
actually possess the stock shares before they're sold.
It's been proven to work, as last summer the SEC,
concerned about predatory naked short-selling of big companies in the
wake of the Bear Stearns wipeout, instituted a temporary pre-borrow
requirement for the shares of 19 fat cat companies (no other companies
were worth protecting, apparently). Naked shorting of those firms
dropped off almost completely during that time.
The lack of pre-borrow voices invited to this
panel is analogous to the Max Baucus health care round table last
spring, when no single-payer advocates were invited. So who will get to
speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a
hedge fund that has done the occasional short sale, to put it gently),
Credit Suisse, NYSE Euronext, and so on.
Taibbi then tells us of increased efforts by
industry players, specifically noting Goldman Sachs being at the forefront
of this effort, and having "their presence felt."
Taibbi mentioned that he'd received two completely
separate calls from two congressional staffers from different offices--folks
whom Taibbi never met before--who felt compelled to inform him of Goldman's
actions.
We learn that these folks both commented on how
these Goldman folks were lobbying against restrictions on naked
short-selling. One of the aides told Taibbi that they had passed out a "fact
sheet about the issue that was so ridiculous that one of the other staffers
immediately thought to send it to me. "
I would later hear that Senate aides between
themselves had discussed Goldman's lobbying efforts and concluded that
it was one of the most shameless performances they'd ever seen from any
group of lobbyists, and that the "fact sheet" the company had had the
balls to hand to sitting U.S. Senators was, to quote one person familiar
with the situation, "disgraceful" and "hilarious."
Checkout the whole story on his blog. Apparently,
in the upcoming Rolling Stone piece, he gets into the nitty gritty with
regard to how naked short-selling brought down both Bear Stearns and Lehman,
last year.
Should be pretty powerful stuff.
Meanwhile, getting back to the SEC roundtable,
noted above, strike up the fifth item that I've now documented in the past
48 hours where it's becoming self-evident that our elected representatives
and our government agencies aren't even bothering to author the new
regulations and legislation that's so needed to prevent a recurrence of
events such as those we witnessed through the economic/market catastrophes
of the past 24 months; these legislators and high-ranking government
officials are actually having the lobbyists navigate the discussion and
write the damn stuff, too!
How much worse can it get? I really don't want
to know the answer to that rhetorical question. But, with the inmates
running the asylum, we may just find out sooner than we think!
Bob Jensen's threads on noble and ignoble
agendas of the bailout machine ---
http://www.trinity.edu/rjensen/2008Bailout.htm#IgnobleAgendas
November 19, 2009 message from Linda A Kidwell,
University of Wyoming [lkidwell@UWYO.EDU]
A very interesting filing from
Overstock.com includes their reason for filing an unreviewed 10-Q. It is a
great illustration of the judgment involved in auditing. ---
Click Here
http://snipurl.com/overstockgt [www_sec_gov]
Linda
Where’s Mary Mary Quite Contrary?
An SEC investigation of Overstock.com and Byrne seeking information as to the
company's accounting policies, targets, projections, and estimates relating to
its financial performance, continued but was dropped in June 2008.
http://en.wikipedia.org/wiki/Overstock.com
Here's the message from that overstocked "humble
servant:"
Question
What does “we agree with PwC mean?”
Would PwC have handled this differently?
Overstock.com Files Unreviewed Form 10-Q for Q3 2009
SALT LAKE CITY —
Overstock.com, Inc. (NASDAQ: OSTK) today filed an unreviewed Form 10-Q
for the period ending September 30, 2009. Below is a letter from
Patrick Byrne, the company’s Chairman and CEO.
“All
things are subject to interpretation; whichever interpretation prevails
at a given time is a function of power and not truth.”
— Friedrich Nietzsche
Dear
Owner:
We have
elected to file an unreviewed Form 10-Q for the period ending
September 30, 2009. Here is why:
1. |
In
February 2009, we were notified by a partner that we had
overpaid it approximately $700,000, but that the partner wanted
to reach a mutual solution to this overpayment and another open
issue (the partner has asserted that we might owe it in excess
of $400,000 regarding this other issue). At that time, we
doubted our ability to recover this overpayment and we could not
reasonably estimate what we might recover. |
|
|
2. |
Thus, we had to decide between either immediately recognizing as
income a sum whose magnitude, collection, and collectability was
in doubt (which we felt was an incorrect and aggressive
position, especially in light of the economic and retail
environment of the time), or whether we should take a more
conservative position of negotiating with this vendor who owed
whom, how much, and on what terms, including timing of payment,
and recognizing those sums only if and when we received the
payments. |
3. |
The accounting for this transaction required significant
judgment and interpretation of the facts and circumstances —
which others with 20/20 hindsight might later question.
Weighing all the facts and circumstances at the time, we decided
it would be a mistake to book this overpayment as an asset as of
December 31, 2008, deciding instead to recognize the sums as we
recovered the money (that is, we thought the conservative
position was the correct position). Our auditors at the time,
PricewaterhouseCoopers (“PwC”), agreed with this course of
action, and we prepared our 2008 Form 10-K on the basis of this
decision. |
|
|
4. |
Although PwC had given us eight years of fine service, after we
filed our 2008 Form 10-K, we ran a formal RFP process for
selecting our 2009 auditors as a reflection of my belief that
changing auditors every decade or so might be healthy. Grant
Thornton won that RFP, and the Audit Committee selected Grant
Thornton as our 2009 auditor. |
|
|
5. |
Before Grant Thornton took our audit engagement in Q1 2009, it
reviewed our filed 2008 Form 10-K and told us it was comfortable
with our past accounting practices. |
|
|
6. |
In
late Q1 2009, we received $785,000 relating to the partner
overpayment discussed in point 1 above (even though the other
issue with that partner remained unresolved). Thus, we
recognized $785,000 in our 2009 Q1 Form 10-Q financials, which
Grant Thornton reviewed as our auditors. In addition we
highlighted $1.9 million (of which the $785,000 was a part)
attributable to the collected overpayment, certain partner
under-billing collections, and a freight carrier’s refund of
overcharges in one-time, non-recurring income in that quarter’s
earnings release, earnings conference call and Form 10-Q. |
|
|
7. |
As
our auditors, Grant Thornton reviewed our financial statements
in Q1 and Q2 2009 before we filed Form 10-Q’s for those
quarters. Throughout 2009, our Audit Committee has repeatedly
asked Grant Thornton if there was any accounting that it would
do differently, and repeatedly received the answer, “No.” In
fact, as recently as late-October 2009, Grant Thornton confirmed
to us that it supported our accounting method for recognizing
the $785,000. |
|
|
8. |
In
early October and again in early November, the SEC sent us
comment letters asking us, among other things, to advise it on
and justify the accounting treatment we used regarding the
$785,000. |
|
|
9. |
Last week, Grant Thornton advised us that, on further
consultation and review within the firm, it had revised its
position and that it now believes that we should have recorded
the $785,000 as an asset in 2008. As a result of its accounting
position, Grant Thornton said it would be unable to complete its
review of the financial statements in our Q3 Form 10-Q unless we
amended our previous 2009 quarterly filings and restated our
2008 financial results. On November 13, Grant Thornton also
advised us that it believes that we should make disclosure or
take action to prevent future reliance on our March 31, 2009
financial statements and June 30, 2009 financial statements
filed in our Q1 and Q2 Form 10-Q’s, as a result of this issue. |
|
|
10. |
We
disagree with Grant Thornton. We, along with PwC, continue to
believe that we have accounted for the $785,000 correctly and
thus our Q1 and Q2 financial statements are correct. Both we
and PwC believe that it is not proper to reopen our 2008
Form 10-K, subject to resolution with the SEC of its comment
letters. |
11. |
Thus, we are in a quandary: one auditing firm won’t sign-off on
our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our
previous auditing firm believes that it is not proper to restate
our 2008 Form 10-K. Unfortunately, Grant Thornton’s
decision-making could not have been more ill-timed as we ran
into SEC filing deadlines. |
As a
result, we have elected to dismiss Grant Thornton, file an unreviewed Q3
Form 10-Q (as we have no current auditor), continue to work with the SEC
on the issues addressed in its comment letters, and engage another
independent audit firm. Once we have completed these last two items, we
will file a reviewed Q3 Form 10-Q/A.
In the
meantime, I will continue to focus on the business during this busiest
part of the year.
I will
hold a conference call to further explain and answer questions regarding
this matter on Wednesday afternoon at 5:00 p.m. EST (details below).
Until then, I remain,
Your
humble servant,
Patrick M.
Byrne
The WebCPA blurb on this is at
http://www.webcpa.com/news/Overstock-CEO-Objects-Grant-Thornton-Audit-52499-1.html
Bailing Out Big Banks Engaged in Sleaze and Sex
"Goldman Laid Down with Dogs," by Ryan Chittum, Columbia Journalism
Review, November 4, 2009 ---
http://www.cjr.org/index.php
This link was forwarded by my friend Larry.
Dean Starkman has been applauding McClatchy’s
series on Goldman Sachs (an Audit funder) for
a couple of
days now. Add another Audit appreciation today.
McClatchy has been doing what Dean has been calling
for for a long time now: Looking much more closely at
how Wall Street
fueled the mortgage crisis and how it
was deeply connected
to the
shadier parts of the
housing industry. Or as McClatchy’s Greg Gordon puts it:
… one of Wall Street’s proudest and most
prestigious firms helped create a market for junk mortgages,
contributing to the economic morass that’s cost millions of Americans
their jobs and their homes.
Today,
McClatchy examines Goldman’s relationship with New
Century Financial, a firm that was something of the canary in the coalmine
of this financial crisis—it was the second-biggest subprime mortgage lender
when it went belly-up in April 2007, which was very, very early. In other
words, it was one of the worst actors in the whole mess:
Perhaps no mortgage lender was more emblematic of
the go-go atmosphere in the sprouting industry that was seizing an
outsize share of the home loan market.
Traversing the country in private jets and
zipping around Southern California in Mercedes Benzes, Porsches and even
a Lamborghini, New Century executives reveled as the firm’s annual
residential mortgage sales rocketed from $357 million in 1996 to nearly
$60 billion a decade later…
What does that have to do with Goldman Sachs and
Wall Street?
For $100 million in mortgages, New Century could
command fees from Wall Street of $4 million to $11 million, ex-employees
told McClatchy. The goal was to close loans fast, bundle them into pools
and sell them to generate money for the next round.
Inside the mortgage company, the former
employees said, pressure was intense to increase the firm’s share of an
exploding market for mortgages that depended almost entirely on Wall
Street’s seemingly unlimited hunger for bigger, faster returns.
Aha! But wait—why did Wall Street want to buy this
trash?
Goldman and other investment banks could put $20
million in the till by taking a 1 percent fee for assembling,
securitizing and selling a $2 billion pool of mostly triple-A rated
bonds backed by subprime loans — and that was just stage one.
That takes you to “The
Giant Pool of Money.” And that was far from the
only juice being squeezed from these lemons. Goldman et al got servicing
fees and the like, plus they “extended lines of credit to New Century —
known as “warehouse loans” — totaling billions of dollars to finance the
issuance of more home loans to other marginal borrowers. Goldman Sachs’
mortgage subsidiary gave the firm a $450 million credit line.”
In other words, Wall Street lent the money to the
predatory firms to create the shady loans so it could buy them from them,
slice them into securities and sell them to the greater fools. This was so
profitable there weren’t enough decent loans to be made. So to feed the
beast, mortgage lenders came up with disastrous inventions like NINJA loans
(No Income, No Jobs, No Assets) and Wall Street, ahem, looked the other way.
It was a vicious circle of profit (virtuous—if you
were one of those who lined their pockets through it) and was interrupted
only when the underlying loans got so bad that borrowers like the ones with
no income, no jobs, and no assets in many instances couldn’t even make a
single payment on the loan. Panic!
McClatchy does well to report on the New Century
culture, helpful in illustrating the lie-down-with-dogs-get-up-with-fleas
thing, writing about the sexualization of some of the work, something
reminds us of
BusinessWeek’s
fascinating story on the subprime
industry’s descent into decadence (the sub headline on that one should be
all that’s needed to entice you to read that one: “The sexual favors,
whistleblower intimidation, and routine fraud behind the fiasco that has
triggered the global financial crisis.”)
But it wasn’t just sex. New Century was giving
kickbacks to mortgage brokers to get their loans, McClatchy quotes a former
top underwriter there as saying.
Let’s not forget, and McClatchy doesn’t,
thankfully, that borrowers were the marks here and took it on the chin:
The loans laid out financial terms that protected
investors but punished homebuyers. They offered above-market interest
rates, typically starting at 8 percent, with provisions that Lee said
were “rigged” to guarantee the maximum 3 percent rise in interest rates
after two years and almost assuredly another 3 percent increase through
ensuing, twice-yearly adjustments.
This is top-notch work by McClatchy. It deserves a
wide airing.
Bob Jensen's threads on Bailing Out Big Banks and Mortgage Companies
Engaged in Sleaze and Sex ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
"SEC Sues Value Line Inc. and Two Senior Officers for $24 Million
Fraudulent Scheme," SEC Press Release, November 4. 2009 ---
http://www.sec.gov/news/press/2009/2009-234.htm
FOR IMMEDIATE RELEASE 2009-234 Washington,
D.C., Nov. 4, 2009 — The Securities and Exchange Commission today charged
New York City-based investment adviser Value Line Inc., its CEO, its former
Chief Compliance Officer and its affiliated broker-dealer with defrauding
the Value Line family of mutual funds by charging over $24 million in bogus
brokerage commissions on mutual fund trades funneled through Value Line's
affiliated broker-dealer, Value Line Securities, Inc. (VLS).
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's Security Analyst Frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Some Great Role Models --- Ha! Ha!
"Dozens in Congress under ethics inquiry:
AN ACCIDENTAL DISCLOSURE Document was found on file-sharing network," by
Ellen Nakashima and Paul Kane, The Washington Post, October 30, 2009 ---
Click Here
The report appears to have been
inadvertently placed on a publicly accessible computer network, and it was
provided to The Washington Post by a source not connected to the
congressional investigations. The committee said Thursday night that the
document was released by a low-level staffer.
The ethics committee is one of the most
secretive panels in Congress, and its members and staff members sign oaths
not to disclose any activities related to its past or present
investigations. Watchdog groups have accused the committee of not actively
pursuing inquiries; the newly disclosed document indicates the panel is
conducting far more investigations than it had revealed.
Shortly after 6 p.m. Thursday, the
committee chairman, Zoe Lofgren (D-Calif.), interrupted a series of House
votes to alert lawmakers about the breach. She cautioned that some of the
panel's activities are preliminary and not a conclusive sign of
inappropriate behavior.
"No inference should be made as to any
member," she said.
Rep. Jo Bonner (Ala.), the committee's
ranking Republican, said the breach was an isolated incident.
The 22-page "Committee on Standards Weekly
Summary Report" gives brief summaries of ethics panel investigations of the
conduct of 19 lawmakers and a few staff members. It also outlines the work
of the new Office of Congressional Ethics, a quasi-independent body that
initiates investigations and provides recommendations to the ethics
committee. The document indicated that the office was reviewing the
activities of 14 other lawmakers. Some were under review by both ethics
bodies.
A broader inquiry
Ethics committee investigations are not
uncommon. Most result in private letters that either exonerate or reprimand
a member. In some rare instances, the censure is more severe.
Many of the broad outlines of the cases
cited in the July document are known -- the committee announced over the
summer that it was reviewing lawmakers with connections to the now-closed
PMA Group, a lobbying firm. But the document indicates that the inquiry was
broader than initially believed. It included a review of seven lawmakers on
the House Appropriations defense subcommittee who have steered federal money
to the firm's clients and have also received large campaign contributions.
The document also disclosed that:
-- Ethics committee staff members have
interviewed House Ways and Means Chairman Charles B. Rangel (D-N.Y.) about
one element of the complex investigation of his personal finances, as well
as the lawmaker's top aide and his son. Rangel said he spoke with ethics
committee staff members regarding a conference that he and four other
members of the Congressional Black Caucus attended last November in St.
Martin. The trip initially was said to be sponsored by a nonprofit
foundation run by a newspaper. But the three-day event, at a luxury resort,
was underwritten by major corporations such as Citigroup, Pfizer and AT&T.
Rules passed in 2007, shortly after Democrats reclaimed the majority
following a wave of corruption cases against Republicans, bar private
companies from paying for congressional travel.
Rangel said he has not discussed other
parts of the investigation of his finances with the committee. "I'm waiting
for that, anxiously," he said.
The Justice Department has told the ethics
panel to suspend a probe of Rep. Alan B. Mollohan (D-W.Va.), whose personal
finances federal investigators began reviewing in early 2006 after
complaints from a conservative group that he was not fully revealing his
real estate holdings. There has been no public action on that inquiry for
several years. But the department's request in early July to the committee
suggests that the case continues to draw the attention of federal
investigators, who often ask that the House and Senate ethics panels refrain
from taking action against members whom the department is already
investigating.
Mollohan said that he was not aware of any
ongoing interest by the Justice Department in his case and that he and his
attorneys have not heard from federal investigators. "The answer is no," he
said.
-- The committee on June 9 authorized
issuance of subpoenas to the Justice Department, the National Security
Agency and the FBI for "certain intercepted communications" regarding Rep.
Jane Harman (D-Calif.). As was reported earlier this year, Harman was heard
in a 2005 conversation agreeing to an Israeli operative's request to try to
obtain leniency for two pro-Israel lobbyists in exchange for the agent's
help in lobbying House Speaker Nancy Pelosi (D-Calif.) to name her chairman
of the intelligence committee. The department, a former U.S. official said,
declined to respond to the subpoena.
Harman said that the ethics committee has
not contacted her and that she has no knowledge that the subpoena was ever
issued. "I don't believe that's true," she said. "As far as I'm concerned,
this smear has been over for three years."
In June 2009, a Justice Department
official wrote in a letter to an attorney for Harman that she was "neither a
subject nor a target" of a criminal investigation.
Because of the secretive nature of the
ethics committee, it was difficult to assess the current status of the
investigations cited in the July document. The panel said Thursday, however,
that it is ending a probe of Rep. Sam Graves (R-Mo.) after finding no
ethical violations, and that it is investigating the financial connections
of two California Democrats.
The committee did not detail the two newly
disclosed investigations. However, according to the July document, Rep.
Maxine Waters, a high-ranking member of the House Financial Services
Committee, came under scrutiny because of activities involving OneUnited
Bank of Massachusetts, in which her husband owns at least $250,000 in stock.
Waters arranged a September 2008 meeting
at the Treasury Department where OneUnited executives asked for government
money. In December, Treasury selected OneUnited as an early participant in
the bank bailout program, injecting $12.1 million.
The other, Rep. Laura Richardson, may have
failed to mention property, income and liabilities on financial disclosure
forms.
File-sharing
The committee's review of investigations
became available on file-sharing networks because of a junior staff member's
use of the software while working from home, Lofgren and Bonner said in a
statement issued Thursday night. The staffer was fired, a congressional aide
said.
The committee "is taking all appropriate
steps to deal with this issue," they said, noting that neither the committee
nor the House's information systems were breached in any way.
"Peer-to-peer" technology has previously
caused inadvertent breaches of sensitive financial, defense-related and
personal data from government and commercial networks, and it is prohibited
on House networks.
House administration rules require that if
a lawmaker or staff member takes work home, "all users of House sensitive
information must protect the confidentiality of sensitive information" from
unauthorized disclosure.
Leo Wise, chief counsel for the Office of
Congressional Ethics, declined to comment, citing office policy against
confirming or denying the existence of investigations. A Justice Department
spokeswoman also declined to comment, citing a similar policy.
The Most Criminal Class Writes the Laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
"Pay-to-Play Torts Pension middlemen get investigated; lawyers get a pass,"
The Wall Street Journal, October 31, 2009 ---
http://online.wsj.com/article/SB10001424052748704107204574473310387443816.html?mod=djemEditorialPage
Pay-to-play schemes involving public officials and
the pension funds they oversee are finally getting the hard look they
deserve. Some 36 states are investigating how financial brokers and other
middlemen have used kickbacks and campaign contributions to gain access to
retirement funds. Now if only plaintiffs law firms would get the same
scrutiny.
Like investment funds, class-action law firms hire
intermediaries to help win state business. But the more common practice is
for plaintiffs lawyers to make campaign contributions to public officials
with the goal of being selected by those same officials to represent the
pension fund in securities litigation.
These enormous state funds are among the world's
largest institutional investors, and they frequently sue companies on behalf
of shareholders. The role of pension funds in such suits became all the more
important after the securities-law reform of 1995 that limited the ability
of some plaintiffs to file shareholder lawsuits. So plaintiffs law firms
have worked especially hard to turn these pension funds into business
partners in their pursuit of class action riches.
The law firms typically agree to take the cases on
a contingency basis that means no fees up front but a huge share (30% or
more) of any settlement or jury verdict. However, attorneys suing on the
government's behalf are supposed to be neutral actors whose goal is justice,
not lining their own pockets. When for-profit lawyers are involved with a
contingency fee at the end of the lawsuit rainbow, the incentives shift
toward settling to get a big payday.
This month, the New York Daily News reported that
the lawyers representing New York state's $116.5 billion pension fund have
received more than a half-billion dollars in contingency fees over the past
decade. Meanwhile, state Comptroller Thomas DiNapoli, the fund's sole
trustee, "has raked in more than $200,000 in campaign cash from law firms
looking to represent the state's pension fund in big-money suits," the paper
reported. Attorneys from one Manhattan firm, Labaton Sucharow, gave Mr.
DiNapoli $47,500 in December 2008, only months after he chose the firm as
lead counsel in a class action suit against Countrywide Financial. Mr.
DiNapoli's office says firms that give money don't get preferential
treatment.
The Empire State is hardly unusual. Labaton
Sucharow has given more than $58,000 to Massachusetts State Treasurer
Timothy Cahill, who recently announced his gubernatorial bid. The Labaton
firm is representing state and county pension funds in more than a dozen
security class action lawsuits.
The Louisiana State Employees' Retirement System is
among the most litigious in the nation. John Kennedy, the state treasurer
who helps decide when Louisiana's major pension funds should bring a law
suit, has received tens of thousands of dollars in political donations from
Bernstein Litowitz, which has offices in New York, New Orleans and San Diego
and was the country's top-grossing securities class-action firm in 2008. The
law firm has represented Louisiana's public pension funds at least 13 times
since 2004, and its partners donated nearly $30,000 to Mr. Kennedy's two
most recent campaigns, even though he ran unopposed both times.
In Mississippi, the state attorney general
determines when the public employees retirement fund should bring a
securities class action and which outside firms will represent the fund.
Would you be shocked to learn that AG Jim Hood has frequently chosen law
firms that have donated to his campaigns?
Mr. Hood is also partial to Bernstein Litowitz. On
February 21, 2006, he chose the firm to represent the Mississippi Public
Employees Retirement Fund in a securities class action against Delphi
Corporation—just days after receiving $25,000 in donations from Bernstein
Litowitz attorneys. The suit was eventually settled, and the lawyers on the
case received $40.5 million in fees. Mr. Hood's campaign would appear to
deserve a raise.
Back in New York, Attorney General Andrew Cuomo has
garnered banner headlines and much praise for his pay-to-play pension fund
probe that has already led to four guilty pleas by investors and
politicians. Good for him. Yet when asked about pursuing the trial bar for
similar behavior, his office says it has no jurisdiction to go after law
firms in class action suits. He could at least turn down their campaign
money, however.
Mr. Cuomo's campaign happens to have received
$200,000 from securities law firms. Perhaps it's merely a coincidence that
the expected candidate for governor in 2010 doesn't want to investigate his
funders. Mr. Cuomo recently proposed legislation that puts restrictions on
campaign donations from investment firms seeking pension business. His
proposal does not seek the same restrictions on securities law firms.
Perhaps that's another coincidence.
If Mr. Cuomo won't investigate pay-to-play torts on
his own, then someone else should investigate Mr. Cuomo's relationship with
these pay-to-play law firms.
The most criminal class writes the laws ---
http://www.trinity.edu/rjensen/FraudRotten.htm
A lender at Fulton bank told me
they were swamped over the summer with mortgage applications from unmarried
couples living together where one of them owned the house and was selling to the
other so they could get their $8000 from the US Treasury. This won't show up in
the fraud stats but it certainly is not the behavior our wise leaders in DC
intended with this credit.
Hossein Nouri
"First-Time Fraudsters A tax credit so silly even a four-year-old can
exploit it," The Wall Street Journal, October 29, 2009 ---
http://online.wsj.com/article/SB10001424052748703574604574501253942115922.html?mod=djemEditorialPage
It's hard not to laugh when viewing the results of
the federal first-time home-buyer tax credit. The credit, worth up to $8,000
for the purchase of a home, has only been available since April of last
year. Yet news of the latest taxpayer-funded mortgage scam has traveled
fast. The Treasury's inspector general for tax administration, J. Russell
George, recently told Congress that at least 19,000 filers hadn't purchased
a home when they claimed the credit. For another 74,000 filers, claiming a
total of $500 million in credits, evidence suggests that they weren't
first-time buyers.
It's hard not to laugh when viewing the results of
the federal first-time home-buyer tax credit. The credit, worth up to $8,000
for the purchase of a home, has only been available since April of last
year. Yet news of the latest taxpayer-funded mortgage scam has traveled
fast. The Treasury's inspector general for tax administration, J. Russell
George, recently told Congress that at least 19,000 filers hadn't purchased
a home when they claimed the credit. For another 74,000 filers, claiming a
total of $500 million in credits, evidence suggests that they weren't
first-time buyers.
Among those claiming bogus credits, at least some
of them were definitely first-timers. The credit has already been claimed by
500 people under the age of 18, including a
four-year-old. This pre-K housing whiz
likely bought because mom and dad make too much to qualify for the full
credit, which starts to phase out at $150,000 of income for couples, $75,000
for singles.
As a "refundable" tax credit, it guarantees the
claimants will get cash back even if they paid no taxes. A lack of
documentation requirements also makes this program a slow pitch in the
middle of the strike zone for scammers. The Internal Revenue Service and the
Justice Department are pursuing more than 100 criminal investigations
related to the credit, and the IRS is reportedly trying to audit almost
everyone who claims it this year.
Speaking of the IRS, apparently its own staff
couldn't help but notice this opportunity to snag an easy $8,000. One day
after explaining to Congress how many "home-buyers" were climbing aboard
this gravy train, Mr. George appeared on Neil Cavuto's program on the Fox
Business Network. Mr. George said his staff has found at least 53 cases of
IRS employees filing "illegal or inappropriate" claims for the credit. "In
all honesty this is an interim report. I expect that the number would be
much larger than that number," he said.
The program is set to expire at the end of
November, so naturally given its record of abuse, Congress is preparing to
extend it. Republican Senator Johnny Isakson of Georgia is so pleased with
the results that he wants to expand the program beyond first-time buyers and
double the income limits.
This is the point in the story when a taxpayer's
sense of humor is bound to give way to a different emotion. The credit's
cost is running at about $1 billion a month and $15 billion for the year.
Also, even when employed by an honest buyer, it's another distortion that
drives capital into housing and away from other more productive uses. For
America's tens of millions of tax-paying renters, it's another subsidy they
provide for their neighbors to be able to sell their houses at a higher
price.
While the credit seems to have boosted home sales,
many of those sales would have happened anyway and have merely been stolen
from the future. Meanwhile, the credit continues to distort the housing
market and postpone the day when home prices can find a floor that is a
basis for a stable recovery.
More than two years into the housing bust,
trillions of dollars in taxpayer losses or guarantees via Fannie Mae and
Freddie Mac, and amid an ongoing plague of redefaults in federal programs to
prevent foreclosures, politicians are still trying to manipulate housing
prices. And leave it to Congress to design a program that even a
four-year-old can scam.
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
What do you want to bet that Marvene got back into the action? ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Why single out capitalism for immorality and ethics and fraud misbehavior?
Making capitalism ethical is a tough task – and
possibly a hopeless one.
Prem Sikka (see below)
The
global code of conduct of Ernst & Young, another
global accountancy firm, claims that "no client or external relationship is
more important than the ethics, integrity and reputation of Ernst & Young".
Partners and former partners of the firm have also been found
guilty of promoting tax evasion.
Prem Sikka (see below)
Jensen Comment
Yeah right Prem, as if making the public sector and socialism ethical is an
easier task. The least ethical nations where bribery, crime, and immorality are
the worst are likely to be the more government (dictator) controlled and lower
on the capitalism scale. And in the so-called capitalist nations, the lowest
ethics are more apt to be found in the public sector that works hand in hand
with bribes from large and small businesses.
Rotten Fraud in General ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
We hang the petty thieves and appoint the great ones to public office.
Aesop
Congress is our only native criminal class.
Mark Twain ---
http://en.wikipedia.org/wiki/Mark_Twain
Why should
members of Congress be allowed to profit from insider trading?
Amid broad congressional concern about ethics scandals, some lawmakers are
poised to expand the battle for reform: They want to enact legislation that
would prohibit members of Congress and their aides from trading stocks based on
nonpublic information gathered on Capitol Hill. Two Democrat lawmakers plan to
introduce today a bill that would block trading on such inside information.
Current securities law and congressional ethics rules don't prohibit lawmakers
or their staff members from buying and selling securities based on information
learned in the halls of Congress.
Brody Mullins, "Bill Seeks to Ban Insider Trading By Lawmakers and Their Aides,"
The Wall Street Journal, March 28, 2006; Page A1 ---
http://online.wsj.com/article/SB114351554851509761.html?mod=todays_us_page_one
The
Culture of Corruption Runs Deep and Wide in Both U.S. Political Parties: Few if
any are uncorrupted
Committee members have shown no appetite for
taking up all those cases and are considering an amnesty for reporting
violations, although not for serious matters such as accepting a trip from a
lobbyist, which House rules forbid. The data firm PoliticalMoneyLine calculates
that members of Congress have received more than $18 million in travel from
private organizations in the past five years, with Democrats taking 3,458 trips
and Republicans taking 2,666. . . But of course, there are those who deem the
American People dumb as stones and will approach this bi-partisan scandal
accordingly. Enter Democrat Leader Nancy Pelosi, complete with talking points
for her minion, that are sure to come back and bite her .... “House Minority
Leader Nancy Pelosi (D-Calif.) filed delinquent reports Friday for three trips
she accepted from outside sponsors that were worth $8,580 and occurred as long
as seven years ago, according to copies of the documents.
Bob Parks, "Will Nancy Pelosi's Words Come Back to Bite Her?" The National
Ledger, January 6, 2006 ---
http://www.nationalledger.com/artman/publish/article_27262498.shtml
And when
they aren't stealing directly, lawmakers are caving in to lobbying crooks
Drivers can send their thank-you notes to Capitol
Hill, which created the conditions for this mess last summer with its latest
energy bill. That legislation contained a sop to Midwest corn farmers in the
form of a huge new ethanol mandate that began this year and requires drivers to
consume 7.5 billion gallons a year by 2012. At the same time, Congress refused
to include liability protection for producers of MTBE, a rival oxygen
fuel-additive that has become a tort lawyer target. So MTBE makers are pulling
out, ethanol makers can't make up the difference quickly enough, and gas
supplies are getting squeezed.
"The Gasoline Follies," The Wall Street Journal, March 28, 2006; Page
A20 ---
Click Here
Once again, the power of pork to sustain incumbents gets its best demonstration
in the person of John Murtha (D-PA). The acknowledged king of earmarks in the
House gains the attention of the New York Times editorial board today, which
notes the cozy and lucrative relationship between more than two dozen
contractors in Murtha's district and the hundreds of millions of dollars in pork
he provided them. It also highlights what roughly amounts to a commission on the
sale of Murtha's power as an appropriator: Mr. Murtha led all House members this
year, securing $162 million in district favors, according to the watchdog group
Taxpayers for Common Sense. ... In 1991, Mr. Murtha used a $5 million earmark to
create the National Defense Center for Environmental Excellence in Johnstown to
develop anti-pollution technology for the military. Since then, it has garnered
more than $670 million in contracts and earmarks. Meanwhile it is managed by
another contractor Mr. Murtha helped create, Concurrent Technologies, a research
operation that somehow was allowed to be set up as a tax-exempt charity,
according to The Washington Post. Thanks to Mr. Murtha, Concurrent has boomed;
the annual salary for its top three executives averages $462,000.
Edward Morrissey, Captain's Quarters, January 14, 2008 ---
http://www.captainsquartersblog.com/mt/archives/016617.php
"Several Democrats, including some closed allied to Speaker Nancy Pelosi, are
the subject of ethics complaints," by Holly Bailey, Newsweek Magazine,
October 3, 2009 ---
http://www.newsweek.com/id/216687
Nancy Pelosi likes to brag that she's
"drained the swamp" when it comes to corruption in the House, but ethics
problems could come back to haunt Democrats in 2010. Democrats are currently
the subject of 12 of the 16 complaints pending before the House ethics
committee. Two of the lawmakers under scrutiny—Reps. Jack Murtha and Charlie
Rangel—have close ties to Pelosi, who has come under criticism for not
asking them to resign their committee posts. Murtha, chairman of a key
defense-appropriations subcommittee, is is not formally under investigation
but the ethics committee is reviewing political contributions he and other
House lawmakers received from lobbying firm whose clients received millions
of dollars in Defense earmarks. Rangel, chairman of the Ways and Means
Committee, is facing scrutiny for not fully disclosing assets. The ethics
committee is also looking into ties between Rangel and a developer who
leased rent-controlled apartments to the congressman, and whether Rangel
improperly used his House office to raise funds for a public policy
institute in his name. Rangel and Murtha deny any wrongdoing. (Another
lawmaker under investigation: Rep. Jesse Jackson Jr., who, according to the
committee, "may have offered to raise funds" for then–Illinois governor Rod
Blagojevich in exchange for the president's Senate seat—a charge Jackson
denies. The panel deferred its probe at the request of the Justice
Department, which is conducting its own inquiry.)
Pelosi has said little about Rangel's
ethics problems, or those involving other Democrats; a Pelosi spokesman,
Brendan Daly, e-mails NEWSWEEK, "The speaker has said that [Rangel] should
not step aside while the independent, bipartisan ethics committee is
investigating."
But watchdog groups, not to mention
Republicans, are calling Pelosi hypocritical (as if
they weren't equally hypocritical)
since Democrats won back control of the House by, in part, trashing the
GOP's ethics lapses. Republicans already plan to use the ethics issue
against Democrats in 2010. Though Rangel and Murtha aren't as known as Tom
DeLay, the GOP poster boy for scandal in 2006, the party aims to change
that: this week the House GOP plans to introduce a resolution calling on
Rangel to resign his committee post.
Pelosi "promised to run the most ethical
Congress in history," says Ken Spain, a spokesman for the National
Republican Congressional Committee,
"and instead of cracking down on corruption, she
promotes it (to garner votes in Congress)."
Daly responds, "Since Democrats
took control of Congress, we have strengthened the ethics process." (Daly
has some magnificent ocean front property for sale in Arizona.)
"Can morality be brought to market?" by Prem Sikka, The Guardian,
October 7, 2009 ---
http://www.guardian.co.uk/commentisfree/2009/oct/07/bae-business-ethics-morality-markets
The
BAE bribery scandal has once again brought
discussions of business ethics to the fore. Politicians also claim to be
interested in promoting
morality in markets, but have not explained how
this can be achieved.
There is no shortage of
companies wrapping themselves in claims of ethical conduct to disarm
critics. BAE boasts a global
code of conduct, which claims that "its leaders
will act ethically, promote ethical conduct both within the company and in
the markets in which we operate". In the light of the revelations about the
way the company secured its business contracts, such claims must be doubted.
BAE is not alone. There is
a huge gap between corporate talk and action, and a few illustrations would
help to highlight this gap. KPMG is one of the world's biggest accountancy
firms. Its
global code of conduct states that the firm is
committed to "acting lawfully and ethically, and encouraging this behaviour
in the marketplace … maintaining independence and objectivity, and avoiding
conflicts of interest". Yet the firm created an extensive organisational
structure to devise
tax avoidance and tax evasion schemes. Former
managers have been
found guilty of tax evasion and the firm was fined
$456m for "criminal
wrongdoing".
The
global code of conduct of Ernst & Young, another
global accountancy firm, claims that "no client or external relationship is
more important than the ethics, integrity and reputation of Ernst & Young".
Partners and former partners of the firm have also been found
guilty of promoting tax evasion.
UBS, a leading bank, has
been fined $780m by the US authorities for
facilitating tax evasion, but it told the world
that "UBS upholds the law, respects regulations and behaves in a principled
way. UBS is self-aware and has the courage to face the truth. UBS maintains
the highest ethical standards."
British Airways paid a
fine of Ł270m after admitting
price fixing on fuel surcharges on its long-haul
flights while its
code of conduct promised that it would behave
responsibly and ethically towards its customers.
These are just a tiny sample that shows that
corporations say one thing but do something completely different. This
hypocrisy is manufactured by corporate culture, and unless that process is
changed there is no prospect of securing moral corporations or markets.
The key issue is that companies cannot buck the
systemic pressures to produce ever higher profits. Capitalism is not
accompanied by any moral guidance on how high these profits have to be, but
shareholders always demand more. Markets do not ask any questions about the
quality of profits or the human consequences of ever-rising returns. Behind
a wall of secrecy, company directors devise plans to fleece taxpayers and
customers to increase profits, and are rewarded through profit-related
remuneration schemes. The social system provides incentives for unethical
behaviour.
Within companies, daily routines encourage
employees to prioritise profit-making even if that is unethical. For
example, tax departments within major accountancy firms operate as profit
centres. The performance of their employees is assessed at regular
intervals, and those generating profits are rewarded with salary increases
and career advancements. In time, the routines of devising tax avoidance
schemes and other financial dodges become firmly established norms, and
employees are desensitised to the consequences.
With increasing public scepticism, and pressure
from consumer groups and non-governmental organisations (NGOs), companies
manage their image by publishing high-sounding statements. Ethics itself has
become big business, and armies of consultants and advisers are available
for hire to enable companies to manage their image. No questions are raised
about the internal culture or the economic incentives for misbehaviour. It
is far cheaper for companies to publish glossy brochures than to pay taxes
or improve customer and public welfare. The payment of fines has become just
another business cost.
Making capitalism ethical is a tough task – and
possibly a hopeless one. Any policy for
encouraging ethical corporate conduct has to change the nature of capitalism
and corporations so that companies are run for the benefit of all
stakeholders, rather than just shareholders. Pressures to change corporate
culture could be facilitated by closing down persistently offending
companies, imposing personal penalties on offending executives and offering
bounties to whistleblowers.
Rotten Fraud in General ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Rotten Fraud in the Public Sector (The Most Criminal Class Writes the Laws) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#Lawmakers
What happened was an explosion of loans being made
outside of the regular banking system. It was largely the unregulated sector of
the lending industry and the underregulated and the lightly regulated that did
that.
Barney Frank
Question
How did banks circumvent mortgage regulations in before the subprime scandal
broke?
Jensen Comment
For once I would like to bless
Barney Frank, although as chairman of the House Financial Services Committee
when these scandals were taking place, he should have stopped this banking house
of cards before this banking fraud came tumbling down. In spite of yelling foul
now, Rep. Frank helped create this pile of "Barney's Rubble." Pardon me for not
blessing Barney now ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
Was he left in the dark about mortgage fraud? Wink! Wink!
I'm about to puke!
Hint
They used a ploy much like corporations used to keep real estate and other debt
of the balance sheet before accounting standard setters put an end to the sham.
For example, Avis Car rental at one time avoided putting millions of debt for
financing its cars by creating a sham subsidiary financing subsidiary and then
(in those good old days) did not consolidate the financing subsidiary into the
consolidated balance sheet of Avis. Similarly, Safeway appeared to not own any
stores or have any mortage debt on those stores because all this was hidden in
an unconsolidated subsidiary. It took way to long in the United States for the
FASB to put an end to the sham of off-balance-sheet-financing (OBSF):
FAS 94: Consolidation of All Majority-owned Subsidiaries--an amendment of
ARB No. 51, with related amendments of APB Opinion No. 18 and ARB No. 43,
Chapter 12 (Issued 10/87) ---
http://www.fasb.org/summary/stsum94.shtml
In the case of banks circumventing regulations on selling mortgages,
here's how it worked with sham mortgage company subsidiaries.
"Subprime and the Banks: Guilty as Charged," by Joe Nocera. The New
York Times, October 14, 2009 ---
http://executivesuite.blogs.nytimes.com/2009/10/14/subprime-and-the-banks-guilty-as-charged/
“There has not been a case made that there is an
enforcement problem with banks,” Edward Yingling, the head of the American
Bankers Association, said last week. “There is a problem with enforcement on
nonbanks.”
As I wrote in
my column last week, this has become something of
a mantra for the banking industry. We aren’t the ones who brought
the world to the brink of financial disaster,
they proclaim. It was those awful nonbanks,
the mortgage brokers and originators, who peddled those terrible subprime
loans to unsuspecting or unsophisticated consumers. They’re the ones who
need to be regulated!
Apparently, when you say something long enough and
loud enough, people start to believe it, even when it defies reality. Here,
for instance, is the normally skeptical
Barney Frank on the subject: “What happened
was an explosion of loans being made outside of the regular banking system.
It was largely the unregulated sector of the lending industry and the
underregulated and the lightly regulated that did that.”
To which I can now triumphantly reply: Oh,
really???
Last weekend, after the column was published, an
angry mortgage broker — someone who felt she and her ilk were being unfairly
scapegoated by the banking industry — sent me a series of rather eye-opening
documents. They were a series of fliers and advertisements that had been
sent to her office (and mortgage brokers all over the country) from
JPMorgan Chase, advertising their latest wares.
They were dated 2005, which was before the subprime mortgage boom got
completely out of control. They’re still pretty sobering.
“The Top 10 Reasons to Choose Chase for All Your
Subprime Needs,” screams the headline on the first one. Another was titled,
“Chase No Doc,” and described the criteria for a borrower to receive a
so-called no-document loan. “Got Bank Statements?” asked a third flier. “Get
Approved!” In a number of the fliers, Chase makes it clear to the mortgage
brokers that the bank doesn’t need income or job verification — it just
needs to look at a handful of old bank statements.
“There were mortgage brokers who acted unethically,
absolutely,” my source told me when I called her on Monday. (She asked to
remain anonymous because she still has to work with JPMorgan Chase and the
other big banks.) “But where do you think mortgage brokers were getting the
subprime mortgages they were selling to customers? From the big banks,
that’s where. Chase,
Wells Fargo,
Bank of America — they were all doing it.”
So enough already about how the banks weren’t the
problem. Of course they were. Here’s the evidence,
right here. Read ’em and weep.
Jensen Comment
If you really want to see how sleazy mortgage lending became, read about the on
Marvene's shack in Phoenix. She purchased the shack for $3,500 and later, with
no improvements, got a $103,000 mortgage. When the mortgage was foreclosed,
neighbors bought the shack and tore it down ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
Bob Jensen's threads on the banking scandals accompanied by taxpayer
bailouts ---
http://www.trinity.edu/rjensen/2008Bailout.htm
Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Brooke Astor’s Son Guilty in Scheme to Defraud Her
Anthony D. Marshall was convicted of stealing from the
matriarch as she suffered from Alzheimer’s disease in the twilight of her life.
He could face from 1 to 25 years behind bars . . . Mr. Marshall was found guilty
of 14 of the 16 counts against him, including one of two first-degree grand
larceny charges, the most serious he faced. Jurors convicted him of giving
himself an unauthorized raise of about $1 million for managing his mother’s
finances. Prosecutors contended that Mrs. Astor’s Alzheimer’s had advanced so
far that there was no way she could have consented to this raise and other
financial decisions that benefited Mr. Marshall. A second defendant in the case,
Francis X. Morrissey Jr., a lawyer who did estate planning for Mrs. Astor, was
convicted of forgery charges.
John Eligon, The New York Times, October 8, 2009 ---
http://www.nytimes.com/2009/10/09/nyregion/09astor.html?_r=1&hp
Here’s an expanded view of questions raised about which
constituencies credit rating agencies (and by analogy auditing firms) really
serve.
A message
forwarded by my anonymous friend Larry on October 18, 2009
How Moody's sold its ratings -- and sold out investors | McClatchy ---
http://www.mcclatchydc.com/politics/story/77244.html
Instead, Moody's promoted executives who headed
its "structured finance" division, which assisted Wall Street in packaging
loans into securities for sale to investors. It also stacked its compliance
department with the people who awarded the highest ratings to pools of
mortgages that soon were downgraded to junk. Such products have another name
now: "toxic assets."
"In 2001, Moody's had revenues of $800.7 million; in 2005, they were up
to $1.73 billion; and in 2006, $2.037 billion. The exploding profits were
fees from packaging . . . and for granting the top-class AAA ratings, which
were supposed to mean they were as safe as U.S. government securities," said
Lawrence McDonald in his recent book, "A Colossal Failure of Common Sense."
Nobody cared about due diligence so long as the
money kept pouring in during the housing boom. Moody's stock peaked in
February 2007 at more than $72 a share.
Billionaire investor Warren Buffett's firm
Berkshire Hathaway owned 15 percent of Moody's
stock by the end of 2001, company reports show. That stake, largely still
intact, meant that the Oracle from Omaha reaped huge financial rewards while
Moody's overlooked the glaring problems in pools of subprime mortgages.
A Berkshire spokeswoman had no comment.
Moody's wasn't alone in ignoring the mounting problems. It wasn't even
first among competitors. The financial industry newsletter Asset-Backed
Alert found that Standard & Poor's participated in 1,962 deals in 2006
involving pools of loans, while Moody's did 1,697. In 2005, Standard &
Poor's did 1,754 deals to Moody's 1,120. Fitch was well behind both.
http://www.mcclatchydc.com/politics/story/77244.html
Jensen Comment
I’m frantically searching the writings of my very technical hero, Janet Tavakoli,
to discover that all this is not true about my other hero, Warren Buffett. Of
course there are huge and unknown, at this points, degrees of culpability.
Janet is pretty rough on the ratings agencies in her
writings. However, she’s always kind to Warren. One of my all-time favorite
books is her Dear Mr. Buffet book. On Page 107, Janet writes as follows:
At
the end of 2007, Berkshire Hathaway owned 78 million shares of Moody’s
Corporation, one of the top three rating agencies (the same shares owned when I
first met Warren Buffett in 2005), representing just over 19 percent of the
capital stock. The cot basis of the shares is $499 million. At the end of 200,
the value was just under $1 billion. By the end of 2006, the value was around
$3.3 billion, but it dropped to $1.7 billion at the end of 2007. The sharp
increase in revenues is due chiefly to revenues generated from rating structured
financial products, and the sharp decrease was due to the disillusionment of the
market with the integrity of the ratings.
On Page 109, Janet continues to berate the rating agency
cartel (where I think it might be possible to substitute auditors for rating
agencies interchangeably):
The
rating agencies seem to not care about the market’s forgiveness since not
only have they not apologized --- a necessary but not sufficient condition ---
they seem to feel the market should change. Specifically, the market
should change its point of view about what it expects from the rating agencies.
Yet it seems that the market has the right to expect rating agencies to follow
the basic principles of statistics.
The
tactic has mainly been successful because the rating agencies act as a cartel,
leveraging their joint power to have fees magically converge and have ratings so
similar that they have participated overrating AAA structured products backed by
dodgy loans in 2007 that took substantial principal losses. Meanwhile, many
market professionals, including me, pointed out in print that the AAA ratings
were maeaningless. The rating agencies presented a farily united front in
defending their methods (except for Fitch, which also participated on overrated
CDOs and later seemed more responsive to downgrading structured products.
. . .
“Ma
and pa” retail investors found that AAA product ended up in their pension funds
and mutual funds because their money managers gave too much credence to an AAA
rating.
But nowhere have I yet found where Janet alludes to any
insider profiteering on the part of Warren Buffett who also lost billions of
dollars in the crash The difference between “ma and pa” and Mr. Buffet is that a
billion dollars is pocket change to Warren Buffet. He can easily recoup his
losses legitimately in trades with stupid hedge fund managers and bankers that
rely too much on fallible models (at least that’s what mathematician Janet
Tavakoli tells us in a very enlightening way).
Expert Financial Predictions (John Stewart's hindsight video
scrapbook) ---
http://www.technologyreview.com/blog/post.aspx?bid=354&bpid=23077&nlid=1840
You have to watch the first third of this video before it gets into the
scrapbook itself
The problem unmentioned here is one faced by auditors and credit rating agencies
of risky clients every day: Predictions are often self fulfilling
If an auditor issues going concern exceptions in audit reports, the exceptions
themselves will probably contribute to the downfall of the clients
The same can be said by financial analysts who elect to trash a company's
financial outlook
Hence we have the age-old conflict between holding back on what you really
secretly predict versus pulling the fire alarm on a troubled company
There are no easy answers here except to conclude that it auditors and
credit rating agencies appeared to not reveal many of their inner secret
predictions in 2008
Auditing firms and credit rating agencies lost a lot of credibility in this
economic crisis, but they've survived many such stains on their reputations in
the past
By now we're used to the fact that the public is generally aware of the fire
before the auditors and credit rating agencies pull the alarm lever
On the other hand, financial wizards who pull the alarm lever on nearly every
company all the time lose their credibility in a hurry
Bob Jensen's
threads on credit rating agencies are at
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Bob Jensen's threads on
auditor professionalism are at
http://www.trinity.edu/rjensen/fraud001.htm#Professionalism
"How Moody's sold its ratings - and sold out investors," by Kevin G.
Hall, McClatchy Newspapers, October 18, 2009 ---
http://www.mcclatchydc.com/homepage/story/77244.html
As the housing market collapsed in late
2007, Moody's Investors Service, whose investment ratings were widely
trusted, responded by purging analysts and executives who warned of trouble
and promoting those who helped Wall Street plunge the country into its worst
financial crisis since the Great Depression.
A McClatchy investigation has found that
Moody's punished executives who questioned why the company was risking its
reputation by putting its profits ahead of providing trustworthy ratings for
investment offerings.
Instead, Moody's promoted executives who
headed its "structured finance" division, which assisted Wall Street in
packaging loans into securities for sale to investors. It also stacked its
compliance department with the people who awarded the highest ratings to
pools of mortgages that soon were downgraded to junk. Such products have
another name now: "toxic assets."
As Congress tackles the broadest proposed
overhaul of financial regulation since the 1930s, however, lawmakers still
aren't fully aware of what went wrong at the bond rating agencies, and so
they may fail to address misaligned incentives such as granting stock
options to mid-level employees, which can be an incentive to issue positive
ratings rather than honest ones.
The Securities and Exchange Commission
issued a blistering report on how profit motives had undermined the
integrity of ratings at Moody's and its main competitors, Fitch Ratings and
Standard & Poor's, in July 2008, but the full extent of Moody's internal
strife never has been publicly revealed.
Moody's, which rates McClatchy's debt and
assigns it quite low value, disputes every allegation against it. "Moody's
has rigorous standards in place to protect the integrity of ratings from
commercial considerations," said Michael Adler, Moody's vice president for
corporate communications, in an e-mail response to McClatchy.
Insiders, however, say that wasn't true
before the financial meltdown.
"The story at Moody's doesn't start in
2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and
senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive
strategy to replace a culture that was very conservative, an
accuracy-and-quality oriented (culture), a getting-the-rating-right kind of
culture, with a culture that was supposed to be 'business-friendly,' but was
consistently less likely to assign a rating that was tougher than our
competitors," Froeba said.
After Froeba and others raised concerns
that the methodology Moody's was using to rate investment offerings allowed
the firm's profit interests to trump honest ratings, he and nine other
outspoken critics in his group were "downsized" in December 2007.
"As a matter of policy, Moody's does not
comment on personnel matters, but no employee has ever been let go for
trying to strengthen our compliance function," Adler said.
Moody's was spun off from Dun & Bradstreet
in 2000, and the first company shares began trading on Oct. 31 that year at
$12.57. Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s
ratings agencies were allowed to switch from having investors pay for
ratings to having the issuers of debt pay for them. That led the ratings
agencies to compete for business by currying favor with investment banks
that would pay handsomely for the ratings they wanted.
Wall Street paid as much as $1 million for
some ratings, and ratings agency profits soared. This new revenue stream
swamped earnings from ordinary ratings.
"In 2001, Moody's had revenues of $800.7
million; in 2005, they were up to $1.73 billion; and in 2006, $2.037
billion. The exploding profits were fees from packaging . . . and for
granting the top-class AAA ratings, which were supposed to mean they were as
safe as U.S. government securities," said Lawrence McDonald in his recent
book, "A Colossal Failure of Common Sense."
He's a former vice president at now
defunct Lehman Brothers, one of the highflying investment banks that helped
create the global crisis.
From late 2006 through early last year,
however, the housing market unraveled, poisoning first mortgage finance,
then global finance. More than 60 percent of the bonds backed by mortgages
have had their ratings downgraded.
"How on earth could a bond issue be AAA
one day and junk the next unless something spectacularly stupid has taken
place? But maybe it was something spectacularly dishonest, like taking that
colossal amount of fees in return for doing what Lehman and the rest
wanted," McDonald wrote.
Ratings agencies thrived on the profits
that came from giving the investment banks what they wanted, and investors
worldwide gorged themselves on bonds backed by U.S. car loans, credit card
debt, student loans and, especially, mortgages.
Before granting AAA ratings to bonds that
pension funds, university endowments and other institutional investors
trusted, the ratings agencies didn't bother to scrutinize the loans that
were being pooled into the bonds. Instead, they relied on malleable
mathematical models that proved worthless.
"Everyone else goes out and does factual
verification or due diligence. The credit rating agencies state that they
are just assuming the facts that they are given," said John Coffee, a
finance expert at Columbia University. "This system will not get fixed until
someone credible does the necessary due diligence."
Nobody cared about due diligence so long
as the money kept pouring in during the housing boom. Moody's stock peaked
in February 2007 at more than $72 a share.
Billionaire investor Warren Buffett's firm
Berkshire Hathaway owned 15 percent of Moody's stock by the end of 2001,
company reports show. That stake, largely still intact, meant that the
Oracle from Omaha reaped huge financial rewards while Moody's overlooked the
glaring problems in pools of subprime mortgages.
A Berkshire spokeswoman had no comment.
One Moody's executive who soared through
the ranks during the boom years was Brian Clarkson, the guru of structured
finance. He was promoted to company president just as the bottom fell out of
the housing market.
Several former Moody's executives said he
made subordinates fear they'd be fired if they didn't issue ratings that
matched competitors' and helped preserve Moody's market share.
Froeba said his Moody's team manager would
tell his team that he, the manager, would be fired if Moody's lost a single
deal. "If your manager is saying that at meetings, what is he trying to tell
you?" Froeba asked.
In the 1990s, Sylvain Raynes helped
pioneer the rating of so-called exotic assets. He worked for Clarkson.
"In my days, I was pressured to do
nothing, to not do my job," said Raynes, who left Moody's in 1997. "I saw in
two instances -- two deals and a rental car deal -- manipulation of the
rating process to the detriment of investors."
When Moody's went public in 2000,
mid-level executives were given stock options. That gave them an incentive
to consider not just the accuracy of their ratings, but the effect they'd
have on Moody's -- and their own -- bottom lines.
"It didn't force you into a corrupt
decision, but none of us thought we were going to make money working there,
and suddenly you look at a statement online and it's (worth) hundreds and
hundreds of thousands (of dollars). And it's beyond your wildest dreams
working there that you could make that kind of money," said one former
mid-level manager, who requested anonymity to protect his current Wall
Street job.
Moody's spokesman Adler insisted that
compensation of Moody's analysts and senior managers "is not linked to the
financial performance of their business unit."
Clarkson couldn't be reached to comment.
Clarkson's own net worth was tied up in
Moody's market share. By the time he was pushed out in May 2008, his
compensation approached $3 million a year.
Clarkson rose to the top in August 2007,
just as the subprime crisis was claiming its first victims. Soon afterward,
a number of analysts and compliance officials who'd raised concerns about
the soundness of the ratings process were purged and replaced with people
from structured finance.
"The CEO is from a structured finance
background, most of the people in the leadership were from a structured
finance background, and it was putting their people in the right places,"
said Eric Kolchinsky, a managing director in Moody's structured finance
division from January 2007 to November 2007, when he was purged, he said,
for questioning some of the ratings. "If they were serious about compliance,
they wouldn't have done that, because it isn't about having friends in the
right places, but doing the right job."
Another mid-level Moody's executive,
speaking on the condition of anonymity for fear of retribution, recalls
being horrified by the purge.
"It is just something unthinkable, putting
business people in the compliance department. It's not acceptable. I was
very upset, frustrated," the executive said. "I think they corrupted the
compliance department."
One of the new top executives was Michael
Kanef, who was experienced in assembling pools of residential
mortgage-backed securities, but not in compliance, the division that was
supposed to protect investors.
"What signal does it send when you put
someone who ran the group that assigned some of the worst ratings in Moody's
history in charge of preventing it from happening again," Froeba said of
Kanef. Clarkson and Kanef, who remains at Moody's, were named in a
class-action lawsuit alleging that Moody's misled investors about its
independence from companies that paid it for ratings.
Kanef went after Scott McCleskey, the vice
president of compliance at Moody's from the spring of 2006 until September
2008, and the man that Moody's said was the one to see for all compliance
matters.
"It's speculation, but I think Scott was
trying to get people to follow some rules and people weren't ready to accept
that there should be rules," Kolchinsky said.
McCleskey testified before the House of
Representatives Oversight and Government Reform Committee on Sept. 30 and
described how he was pushed out on the heels of the people he'd hired.
"One hour after my departure, it was
announced that I would be replaced by an individual from the structured
finance department who had no compliance experience and who, to my
recollection, had been responsible previously for rating mortgage-backed
securities," McCleskey testified.
His replacement, David Teicher, had no
compliance background. SEC documents describe him as a former team director
for mortgage-backed securities from 2006 to 2008.
McCleskey had raised concerns about the
integrity of the ratings process, and Moody's had excluded him from meetings
in January 2008 with the Securities and Exchange Commission about the
eroding quality of pools of subprime loans that Moody's had blessed with top
ratings.
SEC officials, however, didn't bother to
seek out McCleskey, even though he was the "designated compliance officer"
in company filings with the agency. The SEC maintains that its officials met
with Kanef because he was McCleskey's superior.
SEC spokesman Erik Hotmire said that
officials met with Kanef because "we ask to interview whomever we determine
is appropriate."
Another former Moody's executive,
requesting anonymity for fear of legal action by the company, said the
agency might've understood what was going wrong better if it had talked to
the hands-on compliance officials.
"If they had known he'd (Kanef) come from
structured finance, the conflict of having him in that position should have
been evident from the start," the former executive said.
Others who worked at Moody's at the time
described a culture of willful ignorance in which executives knew how far
lending standards had fallen and that they were giving top ratings to risky
products.
"I could see it coming at the tail end of
2006, but it was too late. You knew it was just insane," said one former
Moody's manager. "They certainly weren't going to do anything to mess with
the revenue machine."
Moody's wasn't alone in ignoring the
mounting problems. It wasn't even first among competitors. The financial
industry newsletter Asset-Backed Alert found that Standard & Poor's
participated in 1,962 deals in 2006 involving pools of loans, while Moody's
did 1,697. In 2005, Standard & Poor's did 1,754 deals to Moody's 1,120.
Fitch was well behind both.
"S&P is deeply disappointed in the
performance of its ratings on certain securities tied to the U.S.
residential real estate market. As far back as April of 2005, S&P warned
investors about increased risks in the residential mortgage market," said
Edward Sweeney, a company spokesman. S&P revised criteria and demanded
greater buffers against default risks before rating pools of mortgages, he
said.
Still, S&P continued to give top ratings
to products that analysts from all three ratings agencies knew were of
increasingly poor quality. To guard against defaults, they threw more bad
loans into the loan pools, telling investors they were reducing risk.
The ratings agencies were under no legal
obligation since technically their job is only to give an opinion, protected
as free speech, in the form of ratings.
"As an analyst, I wouldn't have known
there was a compliance function. There was an attitude of carelessness, or
careless ignorance of the law. I think it is a result of the mentality that
what we do is just an opinion, and so the law doesn't apply to us,"
Kolchinsky said.
Experts such as Columbia University's
Coffee think that Congress must impose some legal liability on credit rating
agencies. Otherwise, they'll remain "just one more conflicted gatekeeper,"
and the process of pooling loans — essential to the flow of credit — will
remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small
banks cannot finance the housing demand. They have to take them (investment
banks) these mortgages and move them to a global audience," said Coffee.
"That can't happen unless the world trusts the gatekeeper."
Bob Jensen's threads on the scandals of credit rating companies (corrupt
to the core) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies
Big Four Auditors who live in glass houses should not throw stones ---
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms
According to the Attorney General of New York
"Homeless Organization Is Called a Fraud (with poor accounting)," by
Nicholas Confessore, The New York Times, November 24, 2009 ---
http://cityroom.blogs.nytimes.com/2009/11/24/homeless-organization-called-fraud/?partner=rss&emc=rss
They are a familiar sight on street corners across
the five boroughs: Men and women standing behind folding card tables, urging
passers-by to throw a little change into the empty plastic water jug marked
“U.H.O.”
But an investigation by Attorney General Andrew M.
Cuomo appears to have confirmed what many New Yorkers secretly (if somewhat
guiltily) suspected all along: The United Homeless Organization, supposedly
a nonprofit group set up to help feed and house the homeless, was actually
an elaborate fraud.
According to a complaint filed by Mr. Cuomo [pdf]
on Tuesday morning, U.H.O. does not operate a single shelter, soup kitchen
or food pantry. It does not provide food or clothing to the homeless. It
does not even donate money to other charities that do.
Most of those coins and bills, Mr. Cuomo contended,
end up in the pockets of those working the donation tables, who paid a daily
fee to the group’s founder and president, Stephen Riley, and its director,
Myra Walker, for the right to use the U.H.O. tables, jugs and aprons. The
rest of the money is kept by Mr. Riley and Ms. Walker, and has been used for
a variety of expenses not related to U.H.O. business, including expenses at
Weightwatchers.com fees, Toys ‘R’ Us, PC Richards, Bed, Bath & Beyond, as
well as premium cable and electricity bills at their homes.
Those papers that U.H.O.’s workers display on their
card tables? Nothing more than copies of the group’s certification of
incorporation, according to Mr. Cuomo, used to mislead the public into
believing they are permits. Incorporation does not give any special right to
solicit on the streets, the lawsuit notes.
“U.H.O. exploits the good intentions of people who
thought that their charitable donations were helping to fund services for
the homeless,” Mr. Cuomo said in a statement. “Instead, their donations go
directly to U.H.O.’s principals and workers, who abused the organization’s
tax-exempt status to line their own pockets.”
Mr. Cuomo charged that U.H.O. had failed to
maintain any records of donations or expenditures, including at least half
of the cash withdrawn from the group’s bank account in 2007 and 2008. Mr.
Riley and Ms. Walker also violated state law by operating U.H.O. without any
board or independent oversight and the organization has not held an election
for directors since its incorporation in 1993, according to Mr. Cuomo.
It’s been long known that the money in U.H.O. is
pocketed by the people at the table. The New York Times wrote about it in
2001, when a program director said the best advocates for the homeless are
the homeless themselves. The New York Post likewise wrote about the pocketed
money in 2008.
However, the lawsuit is charging improper use of
the collected feeds, poor accounting, and false claims of how the money
would be used.
The Deep Shah Insiders Leak at Moody's: What $10,000 Bought
Leaks such as this are probably impossible to stop
What disturbs me is that the Blackstone Group would exploit investors based up
such leaks
"Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall
Street Journal, October 20, 2009 ---
http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box
From their first day at Moody's Investors
Service, junior analysts are warned against sharing confidential information
with outsiders. They are even told not to mention company names in the
elevators at the credit-rating firm's Lower Manhattan headquarters.
Federal prosecutors now allege that a
former junior analyst, identified by a person familiar with the matter as
Deep Shah, breached that trust in July 2007 when he passed on inside
information about Blackstone Group's pending $26 billion takeover of Hilton
Hotels.
Mr. Shah and other employees of the
ratings firm, owned by publicly traded Moody's Corp., had advance notice
about the takeover as part of a standing practice to prebrief credit
analysts about planned deals. Prosecutors allege that the junior analyst
shared the Hilton information with an unidentified third party, who in turn
passed the tip to Galleon Group's Raj Rajaratnam. The tip enabled Mr.
Rajaratnam to reap $4 million in profits from trading Hilton shares, a
federal complaint alleges.
While Mr. Shah's role in the alleged
insider-trading affair is small, his link to the third party -- now a key
cooperating witness in the probe -- could shed light on how investigators
uncovered the trading ring. Unusual trading in Hilton's shares was one of
the first events that attracted scrutiny from regulators in 2007. The same
cooperating witness was friends with an executive at Polycom Inc. and also
passed on information about Google Inc.
The complaint said the cooperating witness
arranged to pay $10,000 to the Moody's associate analyst, a title that
describes staffers who aren't considered full analysts but assist them in
analyzing data. Mr. Shah hasn't been charged with a crime. It isn't known if
he is under investigation or if he will face charges.
Mr. Shah couldn't be reached for comment.
A Moody's spokesman declined to comment on the alleged role of Mr. Shah. He
reiterated the company's statement last week, saying that the alleged
wrongdoing by one of its employees "would be an egregious violation" of the
rating firm's policies.
Moody's has drawn flak in the past year
for inaccurate credit ratings on mortgage securities and has had to battle
recent accusations from a former employee that it still issues inflated
ratings on complex securities. Throughout the financial crisis, however,
Moody's credit ratings on corporate bonds have largely conformed to
expectations.
Still, critics say the Hilton incident may
raise questions about whether ratings firms should be privy to inside
information. Companies often inform rating analysts about mergers,
acquisitions or other transactions ahead of time, to let analysts digest and
analyze the information and announce rating actions soon after the deals
become public.
Like law firms and investment banks,
credit-rating agencies have policies and controls to limit the number of
people privy to inside information. "But you can't watch everyone all the
time, and if someone is determined to violate the law they will do so," said
Scott McCleskey, a former Moody's compliance officer who is now U.S.
managing editor of Complinet Inc.
Mr. Shah, who is in his mid-20s, left
Moody's more than a year ago and is believed to have returned to his home
country of India, according to former colleagues. One ex-colleague described
him as "mellow."
He joined the ratings firm in an
entry-level position, and worked with analysts who rated companies in the
technology, lodging and gaming sectors, according to Moody's reports that
listed Mr. Shah's name from 2005 to early 2008.
According to the U.S. attorney's
complaint, Hilton executives contacted a Moody's lead analyst by phone on
the afternoon of July 2, the day before Blackstone Group announced it would
acquire Hilton. The complaint said that, shortly afterward, an associate
analyst "involved" in the rating called the unidentified third party three
times from a cellphone with information that Hilton was to be taken private.
The information was passed to Mr. Rajaratnam who traded Hilton's stock,
according to the complaint.
As an associate analyst, Mr. Shah would
have been paid roughly $90,000 in annual salary, plus a bonus that could
reach $30,000, according to former Moody's employees.
Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
FBI Arrest in What Appears to Be the World's Largest Case Involving
Insider Information
More and more keeps coming out, including revelations of wiretapping
"8 trades the insiders allegedly made The government's case against the
Galleon crew includes transactions in companies like Google, AMD, Hilton and
Sun," by Michael Copeland, Fortune, October 19, 2009 ---
Click Here
http://money.cnn.com/2009/10/19/markets/insider_trading_arrests.fortune/?postversion=2009101912
The government's case in what it is calling the
largest insider trading case involving a U.S. hedge fund contains a detailed
list of trades involving household-name companies.
Investigators have pieced together a case that
alleges more than $25 million in illegal gains based on trading in 2006-09
on companies including Advanced Micro Devices (AMD, Fortune 500), Akamai (AKAM),
Clearwire (CLWR), Google (GOOG, Fortune 500), Hilton, Polycom (PLCM) and Sun
Microsystems (JAVA, Fortune 500), among others.
The six people charged include hedge fund
billionaire Raj Rajaratnam, founder of Galleon Group; Robert Moffat, IBM's
(IBM, Fortune 500) top hardware executive and an oft-discussed CEO
candidate; Mark Curland and Danielle Chiesi, executives of the hedge fund
New Castle Partners; Anil Kumar, a director at consulting firm McKinsey &
Co.; and Rajiv Goel, an executive in Intel's treasury department.
Just what did they allegedly do? Using information
gleaned from wiretapped conversations between the accused and others, along
with the statements of an apparent informant, SEC investigators have pieced
together a series of episodes alleging to show how the defendants used
inside information and well-timed trades to turn million-dollar profits.
Those charged have yet to enter pleas in the case.
Jim Waldman, a lawyer for Rajaratman, told the Wall Street Journal that the
hedge fund chief "is innocent. We're going to fight the charges." Lawyers
for some of the other accused said their clients are shocked by the charges
and deny wrongdoing.
What follows is a condensed account of eight major
trades the suspects made and the inside information they capitalized on,
according to the the SEC investigation and complaint. At the center of some
of the trades is an unnamed "Tipper A," a person who gathered a great deal
of information on companies for Rajaratnam, and whose identity presumably
will be made public as the case unfolds in court.
Polycom beats the Street
On Jan. 10, 2006, the
unnamed source identified in the SEC's complaint as "Tipper A" told
Galleon's Rajaratnam that, based on information received from a Polycom
insider, revenues at the video-conferencing company for the fourth-quarter
of 2005 were about to beat Wall Street estimates. Polycom was set to
announce its earnings more than two weeks later.
Rajaratnam sent an
instant message to his trader instructing him to "buy 60 [thousand shares]
PLCM" for certain Galleon Tech funds. All told, from Jan. 10 through Jan.
25, the date of the Polycom earnings release, Rajaratnam and Galleon bought
245,000 shares of Polycom and 500 Polycom call-option contracts. Polycom did
beat the Street, and collectively, the Galleon Tech funds made over $570,000
in connection with their Polycom trades based on Tipper A's tip.
The same scenario was
repeated for Polycom's first-quarter 2006 earnings, the complaint says.
Galleon made $165,000 on the information. Tipper A made $22,000.
The Hilton takeover
Tipper A allegedly
obtained confidential information in advance of a July 3, 2007, announcement
that a private equity group would be buying Hilton for $47.50 per share, a
premium of $11.45 over the July 3 closing price. Tipper A obtained the
information from an analyst who, at the time, was working at Moody's, a
rating agency that was evaluating Hilton's debt in connection with the
planned buyout. Tipper A bought call option contracts based on the
information, and passed on the tip to Rajaratnam.
On July 3, Rajaratnam and
Galleon bought 400,000 shares of Hilton in the Galleon Tech funds. That
evening, the Hilton transaction was announced. Tipper A sold all of the
Hilton call option contracts for a profit of more than $630,000, the
complaint says. To compensate the source for the Hilton tip, Tipper A paid
the source $10,000. The Galleon Tech funds sold their Hilton shares after
the July 3 announcement for a profit of more than $4 million.
Google Misses
Around July 10, 2007, a
PR consultant to Google allegedly told Tipper A that Google's second-quarter
earnings per share would be down about 25 cents. The Street had estimated
yet another strong quarter for the search giant, which was scheduled to
report earnings July 19.
Two days later Tipper A
bought put options in Google and passed along details of the pending Google
miss to Rajaratnam. He and Galleon began buying Google put options for the
Galleon Tech funds, and continued buying them through July 19. In addition,
Galleon funds bought other options betting on a fall in Google shares and
sold short Google stock beginning July 17.
On July 19, Google
announced its earnings results, disclosing that its earnings-per-share was
indeed 25 cents lower than the prior quarter. Google's share price fell from
over $548 per share to almost $520 per share. The Galleon Tech funds'
profits from the Google tip were almost $8 million. Tipper A sold all of the
put options the day after the July 19 announcement for a profit of over
$500,000.
Trading in Intel
Rajaratnam allegedly tapped former Wharton classmate
and Intel executive Rajiv Goel just before Intel's (INTL)
scheduled fourth-quarter 2006 earnings announcement to get inside
information on the world's largest chipmaker. On Jan. 8, 2007, Rajaratnam
contacted Intel's Goel. The next day, Rajaratnam bought 1 million shares of
Intel at $21.08 per share. On Jan, 11, he bought 500,000 more at $21.65 per
share.
Goel and Rajaratnam
communicated again multiple times over the Martin Luther King Day weekend
that followed. On Tuesday, Jan. 16, the day the markets reopened, Rajaratnam
reversed course, selling the Galleon Tech funds' entire 1.5 million share
long position in Intel at $22.03 per share, and making a profit of a little
over $1 million
Later that day, after the
markets closed, Intel released its fourth-quarter 2006 earnings. Although
the company's earnings beat analysts' projections, its guidance was below
expectations. Intel's stock price fell nearly 5% on the news, but Rajaratnam
was already out of the stock.
According to Intel
officials, Goel has been placed on administrative leave pending the court
case.
Clearwire Gets a Partner
In early February 2008, Goel allegedly tipped
Rajaratnam that there was a pending joint venture between wireless broadband
company Clearwire and Sprint (S,
Fortune 500). Intel
was a huge shareholder in Clearwire. Over the next three months, Galleon
Tech funds bought and sold Clearwire shares on three occasions. Each time,
the Galleon Tech funds traded in advance of news reports relating to the
deal between Clearwire and Sprint, and shortly after calls between Goel and
Rajaratnam. Overall, the Galleon Tech funds realized gains of about $780,000
on their Clearwire trading between February and May 2008. On May 8, the
joint venture between Sprint and Clearwire was publicly announced.
As payback for Goel's
tips, Rajaratnam (or someone acting on his behalf) executed trades in Goel's
personal brokerage account based on inside information concerning Hilton and
PeopleSupport (the government notes that a Galleon director sits on the
PeopleSupport's board of directors though no charges of wrongdoing have been
brought against that person), which resulted in nearly $250,000 in profits
for Goel.
Shorting Akamai
Another hedge fund
executive, New Castle's Danielle Chiesi, is an acquaintance of Rajaratnam.
When an Akamai executive told her that the Internet infrastructure company
would trend lower in the company's second-quarter 2008 guidance to
investors, the government claims she passed along the information to
Rajaratnam. The consensus among Akamai's management was that Akamai's stock
price would decline in the wake of the lowered guidance scheduled for July
30.
Chiesi and the Akamai
source spoke multiple times between July 2 and July 24. Chiesi told what she
had learned from the Akamai source to her colleague at New Castle, Mark
Kurland. On July 25, several New Castle funds took short positions in Akamai
shares. The positions grew through July 30. Rajaratnam's Galleon funds also
built up a short position during the same period.
In its second-quarter
2008 earnings announcement on July 30, Akamai's results disappointed
investors. The stock fell nearly 20% following the announcement. New Castle
made $2.4 million. The Galleon Tech funds took home more than $3.2 million.
IBM knows Sun
In January 2009, IBM was conducting due diligence on Sun Microsystems in
preparation for an offer to buy it (Sun was ultimately bought by Oracle (ORCL,
Fortune 500)).
As part of that process, Sun opened its books to IBM, providing its
second-quarter 2009 results in advance of the scheduled Jan. 27
announcement.
Because much of Sun's
business is hardware, IBM's top hardware executive Robert Moffat was
involved in the evaluation of Sun. Moffat allegedly had access to Sun's
earnings results. He and Chiesi were also friends and contacted each other
repeatedly during January 2009. The frequency of contact between the two
increased just prior to the Sun earnings release, investigators say.
On Jan. 26, New Castle
began acquiring a substantial long position in Sun. On Jan. 27, after the
market close, Sun reported earnings that exceeded Wall Street's estimates,
posting a two-cent per-share profit when analysts had expected a loss. Sun
shares soared 21% on the news. New Castle made almost $1 million.
AMD gets out of manufacturing
On June 1, 2008, McKinsey
& Co. began advising Advanced Micro Devices over its negotiations with two
Abu Dhabi sovereign entities. One, a joint venture with the Abu Dhabi
government, Advanced Technology Investment Co., would take over AMD's chip
manufacturing. The other, an Abu Dhabi sovereign wealth fund, Mubadala
Investment Co., would provide a large investment in AMD (in the end, it
would total $314 million). According to the SEC, Anil Kumar was one of the
McKinsey team briefed on the negotiations. Kumar also knew Rajaratnam.
On Aug. 14, Kumar learned
that the two deals were finally getting done. The next day he told
Rajaratnam, investigators say. Almost immediately, Rajaratnam and Galleon
increased their long position in AMD by buying more than 2.5 million shares
in Galleon funds and continuing to build their long position until just
before the announcement of the AMD transactions. Rajaratnam and Galleon
bought 4 million AMD shares on Sept. 25 and 26, and 1.65 million more on
Oct. 3. On Oct. 8, the deals were announced publicly. AMD's stock price
increased by about 25%. All told, the value of Galleon's entire position in
AMD increased approximately $9.5 million in Oct. 6-7.
However, the allegedly ill-gotten gain was wiped out by the financial crisis
of the time. Because the Galleon Tech funds had accumulated much of their
AMD position beginning in August, before the crisis sent stock prices,
including AMD's, tumbling in September and October, the funds lost money on
the overall trade
The Deep Shah Insiders Leak at Moody's: What $10,000 Bought
Leaks such as this are probably impossible to stop
What disturbs me is that the Blackstone Group would exploit investors based up
such leaks
"Moody's Analysts Are Warned to Keep Secrets," by Serena Ing, The Wall
Street Journal, October 20, 2009 ---
http://online.wsj.com/article/SB125599951161895543.html?mod=article-outset-box
"Billionaire among 6 nabbed in inside trading case Wall Street wake-up
call: Hedge fund boss, 5 others charged in $25M-plus insider trading case,"
by Larry Neumeister and Candice Choi, Yahoo News, October 16, 2009
---
Click Here
One of America's wealthiest men was among
six hedge fund managers and corporate executives arrested Friday in a hedge
fund insider trading case that authorities say generated more than $25
million in illegal profits and was a wake-up call for Wall Street.
Raj Rajaratnam, a portfolio manager for
Galleon Group, a hedge fund with up to $7 billion in assets under
management, was accused of conspiring with others to use insider information
to trade securities in several publicly traded companies, including Google
Inc.
U.S. Magistrate Judge Douglas F. Eaton set
bail at $100 million to be secured by $20 million in collateral despite a
request by prosecutors to deny bail. He also ordered Rajaratnam, who has
both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York
City.
U.S. Attorney Preet Bharara told a news
conference it was the largest hedge fund case ever prosecuted and marked the
first use of court-authorized wiretaps to capture conversations by suspects
in an insider trading case.
He said the case should cause financial
professionals considering insider trades in the future to wonder whether law
enforcement is listening.
"Greed is not good," Bharara said. "This
case should be a wake-up call for Wall Street."
Joseph Demarest Jr., the head of the New
York FBI office, said it was clear that "the $20 million in illicit profits
come at the expense of the average public investor."
The Securities and Exchange Commission,
which brought separate civil charges, said the scheme generated more than
$25 million in illegal profits.
Robert Khuzami, director of enforcement at
the SEC, said the charges show Rajaratnam's "secret of success was not
genius trading strategies."
"He is not the master of the universe. He
is a master of the Rolodex," Khuzami said.
Galleon Group LLP said in a statement it
was shocked to learn of Rajaratnam's arrest at his apartment. "We had no
knowledge of the investigation before it was made public and we intend to
cooperate fully with the relevant authorities," the statement said.
The firm added that Galleon "continues to
operate and is highly liquid."
Rajaratnam, 52, was ranked No. 559 by
Forbes magazine this year among the world's wealthiest billionaires, with a
$1.3 billion net worth.
According to the Federal Election
Commission, he is a generous contributor to Democratic candidates and
causes. The FEC said he made over $87,000 in contributions to President
Barack Obama's campaign, the Democratic National Committee and various
campaigns on behalf of Hillary Rodham Clinton, U.S. Sen. Charles Schumer and
New Jersey U.S. Sen. Robert Menendez in the past five years. The Center for
Responsive Politics, a watchdog group, said he has given a total of $118,000
since 2004 -- all but one contribution, for $5,000, to Democrats.
The Associated Press has learned that even
before his arrest, Rajaratnam was under scrutiny for helping bankroll Sri
Lankan militants notorious for suicide bombings.
Papers filed in U.S. District Court in
Brooklyn allege that Rajaratnam worked closely with a phony charity that
channeled funds to the Tamil Tiger terrorist organization. Those papers
refer to him only as "Individual B." But U.S. law enforcement and government
officials familiar with the case have confirmed that the individual is
Rajaratnam.
At an initial court appearance in U.S.
District Court in Manhattan, Assistant U.S. Attorney Josh Klein sought
detention for Rajaratnam, saying there was "a grave concern about flight
risk" given Rajaratnam's wealth and his frequent travels around the world.
His lawyer, Jim Walden, called his client
a "citizen of the world," who has made more than $20 million in charitable
donations in the last five years and had risen from humble beginnings in the
finance profession to oversee hedge funds responsible for nearly $8 billion.
Walden promised "there's a lot more to
this case" and his client was ready to prepare for it from home. Rajaratnam
lives in a $10 million condominium with his wife of 20 years, their three
children and two elderly parents. Walden noted that many of his employees
were in court ready to sign a bail package on his behalf.
Rajaratnam -- born in Sri Lanka and a
graduate of University of Pennsylvania's Wharton School of Business -- has
been described as a savvy manager of billions of dollars in technology and
health care hedge funds at Galleon, which he started in 1996. The firm is
based in New York City with offices in California, China, Taiwan and India.
He lives in New York.
According to a criminal complaint filed in
U.S. District Court in Manhattan, Rajaratnam obtained insider information
and then caused the Galleon Technology Funds to execute trades that earned a
profit of more than $12.7 million between January 2006 and July 2007. Other
schemes garnered millions more and continued into this year, authorities
said.
Bharara said the defendants benefited from
tips about the earnings, earnings guidance and acquisition plans of various
companies. Sometimes, those who provided tips received financial benefits
and sometimes they just traded tips for more inside information, he added.
The timing of the arrests might be
explained by a footnote in the complaint against Rajaratnam. In it, an FBI
agent said he had learned that Rajaratnam had been warned to be careful and
that Rajaratnam, in response, had said that a former employee of the Galleon
Group was likely to be wearing a "wire."
The agent said he learned from federal
authorities that Rajaratnam had a ticket to fly from Kennedy International
Airport to London on Friday and to return to New York from Geneva,
Switzerland next Thursday.
Also charged in the scheme are Rajiv Goel,
51, of Los Altos, Calif., a director of strategic investments at Intel
Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara,
Calif., a director at McKinsey & Co. Inc., a global management consulting
firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and
group executive at International Business Machines Corp.'s Systems and
Technology Group.
The others charged in the case were
identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60,
also of New York City.
According to court papers, Chiesi worked
for New Castle, the equity hedge fund group of Bear Stearns Asset Management
Inc. that had assets worth about $1 billion under management. Kurland is a
top executive at New Castle.
Kumar's lawyer, Isabelle Kirshner, said of
her client: "He's distraught." He was freed on $5 million bail, secured in
part by his $2.5 million California home.
Kerry Lawrence, an attorney representing
Moffat, said: "He's shocked by the charges."
Bail for Kurland was set at $3 million
while bail for Moffat and Chiesi was set at $2 million each. Lawyers for
Moffat and Chiesi said their clients will plead not guilty. The law firm
representing Kurland did not immediately return a phone call for comment.
A message left at Goel's residence was not
immediately returned. He was released on bail after an appearance in
California.
A criminal complaint filed in the case
shows that an unidentified person involved in the insider trading scheme
began cooperating and authorities obtained wiretaps of conversations between
the defendants.
In one conversation about a pending deal
that was described in a criminal complaint, Chiesi is quoted as saying: "I'm
dead if this leaks. I really am. ... and my career is over. I'll be like
Martha (expletive) Stewart."
Stewart, the homemaking maven, was
convicted in 2004 of lying to the government about the sale of her shares in
a friend's company whose stock plummeted after a negative public
announcement. She served five months in prison and five months of home
confinement.
Prosecutors charged those arrested Friday
with conspiracy and securities fraud.
A separate criminal complaint in the case
said Chiesi and Moffat conspired to engage in insider trading in the
securities of International Business Machines Corp.
According to another criminal complaint in
the case, Chiesi and Rajaratnam were heard on a government wiretap of a
Sept. 26, 2008, phone conversation discussing whether Chiesi's friend Moffat
should move from IBM to a different technology company to aid the scheme.
"Put him in some company where we can
trade well," Rajaratnam was quoted in the court papers as saying.
The complaint said Chiesi replied: "I
know, I know. I'm thinking that too. Or just keep him at IBM, you know,
because this guy is giving me more information. ... I'd like to keep him at
IBM right now because that's a very powerful place for him. For us, too."
According to the court papers, Rajaratnam
replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well,
not really. I mean, come on. ... you know, we nailed it."
Continued in article
"Arrest of Hedge Fund Chief Unsettles the Industry," by Michael J. de la
Merced and Zachery Kouwe, The New York Times, October 18, 2009 ---
http://www.nytimes.com/2009/10/19/business/19insider.html?_r=1
The firm made no secret that its investors included
technology executives. Among them was Anil Kumar, a McKinsey director who
did consulting work for Advanced Micro Devices and was charged in the
scheme. Another defendant, Rajiv Goel, is an Intel executive who is accused
of leaking information about the chip maker’s earnings and an investment in
Clearwire.
Prosecutors also say that a Galleon executive on
the board of PeopleSupport, an outsourcing company, regularly tipped off Mr.
Rajaratnam about merger negotiations with a subsidiary of Essar Group of
India. Regulatory filings by PeopleSupport last year identified the director
as Krish Panu, a former technology executive. He was not charged on Friday.
Galleon has previously been accused of wrongdoing
by regulators. In 2005, it paid more than $2 million to settle an S.E.C.
lawsuit claiming it had conducted an illegal form of short-selling.
Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Another one from that Ketz guy
He knows about Altman’s Z-score model for non-manufacturers
---
http://en.wikipedia.org/wiki/Bankruptcy_prediction
"Hertz Diverts and Subverts (Where Are You, Mary?)," by: J. Edward
Ketz, SmartPros, October 2009 ---
http://accounting.smartpros.com/x67864.xml
In a recent perversion, Hertz Global Holdings (HTZ)
sued Audit Integrity because it had the audacity to predict that Hertz was
in danger of bankruptcy. This is another example of issuer retaliation and
it must stop. The Congress and the SEC need to rein in corporate America
when it attempts to enforce censorship against anybody that criticizes them.
The facts in the case are simple. Earlier this
year Audit Integrity moved Hertz on to its watch list for companies in
financial distress. Hertz demanded a retraction and sent a copy of the
letter to 19 other firms that made the list, encouraging them to join Hertz
in “protecting the investing public.” Then Hertz sued Audit Integrity for
defamation. (See Sue Reisinger, “Hertz
GC Sues Analyst Who Said Company Could Go Bankrupt”)
Audit Integrity responded with an
open letter to the SEC. James Kaplan, Chairman of
Audit Integrity, wrote “As Hertz’s ultimate goal was to silence an
independent research firm calling regulatory and investor attention to the
company’s real and material financial risk, the matter warrants an
investigation by the Securities and Exchange Commission.”
Quite frankly, the court should just toss out the
case. Any introductory student of mine can compute the Altman Z-score and
indeed discover that Hertz is in financial distress. Its 2008 10-K is quite
revealing, with net income a negative $1.2 billion and EBIT a negative $164
million. Retained earnings has a deficit of almost one billion dollars.
And its capital structure is heavily tilted on the debt side as its
debt-equity ratio exceeds 10. Any neophyte would agree with Audit
Integrity.
Altman’s Z-score model for non-manufacturers is:
Z = 6.56 * WC/TA + 3.26 * RE/TA + 6.72 * EBIT/TA +
1.05 * BVE/TD
where WC = working capital
TA= total assets
RE = retained earnings
EBIT = earnings before interest and taxes
BVE = book value of equity and
TD = total debts.
One interprets the Z-score as follows. If Z>2.6,
then we predict the firm is healthy and relatively free from financial
distress. If 1.1<Z<2.6, the company is in the indeterminate zone. It faces
some financial distress, but more investigation is needed to determine how
serious it is. But, if Z<1.1, then the model predicts that the firm faces a
serious chance of going into bankruptcy.
When I plug Hertz’s 2008 numbers into the model, I
obtain a Z-score of 0.417. Altman’s model therefore predicts bankruptcy. I
guess Hertz should sue Professor Altman for inventing such a model. After
all, if the firm goes under, it must be his fault.
A few years ago Senator Wyden expressed concerns
about corporate managers who attempt to intimidate those who issue research
reports critical of them and their operations. He correctly stated that the
impact of such retaliation could have an adverse reaction on the publication
of objective research, which in turn could have a negative impact on the
quality of information that is employed by the investment community and
could lead to an inefficient allocation of resources.
Chairman Cox responded to the Senator on September
1, 2005. He stated that he shared Sen. Wyden’s concerns about issuer
retaliation and its adverse impact on the investment community. He promised
to tackle the issue, but never did.
Mary Schapiro, it is your turn. Are you going to
embrace the mission statement of the SEC and be an advocate for investors or
are you going to be like your predecessor and say one thing but behind the
scenes enable managers and directors to defraud the investment community?
Issuer retaliation is an incredible problem in this
country. If it isn’t stopped, independent investors will stop performing
independent research analyses. And there will be more and more Enrons
bursting on the scene.
Mary, where are you? Where do you stand on the
issues of the day?
Jensen Comment
An enormous problem faced by security analysts, credit rating agencies, and
auditors is that when a company is on the edge of bankruptcy, these
professionals are no longer confined to professionalism in evaluation. They
become decision makers to the extent that "yelling fire" greatly increases the
odds of helping to cause a fire.
Bob Jensen's threads on difficulties security analysts encounter when
trying (or not trying) to issue negative reports on companies ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
More on How White Collar Crime Pays Even When You Get Caught
"The Milberg Double Cross," The Wall Street Journal, July 14, 2008;
Page A16 ---
http://online.wsj.com/article/SB121599290265249457.html?mod=djemEditorialPage
The Justice Department recently took a bow in its
legal victory over the law firm of Milberg Weiss. But now it seems Justice
may itself have been conned by the notorious firm and its felonious former
lead partner, Melvyn Weiss.
It was only last month that Milberg agreed to pay
$75 million as part of a nonprosecution agreement over Justice's charges
that it had run a 30-year kickback scheme. Not 30 days, or months. Thirty
years. The firm got off easy, not least because it finally cut ties with the
partners (including Weiss) it blamed for the scheme. Yet according to papers
filed in New York State court, even as Milberg was pinning the blame on
these criminals and telling Justice it had thrown them overboard, the law
firm's remaining partners were agreeing to pay millions to Weiss going
forward. Apparently crime does pay.
Continued in article
Jensen Comment
If I'm not mistaken, before we knew Melvyn Weiss was going to become a
convicted felon, he was a very sanctimonious featured plenary session
speaker a few years ago at an American Accounting Association annual
meeting. I no longer have the video (I gave it and my other videos to the
accounting history archives at the University of Mississippi.) My
recollection is that Mr. Weiss lambasted CPA firms for wanting limited
liability.
Bob Jensen's threads on how white collar crime pays even if you get caught
are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays