Richard Campbell notes a nice white collar crime blog edited by some law
professors ---
http://lawprofessors.typepad.com/whitecollarcrime_blog/
To date Nadine has eight modules on accounting fraud plus more modules on
other types of fraud
A woman known as "Fraud Girl" ran a series of weekly columns in Simoleon
Sense. Now Fraud Girl has her own blog called Sleight
of Hand ---
http://sleightfraud.blogspot.com/
Her real name is Nadine Sebai
Now I have two women to stalk in Chicago ---
Francine --- http://retheauditors.com/
Nadine ---
http://sleightfraud.blogspot.com/
Nadine's accounting modules to date ---
http://sleightfraud.blogspot.com/search/label/Accounting
Bob Jensen's threads on accounting education blogs ---
http://www.trinity.edu/rjensen/ListservRoles.htm
"SEC Whistleblower Fund Totals $450 Million," Huffington Post,
October 29, 2010 ---
http://www.huffingtonpost.com/2010/10/29/sec-whistleblower-fund-450-million_n_776397.html
The Securities and Exchange Commission says it has
set aside about $450 million for payments to outside whistleblowers whose
information results in successful cases and penalties collected from
companies or individuals.
The SEC set up the program in accordance with the
financial overhaul law enacted in July. It follows intense public criticism
of the agency for the breakdown that allowed Bernard Madoff's
multibillion-dollar fraud to go undetected for 16 years, despite numerous
red flags raised by whistleblowers.
A report issued Friday by the SEC shows it has put
$451.9 million into a new fund to pay whistleblowers, which must have a
minimum $300 million.
Bob Jensen's threads on whistle blowing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
"Boomers Wearing Bull's-Eyes Postcrisis: Those Over 50 Targeted in
Investment Scams; Problem is 'Rampant'," by Blake Ellis, The Wall Street
Journal, December 13, 2011 ---
http://money.cnn.com/2011/12/13/real_estate/home_sales_revision/index.htm
Forensic Accounting Helper Site
December 7, 2011 message from Emma
Hi Bob,
Thanks for getting back to me!
When I graduated from college I realized that
forensic accounting was something that a lot of fellow students were really
interested in. However, people knew very little about what it was or how
their skills could be applied to a career in the field. Basically, I'm
trying to create something that acts as both an educational resource and a
primer/gateway for people who want to learn more about the academic and
professional nature of forensic accounting. The site is located here:
http://www.forensicaccounting.net , and I'd really
appreciate any feedback you might have. If you like it, I'd be great if you
could include it on your site as a resource for others.
Thanks again!
Cheers,
Emma
Jensen Comment
The University of West Virginia now has a "Graduate Certificate in Forensic
Accounting and Fraud Investigation (FAFI)" ---
http://www.be.wvu.edu/fafi/index.htm
Forensic accountants in demand
The widespread growth in white-collar crime and the
increased need for homeland security have greatly raised the demand for
forensic accountants, fraud investigators and for auditors who posses those
skills. Federal, state, and local governmental agencies, such as the
Securities and Exchange Commission, the Internal Revenue Service, and the
Offices of Inspector General all need accountants with forensic
investigation skills. In the private sector, recent legislation
(Sarbanes-Oxley Act of 2002) and auditing standards (Statement on Auditing
Standard No. 99) require companies and their auditors to be more aggressive
in detecting and preventing fraud.
A unique program to answer the need
The Division of Accounting has responded to this
demand by developing an academic program designed to prepare entry-level
accountants and others for forensic accounting and fraud investigative
careers. Although many schools have added a single graduate or undergraduate
course to their curricula, very few offer a multi-course graduate
certificate program. This program is the only one in the region.
The 12-credit graduate Certificate Program in
Forensic Accounting and Fraud Investigation (FAFI) is offered during the
summer. Students may take two paths to earn this certificate:
- Option 1: Complete a four
course stand-alone non-degree graduate certificate program curriculum,
or
- Option 2: Complete a Master
of Professional Accountancy (MPA) degree plus two additional certificate
courses.
WVU developed the National Curriculum
Drs.
Richard
Riley and Bonnie Morris led the effort to develop
national curriculum guidelines for fraud and forensic accounting programs
for the National Institute of Justice.
Journal of Forensic Accounting ---
http://maaw.info/JournalOfForensicAccounting.htm
Journal of Forensic & Investigative Accounting ---
http://maaw.info/JournalOfForensicAndInvestigativeAccounting.htm
Association of Certified Fraud Examiners ---
http://www.acfe.com/
A Simple Guide to Understanding Forensic Accounting ---
http://www.forensicaccounting.net/
Thank you Jim Martin for the heads up.
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/Fraud.htm
Graduates Who Are Happy to Land Minimum Wage Careers
"Little-Known (usually unaccredited) Colleges Exploit Visa Loopholes to Make
Millions Off Foreign Students," by Tom Bartlett, Karin Fischer, and Josh
Keller, Chronicle of Higher Education, March 20, 2011 ---
http://chronicle.com/article/Little-Known-Colleges-Make/126822/
Bob Jensen's threads on for-profit colleges working in the gray zone of
fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud
Bob Jensen's threads on diploma mills ---
http://www.trinity.edu/rjensen/FraudReporting.htm#DiplomaMill
CFO's job description should have read: financial
professional with extensive consulting, management, and prison experience.
"SEC Charges Add to an Already Blemished Bio," by Sarah Johnson,
CFO.com, December 22, 2011 ---
http://www3.cfo.com/blogs/risk-compliance/risks--compliance/2011/12/SEC-Charges-Add-to-an-Already-Blemished-Bio
Jensen Comment
Note that the SEC cannot send bad men and women to prison. It's mission really
is to let them off the hook for a penny fine on every dollar that they steal.
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on how white collar crime pays even if you get caught
---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
"How Insiders Use the College Bowl System to Loot American Universities,"
by Pete Kotz, Phoenix New Times, December 15, 2011 ---
http://www.phoenixnewtimes.com/2011-12-15/news/how-insiders-use-the-college-bowl-system-to-loot-american-universities/
Thanks to Richard Campbell for the heads up.
By the time the 2009 football season rolled around,
the University of Minnesota hadn't won a Big Ten title in 42 years. The
Gophers largely spent those decades serving as target practice for the
league's higher powers, yet they weren't without occasional bursts of
second-string glory.
One arrived two years ago. Minnesota finished 6-6,
collecting the minimum wins needed to earn a slot in the Insight Bowl in
Tempe.
Their bragging rights would be slender. Every year,
70 of Division I football's 120 teams get bowl invitations, making faceless
games like the Insight akin to summer camp participation awards.
Minnesota would face Iowa State, a 6-6 team from
the Big 12. The teams were charged with providing three hours of TV
programming for hardcore fans and shut-ins just before New Year's. The
ratings would be measured in decimal points.
But within the U of M football offices in
Minneapolis, there was cause for celebration, however muted. Though the game
orbited well outside the realm of consequence, it was still a chance to
reward players, boast to recruits, liquor up boosters, and feed a small army
of university suits with a paid vacation in the Arizona sun.
The accounting office no doubt held a much
different view. It surely knew that, like nearly all bowls, the Insight was
designed to plunder all it could from a college treasury.
The bloodbath began the moment the contract was
signed. Minnesota was obligated to write a check for 10,000 tickets, which
were supposed to be resold to fans. Never mind that even the best of teams
struggle to unload such sums. For middling squads like the Gophers, it was
nothing more than a way for the men in funny yellow blazers who ran the
Insight to grab piles of money from a public university.
Minnesota managed to sell just 901 seats. After
kicking another 900 to the band, administrators, and cherished hangers-on,
the school was forced to eat $476,000 worth of useless tickets.
The contract also required the team to show up a
week early, if only to burn as much school money as possible at the
restaurants and retailers of Greater Phoenix.
One would think school administrators would protest
such gall. But one would be wrong. They were quick to see the advantages of
a luxury vacation on the school's dime. So they happily signed off.
The school's traveling party was larded up with 722
people, including players, band members, and faculty. Airfare alone ran
$542,000. Toss in hotels and meals, and the school had blown $1.3 million
before the opening kickoff.
The ballsiest part of all: None of it was
necessary.
Minnesota and Iowa State sit less than 200 miles
apart. Their teams were providing the game. Their bands supplied the
halftime entertainment. In fact, the Insight offered nothing — save for warm
weather — that the schools couldn't have done better themselves.
Had the game been played in Minneapolis, the teams
could have sold more tickets and put on a profitable game, since Big Ten
matches typically generate $1 million to $2 million — not knee-bending
losses.
Yet none of this was ever considered. Thanks to an
alliance of unblushing incompetence and corruption, college football long
ago decided to outsource its most valuable asset — its post-season earnings.
The scheme plays out each year on the ostensibly
pristine fields of amateur athletics. Bowl executives grant themselves
breathtaking salaries. The games, meanwhile, provide coaches, athletic
directors, and the suits who nominally supervise them with an unending
stream of bonuses.
Everyone else picks up the tab.
There's a reason cities hosting Super Bowls or
rounds of March Madness bid with buffets of giveaways just to land the
tourist traffic: If you want a taste, you have to pay.
College football is the only sport that gives away
its postseason revenues. Its business model is akin to Walmart keeping its
profits for the first 10 months of the year, then letting Value World host
its holiday sales.
This is an especially hazardous form of capitalism
for the nation's universities, which have been bloodied by ever-diving state
funding combined with double-digit tuition hikes. And contrary to popular
belief, their athletic departments just widen the damage.
Depending upon the year, only about 20 of the 120
athletic departments featuring Division I football actually pay for
themselves. The rest require students and taxpayers to ride to the rescue.
Minnesota is typical. From 2006 to 2009, the
Gophers went to three Insight Bowls. Their bill for unsold tickets alone was
well over $1 million. At the same time, their athletic department needed a
$25 million infusion over five years just to break even.
These kinds of losses could be allayed if college
football simply cut out the middlemen — the bowls — and took its postseason
in-house by adopting a playoff system. Instead, universities have chosen to
hand their money away in a deal that's at best moronic, and at worst an epic
swindle.
The racket works like this: Through required
purchases of anywhere from 10,000 to 17,500 tickets, schools essentially pay
for the right to appear in a bowl. The bowls keep the ticket and sponsorship
money. Bowl execs also negotiate their own TV contracts.
After taking 50 percent to 60 percent off the top,
the bowls then write checks to the teams' conferences. The conferences, in
turn, split that money among their schools. (Profits from the five Bowl
Championship Series games are spread to varying degrees among all
conferences.)
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Endpoint Security is Changing Fast," by Richi Jennings, Computer
World, December 14, 2011 ---
http://blogs.computerworld.com/19426/the_endpoint_protection_you_need_in_2012
Thank you Jerry Trites for the heads up ---
http://uwcisa-assurance.blogspot.com/
Sophisticated social engineering techniques for
hacking are becoming the norm. And it is moving fast, such that traditional
tools don't do the job any more. Advanced Persistent Threat (APT) is one of
the manifestations of this trend. It involves sending malware to people
disguised in something that is likely to appear to them and to fool them.
APT messages are very customized, based on knowledge of a person that is
obtained from information available in the internet, through such social
media as Facebook and perhaps other sources.They can even follow shortly
after a person performs some action, such as paying bills on their bank
website. In such a case, they might receive a message that their transaction
has failed, or that their account has gone into an overdraft and they should
log in (to a bogus account) and verify it. There are countless variations.
Most of us are aware of many of these messages and
don't get fooled by them. However, there is a possibility that one variation
might be sufficiently relevant that we are fooled, and it might only take
once to cause a lot of damage.
Companies are exposed because all of their
employees are exposed, and might inadvertently expose corporate assets to
theft or damage.
Various solutions are available, many cloud based,
that are particularly designed to keep up with the rapidly changing trends
in this area. It is imperative to keep up with these tools. Such knee jerk
reactions as prohibiting employees from using Facebook and the like just
won't work. But some clearly defined and carefully designed policies around
the use of corporate computers, resources and IDs are badly needed.
Continued in article
Bob Jensen's threads on computing and networking security ---
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection
PwC already dmitted its guilt and already apologized.
"PwC Accused of Breaking Financial Rules Again," Big Four Blog,
December 16, 2011
PwC is being probed for its reporting of client
assets held by Barclays Capital Securities Ltd. to see if the Big4 firm
broke financial rules.
The UK’s Accountancy and Actuarial Discipline Board
is investigating PwC’s reports to the Financial Services Authority on
Barclays’s compliance with rules about separating client assets from other
assets. In January, the FSA fined Barclays £1.12 million (about $1.7
million) after concluding that the bank failed to put client money in
separated and protected accounts. At issue was £752 million ($1.16 billion)
in client assets.
PwC told Business Week that they “will cooperated
fully with the AADB investigation and we will be defending our work
vigorously,” adding that “the focus of the AADB is on cases which raise
important issues affecting the public interest.”
The AADB is also seeking a fine of £1.5 million
against PwC for its role on a client-money account issue with JPMorgan Chase
& Co.’s London activities. The fine would be the highest ever levied for
such a case.
PwC lawyer Tim Dutton has previously told a London
tribunal that the fine should be capped at £1 million because the firm has
admitted its guilt and already apologized.
Bob Jensen's threads on PwC are at
http://www.trinity.edu/rjensen/Fraud001.htm
Credit Scoring Models in the U.S. ---
http://en.wikipedia.org/wiki/Credit_score_%28United_States%29
FICO ---
http://en.wikipedia.org/wiki/FICO
"A Credit Score That Tracks You More Closely," by Tra Siegel Bernard,
The New York Times, December 2, 2011 ---
Click Here
http://www.nytimes.com/2011/12/03/your-money/credit-scores/corelogics-new-credit-score-exposes-even-more-of-your-financial-life.html?_r=1
Anyone who has recently applied for a mortgage
knows that lenders are already looking much more closely at your financial
affairs. But soon, they’ll be able to easily delve into the deepest recesses
of your financial life, accessing information that never before appeared on
your credit report.
This week, a company called CoreLogic introduced a
new type of credit file, which is based on the giant repository of consumer
data it maintains on just about everything that most of the traditional
credit bureaus do not: missed rental payments that have gone into
collection, any evictions or child support judgments, as well as any
applications for payday loans, along with your repayment history.
The new report also includes any property tax liens
and whether you’ve fallen behind on your homeowner’s association dues. It
may reflect that you now owe more than your house is worth or if you own any
other real estate properties outright. It also is supposed to catch
mortgages made by smaller lenders that the big credit bureaus may have
missed.
The idea, CoreLogic says, is to provide lenders
with more details about prospective borrowers, supplementing what they
already know through the more traditional credit reports furnished by the
big three credit bureaus, Equifax, Experian and TransUnion. Moreover,
CoreLogic has formed a partnership with FICO — the provider of one of the
most popular credit scores used by lenders — which will formulate a new
consumer score based on the new data.
Perhaps it’s not surprising that a company decided
to pull together this information, since much of it is already publicly
available. But because it comes on top of all the other information that’s
being collected about you — your exact location at every minute, where
you’ve been on the Web — you can’t help but feel that some of these
companies know more about your activities than your spouse.
While the CoreScore credit report became available
to all types of lenders on Wednesday, the actual score, which will be ready
in March, is being created specifically for mortgage and home equity
lenders, though it could eventually be developed for other types of credit.
For many consumers, the files are likely to reveal
black marks that previously went undetected, which may damage an otherwise
clean record. But the companies contend that it works both ways: The added
information could help consumers with thin credit files by illustrating
positive behaviors elsewhere, say making timely rent payments.
So why now? Clearly, the two companies saw a
business opportunity. Lenders, who just a few years back looked the other
way, remain particularly skittish about mortgage lending and are looking for
more information about prospective borrowers’ ability to pay their debts.
“Lending is very constrained and origination
volumes need to grow to make for a profitable mortgage business,” said
Joanne Gaskin, director of product management global scoring at FICO. “So
lenders are looking for ways to expand, but to expand safely.”
An estimated 100 million American consumers will
have a CoreScore credit report, while more than 200 million people have
traditional reports from the big three bureaus. Though the new information
can influence a lender’s decision, the new score isn’t replacing the classic
scores used in the automated mortgage underwriting systems kept by Fannie
Mae, Freddie Mac or the Federal Housing Administration, which buy or back
the vast majority of mortgages (though CoreLogic said it has let the
agencies know what it is doing). But the added information may sway a lender
to charge you more (or less) in interest on a mortgage. Lenders of all
stripes, including auto lenders, have access to the reports, and they will
be marketed to employers and insurers, too.
Ms. Gaskin said that FICO was still tweaking the
credit score’s formula. But the next step is to build something that will
try to get even deeper inside your financial mind: The company plans to
create a more sophisticated tool that will predict how you might behave
under different loan terms.
The reason all of this is such a big deal,
according to John Ulzheimer, president of consumer education at
SmartCredit.com, is that CoreLogic already has major inroads with many
lenders. When lenders want to pull your credit file, they go to a company
like CoreLogic, which collects all three reports from the traditional
bureaus, cleans them up a bit and merges them into a more user-friendly
report. “They already have this massive market of mortgage companies that
buy these credit reports from them,” he said. “It’s not like they have to go
out and convince the companies to work with them.”
Continued in article
Bob Jensen's threads on FICO Scores ---
http://www.trinity.edu/rjensen/FraudReporting.htm#FICO
A Teaching Case on Price Fixing and Contingent Liabilities
From The Wall Street Journal Accounting Weekly Review on December 16,
2011
Dirty Secrets in Soap Prices
by:
Max Colchester and Christina Passariello
Dec 09, 2011
Click here to view the full article on WSJ.com
TOPICS: Antitrust
SUMMARY: Procter & Gamble, Henkel AG, and Colgate-Palmolive have
been accused of, and fined for, operating a cartel in order to fix prices of
laundry detergent in France. "The group was helped by a French law that
makes it illegal for shops to sell products below costs. As a result, all
price increases were passed on to consumers." The report issued by French
antitrust authorities detailed how the companies managed the scheme. For
example, "in 1996, four brand directors met in the restaurant La Tête Noire
in a western suburb of Paris. The aim: to ensure that they pitched heir
detergents to supermarkets at pre-agreed prices and notified each other of
any special offers....They allegedly took turns choosing spots for the
clandestine rendezvous....To ensure that few got wind of the fix, those who
attended the meetings...took documents home with them and expensed the
restaurant bills under different names...."
CLASSROOM APPLICATION: Questions ask students to understand the
concept of antitrust and to consider the accounting system violations that
must have happened in order to conceal the price fixing meetings.
QUESTIONS:
1. (Advanced) What is the concept of antitrust? What types of
transactions do antitrust authorities review?
2. (Advanced) What antitrust behaviors were the soap manufacturers
Procter & Gamble, Henkel AG, and Colgate-Palmolive fined for committing?
3. (Introductory) How did these three companies commit these
price-fixing negotiations? Who participated in meetings?
4. (Introductory) What happened to soap pricing after the cartel
amongst the three companies broke apart? How does this provide evidence that
antitrust regulation is effective in its objective?
5. (Advanced) In order to conceal their behaviors, what accounting
control violations did brand directors commit?
Reviewed By: Judy Beckman, University of Rhode Island
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
That some bankers have ended up in
prison is not a matter of scandal, but what is outrageous is the fact that all
the others are free.
Honoré de Balzac
Bankers bet with their bank's capital, not their own. If the bet goes right,
they get a huge bonus; if it misfires, that's the shareholders' problem.
Sebastian Mallaby. Council on Foreign Relations, as quoted by
Avital Louria Hahn, "Missing: How Poor Risk-Management Techniques Contributed
to the Subprime Mess," CFO Magazine, March 2008, Page 53 ---
http://www.cfo.com/article.cfm/10755469/c_10788146?f=magazine_featured
Now that the Fed is going to
bail out these crooks with taxpayer funds makes it all the worse.
Wall Street
Remains Congress to the Core
The boom in corporate mergers
is creating concern that illicit trading ahead of deal announcements is becoming
a systemic problem. It is against the law to trade on inside information about
an imminent merger, of course. But an analysis of the nation’s biggest mergers
over the last 12 months indicates that the securities of 41 percent of the
companies receiving buyout bids exhibited abnormal and suspicious trading in the
days and weeks before those deals became public. For those who bought shares
during these periods of unusual trading, quick gains of as much as 40 percent
were possible.
Gretchen Morgenson, "Whispers of Mergers Set Off Suspicious Trading," The New
York Times, August 27, 2006 ---
Click Here
"Should Some Bankers Be Prosecuted?" by Jeff Madrick and Frank
Partnoy, New York Review of Books, November 10, 2011 ---
http://www.nybooks.com/articles/archives/2011/nov/10/should-some-bankers-be-prosecuted/
Thank you Robert Walker for the heads up!
More than three years have passed since the
old-line investment bank Lehman Brothers stunned the financial markets by
filing for bankruptcy. Several federal government programs have since tried
to rescue the financial system: the $700 billion Troubled Asset Relief
Program, the Federal Reserve’s aggressive expansion of credit, and President
Obama’s additional $800 billion stimulus in 2009. But it is now apparent
that these programs were not sufficient to create the conditions for a full
economic recovery. Today, the unemployment rate remains above 9 percent, and
the annual rate of economic growth has slipped to roughly 1 percent during
the last six months. New crises afflict world markets while the American
economy may again slide into recession after only a tepid recovery from the
worst recession since the Great Depression.
n our article in the last issue,1 we showed that,
contrary to the claims of some analysts, the federally regulated mortgage
agencies, Fannie Mae and Freddie Mac, were not central causes of the crisis.
Rather, private financial firms on Wall Street and around the country
unambiguously and overwhelmingly created the conditions that led to
catastrophe. The risk of losses from the loans and mortgages these firms
routinely bought and sold, particularly the subprime mortgages sold to
low-income borrowers with poor credit, was significantly greater than
regulators realized and was often hidden from investors. Wall Street bankers
made personal fortunes all the while, in substantial part based on profits
from selling the same subprime mortgages in repackaged securities to
investors throughout the world.
Yet thus far, federal agencies have launched few
serious lawsuits against the major financial firms that participated in the
collapse, and not a single criminal charge has been filed against anyone at
a major bank. The federal government has been far more active in rescuing
bankers than prosecuting them.
In September 2011, the Securities and Exchange
Commission asserted that overall it had charged seventy-three persons and
entities with misconduct that led to or arose from the financial crisis,
including misleading investors and concealing risks. But even the SEC’s
highest- profile cases have let the defendants off lightly, and did not lead
to criminal prosecutions. In 2010, Angelo Mozilo, the head of Countrywide
Financial, the nation’s largest subprime mortgage underwriter, settled SEC
charges that he misled mortgage buyers by paying a $22.5 million penalty and
giving up $45 million of his gains. But Mozilo had made $129 million the
year before the crisis began, and nearly another $300 million in the years
before that. He did not have to admit to any guilt.
The biggest SEC settlement thus far, alleging that
Goldman Sachs misled investors about a complex mortgage product—telling
investors to buy what had been conceived by some as a losing proposition—was
for $550 million, a record of which the SEC boasted. But Goldman Sachs
earned nearly $8.5 billion in 2010, the year of the settlement. No
high-level executives at Goldman were sued or fined, and only one junior
banker at Goldman was charged with fraud, in a civil case. A similar suit
against JPMorgan resulted in a $153.6 million fine, but no criminal charges.
Although both the SEC and the Financial Crisis
Inquiry Commission, which investigated the financial crisis, have referred
their own investigations to the Department of Justice, federal prosecutors
have yet to bring a single case based on the private decisions that were at
the core of the financial crisis. In fact, the Justice Department recently
dropped the one broad criminal investigation it was undertaking against the
executives who ran Washington Mutual, one of the nation’s largest and most
aggressive mortgage originators. After hundreds of interviews, the US
attorney concluded that the evidence “does not meet the exacting standards
for criminal charges.” These standards require that evidence of guilt is
“beyond a reasonable doubt.”
This August, at last, a federal regulator launched
sweeping lawsuits alleging fraud by major participants in the mortgage
crisis. The Federal Housing Finance Agency sued seventeen institutions,
including major Wall Street and European banks, over nearly $200 billion of
allegedly deceitful sales of mortgage securities to Fannie Mae and Freddie
Mac, which it oversees. The banks will argue that Fannie and Freddie were
sophisticated investors who could hardly be fooled, and it is unclear at
this early stage how successful these suits will be.
Meanwhile, several state attorneys general are
demanding a settlement for abuses by the businesses that administer
mortgages and collect and distribute mortgage payments. Negotiations are
under way for what may turn out to be moderate settlements, which would
enable the defendants to avoid admitting guilt. But others, particularly
Eric Schneiderman, the New York State attorney general, are more
aggressively pursuing cases against Wall Street, including Goldman Sachs and
Morgan Stanley, and they may yet bring criminal charges.
Successful prosecutions of individuals as well as
their firms would surely have a deterrent effect on Wall Street’s deceptive
activities; they often carry jail terms as well as financial penalties.
Perhaps as important, the failure to bring strong criminal cases also makes
it difficult for most Americans to understand how these crises occurred. Are
they simply to conclude that Wall Street made well- meaning if very big
errors of judgment, as bankers claim, that were rarely if ever illegal or
even knowingly deceptive?
What is stopping prosecution? Apparently not public
opinion. A Pew Research Opinion survey back in 2010 found that three
quarters of Americans said that government policies helped banks and
financial institutions while two thirds said the middle class and poor
received little help. In mid-2011, half of those surveyed by Pew said that
Wall Street hurts the economy more than it helps it.
Many argue that the reluctance of prosecutors
derives from the power and importance of bankers, who remain significant
political contributors and have built substantial lobbying operations. Only
5 percent of congressional bills designed to tighten financial regulations
between 2000 and 2006 passed, while 16 percent of those that loosened such
regulations were approved, according to a study by the International
Monetary Fund.2 The IMF economists found that a major reason was lobbying
efforts. In 2009 and early 2010, financial firms spent $1.3 billion to lobby
Congress during the passage of the Dodd-Frank Act. The financial
reregulation legislation was weakened in such areas as derivatives trading
and shareholder rights, and is being further watered down.
Others claim federal officials fear that punishing
the banks too much will undermine the fragile economic recovery. As one
former Fannie official, now a private financial consultant, recently told
The New York Times, “I am afraid that we risk pushing these guys off of a
cliff and we’re going to have to bail out the banks again.”
The responsibility for reluctance, however, also
lies with the prosecutors and the law itself. A central problem is that
proving financial fraud is much more difficult than proving most other
crimes, and prosecutors are often unwilling to try it. Congress could fix
this by amending federal fraud statutes to require, for example, that
prosecutors merely prove that bankers should have known rather than actually
did know they were deceiving their clients.
But even if Congress does not, it is not too late
for bold federal prosecutors to try to bring a few successful cases. A
handful of wins could create new precedents and common law that would set a
higher and clearer standard for Wall Street, encourage more ethical
practices, deter fraud—and arguably prevent future crises.
Continued in article
Watch the video! (a bit slow loading)
Lynn Turner is Partnoy's co-author of the white paper."Make Markets Be Markets"
"Bring Transparency to Off-Balance Sheet Accounting," by Frank Partnoy,
Roosevelt Institute, March 2010 ---
http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting
Watch the video!
The greatest swindle in the history of the world ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Bob Jensen's threads on how the banking system is rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking
"What the Hell Has Happened to College Sports?" Chronicle of Higher
Education, December 11, 2011 ---
http://chronicle.com/article/What-the-Hell-Has-Happened-to/130071/
Flaunting the NCAA Academic Standards for Top Athletes
"Bad Apples or More?" by Doug Lederman, Inside Highe Ed,
February 7, 2011 ---
http://www.insidehighered.com/news/2011/02/07/ncaa_punishes_almost_half_of_members_of_football_bowl_subdivision_for_major_rules_violations
"North Carolina Admits to Academic Fraud in Sports Program,"
Inside Higher Ed, September 20, 2011 ---
http://www.insidehighered.com/news/2011/09/20/qt#270772
"College athletes studies guided toward
'major in eligibility'," by Jill Steeg et al., USA Today,
November 2008, Page 1A ---
http://www.usatoday.com/sports/college/2008-11-18-majors-cover_N.htm
Steven Cline left
Kansas State University last spring with memories of two years as a
starting defensive lineman for a major-college football team. He
left with a diploma, credits toward a master's degree and a place on
the 2007 Big 12 Conference all-academic team. He also left with
regrets about accomplishing all of this by majoring in social
sciences — a program that drew 34% of the football team's juniors
and seniors last season, compared with about 4% of all juniors and
seniors at Kansas State. Cline says he found not-so-demanding
courses that helped him have success in the classroom and on the
field but did little for his dream of becoming a veterinarian.
"I realize I just
wasted all my efforts in high school and college to get a social
science degree," says Cline, who adds he did poorly in biology as a
freshman, then chose what an athletics academic adviser told him
would be an easier path.
His experience
reflects how the NCAA's toughening of academic requirements for
athletes has helped create an environment in which they are more
likely to graduate than other students — but also more likely to be
clustered in programs without the academic demands most students
face.
Some athletes say
they have pursued — or have been steered to — degree programs that
helped keep them eligible for sports but didn't prepare them for
post-sports careers.
"A major in
eligibility, with a minor in beating the system," says C. Keith
Harrison, an associate professor at the University of Central
Florida, where he is associate director of the Institute of
Diversity and Ethics in Sports.
Special Admission Students in Varsity
Athletics
Many universities
fill the spots on their football squads through the use of “special
admits,” a phrase that means that these students didn’t meet regular
admissions requirements, according to an article and survey in
The Indianapolis Star. While most
colleges have provisions for special admits, which in theory are for
truly special applicants, very few non-athletes benefit. For example,
the Star noted that 76 percent of the freshman football class at Indiana
University at Bloomington is made up of special admits. Among all
freshmen last year, only 2 percent are special admits. Some universities
rely even more on special admits for football, the survey found: the
University of California at Berkeley (95 percent of freshmen football
players, compared to 2 percent for the student body), Texas A&M
University (94 percent vs. 8 percent), the University of Oklahoma (81
percent vs. 2 percent). While some universities didn’t report any
special admits, the Star article quoted athletics officials who are
dubious of these claims. Myles Brand, president of the National
Collegiate Athletic Association, told the newspaper he was surprised by
the extent of special admits, but said the issue was whether
universities provide appropriate help for these students to succeed
academically.
Inside Higher Ed, September 8, 2008 ---
http://www.insidehighered.com/news/2008/09/08/qt
"The Admissions Gap for Big-Time Athletes," by Doug
Lederman, Inside Higher Ed, December 29, 2008 ---
http://www.insidehighered.com/news/2008/12/29/admit
"Academic fraud runs rampant at major universities," by Mike
Finger, San Antonio Express-News, September 2, 2003 ---
http://news.mysanantonio.com/story.cfm?xla=saen&xlb=200&xlc=1058365&xld=200
The first time a coed casually walked up to him,
introduced herself and offered to do his homework, it would have been natural
for Terrance Simmons to be taken aback.
When he learned that his basketball coach at
Minnesota, Clem Haskins, was being forced out as a result of massive NCAA
rules violations, Simmons understandably could have been shocked.
And when he read this spring about another seemingly
endless string of new academic fraud cases — involving people who somehow
didn't learn from the 1999 scandal that was supposed to be a national wake-up
call — one might have expected Simmons to be a bit dismayed.
But he wasn't.
None of it surprised him.
Because the way Simmons sees it, he knew the kind of
world he was getting into from the very beginning.
He remembers sitting in his family's living room in
Louisiana as a prized high school recruit. He remembers college coaches —
"and we're talking about coaches from major universities," he said
— giving him all kinds of reasons to join their programs.
Most of all, he remembers many of those recruiters
making it quite clear that scholastic integrity wasn't exactly their top
priority.
"They didn't come right out and say I didn't
have to go to class," Simmons said, "but it wasn't very hard to read
between the lines."
Likewise, it doesn't take many code-breaking skills
to figure out that academic fraud has become a scourge of epic proportions in
major college athletics.
In the past four years alone, the NCAA has doled out
punishment nine times for academic infractions, ranging from grade tampering
to improper use of tutors. That number doesn't even include all of the schools
involved in the latest outbreak.
In the span of just a few weeks at the end of last
season, the men's basketball teams at Fresno State, Georgia and St.
Bonaventure all removed themselves from postseason play amid reports of fraud.
Those scandals were followed by accusations of
similar violations at Fairfield and Missouri. The possibility of academic
infractions hasn't been ruled out at Baylor, where the basketball program is
already under intense scrutiny after the alleged murder of a player, the
ensuing cover-up and the resignation of coach Dave Bliss.
Simmons, who graduated from Minnesota with a degree
in communications and economics and wasn't involved in the violations that
occurred while he played for the Golden Gophers, thinks the frequency of
reported similar transgressions will grow before it subsides.
Continued in the article
Academic Fraud and Friction at
Florida State University
On Friday,
the National Collegiate Athletic Association announced
that more than 60 athletes at the university had
cheated in two online courses over a year and a half long period, one of
the most serious cases of academic fraud in the NCAA's recent history.
Yet just about all anyone seemed to be able to talk about -- especially
Florida State fans in commenting on the case and
news publications in reporting on it -- is
how the NCAA's penalties (which include requiring Florida State to
vacate an undetermined number of victories in which the cheating
athletes competed) might undermine the legacy of the university's
football coach, Bobby Bowden. Bowden has one fewer career victory than
Pennsylvania State University's longtime coach, Joe Paterno, and if
Florida State has to wipe out as many as 14 football wins from 2007 and
2008, it could end Bowden's chance of being the all-time winningest
coach in big-time college football.
Inside Higher Ed, March 9, 2009 ---
http://www.insidehighered.com/news/2009/03/09/fsu
Compounding FSU's problem is an earlier cheating scandal
20 Florida State University Football Players
Likely to Be Suspended in Cheated Scandal
"Source: Multiple suspensions likely for
Music City Bowl, plus 3 games in 2008," by Mark Schlabach, ESPN.com,
December 18, 2007 ---
http://sports.espn.go.com/ncf/news/story?id=3159534
As many as 20
Florida State football players will be suspended from playing
against Kentucky in the Dec. 31 Gaylord Hotels Music City Bowl, as
well as the first three games of the 2008 season, for their roles in
an alleged cheating scandal involving an Internet-based course, a
source with knowledge of the situation said Tuesday morning.
Florida State
officials are expected to announce the results of the investigation
this week. The source said university officials determined Monday
night the exact number of football players who will be suspended.
Federal privacy laws prohibit the school from releasing names.
. . .
The investigation
already has led to the resignations of two academic assistance
employees who worked with FSU student-athletes. The school revealed
in September that as many as 23 student-athletes were given answers
before taking tests over the Internet.
Further
investigations revealed additional student-athletes were involved in
the cheating, according to the source.
"If the players
fight the suspensions, they'll risk losing all of their
eligibility," a source with knowledge of the situation said Tuesday
morning.
The school's
investigation found that a tutor gave students answers while they
were taking tests and filled in answers on quizzes and typed papers
for students.
Florida State
president T.K. Wetherell, a former Seminoles football player,
reported the initial findings in a letter to the NCAA in September.
Wetherell ordered an
investigation by the university's Office of Audit Services in May
after receiving information an athletics department tutor had
directed one athlete to take an online quiz for another athlete and
then provided the answers.
The tutor implicated
in the audit told investigators he had been providing students with
answers for the test since the fall of 2006, according to a
university report.
Wisconsin was the
last football program to suspend as many as 20 players. Days before
the start of the 2000 regular season, 26 Badgers were given three-
or one-game suspensions for getting unadvertised price breaks at a
shoe store.
Florida State
announced in October that athletics director Dave Hart Jr. will
resign Dec. 31. Wetherell appointed State Rep. William "Bill"
Proctor interim athletics director. Proctor also is a former FSU
football player.
The school announced
last week that longtime football coach Bobby Bowden had agreed to a
one-year contract extension through the 2008 season that will pay
him at least $1.98 million. Bowden, who is in his 32nd season at the
school, is major college football's all-time winningest coach with
373 career victories.
Florida State also
designated offensive coordinator Jimbo Fisher as Bowden's eventual
successor. Fisher's new contract calls for him to replace Bowden by
the end of the 2010 season. If Fisher isn't named FSU's new coach by
then, the school's booster organization would owe him $2.5 million.
Under the terms of the new contract, Fisher would owe Seminoles
boosters $2.5 million if he leaves the school before the end of the
2010 season.
The Seminoles
struggled for the fourth consecutive season in 2007, finishing 7-5
overall, 4-4 in ACC play. It is the fourth consecutive season they
failed to win 10 games, after winning at least 10 games in 14
consecutive seasons, from 1987 to 2000.
Continued in article
Jensen Comment
It ended up being 25 players who were suspended ---
http://www.palmbeachpost.com/sports/content/sports/epaper/2007/12/18/1218fsu.html
Florida State lost to Kentucky in the Music Bowl (35-28)
The Now Infamous Favored
Professor by University of Michigan Athletes
A single University of Michigan professor
taught 294 independent studies for students, 85 percent of them
athletes, from the fall of 2004 to the fall of 2007, according to
The Ann Arbor News. According to the
report, which kicks off a series on Michigan athletics and was based on
seven months of investigation, many athletes reported being steered to
the professor, and said that they earned three or four credits for
meeting with him as little as 15 minutes every two weeks. In addition,
three former athletics department officials said that athletes were
urged to take courses with the professor, John Hagen, to raise their
averages. Transcripts examined by the newspaper showed that students
earned significantly higher grades with Hagen than in their regular
courses. The News reported that Hagen initially denied teaching a high
percentage of athletes in his independent studies, but did not dispute
the accuracy of documents the newspaper shared with him. He did deny
being part of any effort to raise the averages of his students. The
newspaper also said that Michigan’s president and athletics director had
declined to be interviewed for the series.
Inside Higher Ed, March 17, 2008 ---
http://www.insidehighered.com/news/2008/03/17/qt
Question
Has the University of Michigan blocked efforts to investigate its "independent
study" athletics scandals?
In March, The Ann Arbor News
ran a series of articles exploring allegations that many top athletes at
the University of Michigan were
encouraged to enroll in independent study courses with a
professor who allegedly didn’t require much work for great grades. On
Sunday, the newspaper started
a new series — arguing that the university
has blocked efforts by professors to study issues related to athletes
and academics. While university officials have said that they would
provide information sought by faculty members, the series suggests
otherwise.
Inside Higher Education, June 16, 2008 ---
http://www.insidehighered.com/news/2008/06/16/qt
Bob Jensen's threads on athletics controversies in higher education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#Athletics
"The Man Who Busted the ‘Banksters’," Smithsonian, November 29,
2011 ---
http://blogs.smithsonianmag.com/history/2011/11/the-man-who-busted-the-%E2%80%98banksters%E2%80%99/
Three years removed from the stock market crash of
1929, America was in the throes of the Great Depression, with no recovery on
the horizon. As President Herbert Hoover reluctantly campaigned for a second
term, his motorcades and trains were pelted with rotten vegetables and eggs
as he toured a hostile land where shanty towns erected by the homeless had
sprung up. They were called “Hoovervilles,” creating the shameful images
that would define his presidency. Millions of Americans had lost their jobs,
and one in four Americans lost their life savings. Farmers were in ruin, 40
percent of the country’s banks had failed, and industrial stocks had lost 80
percent of their value.
With unemployment hovering at nearly 25 percent in
1932, Hoover was swept out of office in a landslide, and the newly elected
president, Franklin Delano Roosevelt, promised Americans relief. Roosevelt
had decried “the ruthless manipulation of professional gamblers and the
corporate system” that allowed “a few powerful interests to make industrial
cannon fodder of the lives of half the population.” He made it plain that he
would go after the “economic nobles,” and a bank panic on the day of his
inauguration, in March 1933, gave him just the mandate he sought to attack
the economic crisis in his “First 100 Days” campaign. “There must be an end
to a conduct in banking and in business which too often has given to a
sacred trust the likeness of callous and wrongdoing,” he said.
Ferdinand Pecora was an an unlikely answer to what
ailed America at the time. He was a slight, soft-spoken son of Italian
immigrants, and he wore a wide-brimmed fedora and often had a cigar dangling
from his lips. Forced to drop out of school in his teens because his father
was injured in a work-related accident, Pecora ultimately landed a job as a
law clerk and attended New York Law School, passed the New York bar and
became one of just a handful of first-generation Italian lawyers in the
city. In 1918, he became an assistant district attorney. Over the next
decade, he built a reputation as an honest and tenacious prosecutor,
shutting down more than 100 “bucket shops”—illegal brokerage houses where
bets were made on the rise and fall prices of stocks and commodity futures
outside of the regulated market. His introduction to the world of fraudulent
financial dealings would serve him well.
Just months before Hoover left office, Pecora was
appointed chief counsel to the U.S. Senate’s Committee on Banking and
Currency. Assigned to probe the causes of the 1929 crash, he led what became
known as the “Pecora commission,” making front-page news when he called
Charles Mitchell, the head of the largest bank in America, National City
Bank (now Citibank), as his first witness. “Sunshine Charley” strode into
the hearings with a good deal of contempt for both Pecora and his
commission. Though shareholders had taken staggering losses on bank stocks,
Mitchell admitted that he and his top officers had set aside millions of
dollars from the bank in interest-free loans to themselves. Mitchell also
revealed that despite making more than $1 million in bonuses in 1929, he had
paid no taxes due to losses incurred from the sale of diminished National
City stock—to his wife. Pecora revealed that National City had hidden bad
loans by packaging them into securities and pawning them off to unwitting
investors. By the time Mitchell’s testimony made the newspapers, he had been
disgraced, his career had been ruined, and he would soon be forced into a
million-dollar settlement of civil charges of tax evasion. “Mitchell,” said
Senator Carter Glass of Virginia, “more than any 50 men is responsible for
this stock crash.”
The public was just beginning to get a taste for
the retribution that Pecora was dishing out. In June 1933, his image
appeared on the cover of Time magazine, seated at a Senate table, a cigar in
his mouth. Pecora’s hearings had coined a new phrase, “banksters” for the
finance “gangsters” who had imperiled the nation’s economy, and while the
bankers and financiers complained that the theatrics of the Pecora
commission would destroy confidence in the U.S. banking system, Senator
Burton Wheeler of Montana said, “The best way to restore confidence in our
banks is to take these crooked presidents out of the banks and treat them
the same as [we] treated Al Capone.”
President Roosevelt urged Pecora to keep the heat
on. If banks were worried about the hearings destroying confidence,
Roosevelt said, they “should have thought of that when they did the things
that are being exposed now.” Roosevelt even suggested that Pecora call none
other than the financier J.P. Morgan Jr. to testify. When Morgan arrived at
the Senate Caucus Room, surrounded by hot lights, microphones and dozens of
reporters, Senator Glass described the atmosphere as a “circus, and the only
things lacking now are peanuts and colored lemonade.”
Continued in article
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's American History of Fraud ---
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
"SEC Brings Crisis-Era Suits Fannie, Freddie Ex-Executives Face Cases
Stemming From Subprime Disclosures," by Nick Timiraos and Chad Bray, The
Wall Street Journal, December 17, 2011 ---
http://online.wsj.com/article/SB10001424052970203733304577102310955780788.html
U.S. securities regulators accused six former
executives at mortgage firms Fannie Mae and Freddie Mac of playing down the
risks to investors of the firms' foray into subprime loans.
The civil lawsuits, filed Friday by the Securities
and Exchange Commission in Manhattan federal court, rank among the
highest-profile crisis-related cases the government has brought. They are
also the first cases against the top executives at Fannie and Freddie before
their 2008 government takeover, which has cost taxpayers $151 billion.
The complaints name as defendants former Freddie
Mac Chief Executive Richard Syron and former Fannie Mae CEO Daniel Mudd, who
is currently chief executive of Fortress Investment Group LLC. The agency
also accused four other high-ranking former executives at Freddie Mac and
Fannie Mae.
The executives and their lawyers said they would
vigorously contest the charges.
At the heart of the lawsuits is the government's
contention that Fannie and Freddie executives knowingly misled investors
about the volumes of risky mortgages that the companies were purchasing as
the housing boom turned to bust. Documents
Complaints: SEC v. Fannie Mae | SEC v. Freddie Mac
Nonprosecution Agreements: Fannie Mae | Freddie Mac
"Fannie Mae and Freddie Mac executives told the
world that their subprime exposure was substantially smaller than it really
was," said Robert Khuzami, director of the SEC's Enforcement Division.
The lawsuits come as the SEC and other
law-enforcement agencies face rising political pressure to take more
aggressive action against financial companies over the 2008 crisis. Federal
authorities have a mixed record in cases tied to the subprime-mortgage bust,
with no major cases having been brought in some of the highest-profile
blowups, such as the September 2008 bankruptcy of Lehman Brothers Holdings
Inc.
Continued in article
Jensen Comment
So why is the Department of Justice and the SEC backing off of bigger criminals
like the banksters of Countrywide, Washington Mutual, Citigroup, JP Morgan,
Merrill Lynch, Lehman Brothers, Bear Sterns, etc.?
The Justice Department can put criminals in jail, but the SEC can only go for
fines. The problem is that when dealing with banksters the SEC has a track
record of pittance, chicken feed fines. Steal a dollar and the SEC will go
after less than a dime from a bankster.
Another CBS Sixty Minutes Blockbuster (December 4, 2011)
"Prosecuting Wall Street"
Free download for a short while
http://www.cbsnews.com/8301-18560_162-57336042/prosecuting-wall-street/?tag=pop;stories
Note that this episode features my hero Frank Partnoy
Key provisions of Sarbox with respect to the Sixty Minutes revelations:
The act also covers issues such as
auditor independence,
corporate governance,
internal control assessment, and enhanced financial disclosure.
Sarbanes–Oxley Section 404: Assessment of internal control ---
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Sarbanes.E2.80.93Oxley_Section_404:_Assessment_of_internal_control
Both the corporate CEO and the external auditing firm are to
explicitly sign off on the following and are subject (turns out to be a
ha, ha joke) to huge fines and jail time for egregious failure to
do so:
- Assess both the design and operating
effectiveness of selected internal controls related to significant
accounts and relevant assertions, in the context of material
misstatement risks;
- Understand the flow of transactions,
including IT aspects, in sufficient detail to identify points at
which a misstatement could arise;
- Evaluate company-level (entity-level)
controls, which correspond to the components of the
COSO framework;
- Perform a fraud risk assessment;
- Evaluate controls designed to
prevent or detect fraud, including management override of
controls;
- Evaluate controls over the period-end
financial
reporting process;
- Scale the assessment based on the size and
complexity of the company;
- Rely on management's work based on factors
such as competency, objectivity, and risk;
- Conclude on the adequacy of internal
control over financial reporting.
Most importantly as far as the CPA auditing firms are concerned is
that Sarbox gave those firms both a responsibility to verify that
internal controls were effective and the authority to charge more
(possibly twice as much) for each audit. Whereas in the 1990s auditing
was becoming less and less profitable, Sarbox made the auditing industry
quite prosperous after 2002.
There's a great gap between the theory of Sarbox and its enforcement
In theory, the U.S. Justice Department (including the FBI) is to enforce
the provisions of Section 404 and subject top corporate executives and audit
firm partners to huge fines (personal fines beyond corporate fines) and jail
time for signing off on Section 404 provisions that they know to be false.
But to date, there has not been one indictment in enormous frauds where the
Justice Department knows that executives signed off on Section 404 with
intentional lies.
In theory the SEC is to also enforce Section 404, but the SEC in Frank
Partnoy's words is toothless. The SEC cannot send anybody to jail. And the
SEC has established what seems to be a policy of fining white collar
criminals less than 20% of the haul, thereby making white collar crime
profitable even if you get caught. Thus, white collar criminals willingly
pay their SEC fines and ride off into the sunset with a life of luxury
awaiting.
And thus we come to the December 4 Sixty Minutes module that features
two of the most egregious failures to enforce Section 404:
The astonishing case of CitiBank
The astonishing case of Countrywide (now part of Bank of America)
The Astonishing Case of CitiBank
What makes the Sixty Minutes show most interesting are the whistle
blowing revelations by a former Citi Vice President in Charge of Fraud
Investigations
- What has to make the CitiBank revelations the most embarrassing
revelations on the Sixty Minutes blockbuster emphasis that top
CItiBank executives were not only informed by a Vice President in Charge of
Fraud Investigation of huge internal control inadequacies, the outside U.S.
government top accountant, the U.S. Comptroller General, sent an official
letter to CitiBank executives notifying them of their Section 404 internal
control failures.
- Eight days after receiving the official warning from the government, the
CEO of CitiBank flipped his middle finger at the U.S. Comptroller General
and signed off on Section 404 provisions that he'd also been informed by his
Vice President of Fraud and his Internal Auditing Department were being
violated.
http://www.bloomberg.com/news/2011-02-24/what-vikram-pandit-knew-and-when-he-knew-it-commentary-by-jonathan-weil.html
- What the Sixty Minutes show failed to mention is that the
external auditing firm of KPMG also flipped a bird at the U.S. Comptroller
General and signed off on the adequacy of its client's internal controls.
- A few months thereafter CitiBank begged for and got hundreds of billions
in bailout money from the U.S. Government to say afloat.
- The implication is that CitiBank and the other Wall Street corporations
are just to0 big to prosecute by the Justice Department. The Justice
Department official interviewed on the Sixty Minutes show sounded
like hollow brass wimpy taking hands off orders from higher authorities in
the Justice Department.
- The SEC worked out a settlement with CitiBank, but the fine is such a
joke that the judge in the case has to date refused to accept the
settlement. This is so typical of SEC hand slapping settlements --- and the
hand slaps are with a feather.
The astonishing case of Countrywide (now part of Bank of America)
- Countrywide Financial before 2007 was the largest issuer of mortgages on
Main Streets throughout the nation and by estimates of one of its own
whistle blowing executives in charge of internal fraud investigations over
60% of those mortgages were fraudulent.
- After Bank of America purchased the bankrupt Countrywide, BofA top
executives tried to buy off the Countrywide executive in charge of fraud
investigations to keep him from testifying. When he refused BofA fired him.
- Whereas the Justice Department has not even attempted to indict
Countrywide executives and the Countrywide auditing firm of Grant Thornton
(later replaced by KPMG) to bring indictments for Section 404 violations,
the FTC did work out an absurdly low settlement of $108 million for 450,000
borrowers paying "excessive fees" and the attorneys for those borrowers ---
http://www.nytimes.com/2011/07/21/business/countrywide-to-pay-borrowers-108-million-in-settlement.html
This had nothing to do with the massive mortgage frauds committed by
Countrywide.
- Former Countrywide CEO Angelo Mozilo settled the SEC’s Largest-Ever
Financial Penalty ($22.5 million) Against a Public Company's Senior
Executive
http://sec.gov/news/press/2010/2010-197.htm
The CBS Sixty Minutes show estimated that this is less than 20% of what he
stole and leaves us with the impression that Mozilo deserves jail time but
will probably never be charged by the Justice Department.
I was disappointed in the CBS Sixty Minutes show in that it completely
ignored the complicity of the auditing firms to sign off on the Section 404
violations of the big Wall Street banks and other huge banks that failed.
Washington Mutual was the largest bank in the world to ever go bankrupt. Its
auditor, Deloitte, settled with the SEC for Washington Mutual for
$18.5 million. This isn't even a hand slap relative to the billions lost by
WaMu's investors and creditors.
No jail time is expected for any partners of the negligent auditing
firms. .KPMG settled for peanuts with Countrywide for
$24 million of negligence and New Century for
$45 million of negligence costing investors billions.
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's threads on how white collar crime pays even if you get caught
---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays
The Wall Street Journal, in an investigational piece
(December 20, 2010), reported that five spine surgeons at Norton Hospital in
Louisville, Kentucky, who performed the third-most spinal fusions of Medicare
patients in the country, had received more than $7 million in “royalties” from
Medtronic, the nation’s biggest manufacturer of spinal implants.
"Physician Payment Sunshine Act Signals New Dawn for Compliance," by
Joseph J. Feltes, MD News, November 14, 2011 ---
http://www.mdnews.com/news/2011_11/05737_novdec2011_physician-payment-sunshine
Once upon a time, physicians and their families
used to be able to enjoy exotic cruises sponsored by pharmaceutical
companies where their only obligation, it seems, was to sign in briefly at
sparsely attended meetings before embarking on offshore adventures. It’s
been awhile since the sun slowly set on the wake of the last ship’s
sybaritic junket.
Today, the Federal Physician Payment Sunshine Act —
part of national healthcare reform — signals a new dawn of transparency,
compliance obligations, and regulatory scrutiny. Beginning January 1, 2012,
manufacturers of drugs, devices, biologicals or medical supplies, covered by
Medicare, Medicaid or other federal healthcare program, must report to the
Department of Health and Human Services all payments or transfers of value
they make to physicians or
teaching hospitals.
The Sunshine Act applies to payments or transfers
of value covering a broad array of activities, including: consulting fees;
compensation for services other than consulting; honoraria; gifts;
entertainment; food; travel (including specified destinations); education
and research; charitable contributions; royalties or licenses; current or
prospective ownership or investment interests (other than through publicly
traded securities or mutual funds); direct compensation for serving as
faculty or as a speaker for medical education programs; grants; or falling
within the catchall “any other nature of payment or other transfer of value
as defined by the Secretary of HHS.” Additionally, if the payment or
transfer of value relates to marketing, education, or research which
pertains to a covered drug, biological, device or supply, that also must be
reported, along with the name of the covered product.
Remaining outside the aura are certain excluded
items that need not have to be reported, such as the transfer of items
having a value of less than $10 (unless the items exceed an annual aggregate
of $100); product samples for patient use not intended to be sold;
educational materials that directly benefit patients or are intended for
patient use; the loan of a covered device for 90 days or less for evaluation
purposes; items or services provided under a contractual warranty; certain
discounts and rebates; and in-kind items used to provide charity care, to
name a few.
Covered manufacturers must disclose to the
Secretary in electronic form the name of the physician (or teaching
hospital); the physician’s business address, specialty and National Provider
Identifier; the amount of payment or value of transfer; the dates on which
payments or transfers are made; a description of whether payment or transfer
was made in cash or cash equivalents, in-kind items or services, or stocks
or stock options. This information will be stored in a database.
While the burden of reporting rests with covered
manufacturers, access to and use of the electronic information stored in the
database can be accessed by the media, consumers, the Office for Inspector
General, and by prosecutors. That could pose potential liability risk to
physicians for non-compliance with federal Anti-Kickback (illegal
remuneration), the Stark laws (financial interest), or the False Claims Act
(ill-gotten gain). It also could create potential reputational damage —
fairly or unfairly — if it were to appear that research was flawed or a
physician’s choice of drug was influenced by payments or other transfers of
value.
The Wall Street Journal, in an investigational
piece (December 20, 2010), reported that five spine surgeons at Norton
Hospital in Louisville, Kentucky, who performed the third-most spinal
fusions of Medicare patients in the country, had received more than $7
million in “royalties” from Medtronic, the nation’s biggest manufacturer of
spinal implants.
The WSJ indicated that it had “mined” certain
Medicare databases as the source of its exposé. The new Sunshine Act likely
will eliminate the need to dig deeply, since the information will be
collected in one database, there for the picking. Critics of the law,
including Thomas Peter Stossel, MD, Professor of Medicine at Harvard Medical
School, objects that the term “Sunshine” carries with it the “implicit aura
of corruption,” which indeed is unfortunate.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's healthcare news threads are at
http://www.trinity.edu/rjensen/Health.htm
"Undercover Researchers Expose Chinese Internet Water Army: An undercover
team of computer scientists reveals the practices of people who are paid to post
on websites," Technology Review, November 22, 2011 ---
http://www.technologyreview.com/blog/arxiv/27357/
Thank you Glen Gray for the heads up
In China, paid posters are known as the Internet
Water Army because they are ready and willing to 'flood' the internet for
whoever is willing to pay. The flood can consist of comments, gossip and
information (or disinformation) and there seems to be plenty of demand for
this army's services.
This is an insidious tide. Positive recommendations
can make a huge difference to a product's sales but can equally drive a
competitor out of the market. When companies spend millions launching new
goods and services, it's easy to understand why they might want to use every
tool at their disposal to achieve success.
The loser in all this is the consumer who is conned
into making a purchase decision based on false premises. And for the moment,
consumers have little legal redress or even ways to spot the practice.
Today, Cheng Chen at the University of Victoria in
Canada and a few pals describe how Cheng worked undercover as a paid poster
on Chinese websites to understand how the Internet Water Army works. He and
his friends then used what he learnt to create software that can spot paid
posters automatically.
Paid posting is a well-managed activity involving
thousands of individuals and tens of thousands of different online IDs. The
posters are usually given a task to register on a website and then to start
generating content in the form of posts, articles, links to websites and
videos, even carrying out Q&A sessions.
Often, this content is pre-prepared or the posters
receive detailed instructions on the type of things they can say. And there
is even a quality control team who check that the posts meet a certain
'quality' threshold. A post would not be validated if it is deleted by the
host or was composed of garbled words, for example.
Having worked undercover to find out how the system
worked, Cheng and co then studied the pattern of posts that appeared on a
couple of big Chinese websites: Sina.com and Sohu.com. In particular, they
studied the comments on several news stories about two companies that they
suspected of paying posters and who were involved in a public spat over each
other's services.
The Sina dataset consisted of over 500 users making
more than 20,000 comments; the Sohu dataset involved over 200 users and more
than 1000 comments.
Cheng and co went through all the posts manually
identifying those they believed were from paid posters and then set about
looking for patterns in their behaviour that can differentiate them from
legitimate users. (Just how accurate were there initial impressions is a
potential problem, they admit, but the same one that spam filters also have
to deal with.)
They discovered that paid posters tend to post more
new comments than replies to other comments. They also post more often with
50 per cent of them posting every 2.5 minutes on average. They also move on
from a discussion more quickly than legitimate users, discarding their IDs
and never using them again.
What's more, the content they post is measurably
different. These workers are paid by the volume and so often take shortcuts,
cutting and pasting the same content many times. This would normally
invalidate their posts but only if it is spotted by the quality control
team.
So Cheng and co built some software to look for
repetitions and similarities in messages as well as the other behaviours
they'd identified. They then tested it on the dataset they'd downloaded from
Sina and Sohu and found it to be remarkably good, with an accuracy of 88 per
cent in spotting paid posters. "Our test results with real-world datasets
show a very promising performance," they say.
That's an impressive piece of work and a good first
step towards combating this problem, although they'll need to test it on a
much wider range of datasets. Nevertheless, these guys have the basis of a
software package that will weed out a significant fraction of paid posters,
provided these people conform to the stereotype that Cheng and co have
measured.
And therein lies the rub. As soon as the first
version of the software hits the market, paid posters will learn to modify
their behaviour in a way that games the system. What Cheng and co have
started is a cat and mouse game just like those that plague the antivirus
and spam filtering industries.
And that means, the battle ahead with the Internet
Water Army will be long and hard.
Continued in article
Bob Jensen's threads on computer and network security are at
http://www.trinity.edu/rjensen/ecommerce/000start.htm#SpecialSection
Remember when the 2007/2008 severe economic collapse was caused by "street
events":
Fraud on Main Street ---
issuance of "poison" mortgages (many
subprime)
that lenders knew could never be repaid by borrowers.
Lenders didn't care about loan defaults because they sold the poison mortgages
to suckers like Fannie and Freddie.
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze
For low income borrowers the Federal Government forced Fannie and Freddie to buy
up the poisoned mortgages ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Rubble
Math Error on Wall Street --- issuance of CDO portfolio
bonds laced with a portion of healthy mortgages and a portion of poisoned
mortgages.
The math error is based on an assumption that risk of poison can be diversified
and diluted using a risk diversification formula.
The risk diversification formula is called the
Gaussian copula function
The formula made a fatal assumption that loan defaults would be random events
and not correlated.
When the real estate bubble burst, home values plunged and loan defaults became
correlated and enormous.
Fraud on Wall Street
--- all the happenings on Wall Street were not merely
innocent math errors
Banks and investment banks were selling CDO bonds that they knew were
overvalued.
Credit rating agencies knew they were giving AAA high credit ratings to bonds
that would collapse.
The banking industry used powerful friends in government to pass its default
losses on to taxpayers.
Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
Can the 2008 investment banking failure be traced to a math error?
Recipe for Disaster: The Formula That Killed Wall Street ---
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
Link forwarded by Jim Mahar ---
http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html
Some highlights:
"For five years, Li's formula, known as a
Gaussian copula function, looked like an unambiguously positive
breakthrough, a piece of financial technology that allowed hugely
complex risks to be modeled with more ease and accuracy than ever
before. With his brilliant spark of mathematical legerdemain, Li made it
possible for traders to sell vast quantities of new securities,
expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond
investors and Wall Street banks to ratings agencies and regulators. And
it became so deeply entrenched—and was making people so much money—that
warnings about its limitations were largely ignored.
Then the model fell apart." The article goes on to show that correlations
are at the heart of the problem.
"The reason that ratings agencies and investors
felt so safe with the triple-A tranches was that they believed there was
no way hundreds of homeowners would all default on their loans at the
same time. One person might lose his job, another might fall ill. But
those are individual calamities that don't affect the mortgage pool much
as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and
tranching still hadn't solved all the problems of mortgage-pool risk.
Some things, like falling house prices, affect a large number of people
at once. If home values in your neighborhood decline and you lose some
of your equity, there's a good chance your neighbors will lose theirs as
well. If, as a result, you default on your mortgage, there's a higher
probability they will default, too. That's called correlation—the degree
to which one variable moves in line with another—and measuring it is an
important part of determining how risky mortgage bonds are."
I would highly recommend reading the entire thing that gets much more
involved with the
actual formula etc.
The
“math error” might truly be have been an error or it might have simply been a
gamble with what was perceived as miniscule odds of total market failure.
Something similar happened in the case of the trillion-dollar disastrous 1993
collapse of Long Term Capital Management formed by Nobel Prize winning
economists and their doctoral students who took similar gambles that ignored the
“miniscule odds” of world market collapse -- -
http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM
History
(Long Term
Capital Management and CDO Gaussian Coppola failures)
Repeats Itself in Over a Billion Lost in MF Global
"Models
(formulas) Behaving Badly Led to MF’s Global Collapse – People Too,"
by Aaron Task, Yahoo Finance, November 21, 2011 ---
http://finance.yahoo.com/blogs/daily-ticker/models-behaving-badly-led-mf-global-collapse-people-174954374.html
"The entire system has been utterly destroyed by
the MF Global collapse," Ann Barnhardt, founder and CEO of Barnhardt Capital
Management, declared last week in a letter to clients.
Whether that's hyperbole or not is a matter of
opinion, but MF Global's collapse — and the inability of investigators to
find about $1.2 billion in "missing" customer funds, which is twice the
amount previously thought — has only further undermined confidence among
investors and market participants alike.
Emanuel Derman, a professor at Columbia University
and former Goldman Sachs managing director, says
MF Global was undone by
an over-reliance on short-term funding, which dried up as revelations of its
leveraged bets on European sovereign debt came to light.
In the accompanying video, Derman says MF Global
was much more like Long Term Capital Management than Goldman Sachs, where he
worked on the risk committee for then-CEO John Corzine.
A widely respected expert on risk management,
Derman is the author of a new book
Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to
Disaster, on Wall Street and in Life.
As discussed in the accompanying video, Derman says
the "idolatry" of financial models puts Wall Street firms — if not the
entire banking system — at risk of catastrophe. MF Global was an extreme
example of what can happen when the models — and the people who run them --
behave badly, but if Barnhardt is even a little bit right, expect more
casualties to emerge.
Jensen Comment
MF Global's auditor (PwC) will now be ensnared, as seems appropriate in this
case, the massive lawsuits that are certain to take place in the future ---
http://www.trinity.edu/rjensen/Fraud001.htm
Question
Where did the missing MF Global funds end up?
Hint:
The the word "repo" sound familiar?
http://en.wikipedia.org/wiki/Repurchase_agreement
"MF Global and the great Wall St re-hypothecation scandal," by
Chrisopher Elias, Reuters, December 7, 2011 ---
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
A legal loophole in international brokerage
regulations means that few, if any, clients of MF
Global are
likely to get their money back. Although
details of the drama are still unfolding, it
appears that MF Global and some of its Wall Street counterparts have been
actively and aggressively circumventing U.S. securities rules at the expense
(quite literally) of their clients.
MF Global's bankruptcy revelations concerning
missing client money suggest that funds were not inadvertently misplaced or
gobbled up in MF’s dying hours, but were instead appropriated as part of a
mass Wall St manipulation of brokerage rules that allowed for the wholesale
acquisition and sale of client funds through re-hypothecation. A loophole
appears to have allowed MF Global, and many others, to use its own clients’
funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake
and eat it too in the world of finance, MF Global shows how you can have
your cake, eat it, eat someone else’s cake and then let your clients pick up
the bill. Hard cheese for many as their dough goes missing.
FINDING FUNDS
Current estimates for the shortfall in MF Global
customer funds have now reached $1.2 billion as revelations break that the
use of client money appears widespread. Up until now the assumption has been
that the funds missing had been misappropriated by MF Global as it
desperately sought to avoid bankruptcy.
Sadly, the truth is likely to be that MF Global
took advantage of an asymmetry in brokerage borrowing rules that allow firms
to legally use client money to buy assets in their own name - a legal
loophole that may mean that MF Global clients never get their money back.
REPO RECAP
First a quick recap. By now the story of MF
Global’s demise is strikingly familiar. MF plowed money into an
off-balance-sheet maneuver known as a repo, or sale and repurchase
agreement. A repo involves a firm borrowing money and putting up assets as
collateral, assets it promises to repurchase later. Repos are a common way
for firms to generate money but are not normally off-balance sheet and are
instead treated as “financing” under accountancy rules.
MF Global used a version of an off-balance-sheet
repo called a "repo-to-maturity." The repo-to-maturity involved borrowing
billions of dollars backed by huge sums of sovereign debt, all of which was
due to expire at the same time as the loan itself. With the collateral and
the loans becoming due simultaneously, MF Global was entitled to treat the
transaction as a “sale” under U.S. GAAP. This allowed the firm to move $16.5
billion off its balance sheet, most of it debt from Italy, Spain, Belgium,
Portugal and Ireland.
Backed by the European Financial Stability Facility
(EFSF), it was a clever bet (at least in theory) that certain Eurozone bonds
would remain default free whilst yields would continue to grow. Ultimately,
however, it proved to be MF Global’s downfall as margin calls and its high
level of leverage sucked out capital from the firm. For more information on
the repo used by MF Global please see Business
Law Currents MF
Global – Slayed by the Grim Repo?
Puzzling many, though, were the huge sums involved.
How was MF Global able to “lose” $1.2 billion of its clients’ money and
acquire a sovereign debt position of $6.3 billion – a position more than
five times the firm’s book value, or net worth? The answer it seems lies in
its exploitation of a loophole between UK and U.S. brokerage rules on the
use of clients funds known as “re-hypothecation”.
RE-HYPOTHECATION
By way of background, hypothecation is when a
borrower pledges collateral to secure a debt. The borrower retains ownership
of the collateral but is “hypothetically” controlled by the creditor, who
has a right to seize possession if the borrower defaults.
In the U.S., this legal right takes the form of a
lien and in the UK generally in the form of a legal charge. A simple example
of a hypothecation is a mortgage, in which a borrower legally owns the home,
but the bank holds a right to take possession of the property if the
borrower should default.
In investment banking, assets deposited with a
broker will be hypothecated such that a broker may sell securities if an
investor fails to keep up credit payments or if the securities drop in value
and the investor fails to respond to a margin call (a request for more
capital).
Re-hypothecation occurs when a bank or broker
re-uses collateral posted by clients, such as hedge funds, to back the
broker’s own trades and borrowings. The practice of re-hypothecation runs
into the trillions of dollars and is perfectly legal. It is justified by
brokers on the basis that it is a capital efficient way of financing their
operations much to the chagrin of hedge funds.
U.S. RULES
Under the U.S. Federal Reserve Board's Regulation T
and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value
of 140% of the client's liability to the prime broker. For example, assume a
customer has deposited $500 in securities and has a debt deficit of $200,
resulting in net equity of $300. The broker-dealer can re-hypothecate up to
$280 (140 per cent. x $200) of these assets.
But in the UK, there is absolutely no
statutory limit on
the amount that can be re-hypothecated. In fact, brokers are free to
re-hypothecate all and even more than the assets deposited by clients.
Instead it is up to clients to negotiate a limit or prohibition on
re-hypothecation. On the above example a UK broker could, and frequently
would, re-hypothecate 100% of the pledged securities ($500).
This asymmetry of rules makes exploiting the more
lax UK regime incredibly attractive to international brokerage firms such as
MF Global or Lehman Brothers which can use European subsidiaries to create
pools of funding for their U.S. operations, without the bother of complying
with U.S. restrictions.
In fact, by 2007, re-hypothecation had grown so
large that it accounted for half of the activity of the shadow banking
system. Prior to Lehman Brothers collapse, the International
Monetary Fund (IMF)
calculated that U.S. banks were receiving $4 trillion worth of funding by
re-hypothecation, much of which was sourced from the UK. With assets being
re-hypothecated many times over (known as “churn”), the original collateral
being used may have been as little as $1 trillion – a quarter of the
financial footprint created through re-hypothecation.
BEWARE THE BRITS: CIRCUMVENTING U.S. RULES
Keen to get in on the action, U.S. prime brokers
have been making judicious use of European subsidiaries. Because
re-hypothecation is so profitable for prime brokers, many prime brokerage
agreements provide for a U.S. client’s assets to be transferred to the prime
broker’s UK subsidiary to circumvent U.S. rehypothecation rules.
Under subtle brokerage contractual provisions, U.S.
investors can find that their assets vanish from the U.S. and appear instead
in the UK, despite contact with an ostensibly American organisation.
Potentially as simple as having MF Global UK
Limited, an English subsidiary, enter into a prime brokerage agreement with
a customer, a U.S. based prime broker can immediately take advantage of the
UK’s unrestricted re-hypothecation rules.
LEHMAN LESSONS
In fact this is exactly what Lehman Brothers did
through Lehman Brothers International (Europe) (LBIE), an English subsidiary
to which most U.S. hedge fund assets were transferred. Once transferred to
the UK based company, assets were re-hypothecated many times over, meaning
that when the debt carousel stopped, and Lehman Brothers collapsed, many
U.S. funds found that their assets had simply vanished.
A prime broker need not even require that an
investor (eg hedge fund) sign all agreements with a European subsidiary to
take advantage of the loophole. In fact, in Lehman’s case many funds signed
a prime brokerage agreement with Lehman Brothers Inc (a U.S. company) but
margin-lending agreements and securities-lending agreements with LBIE in the
UK (normally conducted under a Global Master Securities Lending Agreement).
These agreements permitted Lehman to transfer
client assets between various affiliates without the fund’s express consent,
despite the fact that the main agreement had been under U.S. law. As a
result of these peripheral agreements, all or most of its clients’ assets
found their way down to LBIE.
MF RE-HYPOTHECATION PROVISION
A similar re-hypothecation provision can be seen in
MF Global’s U.S. client agreements. MF Global’s Customer Agreement for
trading in cash commodities, commodity futures, security futures, options,
and forward contracts, securities, foreign futures and options and
currencies includes the following clause:
“7. Consent
To Loan Or PledgeYou hereby grant us the right, in accordance
with Applicable Law, to borrow, pledge, repledge, transfer,
hypothecate, rehypothecate,loan, or invest any of the
Collateral, including, without limitation, utilizing the Collateral to
purchase or sell securities pursuant to repurchase agreements [repos] or
reverse repurchase agreements with any party, in each case without
notice to you, and we shall have no obligation to retain a like amount
of similar Collateral in our possession and control.”
In its quarterly report, MF Global disclosed that
by June 2011 it had repledged (re-hypothecated) $70 million, including
securities received under resale agreements. With these transactions taking
place off-balance sheet it is difficult to pin down the exact entity which
was used to re-hypothecate such large sums of money but regulatory filings
and letters from MF Global’s administrators contain some clues.
According to a letter from KPMG to MF Global
clients, when MF Global collapsed, its UK subsidiary MF Global UK Limited
had over 10,000 accounts. MF Global disclosed in March 2011 that it had
significant credit risk from its European subsidiary from “counterparties
with whom we place both our own funds or securities and those
of our clients”.
CAUSTIC COLLATERAL
Matters get even worse when we consider what has
for the last 6 years counted as collateral under re-hypothecation rules.
Despite the fact that there may only be a quarter
of the collateral in the world to back these transactions, successive U.S.
governments have softened the requirements for what can back a
re-hypothecation transaction.
Beginning with Clinton-era liberalisation, rules
were eased that had until 2000 limited the use of re-hypothecated funds to
U.S. Treasury, state and municipal obligations. These rules were slowly cut
away (from 2000-2005) so that customer money could be used to enter into
repurchase agreements (repos), buy foreign bonds, money market funds and
other assorted securities.
Hence, when MF Global conceived of its Eurozone
repo ruse, client funds were waiting to be plundered for investment in AA
rated European sovereign debt, despite the fact that many of its hedge fund
clients may have been betting against the performance of those very same
bonds.
OFF BALANCE SHEET
As well as collateral risk, re-hypothecation
creates significant counterparty risk and its off-balance sheet treatment
contains many hidden nasties. Even without circumventing U.S. limits on
re-hypothecation, the off-balance sheet treatment means that the amount of
leverage (gearing) and systemic risk created in the system by
re-hypothecation is staggering.
Re-hypothecation transactions are off-balance sheet
and are therefore unrestricted by balance sheet controls. Whereas on balance
sheet transactions necessitate only appearing as an asset/liability on one
bank’s balance sheet and not another, off-balance sheet transactions can,
and frequently do, appear on multiple banks’ financial statements. What this
creates is chains of counterparty risk, where multiple re-hypothecation
borrowers use the same collateral over and over again. Essentially, it is a
chain of debt obligations that is only as strong as its weakest link.
With collateral being re-hypothecated to a factor
of four (according to IMF estimates), the actual capital backing banks
re-hypothecation transactions may be as little as 25%. This churning of
collateral means that re-hypothecation transactions have been creating
enormous amounts of liquidity, much of which has no real asset backing.
The lack of balance sheet recognition of
re-hypothecation was noted in
Jefferies’ recent 10Q (emphasis added):
“Note 7. Collateralized Transactions
We pledge securities in connection with repurchase agreements,
securities lending agreements and other secured arrangements, including
clearing arrangements. The pledge of our securities is in connection
with our mortgage−backed securities, corporate bond, government and
agency securities and equities businesses. Counterparties generally have
the right to sell or repledge the collateral.Pledged
securities that can be sold or repledged by the counterparty are
included within Financial instruments owned and noted as Securities
pledged on our Consolidated Statements of Financial Condition. We
receive securities as collateral in connection with resale agreements,
securities borrowings and customer margin loans. In
many instances, we are permitted by contract or custom to rehypothecate
securities received as collateral. These securities maybe used to secure
repurchase agreements, enter into security lending or derivative
transactions or cover short positions. At
August 31, 2011 and November 30, 2010, the approximate fair value of
securities received as collateral by us that may be sold or repledged
was approximately $25.9 billion and $22.3 billion, respectively. At
August 31, 2011 and November 30, 2010, a substantial portion of the
securities received by us had been sold or repledged.
We engage in securities for securities
transactions in which we are the borrower of securities and provide
other securities as collateral rather than cash. As
no cash is provided under these types of transactions, we, as borrower,
treat these as noncash transactions and do not recognize assets or
liabilities on the Consolidated Statements of Financial Condition. The
securities pledged as collateral under these transactions are included
within the total amount of Financial instruments owned and noted as
Securities pledged on our Consolidated Statements of Financial
Condition.
According to Jefferies’ most recent Annual Report
it had re-hypothecated $22.3 billion (in fair value) of assets in 2011
including government debt, asset backed securities, derivatives and
corporate equity- that’s just $15 billion shy of Jefferies total on balance
sheet assets of $37 billion.
HYPER-HYPOTHECATION
With weak collateral rules and a level of leverage
that would make Archimedes tremble, firms have been piling into
re-hypothecation activity with startling abandon. A review of filings
reveals a staggering level of activity in what may be the world’s largest
ever credit bubble.
Bob Jensen's threads on the Bankruptcy Examiner's Report in the Lehman
Brothers Repo 105/108 scandals --- |
www.trinity.edu/rjensen/Fraud001.htm
"Mortgage Defaults Drive 88% Jump in Suspected Fraud," Journal of
Accountancy, September 28, 2011 ---
http://www.journalofaccountancy.com/Web/20114624.htm
From The Economist, October 8-14, Page 12
America's Justice Department and New York State's
attorney general filed separate civil lawsuits against BNY Mellon for
allegedly defrauding clients by systematically using the foreign exchange
rate on transactions that best suited the bank.
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Billings for Services Never Rendered
"SEC Charges Morgan Stanley Investment Management for Improper Fee
Arrangement," SEC, November 14, 2011 ---
http://sec.gov/news/press/2011/2011-244.htm
Morgan Stanley settled the charges for $3.3 million fine
Bob Jensen's Fraud Updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
A Multiple Choice Test
"What's Your Fraud IQ? Do you know how to prevent fraud? Test your basic
understanding of ways to protect personal and corporate information," by
Dawn Taylor and Andi McNeal, Journal of Accountancy, November 2011 ---
http://www.journalofaccountancy.com/Issues/2011/Nov/20114391.htm
Bob Jensen's threads on fraud detection and prevention ---
http://www.trinity.edu/rjensen/FraudReporting.htm
The Fed Audit
Socialist Bernie Sanders is probably my least favorite senator alongside Barbara
(mam) Boxer. But he does make some important revelations in the posting below.
The first ever GAO audit of the Federal Reserve was conducted in early 2011
due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed
last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent
Senator, led the charge for a Federal Reserve audit in the Senate, but watered
down the original language of the house bill (HR1207), so that a complete audit
would not be carried out. Ben Bernanke, Alan Greenspan, and various other
bankers vehemently opposed the audit and lied to Congress about the effects an
audit would have on markets. Nevertheless, the results of the first audit in the
Federal Reserve nearly 100 year history were posted on Senator Sanders webpage
in July.
The list of
institutions that received the most money from the Federal Reserve can be found
on page 131 of the GAO Audit and is as follows:
Citigroup: $2.5
trillion($2,500,000,000,000)
Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
Bank of America : $1.344 trillion ($1,344,000,000,000)
Barclays PLC ( United Kingdom ): $868 billion* ($868,000,000,000)
Bear Sterns: $853 billion ($853,000,000,000)
Goldman Sachs: $814 billion ($814,000,000,000)
Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
JP Morgan Chase: $391 billion ($391,000,000,000)
Deutsche Bank ( Germany ): $354 billion ($354,000,000,000)
UBS ( Switzerland ): $287 billion ($287,000,000,000)
Credit Suisse ( Switzerland ): $262 billion ($262,000,000,000)
Lehman Brothers: $183 billion ($183,000,000,000)
Bank of Scotland ( United Kingdom ): $181 billion ($181,000,000,000)
BNP Paribas (France): $175 billion ($175,000,000,000)
"The Fed Audit," by Bernie Sanders, Independent Senator from Vermont, July
21, 2011 ---
http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3
The first top-to-bottom audit of the Federal
Reserve uncovered eye-popping new details about how the U.S. provided a
whopping $16 trillion in secret loans to bail out American and foreign banks
and businesses during the worst economic crisis since the Great Depression.
An amendment by Sen. Bernie Sanders to the Wall Street reform law passed one
year ago this week directed the Government
Accountability Office to conduct the study. "As a
result of this audit, we now know that the Federal Reserve provided more
than $16 trillion in total financial assistance to some of the largest
financial institutions and corporations in the United States and throughout
the world," said Sanders. "This is a clear case of socialism for the rich
and rugged, you're-on-your-own individualism for everyone else."
Among the investigation's key findings is that the
Fed unilaterally provided trillions of dollars in financial assistance to
foreign banks and corporations from South Korea to Scotland, according to
the GAO report. "No agency of the United States government should be allowed
to bailout a foreign bank or corporation without the direct approval of
Congress and the president," Sanders said.
The non-partisan, investigative arm of Congress
also determined that the Fed lacks a comprehensive system to deal with
conflicts of interest, despite the serious potential for abuse. In fact,
according to the report, the Fed provided conflict of interest waivers to
employees and private contractors so they could keep investments in the same
financial institutions and corporations that were given emergency loans.
For example, the CEO of JP Morgan Chase served on
the New York Fed's board of directors at the same time that his bank
received more than $390 billion in financial assistance from the Fed.
Moreover, JP Morgan Chase served as one of the clearing banks for the Fed's
emergency lending programs.
In another disturbing finding, the GAO said that on
Sept. 19, 2008, William Dudley, who is now the New York Fed president, was
granted a waiver to let him keep investments in AIG and General Electric at
the same time AIG and GE were given bailout funds. One reason the Fed did
not make Dudley sell his holdings, according to the audit, was that it might
have created the appearance of a conflict of interest.
To Sanders, the conclusion is simple. "No one who
works for a firm receiving direct financial assistance from the Fed should
be allowed to sit on the Fed's board of directors or be employed by the
Fed," he said.
The investigation also revealed that the Fed
outsourced most of its emergency lending programs to private contractors,
many of which also were recipients of extremely low-interest and then-secret
loans.
The Fed outsourced virtually all of the operations
of their emergency lending programs to private contractors like JP Morgan
Chase, Morgan Stanley, and Wells Fargo. The same firms also received
trillions of dollars in Fed loans at near-zero interest rates. Altogether
some two-thirds of the contracts that the Fed awarded to manage its
emergency lending programs were no-bid contracts. Morgan Stanley was given
the largest no-bid contract worth $108.4 million to help manage the Fed
bailout of AIG.
A more detailed GAO investigation into potential
conflicts of interest at the Fed is due on Oct. 18, but Sanders said one
thing already is abundantly clear. "The Federal Reserve must be reformed to
serve the needs of working families, not just CEOs on Wall Street."
To read the GAO report, click here
http://sanders.senate.gov/imo/media/doc/GAO Fed Investigation.pdf
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
"ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J.
Edward Ketz, Grumpy Old Accountants, November 7, 2011
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/357#more-357
Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---
http://www.trinity.edu/rjensen/FraudEnron.htm
"Have We Got a Convention Center to Sell You! From Boston to Austin,
politicians spend money on fancy white elephants," by Steven Malanga, The
Wall Street Journal, December 31, 2011 ---
http://online.wsj.com/article/SB10001424052970204720204577126603702369654.html#mod=djemEditorialPage_t
. . .
Then there's Boston, perhaps the quintessential
example of a city that interprets failure in the convention business as a
license to spend more on it. Massachusetts officials shelled out $230
million to renovate Hynes Convention Center in the late 1980s. When the
makeover produced virtually no economic bounce, officials decided that the
city needed a new, $800 million center financed by a hotel occupancy excise
tax, a rental-car surcharge, and the sale of taxi medallions. Opened in
2004, that new Boston Convention and Exhibition Center was projected (by
consultants hired by the state) to have Boston renting some 670,000
additional hotel rooms annually within five years. Instead, Beantown saw
just 310,000 additional hotel room rentals in 2009.
Now Massachusetts officials want to spend $2
billion to double the size of the Boston Convention Center and add a hotel.
Of course, they predict that the expanded facilities would bring an
additional $222 million into the local economy each year, including 140,000
hotel room rentals. Even with these bullish projections, officials claim
that the hotel would need $200 million in public subsidies.
"The whole thing is a racket," Boston Globe
columnist Jeff Jacoby recently observed. "Once again the politicos will
expand their empire. Once again crony capitalism will enrich a handful of
wired business operators. And once again Joe and Jane Taxpayer will pay
through the nose. How many times must we see this movie before we finally
shut it off?"
Many times, if officials in Baltimore have their
way. Several years ago they built a $300 million city-owned hotel, (the
Hilton Baltimore Convention Center Hotel) to boost the fortunes of the
city's struggling convention center. Having opened in 2008, the hotel lost
$11 million last year. Now the city is considering a public-private
expansion plan that would add a downtown arena, an additional convention
hotel, and 400,000 feet of new convention space at the cost of $400 million
in public money.
The list goes on—everywhere from Columbus, Ohio, to
Dallas, Austin, Phoenix and places in between. One problem is that
optimistic projections about new facilities fail to account for how other
cities are expanding, too. Why did Minneapolis struggle to hit projected
targets after it enlarged its convention center in 2002? "Other cities
expanded right along with us,'' Minneapolis's convention center director,
Jeff Johnson, said this year.
The surest sign that taxpayers should be leery of
such public investments is that officials have changed their sales pitch.
Convention and meeting centers shouldn't be judged, they now say, by how
many hotel rooms, restaurants, and local attractions they help fill. That's
"narrow-minded thinking," said James Rooney of the Massachusetts Convention
Center Authority this year. Instead, as Boston Mayor Thomas Menino has said,
expanding a convention center can "demonstrate to the world that we have
unlimited confidence in our city and what it can do, not only as a
convention destination but as the center of the most important trends in
hospitality, science, health and education."
Continued in article
Jensen Comment
When I still lived in San Antonio, taxpayers went on the hook for an Alamo Dome
Convention Center that cost nearly $300 million intended to also be the home of
the NBA San Antonio Spurs. Almost the instant the ribbon was cut on the the
Alamo Dome, the San Antonio Spurs asked taxpayers to fund their own new arena.
These things sell because the promoters say that the funding will come for taxes
on visitors to the city rather than local taxpayers. What they don't tell you is
that the new taxes event revenues do not pay millions of dollars in operating
and vacancy losses. Those losses are then quietly billed to local taxpayers.
Welcome to the world of urban crony business fraud
"Tracing the L.A. Coliseum's fiscal decay As the landmark stadium's
finances nose-dived, commissioners took little notice," by Paul Pringle and
Rong-Gong Lin II, Los Angeles Times, December
http://www.latimes.com/news/local/la-me-coliseum-commission-20111231,0,338108.story
Thank you Glen Gray for the heads up.
Month after month, the financial forecasts for the
Los Angeles Memorial Coliseum seemed as sunny as could be.
General Manager Patrick Lynch would tell his bosses
on the Coliseum Commission that the box office from rave concerts was brisk
and a lucrative deal for naming rights to the stadium could be just around
the corner, records show.
For the most part, the nine-member commission took
the affable Lynch at his word. And why not? As L.A. County Supervisor Don
Knabe, who si
Despite Lynch's assurances, there was a different
reality: The Coliseum had become mired in conflicts of interest, spending
irregularities and loose accounting that eroded its fiscal foundation and
had all but bankrupted its future as one of the nation's most-storied public
landmarks.
Lynch resigned in February after The Times began a
series of reports on the Coliseum's finances. He and his former events
manager, Todd DeStefano, who quit shortly before the first story appeared,
are the subjects of a criminal investigation by county prosecutors involving
alleged kickbacks and self-dealing. State regulators and the Los Angeles
city controller's office have also launched inquiries.
Three other Coliseum managers and employees have
gone on leave or left the stadium's employment after The Times'
investigation questioned the propriety of their financial dealings. All deny
wrongdoing.
How a multimillion-dollar scandal at such a
high-profile venue could go undetected for so long is not entirely clear.
But the groundwork for alleged abuse lay in a history of clumsy stewardship,
inattentiveness by commission members and a cozy relationship between Lynch
and his overseers.
The commission was empowered to safeguard the
interests of the state, county and city. But it became more of a sportsmen's
club than a watchdog.
"The place was on autopilot," said mall developer
Rick Caruso, who resigned as a commissioner earlier this year. He was often
a lone voice in challenging Lynch, with scant results. "There was no
accountability."
The Coliseum is now so broke that it is unable to
make upgrades promised in its lease with USC, whose football Trojans are the
stadium's main tenant. As a result, the panel is about to turn over
day-to-day control of the taxpayer-owned property to the private school.
Jessica Levinson, a Loyola Law School professor who
studies public corruption, described the commission's failure to spot
warning signs of the scandal as a "great tragedy."
"This was below the standards of how you would run
a neighborhood lemonade stand," she said.
The Coliseum, completed in 1923 when Warren G.
Harding was in the White House, was heralded as a symbol of a burgeoning
metropolis' ambitions to play on the global stage.
Continued in article
Bob Jensen's Fraud Updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
How Professor Stapel committed academic research fraud is becoming known,
but why he did so remains a mystery
"The Fraud Who Fooled (Almost) Everyone," by Tom Bartlett,
Chronicle of Higher Education, November 3. 2011 ---
http://chronicle.com/blogs/percolator/the-fraud-who-fooled-almost-everyone/27917
It’s
now known that Diederik Stapel, the Dutch social
psychologist who was suspended by Tilburg University in September, faked
dozens of studies and managed not to get caught for years despite his
outrageous fabrications. But how, exactly, did he do it?
That question won’t be fully answered for a
while—the investigation into the vast fraud is continuing. But a
just-released
English version of Tilburg’s interim report on
Stapel’s deception begins to fill in some of the details of how he
manipulated those who worked with him.
This was, according to the report, his modus
operandi:
Continued in article
Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize
"Plagiarism, Profanity, Fraud, and Design," by Josh
Keller, Chronicle of Higher Education, November 4, 2011 ---
Click Here
http://chronicle.com/blogs/wiredcampus/crosstalk-plagiarism-profanity-fraud-and-design/34119?sid=wc&utm_source=wc&utm_medium=en
Plagiarism:
A study of 24 million college papers by
Turnitin, which makes plagiarism-detection software, finds that
college students are
most likely to lift copy from Wikipedia, Yahoo Answers, and
Slideshare. The study counted all
suspiciously similar language and did not consider whether students
cited the sources they lifted from. Via the Scholarly Kitchen, where
Phil Davis
noted some of the study’s limitations.
Profanity:
A Web site promoting Oberlin
College co-created by its social media coordinator,
Why the F*** Should I Choose Oberlin?,
drew varied reactions and plenty of attention
last week. The site, which notes it is not officially affiliated
with Oberlin, collects profanity-laced quotes about why Oberlin is
great. Georgy Cohen
interviews the co-creator, Ma’ayan
Plaut, who says she has “tacit and unofficial approval” from her
boss. On Higher Ed Marketing, Andrew Careaga says his inner
15-year-old thought the site is brilliant, but his 51-year-old
“shook his jaded head.”
Fraud:
Educause offers advice on how colleges can
respond to a Dear Colleague letter from
the U.S. Department of Education that asks colleges to limit
student-aid fraud in online programs.
Design:
Keith Hampson argues that good
design will play an increasingly important role
in the college student experience as
college move online. “Somehow, though, digital higher education—both
its software and content—has managed to remain untouched by good
design. Design is not even on the agenda,” he says.
Bob Jensen's threads on higher education controversies are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm
Question
Why did Joe Paterno sell his relatively modest home to his wife for $1?"
"Paterno Passed On Home to His Wife for $1," by Mark Viera and Pete
Thamel, The New York Times, November 15, 2011 ---
http://www.nytimes.com/2011/11/16/sports/ncaafootball/in-july-paterno-transferred-ownership-of-home-to-his-wife-for-1.html?_r=3
Joe Paterno transferred full ownership of his house
to his wife, Sue, for $1 in July, less than four months before a sexual
abuse scandal engulfed his Penn State football program and the university.
Documents filed in Centre County, Pa., show that on
July 21, Paterno’s house near campus was turned over to “Suzanne P. Paterno,
trustee” for a dollar plus “love and affection.” The couple had previously
held joint ownership of the house, which they bought in 1969 for $58,000.
¶ According to documents filed with the county, the
house’s fair-market value was listed at $594,484.40. Wick Sollers, a lawyer
for Paterno, said in an e-mail that the Paternos had been engaged in a
“multiyear estate planning program,” and the transfer “was simply one
element of that plan.” He said it had nothing to do with the scandal.
¶ Paterno, who was fired as the football coach at
the university last week, has been judged harshly by many for failing to
take more aggressive action when he learned of a suspected sexual assault of
a child by one of his former top assistants.
¶ Some legal experts, in trying to gauge the legal
exposure of the university and its top officials to lawsuits brought by
suspected victims of the assistant, Jerry Sandusky, have theorized that
Paterno could be a target of civil actions. On Nov. 5, Sandusky, Penn
State’s former defensive coordinator, was charged with 40 counts related to
the reported sexual abuse of eight boys over 15 years. Paterno, 84, was
among those called to give testimony before a grand jury during the
investigation, which began in 2009.
¶ Experts in estate planning and tax law, in
interviews, cautioned that it would be hard to determine the Paternos’
motivation simply from the available documents. It appears the family house
had been the subject of years of complex and confusing transactions.
¶ Lawrence A. Frolik, a law professor at the
University of Pittsburgh who specializes in elder law, said that he had
“never heard” of a husband selling his share of a house for $1 to his spouse
for tax or government assistance purposes.
¶ “I can’t see any tax advantages,” Frolik said.
“If someone told me that, my reaction would be, ‘Are they hoping to shield
assets in case if there’s personal liability?’ ” He added, “It sounds like
an attempt to avoid personal liability in having assets in his wife’s name.”
¶ Two lawyers examined the available documents in
recent days. Neither wanted to be identified because they were not directly
involved in the case or the property transaction. One of the experts said it
appeared to be an explicit effort to financially shield Joe Paterno. The
other regarded the July transaction, at least on its face, as benign.
Continued in article
Jensen Comment
Ruth Madoff was not allowed to keep assets in her name except for assets that
were not gifts from her husband or passed through her husband's financial
transactions. For example, I think she was allowed to keep her family
inheritance.
This kind of "fraud" is extremely common, albeit illegal, where home titles
and other assets of a parent are passed on to children in anticipation of having
Medicaid pay for the parent's eventual nursing home care. Medicare does not pay
for long-term nursing home care, and Obamacare just eliminated this extremely
expensive benefit that would've greatly driven up the price of medical
insurance.
Audit Failure: The GAO Reported No Problems Amidst All This Massive Fraud
Note that most of these particular workers retire long before age 65 and are
fraudulently collecting full Social Security and Medicare benefits intended for
truly disabled persons
"The Public-Union Albatross What it means when 90% of an agency's workers
(fraudulently) retire with disability benefits," by Philip K. Howard,
The Wall Street Journal, November 9, 2011 ---
http://online.wsj.com/article/SB10001424052970204190704577024321510926692.html?mod=djemEditorialPage_t
The indictment of seven Long Island Rail Road
workers for disability fraud last week cast a spotlight on a troubled
government agency. Until recently, over 90% of LIRR workers retired with a
disability—even those who worked desk jobs—adding about $36,000 to their
annual pensions. The cost to New York taxpayers over the past decade was
$300 million.
As one investigator put it, fraud of this kind
"became a culture of sorts among the LIRR workers, who took to gathering in
doctor's waiting rooms bragging to each [other] about their disabilities
while simultaneously talking about their golf game." How could almost every
employee think fraud was the right thing to do?
The LIRR disability epidemic is hardly unique—82%
of senior California state troopers are "disabled" in their last year before
retirement. Pension abuses are so common—for example, "spiking" pensions
with excess overtime in the last year of employment—that they're taken for
granted.
Governors in Wisconsin and Ohio this year have led
well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing]
the collective bargaining rights of public employees." What are these
so-called "rights"? The dispute has focused on rich benefit packages that
are drowning public budgets. Far more important is the lack of productivity.
"I've never seen anyone terminated for
incompetence," observed a long-time human relations official in New York
City. In Cincinnati, police personnel records must be expunged every few
years—making periodic misconduct essentially unaccountable. Over the past
decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a
cost of $3.5 million.
Collective-bargaining rights have made government
virtually unmanageable. Promotions, reassignments and layoffs are dictated
by rigid rules, without any opportunity for managerial judgment. In 2010,
shortly after receiving an award as best first-year teacher in Wisconsin,
Megan Sampson had to be let go under "last in, first out" provisions of the
union contract.
Even what task someone should do on a given day is
subject to detailed rules. Last year, when a virus disabled two computers in
a shared federal office in Washington, D.C., the IT technician fixed one but
said he was unable to fix the other because it wasn't listed on his form.
Making things work better is an affront to union
prerogatives. The refuse-collection union in Toledo sued when the city
proposed consolidating garbage collection with the surrounding county.
(Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts
eliminated funding to mow the grass along the roads, the union sued to stop
the county executive from giving the job to inmates.
No decision is too small for union micromanagement.
Under the New York City union contract, when new equipment is installed the
city must reopen collective bargaining "for the sole purpose of negotiating
with the union on the practical impact, if any, such equipment has on the
affected employees." Trying to get ideas from public employees can be
illegal. A deputy mayor of New York City was "warned not to talk with
employees in order to get suggestions" because it might violate the "direct
dealing law."
How inefficient is this system? Ten percent? Thirty
percent? Pause on the math here. Over 20 million people work for federal,
state and local government, or one in seven workers in America. Their
salaries and benefits total roughly $1.5 trillion of taxpayer funds each
year (about 10% of GDP). They spend another $2 trillion. If government could
be run more efficiently by 30%, that would result in annual savings worth $1
trillion.
What's amazing is that anything gets done in
government. This is a tribute to countless public employees who render
public service, against all odds, by their personal pride and willpower,
despite having to wrestle daily choices through a slimy bureaucracy.
One huge hurdle stands in the way of making
government manageable: public unions. The
head of the American Federation of State, County and Municipal Employees
recently bragged that the union had contributed $90 million in the 2010
off-year election alone. Where did the
unions get all that money? The power is imbedded in an artificial legal
construct—a "collective-bargaining right" that deducts union dues from all
public employees, whether or not they want to belong to the union.
Some states, such as Indiana, have succeeded in
eliminating this requirement. I would go further: America should ban
political contributions by public unions, by constitutional amendment if
necessary. Government is supposed to serve the public, not public employees.
America must bulldoze the current system and start
over. Only then can we balance budgets and restore competence, dignity and
purpose to public service.
Bob Jensen's threads on the entitlements disaster are at
http://www.trinity.edu/rjensen/Entitlements.htm
Audit Failure: The GAO Reported No Problems
Amidst All This Fraud
This is what a union site claims about the Long Island Rail Road workers for
disability ---
http://www.railroad.net/forums/viewtopic.php?f=63&t=55668&start=300
What you won't read in Newsday or the New York
Times from non-copyrighted labor source:
GAO Audit Gives Railroad Occupational Disability
Program a Clean Bill of Health
The United States Government Accountability Office
(GAO) just issued its second review of the Railroad Retirement Board
Occupational Disability Program. And once again it found no problems.
“This was a major accomplishment for rail labor,”
says TCU President Bob Scardelletti. “Occupational Disability is a vitally
important program for members who need it. It’s the best in the country, and
this Report will help keep it that way.”
The increased government attention on Occupational
Disability began when New York politicians and newspapers began a full scale
campaign targeting Long Island Rail Road workers’ alleged abuse of the
program. After extensive scandalous press reports, public hearings, wild
allegations, and a congressionally requested GAO investigation, no
improprieties were found.
The Railroad Retirement Board did institute some
oversight measures specific to Long Island Rail Road to make sure that no
abuses were occurring, reflecting the fact that the rate of applications for
occupational disability were higher than on any other railroad. But these
oversight procedures wound up finding that all Long Island applications that
were approved were properly reviewed, legitimate and in accordance with
existing law and regulations. And that fact was endorsed by the first GAO
audit of Long Island Rail Road claims in a report released in September,
2009.
Not satisfied with the GAO’s findings, two
Congressman – John Mica of Florida and Bill Shuster of Pennsylvania – on
March 18, 2009 formally requested the GAO to “conduct a systematic review of
RRB’s occupational disability program”, not just limited to Long Island Rail
Road.
The Congressmen’ request prompted yet another GAO
review of the occupational disability program. In their just-issued response
to the two Congressmen, the GAO reported they found no improprieties and
made no recommendations.
“Once again efforts to
find fault with the occupational disability have come up empty,” says
President Scardelletti. “That’s because the program is functioning as it
was intended – to be a last resort for rail workers who because of
illness or injury can no longer perform their jobs. It is a necessary
benefit and it is not abused by those who unfortunately must apply for it.
We will continue to do everything in our power to preserve it as is.”
Jensen Comment
The program seems to be "working as intended." Either 90% of all the railroad's
workers are becoming disabled on the job or the system is "intended" to defraud
the taxpayers. One sign of that it was a fraud is that the same doctor (now
indicted) was receiving millions of dollars from the union to sign phony
disability claims.
And there are some who advocate that the GAO take over the private sector
auditing because there will be less fraud, greater independence, and more
competent auditors than anything the Big Four and other auditing firms can come
up with. Baloney!
"Europe's Entitlement Reckoning From Greece to Italy to France, the
welfare state is in crisis," The Wall Street Journal, November 9,
2011 ---
In the European economic crisis, all roads lead
through Rome. The markets have raised the price of financing Italy's mammoth
debt to new highs, and on Tuesday Silvio Berlusconi became the second
euro-zone prime minister, after Greece's George Papandreou, to resign this
week. His departure may keep the world's eighth largest economy solvent for
the time being, but it hardly addresses the root of the problem.
In Italy, as in Greece, Spain and Portugal and
eventually France, the welfare-entitlement state has hit a wall. Successive
governments on the Continent, right and left, have financed generous
entitlements with high taxes and towering piles of debt. Their economies
have failed to grow fast enough to keep up, and last year the money started
to run out. The reckoning has arrived.
If the first step in curing an addiction is to
acknowledge it, there is little sign of that in Europe. The solutions on
offer are to spend still more money, to have the Germans bail out everybody
else, or to ditch the euro so bankrupt countries can again devalue their own
currencies. France's latest debt solution includes raising corporate,
capitals gains and sales taxes.
Yet Europe's problem isn't the euro. If it were,
Hungary, Iceland and Latvia—none of which use the euro—would have been
spared their painful days of reckoning. The same applies for Britain. Europe
is in a debt spiral brought about by spendthrift, overweening and
inefficient governments.
This is a crisis of the welfare state, and Italy is
a model basket case. Mario Monti, who is tipped to lead a new government of
technocrats, once described the Italian economy as a case of "self-inflicted
strangulation." Government debt is 120% of GDP, making Italy the world's
third largest borrower after the U.S. and Japan. Its economy last grew at
more than 2% a year in 2000.
An aging and shrinking population is a symptom, but
not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million
people are 65 or older and make increasingly expensive claims on state-paid
pensions and other benefits. In fast-growing Turkey, only 6.3% fit that
demographic. Italian women have on average 1.2 children, putting the
country's birth rate at 207th out of 221 countries.
But the bulk of the responsibility lies with
politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each
time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the
longest serving premier in post-war Italy, from 2001 to 2006, controlled
parliament and could have pushed through reforms. He didn't. Promises to
lower taxes and hack away at regulations and protections for Italy's
powerful guilds—from taxi drivers to pharmacists to journalists—were broken.
"It is not difficult to rule Italy," Benito
Mussolini once said, "it is useless." The so-called concertazione, or
concert, of Italian coalition politics that brings together numerous parties
in the Parliament makes for unstable and indecisive governments. So does the
fear prominent in many European countries that any serious reform will
provoke street protests. An unhappy byproduct of a welfare state is that it
creates powerful interests that will fight to the last to preserve their
free lunch, no matter the cost to the country.
But now hard choices can no longer be postponed.
And the solution to Europe's debt crisis must begin with reforming, if not
dismantling, the welfare state. Europe rose from the economic grave in the
1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the
1980s-'90s, and it can grow again. A decade ago, Germany was called the
"sick man of Europe," bedeviled by Italian-like economic problems. But a
center-left coalition, supported by trade unions and German society,
overhauled labor and welfare codes and set the stage for the current (if
still modest) export-led revival in Germany.
The road from Rome may now lead to Paris, Madrid
and other debt-ridden European countries. But this is no cause for U.S.
chortling, because that same road also leads to Sacramento, Albany and
Washington. America's federal debt was 35.7% of GDP in 2007, but it was
61.3% last year and is rising on an Italian trajectory. The lesson of Italy,
and most of the rest of Europe, is never to become a high-tax, slow-growth
entitlement state, because the inevitable reckoning is nasty, brutish and
not short.
"U.S. Expected to Charge Executive Tied to Galleon Case," by Azam
Ahmed, Peter Lattman, and Ben Protess, The New York Times, October 25,
2011 ---
http://dealbook.nytimes.com/2011/10/25/gupta-faces-criminal-charges/?nl=todaysheadlines&emc=tha2
Federal prosecutors are expected to file criminal
charges on Wednesday against Rajat K. Gupta, the most prominent business
executive ensnared in an aggressive insider trading investigation, according
to people briefed on the case.
The case against Mr. Gupta, 62, who is expected to
surrender to F.B.I. agents on Wednesday, would extend the reach of the
government’s inquiry into America’s most prestigious corporate boardrooms.
Most of the defendants charged with insider trading over the last two years
have plied their trade exclusively on Wall Street.
The charges would also mean a stunning fall from
grace of a trusted adviser to political leaders and chief executives of the
world’s most celebrated companies.
A former director of Goldman Sachs and Procter &
Gamble and the longtime head of McKinsey & Company, the elite consulting
firm, Mr. Gupta has been under investigation over whether he leaked
corporate secrets to Raj Rajaratnam, the hedge fund manager who was
sentenced this month to 11 years in prison for trading on illegal stock
tips.
While there has been no indication yet that Mr.
Gupta profited directly from the information he passed to Mr. Rajaratnam,
securities laws prohibit company insiders from divulging corporate secrets
to those who then profit from them.
The case against Mr. Gupta, who lives in Westport,
Conn., would tie up a major loose end in the long-running investigation of
Mr. Rajaratnam’s hedge fund, the Galleon Group. Yet federal authorities
continue their campaign to ferret out insider trading on multiple fronts.
This month, for example, a Denver-based hedge fund manager and a chemist at
the Food and Drug Administration pleaded guilty to such charges.
A spokeswoman for the United States attorney in
Manhattan declined to comment.
Gary P. Naftalis, a lawyer for Mr. Gupta, said in a
statement: “The facts demonstrate that Mr. Gupta is an innocent man and that
he acted with honesty and integrity.”
Mr. Gupta, in his role at the helm of McKinsey, was
a trusted adviser to business leaders including Jeffrey R. Immelt, of
General Electric, and Henry R. Kravis, of the private equity firm Kohlberg
Kravis Roberts & Company. A native of Kolkata, India, and a graduate of the
Harvard Business School, Mr. Gupta has also been a philanthropist, serving
as a senior adviser to the Bill & Melinda Gates Foundation. Mr. Gupta also
served as a special adviser to the United Nations.
His name emerged just a week before Mr.
Rajaratnam’s trial in March, when the Securities and Exchange Commission
filed an administrative proceeding against him. The agency accused Mr. Gupta
of passing confidential information about Goldman Sachs and Procter & Gamble
to Mr. Rajaratnam, who then traded on the news.
The details were explosive. Authorities said Mr.
Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion
investment in Goldman Sachs during the darkest days of the financial crisis
in addition to other sensitive information affecting the company’s share
price.
At the time, federal prosecutors named Mr. Gupta a
co-conspirator of Mr. Rajaratnam, but they never charged him. Still, his
presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the
chief executive of Goldman, testified about Mr. Gupta’s role on the board
and the secrets he was privy to, including earnings details and the bank’s
strategic deliberations.
The legal odyssey leading to charges against Mr.
Gupta could serve as a case study in law school criminal procedure class. He
fought the S.E.C.’s civil action, which would have been heard before an
administrative judge. Mr. Gupta argued that the proceeding denied him of his
constitutional right to a jury trial and treated him differently than the
other Mr. Rajaratnam-related defendants, all of whom the agency sued in
federal court.
Mr. Gupta prevailed, and the S.E.C. dropped its
case in August, but it maintained the right to bring an action in federal
court. The agency is expected to file a new, parallel civil case against Mr.
Gupta as well. It is unclear what has changed since the S.E.C. dropped its
case in August.
An S.E.C. spokesman declined to comment.
Continued in article
Bob Jensen's Rotten to the Core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm
Question
How is the current Olympus scandal in Japan related to the Enron scandal?
Hint:
Think Special Purpose Vehicles (SPVs)
Accounting Fraud in Japan
Olympus Urged to Extend Purge of Executives Over Hidden Losses
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Olympus President Shuichi Takayama yesterday
said the company was looking into the role played by
special purpose funds in
hiding the losses, which date back to the 1990s.
After he was fired, Woodford went public with
his concerns over the advisory fees and writedowns on three other
transactions. All involved payments to Cayman Islands companies or
special purpose vehicles
whose beneficiaries are not known.
"Olympus Urged to Extend Purge of Executives Over Hidden Losses,"
Business Week, November 8, 2011 ---
http://www.businessweek.com/news/2011-11-08/olympus-urged-to-extend-purge-of-executives-over-hidden-losses.html
Olympus Corp.’s admission that three of its top
executives colluded to hide losses from investors fails to address the roles
played by other officials, according to the company’s biggest overseas
shareholder.
The Japanese camera maker’s shares slumped 29
percent yesterday after it reversed weeks of denials that there was any
wrongdoing in past acquisitions. The company fired Executive Vice President
Hisashi Mori over his role in covering up the losses with former Chairman
Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada
would step down.
Olympus’ biggest overseas shareholder is now
demanding investor relations head Akihiro Nambu go too because of his role
as a director of Gyrus Group Plc, the U.K. takeover target used to funnel
more than $600 million in inflated advisory fees to a Cayman Islands fund.
And after Nambu, the rest of the board must follow, said Josh Shores, a
London-based principal for Southeastern Asset Management Inc.
“Even if they didn’t know the specific details
around where payments were going and exactly why, they knew that cash was
going out the door and they also failed to raise their hands to ask
questions,” Shores said. “I don’t know who else is involved, but somebody
else is. There is a third party somewhere who received this money.”
Olympus President Shuichi Takayama yesterday said
the company was looking into the role played by special purpose funds in
hiding the losses, which date back to the 1990s.
Cayman Links
At least eight Cayman Islands entities have been
linked to Olympus acquisitions that are suspected of playing a role in the
accounting scandal. Five of those no longer exist, according to a search of
the Caymans registry, which doesn’t give details on the individuals behind
the companies.
Kikukawa, Mori and Nambu became the three directors
of Gyrus in June 2008 following the $2 billion acquisition of the U.K.
medical equipment maker in February that year. They were also directors of
three companies set up to handle the takeover, including the decision to pay
out advisory fees that amounted to more than a third of the acquisition’s
value, filings show.
Olympus declined a request to interview Kikukawa
and Mori. In six attempts to talk to Kikukawa at his home, the former
chairman didn’t appear. Mori’s home address given in U.K. filings leads to a
house under renovation in Kawasaki city, about an hour from central Tokyo.
Nobody answered the doorbell on a recent visit to Nambu’s home in a
seven-story condominium about 27 kilometers from the city center.
Japanese and U.S. regulators are probing
allegations by former chief executive officer Michael C. Woodford that more
than $1.5 billion was siphoned through offshore funds. That money may have
been used to cancel out non-performing securities that Olympus was keeping
off its books, according to a report in the Shukan Asahi magazine, which
cited people familiar with the process.
Cockroaches
Yesterday’s plunge in Olympus shares pulled other
Japanese equities lower on concerns the country hasn’t escaped corporate
governance weaknesses that have dogged it since the stock market bubble
burst at the end of 1989. Olympus shares have lost 70 percent of their value
since Woodford took his accusations public after he was axed on Oct. 14.
“Institutional investors will stay away from
Japan’s market until they confirm this is an isolated case,” said Koichi
Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors
probably think that if there’s one cockroach, there may be 10 more,” he
said.
‘Tobashi’
Olympus’ revelations echo the practice of hiding
losses known as “tobashi” that became widespread in Japan in the late 1980s
and led to the failure of Yamaichi Securities Co., according to Yasuhiko
Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used
overseas paper companies to hide problematic securities, until it failed in
1997 with 260 billion yen ($3.3 billion) in hidden impairments.
Takayama declined to comment on the involvement of
any securities firms in Olympus’ cover-up. The Topix Securities and
Commodity Futures Index fell 11 percent, the most of any industry group in
the broader gauge. Nomura Holdings Inc. tumbled 15 percent to the lowest in
37 years.
“There is speculation in the market that Nomura may
somehow be involved in this Olympus case,” said Shoichi Arisawa, an
Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in
particular probably sold after seeing a high volume of Nomura’s shares being
traded.”
Nomura didn’t participate in Olympus’s concealment
of losses, said Hajime Ikeda, managing director of corporate communications
for the securities firm.
Nomura Unaware
“We are not aware of any involvement by Nomura in
Olympus’s hiding of losses in the 1990s, and we weren’t involved when
Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a
telephone interview in Tokyo yesterday.
Olympus plunged by its 300 yen daily limit in Tokyo
trading, closing at 734 yen. The Topix ended 1.7 percent lower, the
worst-performing Asian stock index.
The Tokyo Stock Exchange said it’s considering
moving the shares in Olympus, the world’s biggest maker of endoscopes, to a
watchlist for possible delisting. Takayama pledged to continue with the
investigation into the losses, which he said were probably inherited by
Kikukawa.
“The investigation must continue to determine how
much rot there is,” said David Herro, chief investment officer of Harris
Associates LP. “All responsible must, at a minimum, leave. Also, since the
management’s credibility is nearly nonexistent, all of what they say must be
verified.”
Bowed in Apology
Harris held 10.9 million Olympus shares as of June
30, a 4 percent stake that makes it the company’s second-biggest overseas
investor. Southeastern had a 5 percent stake as of Aug. 16, according to
data compiled by Bloomberg.
Olympus President Takayama yesterday said he was
unaware of the hidden losses until he was told by Mori and Kikukawa the
previous evening. At the press conference, he bowed three times in seven
minutes to apologize.
In the weeks running up to his dismissal, Woodford
was engaged in an exchange of letters with Kikukawa and Mori in which he
detailed the allegations and which were copied to all member of the board.
After he was fired, Woodford went public with his
concerns over the advisory fees and writedowns on three other transactions.
All involved payments to Cayman Islands companies or special purpose
vehicles whose beneficiaries are not known.
Olympus paid a total of 73.4 billion yen to
increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006
and 2008, which was also used to hide losses, it said yesterday. Olympus
wrote down 55.7 billion yen, or 76 percent of the acquisition value, in
March 2009, the company said in a statement Oct. 19.
“It’s beyond belief that Mr. Takayama claims he
only found out about it last night,” Woodford said in a telephone interview
yesterday. “If he didn’t know before I started writing my letters then he
should have known after.”
Continued in article
Teaching Case on Olympus and SPV Frauds
From The Wall Street Journal Accounting Weekly Review on December 2,
2011
Olympus Heat Rises
by:
Juro Osawa and Phred Dvorak
Nov 25, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Audit Quality, Audit Report, Auditing, Auditor Changes,
Auditor/Client Disagreements, business combinations, Business Ethics,
Fraudulent Financial Reporting
SUMMARY: The series of events leading to questions about auditing
practices at Olympus that failed to uncover a decades-long coverup of
investment losses is highlighted in this review. The company must submit its
next financial statement filing to the Tokyo Stock Exchange by December 14,
2011 for the period ended September 30, 2011 or face delisting.
CLASSROOM APPLICATION: The review focuses on auditing questions
about sufficient competent evidence, change of auditors, and ability to
provide an audit report given knowledge of the length of time this coverup
has been ongoing.
QUESTIONS:
1. (Introductory) What fraudulent accounting and reporting
practices has Olympus, the Japanese optical equipment maker, admitted to
committing?
2. (Advanced) What services is Mr. Woodford calling for to
investigate the inappropriate payments and accounting practices by Olympus?
Specifically name the type of engagement for which Mr. Woodford thinks that
Olympus should contract with outside accountants.
3. (Introductory) Refer to the related articles. What questions
have been raised about outside accountants' examinations of Olympus's
financial statements for many years?
4. (Advanced) Based only on the discussion in the article, what
evidence did Olympus's auditors rely on to resolve their questions about the
propriety of accounting for mergers and acquisitions? Again, based only on
the WSJ articles, how reliable was that audit evidence?
5. (Advanced) What happened with Olympus's engagement of KPMG AZSA
LLC as its outside auditor? What steps must be taken under U.S. requirements
when a change of auditors occurs?
6. (Introductory) What challenges will Olympus face in meeting the
deadline of December 14 to file its latest financial statements? What will
happen to the company if it cannot do so?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Olympus Casts Spotlight on Accounting
by Kana Inagaki
Nov 08, 2011
Online Exclusive
Olympus Admits to Hiding Losses
by Kana Inagaki and Phred Dvorak
Nov 08, 2011
Online Exclusive
"Olympus Heat Rises (video)," by: Juro Osawa and Phred Dvorak, The Wall
Street Journal, November 25, 2011 ---
http://online.wsj.com/video/olympus-we-hid-investment-losses-for-decades/54207106-7753-477D-9EA5-7C152AF62DF4.html
Bob Jensen's threads on the criminal activity at Olympus
Scroll down deeply at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG
What's Right and What's
Wrong With SPEs, SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"ENRON: what happened and what we can learn from it,"
by George J. Benston and Al L.
Hartgraves, Journal of Accounting and Public Policy, 2002, pp. 125-127
The following are excerpts only.
Abstract
Enron's accounting for its
non-consolidated special-purpose entities (SPEs), sales of its own stock and
other assets to the SPEs, and mark-ups of investments to fair value
substantially inflated its reported revenue, net income, and stockholders'
equity, and possibly understated its liabilities. We delineate six
accounting and auditing issues, for which we describe, analyze, and indicate
the effect on Enron's financial statements of their complicated structures
and transactions. We next consider the role of Enron's board of directors,
audit committee, and outside attorneys and auditors. From the foregoing, we
evaluate the extent to which Enron and Andersen followed the requirements of
GAAP and GAAS, from which we draw lessons and conclusions.
The accounting issues
The transactions involving SPEs at Enron,
and the related accounting issues are, indeed, very complex. This section
summarizes some of the key transactions and their related accounting
effects. The Powers Report, a 218-page document, provides in great detail a
discussion of a selected group of Enron SPEs that have been the central
focus of the Enron investigations. While very much less detailed than the
Powers Report, the discussion in the following section (which may seem
laborious at times), supplemented with additional material that became
available after publication of the Report, should provide the reader with
insight into how Enron sought to bend the accounting rules to their
advantage. However, even a cursory review of this section will give the
reader a sense of the complex financing structures that Enron used in an
attempt to create various financing, tax, and accounting advantages.
Six accounting and auditing issues are of
primary importance, since they were used extensively by Enron to manipulate
its reported figures: (1) The
accounting policy of not consolidating SPEs that appear to have permitted
Enron to hide losses and debt from investors.
(2) The accounting treatment of sales of Enron's merchant investments to
unconsolidated (though actually controlled) SPEs as if these were arm's
length transactions. (3) Enron's income recognition practice of recording
as current income fees for services rendered in future periods and recording
revenue from sales of forward contracts, which were, in effect, disguised
loans. (4) Fair-value accounting resulting in restatements of merchant
investments that were not based on trustworthy numbers. (5) Enron's
accounting for its stock that was issued to and held by SPEs. (6)
Inadequate disclosure of related party transactions and conflicts of
interest, and their costs to stockholders.
Continued in article at
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
"KPMG Scrutinized Over Handling of Olympus Accounting Fraud Scandal,"
by Kalen Smith, Big Four Blog, December 15, 2011 ---
http://www.big4.com/kpmg/kpmg-scrutinized-over-handling-of-olympus-accounting-fraud-scandal
KPMG’s auditors in Tokyo are under scrutiny after
signing off on reports issued by Olympus Corp. Auditors found several
accounting irregularities when they reviewed financial statements provided
by Olympus executives. The auditors were particularly concerned over $600
million worth of takeover advisory fees and payments on acquisitions.
Despite their concerns, auditors chose to sign off on the reports after an
outside consultant approved of the findings.
Although the consultant said the takeover costs
were justified, they were also hired from Olympus Corp. This has raised some
red flags over a possible conflict of interest in the matter.
Olympus has now been revealed to have engaged in
financial fraud for more than two decades. Following the revelation of the
accounting scandal at Olympus, regulators are looking closely at KPMG and
Ernst & Young. Regulators feel the auditors should have seen signs of the
fraud and taking measures to stop them.
According to allegations, KPMG was Olympus’s
auditor for years. They failed to catch the discrepancies and Ernst & Young
was called in as well.
According to Yuuki Sakurai of Fukoku Capital
Management, auditors work for the companies that pay them. Auditors are
going to have a hard time staying in business if they get a reputation for
being the kind of company that goes to the regulators without solid evidence
of malfeasance.
Although the manner in which KPMG handled the
Olympus case created some concern for regulators, it may signify greater
concern over the corporate culture that has created a serious conflict of
interest between auditors’ responsibilities for their clients and need to
uphold the law.
Bob Jensen's threads on KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm
Bob Jensen's threads on the the decline of professionalism and
independence in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"ENRON’S TENTH ANNIVERSARY: THE CRIMES," by Anthony H. Catanach and J.
Edward Ketz, Grumpy Old Accountants, November 7, 2011
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/357#more-357
Bob Jensen's threads on the Enron, Worldcom, and Andersen scandals ---
http://www.trinity.edu/rjensen/FraudEnron.htm
The idea of a central bank manipulating world
markets packs an increasingly powerful emotional punch with voters.
"Is there a shadowy plot behind gold?" by Gillian Tett, Financial Times,
October 21, 2011 ---
http://www.ft.com/intl/cms/s/2/90effa18-faa3-11e0-8fe7-00144feab49a.html?ftcamp=traffic/email/monthnl//memmkt#axzz1c1AAhDzo
Out there in the world today, a cabal of western
central bankers is secretly determined to manipulate the world’s markets.
They are doing this not via interest rates, but by rigging gold prices. More
specifically, they have kept bullion prices artificially low in recent
decades to ensure that our so-called fiat currency system – that is, money
created by central banks – continues to work. For if the public ever knew
the “real” price of gold, we would finally understand that our currencies,
such as the dollar, are a sham … hence the need for that central bank plot.
Does this sound like the ranting of a Tea Party
activist? A Hollywood screenplay? Or could there be a grain of truth in it?
The question has been provoking hot debate among a small tribe of investors
in America for many years, particularly those owning gold mining stocks.
Right now it is also leaching into the more mainstream American political
world.
Continued in article
Jensen Comment
This is not a rant from an long-haired anarchist defecating in a NYC park, but
such a guy probably takes such market manipulation for granted. Such strange
things are happening with gold prices I'm a bit of a believer myself.
Bob Jensen's Rotten to the Core threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
Hi Honey,
"I'll show you mine (insider news about My Nookie) if you show me
yours (insider news about Deloitte's audit clients),"
"Former Deloitte Employee Swings to Settlement with SEC Over Insider
Trading Charges," by Calib Newquist, Going Concern, October 18, 2011
---
http://goingconcern.com/2011/10/former-deloitte-employee-swings-to-settlement-with-sec-over-insider-trading-charges/
Remember Annabel McClellan? She’s the wife
(some doubt about this) of
former Deloitte
partner Arnold McClellan who sorta got wrapped up into
an insider trading mess with her sister and brother-in-law
last fall. Annabel is also a former Deloitte
employee who gave up the glamorous life of a Salzberg solider to be a
stay-at-home mom. Oh! and she was working on
swingers app called My Nookie that was on the
verge of taking the scene by storm. The whole insider trading thing put
those ambitions on hold due to the fact that Annabel may be
looking at some jail time and she
settled civil charges with the SEC yesterday for $1 million.
The good news for Arnie is that if judge gives the
settlement the thumbs-up, he’ll be off the hook who, prosecutors say, had no
clue that the Mrs. was engaging in extracurricular activities:
Bob Jensen's threads about Deloitte ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies," by
Jesse Hamilton, Business Week, October 17, 2011 ---
http://www.businessweek.com/news/2011-10-17/deloitte-faulted-by-pcaob-over-unresolved-audit-deficiencies.html
Deloitte & Touche LLP repeatedly failed to support
assumptions in audits examined in a 2007 inspection, the Public Company
Accounting Oversight Board said in the first public report of unresolved
deficiencies involving one of the so-called Big Four accounting firms.
The firm’s quality controls and independence
systems give “cause for concern,” the PCAOB said in its report, which was
released today. The Washington-based nonprofit, created in 2002 to oversee
audits of public companies after the collapses of Enron Corp. and WorldCom
Inc., gives audit firms at least a year to fix deficiencies and only
releases the reports in cases where auditors fail to make sufficient
improvements.
“These deficiencies may result, in part, from a
Firm culture that allows, or tolerates, audit approaches that do not
consistently emphasize the need for an appropriate level of critical
analysis,” the PCAOB said in the Deloitte report, which didn’t name the
clients involved in the cited audits.
The PCAOB in 2007 looked at Deloitte’s practices
through inspections at the company’s New York headquarters and 18 other
offices. The report made public today lays out instances in which the firm
insufficiently weighed clients’ valuation of assets and income-tax
assumptions. The watchdog also faulted Deloitte’s independence procedures,
saying it “has no formal system in place to monitor the services its foreign
affiliates actually perform.”
“In our drive for continuous improvement, we have
been making a series of investments focused on strengthening and improving
our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a
statement. Echevarria, who has been with the firm since 1978, was elected to
the top job in April.
The disclosure isn’t a disciplinary action, said
Colleen Brennan, a PCAOB spokeswoman. Dozens of smaller registered public
accounting firms have had similar criticisms made public and have retained
their registration, she said.
The 2007 Inspection Report is at
http://pcaobus.org/Inspections/Reports/Documents/2008_Deloitte.pdf
Bob Jensen's threads about Deloitte ---
http://www.trinity.edu/rjensen/Fraud001.htm
Dennis Kozlowski Talks Jail, Pay (no mention that he cost PwC $225 million
for negligence)
"Dennis Kozlowski Talks Jail, Pay," by Joann S. Lublin, The Wall
Street Journal, October 21, 2011 ---
Click Here
http://online.wsj.com/article/SB10001424052970203752604576643093882076826.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsTop
As convicted hedge-fund manager Raj Rajaratnam gets
ready to enter the prison system, L. Dennis Kozlowski, a poster child for
the last wave of corporate scandals, is hoping he'll soon get out.
The former chief executive of Tyco International
Ltd. was found guilty in 2005 of looting his employer and sentenced to as
much as a quarter century behind bars. Now, he's suing New York state to win
work release and awaiting his first parole hearing in April.
Meanwhile, Mr. Kozlowski looks out—across razor
wire made by Tyco—at a world where the stumbling economy and scorn heaped on
big business have a familiar feel.
Once one of America's highest paid CEOs, the
64-year-old felon acknowledges he got "piggy" when it came to his pay. And
he says he shares the outrage over corporate greed expressed by the Occupy
Wall Street protesters, many of whom wonder why the recent financial crisis
didn't send as many executives to prison as the scandals of a decade ago. "I
understand their frustration," Mr. Kozlowski said in an interview in a
visitors' room here at the Mid-State Correctional Facility. Kozlowski On:
Jail food: "Everything is bad about the food. It's
mysterious. By the time it gets to us, it's cold.'' His expected salary
during work-release: "I would be satisfied with minimum wage.'' Why rich
men's toys no longer appeal to him: "I have learned how little I can live
with…. There are no shower curtains here.''
The former executive, who pulled in a pay package
worth more than $105 million in fiscal 2000, criticized ailing financial
firms for paying out sizable executive bonuses after they were helped by
taxpayer bailouts. "That's indefensible," he said.
Mr. Kozlowski also discussed his post-prison plans,
his meetings with General Electric Co. CEO Jeff Immelt about possibly
combining their companies, and the missteps that led him to prison.
Mr. Kozlowski was found guilty in June 2005 on 22
of 23 counts, including grand larceny, conspiracy and securities fraud,
stemming from giant bonuses and other improper compensation he got as Tyco's
CEO.
He received a sentence of 8 1/3 years to 25 years,
compared with 25 years for former WorldCom CEO Bernard J. Ebbers and 24 for
former Enron President Jeffrey Skilling. In seeking the maximum sentence,
Assistant District Attorney Owen Heimer called Mr. Kozlowski's crimes
"unprecedented" and said he made Tyco a "symbol of kleptocratic management."
Mr. Kozlowski hopes to take a work-release job with
Access Technologies Group Inc., a small company in New Canaan, Conn., whose
services include job-search training for ex-convicts. But New York state has
turned down his request for work release four times.
He's suing to overturn the decision and chafes that
Mark H. Swartz, the former Tyco finance chief convicted of similar crimes,
already has such a job. The New York Department of Corrections and Community
Supervision confirmed that Mr. Swartz started a Manhattan work-release
assignment in late September but declined to comment on Mr. Kozlowski's
request. An attorney for Mr. Swartz declined to comment.
Continued in article
Jensen Comment
Unlike many of these executive "Go to Jail" events that take place for companies
that have crashed and burned (like Enron and Worldcom), Kozlowski and Swartz
were sent to prison for stealing from a company (Tyco) that was actually in good
shape and made much better with the fast wheeling and dealing of L. Dennis
Kozlowski.
Certainly Dennis lived very high on the hog on his Tyco expense account,
including his multi-million dollar wedding in Cyprus that he put on a Tyco
credit card. Dennis had a weakness for women and high living, but he also was
pretty shrewd about finding and negotiating acquisitions for Tyco.
And the Dennis and Swartz cover ups of fraud resulted in PwC paying out one
of the largest audit-malpractice settlements in the history of CPA firm
auditing.
"PwC Sets Accord in Tyco Case: Pact
for $225 Million Settles Claims Involving Auditing Malpractice," by David
Reilly and Jennifer Levitz, The Wall Street Journal, July 7, 2007 ---
Click Here
Accounting titan
PricewaterhouseCoopers LLP agreed to pay $225 million to settle
audit-malpractice claims arising from the criminal misdeeds of top
executives at Tyco International Ltd., marking the largest single legal
payout ever made by that firm and one of the biggest ever by an auditor.
The settlement
applies to claims from both Tyco investors, who had filed a class-action
lawsuit against the accounting firm in federal court in New Hampshire, and
Tyco itself. The agreement was disclosed Friday by PwC, Tyco and the
class-action investors.
Tyco's involvement
in the PwC deal followed on its agreement in May to settle for $2.98 billion
claims brought against it by the same class-action plaintiffs -- removing a
cloud of liability that shadowed the conglomerate as it split into three
publicly traded companies. As part of that agreement, Tyco allowed investors
to pursue its own claims against PricewaterhouseCoopers, while Tyco would
pursue claims on behalf of shareholders against former executives, including
former Chief Executive L. Dennis Kozlowski.
Attorneys for Tyco
investors said the settlement marked a victory for shareholders. The $225
million payout "sends a message to accounting firms" and will act as a
"deterrent to future situations like this," according to Jay Eisenhofer of
Grant & Eisenhofer PA, who represented investors in the case. Tyco declined
to comment beyond saying that the agreement had been filed.
The PwC settlement
ranks among the top 10 legal payouts made by accounting firms related to
work on behalf of one company. Ernst & Young LLP's $335 million settlement
in 1999 related to work for Cendant Corp. remains the biggest-ever payout by
an auditor.
As a percentage of
the overall settlement reached by the company and other parties -- an
important metric looked at by accounting firms -- the PwC deal represented a
payout on its end of about 7% of the total. That is generally in line with
payouts by accounting firms, which tend to range from 5% to 15% of total
payouts.
While the Tyco case
was one of several corporate scandals that rocked markets earlier this
decade, it is somewhat unusual in that the malfeasance revolved around
compensation issues involving top executives. That contrasted with the kind
of bankruptcy-inducing fraud seen in many other scandals such as those at
Enron Corp. and WorldCom Inc. In June of 2005, a jury convicted Mr.
Kozlowski, and Mark Swartz, Tyco's former chief financial officer, of grand
larceny, conspiracy and securities fraud. Both are serving prison sentences
in New York.
While PwC stood by
its work, the firm's position was potentially undermined when the Securities
and Exchange Commission in 2003 barred Richard P. Scalzo, the firm's lead
partner on Tyco's audits from 1997 to 2001, from audits of publicly listed
companies. The SEC didn't accuse him of deliberately covering up faulty
accounting at Tyco, but said he was "reckless" for not heeding warning signs
regarding the integrity of the company's management. Mr. Scalzo didn't admit
or deny wrongdoing.
Although the PwC
settlement with Tyco will have to be approved by class-action investors, and
some could drop out to pursue claims individually, the deal mostly brings to
a close one of the biggest legal issues for PwC. Other high-profile cases
the firm has outstanding are suits related to its work for insurance titan
American International Group Inc. and computer maker Dell Inc.
Bob Jensen's threads on PwC lawsuits ---
http://www.trinity.edu/rjensen/Fraud001.htm
"Where There's Smoke, There's Fraud: Sarbanes-Oxley has done little
to curb corporate malfeasance. Therefore, CFOs should implement a range of
fraud-prevention measures," by Laton McCartney, CFO.com, March 1, 2011 ---
http://www3.cfo.com/article/2011/3/regulation_where-theres-smoke-theres-fraud
As a convicted felon, Sam E. Antar, the former CFO
for the now-defunct consumer-electronics chain Crazy Eddie, no doubt has
regrets. Among them: he is no longer in the game at a time when corporate
fraud is experiencing a resurgence. "If I were out of retirement today, I'd
be bigger than Bernie Madoff," he boasts.
In conjunction with CEO Eddie Antar (his cousin),
Sam Antar helped mastermind one of the largest corporate frauds in the
1980s, bilking investors and creditors out of hundreds of millions of
dollars. Today, he makes a living lecturing about corporate fraud (and
shorting the stocks of companies he thinks may have inflated earnings).
Antar says that despite the antifraud provisions of
the Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall
Street Reform and Consumer Protection Act, it remains as easy today for bad
guys, both internal and external, to loot corporate coffers as it was during
the Enron and WorldCom days. "Nothing's changed," he says. "Wall Street
analysts are just as gullible, internal controls remain weak, and the SEC is
underfunded and, at best, ineffective. Madoff only got caught because the
economy tanked."
Antar won't get much of an argument from
organizations that monitor corporate fraud. In fact, the consensus today is
that financial shenanigans are markedly on the increase. "There's a lot more
employee fraud and embezzlement today then there was 10 years ago, and this
past year there was much more than a year ago," says Steve Pedneault of
Forensic Accounting Services. "People blame the economy, but much of the
fraud and embezzlement that's coming to the surface now was in the works for
4 or 5 years before the recession hit."
Last year, the Committee of Sponsoring
Organizations of the Treadway Commission's report on corporate fraud
concluded that fraud continues to increase in depth and breadth despite
Sarbanes-Oxley; the methods of committing financial fraud have not
materially changed; and traditional measures of corporate governance have
limited impact on predicting fraud. Median loss due to fraud, based on
presence of antifraud controls, 2010No. of fraud cases, based on
perpetrator's dept. (2010)
In other words, same old same old, only worse: in
its 2010/2011 Global Fraud Report, risk consulting firm Kroll found that
business losses due to fraud increased 20% in the last 12 months, from $1.4
million to $1.7 million per billion dollars of sales. The report, based on a
survey of more than 800 senior executives from 760 companies around the
world, also found that 88% of the respondents reported being victims of
corporate fraud over the past 12 months. If fraud were the flu, this would
qualify as a pandemic.
The most likely targets by industry are financial
services, media, technology, manufacturing, and health care. Small and
midsize companies are also more vulnerable. "Many of these organizations
typically rely on a small accounting department, especially in today's
economy," says Pedneault. They simply don't have the resources to catch
fraudsters.
That challenge becomes all the more daunting when
one considers the many varieties of fraud that exist. Aside from various
forms of embezzlement and outright theft, and the growing risk of
information theft (think hackers), two other kinds of corporate malfeasance
have come to the fore in recent years: fraud in the business model and fraud
in the business process.
The former is defined by a company selling illegal
or worthless wares. "If the pharmaceutical industry sells alleged off-label
drugs that have not been approved by the FDA, or the financial-services
industry is offering worthless subprime mortgages, that can constitute
business-model fraud," says Toby J. F. Bishop, director of the Deloitte
Forensic Center for Deloitte Financial Advisory Services.
Fraud of the business-practice variety, Bishop
explains, can range from corporations ignoring or turning a blind eye to
environmental or safety laws to the ever-popular practice of engaging in
"window dressing" at the end of the quarter.
An Action Plan With fraud on the rise, and with all
parties that could possibly be tempted feeling more pressure to cross the
line, how should companies respond? First, the bad news: "Most fraud today
is uncovered by whistle-blowers, or by accident — a tip, a rogue piece of
mail, or by happenstance," says Tracy L. Coenen, a forensic accountant and
fraud investigator who heads up Sequence, a forensic accounting firm.
In a sense, companies (at least those that are
publicly traded) were supposed to self-insure against fraud by implementing,
at great expense, the controls framework included in Sarbanes-Oxley. But a
framework still requires an enforcer, and at many companies there is none.
"There's often no single entity for oversight," says Deloitte's Bishop.
"Many companies have no compliance or risk management at all."
Even when they do, there's the issue of how
effective it can be. It's not a job that wins friends and influences fellow
workers. "The compliance officer is the most hated person in the company,"
notes Thomas Quilty, CEO of BD Consulting and Investigations. "Companies
often retaliate against them," adds Antar.
"Compliance staff frequently end up pushing paper
[just] so it looks like the company has tried to do the right thing in case
there's an investigation," says Coenen. "They're not effective."
As for what to do, while no one has yet come up
with a silver bullet, experts point to seven useful steps that all companies
can take:
Continued in a long article
Bob Jensen's fraud updates ---
http://www.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's threads on professionalism in auditing ---
http://www.trinity.edu/rjensen/Fraud001c.htm
"ACCOUNTANTS BEHAVING BADLY," by Anthony H. Catanach, Jr. and J.
Edward Ketz, Grumpy Old Accountants, October 3, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/332
Cheating is all around us. Athletics provide a
never ending series of ethical disappointments whether it be the use of
performance enhancing drugs in bicycling, baseball, and football, the bout
fixing in Sumo wrestling, or the recent NCAA rule violations by Ohio State’s
football program.
David Callahan in his controversial book
The Cheating
Culture, states:
When “everybody does it,” or imagines that
everybody does it, a cheating culture has emerged.
However, not everyone feels this way. Warren Buffet
opines on ethics and protecting reputation in the
2010 Berkshire
Hathaway Annual Report (pages 104 and 105), and
states:
Sometimes your associates will say “Everybody
else is doing it.” This rationale is almost always a bad one if it is the
main justification for a business action. It is totally unacceptable when
evaluating a moral decision. Whenever somebody offers that phrase as a
rationale, in effect they are saying that they can’t come up with a good
reason. If anyone gives this explanation, tell them to try using it with a
reporter or a judge and see how far it gets them.
But why are so many accountants cheating today?
How could this happen with the continuing education ethics hours requirement
for licensing? Aren’t accountants supposed to be our first line of defense
against financial reporting fraud? Twenty years ago Eli Mason, one of the
acknowledged leaders of the accounting profession, clearly defined the
ethical responsibilities of accountants in his CPA Credo:
- To serve the public from whom my
authority is derived.
- To serve my profession and
contribute to its institutions.
- To practice at the highest
professional level.
- To maintain an ethical posture
characteristic of a learned profession.
- To maintain my technical skills as
that the public is served with competence.
- To maintain a state of
independence at all times so that decisions are reached with
objectivity.
- To work with my colleagues – for
the practice of a profession is an experience in human behavior and
mutual respect.
This is how accountants and auditors are supposed
to behave: public service, ethics, and independence.
Unfortunately, these three key attributes appear to have been abandoned by
many in the profession.
Just look at what we have recently seen from the
senior leadership of large accounting firms?
- The
Securities and Exchange Commission charged
Deloitte’s former vice chair, Thomas P. Flanagan, with insider trading,
and violating auditor independence rules in August 2010, and
simultaneously settled. Deloitte itself sued Flanagan and received a
summary judgment in January 2010 on charges of breach of fiduciary duty,
breach of contract, common law fraud, and equitable fraud after filing
suit in November 2008.
- And if that is not bad enough, several senior
leaders from
BDO Seidman were convicted this May (2011) of
conspiracy to defraud the Internal Revenue Service, tax evasion, and
perjury related to fraudulent tax shelter schemes offered to clients.
Those convicted included charged Denis Field, who previously served as
BDO Seidman’s CEO, Chairman, head of the national tax practice, and
leader of the “Tax Solutions Group.” Robert Greisman, a tax partner in
BDO’s Chicago office previously pled guilty.
Unbelievable for accountants, but is any of this
new? No, not really, the history of accounting is filled with cases of
accountants misbehaving, but it sure does seem like it’s getting worse in
the recent past. Behind each and every one of the many recent corporate
reporting failures is a major accounting and auditing firm that has
committed “malpractice.” And it seems that despite increased scrutiny by
the press and investment community, as well as required ethics training,
these “accounting meltdowns” are becoming more frequent, and more costly to
investors.
Continued in article
Bob Jensen's threads on professionalism and independence ---
http://www.trinity.edu/rjensen/Fraud001c.htm
The Wonk (Professor) Who Slays Washington
Insider trading is an asymmetry of information between a buyer and a seller
where one party can exploit relevant information that is withheld from the other
party to the trade. It typically refers to a situation where only one party has
access to secret information while the other party has access to only
information released to the public. Financial markets and real estate markets
are usually very efficient in that public information is impounded pricing the
instant information is made public. Markets are highly inefficient if traders
are allowed to trade on private information, which is why the SEC and Justice
Department track corporate insider trades very closely in an attempt to punish
those that violate the law. For example, the former
wife of a partner in the auditing firm Deloitte & Touche was recently sentenced
to 11 months exploiting inside information extracted from him about her
husband's clients. He apparently did was not aware she was using this inside
information illegally.
In another recent case, hedge fund manager Raj Rajaratnam was sentenced to 11
years for insider trading.
Even more commonly traders who are damaged by insiders typically win enormous
lawsuits later on for themselves and their attorneys, including enormous
punitive damages. You can read more about insider trading at
http://en.wikipedia.org/wiki/Insider_trading
Corporate executives like Bill Gates often announce future buying and selling
of shares of their companies years in advance to avoid even a hint of scandal
about exploiting current insider information that arises in the meantime. More
resources of the SEC are spent in tracking possible insider information trades
than any other activity of the SEC. Efforts are made to track trades of
executive family and friends and whistle blowing is generously rewarded.
Question
Trading on insider information is against U.S. law for every segment of society
except for one privileged segment that legally exploits investors for personal
gains by trading on insider information. What is that privileged segment of
U.S. society legally trades on inside information for personal gains?
Hints:
Congress is our only native criminal class.
Mark Twain ---
http://en.wikipedia.org/wiki/Mark_Twain
We hang the petty thieves and appoint the great ones to public office.
Attributed to Aesop
Answer (Please share this with your students):
Over the years I've been a loyal viewer of the top news show on television ---
CBS Sixty Minutes
On November 13, 2011 the show entitled "Insider"
is the most depressing segment I've ever watched on television ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody#ixzz1dfeq66Ok
Also see
http://financeprofessorblog.blogspot.com/2011/11/congress-trading-stock-on-inside.html
Jensen Comment
- It came as no surprise that many (most?) members of the U.S. House of
Representatives and the U.S. Senate that writes the laws of the land made it
illegal for to trade in financial and real estate market by profiting
personally on insider information not yet available, including pending
legislation that they will decide, wrote themselves out of the law making
it legal for them to personally profit from trading on insider information.
What came as a surprise is how leaders at the very top of Congress make
millions trading on inside information with impunity and well as immunity.
- The Congressional leader that comes off the worst in this Sixty
Minutes "Insider" segment is former House Speaker and current Minority
leader Nancy Pelosi.
When confronted with specific facts on how she and her husband made some of
their insider trading millions she fired back at reporter Steve Kroft with
an evil glint saying what is tantamount to: "How dare you question me
about insider trades that are perfectly legal for members of Congress. Who
are you to question my ethics about exploiting our insider trading
privileges. Back off Steve or else!" Her manner can be extremely scary.
Other Democratic Party members of Congress come off almost as bad in terms
of insider trading for personal gain.
- Current Speaker of the House,
John
Boehner, is more subtle. He denies making any of his personal portfolio
investment decisions and denies communicating with the person he hires to
make such decision. However, that trust investor mysteriously makes money
for Rep. Boehner using insider information obtained mysteriously. Other
Republican members of Congress some off even worse in terms of insider
trading.
- Members of Congress on powerful committees regularly make insider
profits on legislation currently being written into the law that is still
being held secret from the public. One of my heroes, former Senator
Judd Gregg,
is no longer my hero.
- Everybody knows that influence peddling in Congress by lobbyists, many
of them being former members of Congress, is a dirty business of showering
gifts on current members of Congress. What is made clear, however, is that
these lobbyists are personally getting something in return from friendly
members of Congress who pass along insider information to lobbyists. The
lobbyists, in turn, peddle this insider information back to the private
sector, such as hedge fund managers, for a commission. Moral of story:
Voters do not stop insider trading by a member of Congress by voting him
or her out of office if they become peddlers of insider information
obtained, as lobbyists, from their old friends still in the Congress.
- Five out of 435 members of the House of Representatives are seeking to
sponsor a bill to make it illegal for representatives and senators to profit
from trading on inside information. The Sixty Minutes show demonstrates how
Nancy Pelosi, John Boehner, and other House leaders have buried that effort
so deep in the bowels of the legislative process that there's no chance in
hell of stopping insider trading by members of Congress. Insider trading is
a privilege that attracts unethical people to run for Congress.
Watch the "Insider" Video Now While
It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody
"They have legislated themselves as untouchable as a
political class . . . "
"The Wonk (Professor) Who Slays Washington," by Peter J. Boyer,
Newsweek Magazine, November 21, 2011, pp. 32-37 ---
http://www.thedailybeast.com/newsweek/2011/11/13/peter-schweizer-s-new-book-blasts-congressional-corruption.html
In the Spring of 2010, a bespectacled, middle-aged
policy wonk named Peter Schweizer fired up his laptop and began a
months-long odyssey into a forbidding maze of public databases, hunting for
the financial secrets of Washington’s most powerful politicians. Schweizer
had been struck by the fact that members of Congress are free to buy and
sell stocks in companies whose fate can be profoundly influenced, or even
determined, by Washington policy, and he wondered, do these ultimate
insiders act on what they know? Yes, Schweizer found, they certainly seem
to. Schweizer’s research revealed that some of Congress’s most prominent
members are in a position to routinely engage in what amounts to a legal
form of insider trading, profiting from investment activity that, he says,
“would send the rest of us to prison.”
Schweizer, who is 47, lives
in Tallahassee with his wife and children (“New York or D.C. would be
too distracting—I’d never get any writing done”) and commutes regularly
to Stanford, where he is the William J. Casey research fellow at the
Hoover Institution. His circle of friends includes some bare-knuckle
combatants in the partisan frays (such as conservative media impresario
Andrew Breitbart), but Schweizer himself comes across more as a bookish
researcher than the right-wing hit man liberal critics see. Indeed, he
sounds somewhat surprised, if gratified, to have attracted attention
with his findings. “To me, it’s troubling that a fellow at Stanford who
lives in Florida had to dig this up.”
It was in his Tallahassee
office that Schweizer began what he thought was a promising research
project: combing through congressional financial-disclosure records
dating back to 2000 to see what kinds of investments legislators were
making. He quickly learned that Capitol Hill has quite a few market
players. He narrowed his search to a dozen or so members—the leaders of
both houses, as well as members of key committees—and focused on trades
that coincided with big policy initiatives of the sort that could move
markets.
While examining trades made
around the time of the 2003 Medicare overhaul, Schweizer experienced what he
calls his “Holy crap!” moment. The legislation, which created a new
prescription-drug entitlement, promised to be a huge boon to the
pharmaceutical industry—and to savvy investors in the Capitol. Among those
with special insight on the issue was Massachusetts Sen. John Kerry,
chairman of the health subcommittee of the Senate’s powerful Finance
Committee. Kerry is one of the wealthiest members of the Senate and heavily
invested in the stock market. As the final version of the drug program
neared approval—one that didn’t include limits on the price of drugs—brokers
for Kerry and his wife were busy trading in Big Pharma. Schweizer found that
they completed 111 stock transactions of pharmaceutical companies in 2003,
103 of which were buys.
“They were all great picks,”
Schweizer notes. The Kerrys’ capital gains on the transactions were at least
$500,000, and as high as $2 million (such information is necessarily
imprecise, as the disclosure rules allow members to report their gains in
wide ranges). It was instructive to Schweizer that Kerry didn’t try to shape
legislation to benefit his portfolio; the apparent key to success was the
shaping of trades that anticipated the effect of government policy.
Continued in article
Jensen Questions
If all these transactions were only by chance profitable, why is it that the
representatives, senators, and their trust investors always profited and never
lost in dealings connected to inside information?
More importantly why did representatives and senators who write the laws
have to write themselves in as exempt from insider trading laws?
Why aren't national leaders like Nancy Pelosi, John Kerry, and John
Boehner who vigorously deny inside trading actively seeking to overturn laws
that exempt representatives and senators from insider trading lawsuits? Why do
they still hold themselves above their own law?
Why have representatives and senators buried reform legislation concerning
their insider trading exemption so deep in the legislative process that there's
zero hop of reforming themselves against abuses of insider trading and
exploitation of other investors?
Watch the "Insider" Video Now While
It's Still Free ---
http://www.cbsnews.com/video/watch/?id=7387951n&tag=contentMain;contentBody
THIS IS HOW YOU FIX CONGRESS!!!!!
If you agree with the above, pass it on.
Warren Buffett, in a recent interview with CNBC, offers one of the best
quotes about the debt ceiling:"I could end the deficit in 5 minutes," he
told CNBC. "You just pass a law that says that anytime there is a deficit of
more than 3% of GDP, all sitting members of Congress are ineligible for
re-election. The 26th amendment (granting the right to vote for 18
year-olds) took only 3 months & 8 days to be ratified! Why? Simple! The
people demanded it. That was in1971...before computers, e-mail, cell phones,
etc. Of the 27 amendments to the Constitution, seven (7) took 1 year or less
to become the law of the land...all because of public pressure.Warren Buffet
is asking each addressee to forward this email to a minimum oftwenty people
on their address list; in turn ask each of those to do likewise. In three
days, most people in The United States of America will have the message.
This is one idea that really should be passed around.*Congressional Reform
Act of 2011......
1. No Tenure / No Pension. A Congressman collects a salary while in office
and receives no pay when they are out of office.
2.. Congress (past, present & future) participates in Social Security. All
funds in the Congressional retirement fund move to the Social Security
system immediately. All future funds flow into the Social Security
system,and Congress participates with the American people. It may not be
used for any other purpose..
3. Congress can purchase their own retirement plan, just as all Americans
do...
4. Congress will no longer vote themselves a pay raise. Congressional pay
will rise by the lower of CPI or 3%.
5. Congress loses their current health care insurance and participates in
the same health care plan as the American people.
6. Congress must equally abide by all laws they impose on the American
people..
7. All contracts with past and present Congressmen are void effective
1/1/12. The American people did not make this contract with Congressmen.
Congressmen made all these contracts for themselves. Serving in Congress is
an honor,not a career. The Founding Fathers envisioned citizen legislators,
so ours should serve their term(s), then go home and back to work.
If each person contacts a minimum of twenty people then it will only take
three days for most people (in the U.S.) to receive the message. Maybe it is
time.
PLEASE PASS THIS ON
Holman Jenkins of The Wall Street Journal contends that in total
representatives and senators do not perform better (possibly even worse) than
average investors in the stock market ---
http://online.wsj.com/article/SB10001424052970204190504577039834018364566.html?mod=djemEditorialPage_t
What he does not mention is that opportunities to trade on inside information is
generally infrequent and often limited to a few members of a particular
legislative committee receiving insider testimony or preparing to release
committee recommendations to the legislature.
Jenkins misses the entire point of insider trading. If it was a daily event
in the public or private sector it would be squashed even harder than it is now
being squashed, because rampant insider trading would drive the public away from
the financial and real estate markets. The trading markets survive this cancer
because it is relatively infrequent when it does take place among corporate
executives (illegally) or our legislators (legally).
Feeling
cynical?
They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss.
What's a sweetheart like you doin' in a dump like this?
Lyrics of a Bob Dylan song forwarded by Amian Gadal
[DGADAL@CI.SANTA-BARBARA.CA.US] |
If the law passes in its current form, insider
trading by Congress will not become illegal.
"Congress's Phony Insider-Trading Reform: The denizens of Capitol Hill
are remarkable investors. A new law meant to curb abuses would only make their
shenanigans easier," by Jonathan Macey, The Wall Street Journal,
December 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203413304577088881987346976.html?mod=djemEditorialPage_t
Members of Congress already get better health
insurance and retirement benefits than other Americans. They are about to
get better insider trading laws as well.
Several academic studies show that the investment
portfolios of congressmen and senators consistently outperform stock indices
like the Dow and the S&P 500, as well as the portfolios of virtually all
professional investors. Congressmen do better to an extent that is
statistically significant, according to studies including a 2004 article
about "abnormal" Senate returns by Alan J. Ziobrowski, Ping Cheng, James W.
Boyd and Brigitte J. Ziobrowski in the Journal of Financial and Qualitative
Analysis. The authors published a similar study of the House this year.
Democrats' portfolios outperform the market by a
whopping 9%. Republicans do well, though not quite as well. And the trading
is widespread, although a higher percentage of senators than representatives
trade—which is not surprising because senators outperform the market by an
astonishing 12% on an annual basis.
These results are not due to luck or the financial
acumen of elected officials. They can be explained only by insider trading
based on the nonpublic information that politicians obtain in the course of
their official duties.
Strangely, while insider trading by corporate
insiders has long been the white collar crime equivalent of a major felony,
the Securities and Exchange Commission has determined that insider trading
laws do not apply to members of Congress or their staff. That is because,
according to the SEC at least, these public officials do not owe the same
legal duty of confidentiality that makes insider trading illegal by
nonpoliticians.
The embarrassing inconsistency was ignored for
years. All of this changed on Nov. 13, 2011, after insider trading on
Capitol Hill was the focus of CBS's "60 Minutes." The previously moribund
"Stop Trading on Congressional Knowledge Act" (H.R. 1148), first introduced
in 2006, was pulled off the shelf and reintroduced. The bill suddenly had
more than 140 sponsors, up from a mere nine before the show.
The "Stock" Act, as it is called, would make it
illegal for members of Congress and staff to buy or sell securities based on
certain nonpublic information. It would toughen disclosure obligations by
requiring congressmen and their staffers to report securities trades of more
than $1,000 to the clerk of the House (or the secretary of the Senate)
within 90 days. And it would bring the new cottage industry in Washington,
the so-called political intelligence consultants used by hedge funds, under
the same rules that govern lobbyists. These political intelligence
consultants are hired by professional investors to pry information out of
Congress and staffers to guide trading decisions.
Publicly, House members echo bill sponsor Rep.
Louise Slaughter (D., N.Y) in saying things like: "We want to remove any
current ambiguity" about whether insider trading rules apply to Congress. Or
as co-sponsor Rep. Timothy Walz (D., Minn.) put it: "We are trying to set
the bar higher for members of Congress."
On closer examination, it appears that what
Congress really wants is to keep making the big bucks that come from trading
on inside information but to trick those outside of the Beltway into
believing they are doing something about this corruption. For one thing, the
rules proposed for Capitol Hill are not like those that apply to the rest of
us. Ours are so broad and vague that prosecutors enjoy almost unfettered
discretion in deciding when and whom to prosecute.
Congress's rules would be clear and precise. And
not too broad; in fact they are too narrow. For example, the proposed rules
in the Stock bill are directed only at information related to pending
legislation. It would appear that inside information obtained by a
congressman during a regulatory briefing, or in another context unrelated to
pending legislation, would not be covered.
At a Dec. 6 House hearing, SEC enforcement chief
Robert Khuzami opined that any new rules for Congress should not apply to
ordinary citizens. He worried that legislators might "narrow current law and
thereby make it more difficult to bring future insider trading actions
against individuals outside of Congress."
This don't-rock-the-boat approach serves the
interests of the SEC because it maximizes the commission's power and
discretion, but it's not the best approach. The sensible thing to do would
be to rationalize the rules by creating a clear definition of what
constitutes insider trading, and then apply those rules to everyone on and
outside Capitol Hill.
If the law passes in its current form, insider
trading by Congress will not become illegal. I predict such trading will
increase because the rules of the game will be clearer. Most significantly,
the rule proposed for Congress would not involve the same murky inquiry into
whether a trader owed or breached a "fiduciary duty" to the source of the
information that required that he refrain from trading.
Continued in article
Bob Jensen's threads on Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm
"Accused of Deception, Citi Agrees to Pay $285 Million," by Edward
Wyatt, The New York Times, October 19, 2011 ---
http://www.nytimes.com/2011/10/20/business/citigroup-to-pay-285-million-to-settle-sec-charges.html?hp
Citigroup agreed to pay $285 million to settle
charges that it misled investors in a $1 billion derivatives deal tied to
the United States housing market, then bet against investors as the housing
market began to show signs of distress, the Securities and Exchange
Commission said Wednesday.
The S.E.C. also brought charges against a Citigroup
employee who was responsible for structuring the transaction, and brought
and settled charges against the asset management unit of Credit Suisse and a
Credit Suisse employee who also had responsibility for the derivative
security.
¶ The S.E.C. said that the $285 million would be
returned to investors in the deal, a collateralized debt obligation known as
Class V Funding III. The commission said that Citigroup exercised
significant influence over the selection of $500 million of assets in the
deal’s portfolio.
¶ Citigroup then took a short position against
those mortgage-related assets, an investment in which Citigroup would profit
if the assets declined in value. The company did not disclose to the
investors to whom it sold the collateralized debt obligation that it had
helped to select the assets or that it was betting against them.
¶ The S.E.C. also charged Brian Stoker, the
Citigroup employee who was primarily responsible for putting together the
deal, and Samir H. Bhatt, a Credit Suisse portfolio manager who was
primarily responsible for the transaction. Credit Suisse served as the
collateral manager for the C.D.O. transaction.
¶ “The securities laws demand that investors
receive more care and candor than Citigroup provided to these C.D.O.
investors,” said Robert Khuzami, director of the S.E.C.’s division of
enforcement. “Investors were not informed that Citigroup had decided to bet
against them and had helped choose the assets that would determine who won
or lost.”
¶ Citigroup received fees of $34 million for
structuring and marketing the transaction and realized net profits of at
least $126 million from its short position. The $285 million settlement
includes $160 million in disgorgement plus $30 million in prejudgment
interest and a $95 million penalty, all of which will be returned to
investors.
¶ The companies and individuals who settled the
charges neither admitted nor denied the charges.
Continued in article
Bob Jensen
We've come to expect that lawyers lie --- it's part of their job
responsibilities in some instances
But it's a bit of a shock how much law schools themselves lie (until we make the
connection that law schools are run by lawyers)
"Coburn, Boxer Call for Department of Education to Examine Questions of
Law School Transparency," New Release from the Official Site of Senator
Barbara Boxer, October 14, 2011 ---
http://boxer.senate.gov/en/press/releases/101411.cfm
Washington, D.C. – U.S. Senators
Tom Coburn (R-OK) and Barbara Boxer (D-CA) yesterday asked the Department of
Education’s Inspector General to provide information about key law school
job placement, bar passage and loan debt metrics in light of serious
concerns that have been raised about the accuracy and transparency of
information being provided to prospective law school students.
This letter follows repeated calls from Senator
Boxer to the American Bar Association to provide stronger oversight of
reporting by law schools and better access to information for students.
In their letter, the Senators pointed to media
reports that raise questions about whether the claims law schools use to
lure prospective students are, in fact, accurate. They also cited reporting
that questions whether law school tuition and fees are used for legal
education or for unrelated purposes.
The full text of the Senators’ letter appears
below.
October 13, 2011
Ms. Kathleen Tighe
Inspector General
U.S. Department of Education
400 Maryland Ave., S.W.
Washington, DC 20202-1500
To help better inform Congress as it prepares to
reform the Higher Education Act, we write to request an examination of
American law schools that focuses on the confluence of growing enrollments,
steadily increasing tuition rates and allegedly sluggish job placement.
Recent media stories reveal concerning challenges
for students and graduates of such schools. For example, The New York Times
reported on a law school that “increased the size of the class arriving in
the fall of 2009 by an astounding 30 percent, even as hiring in the legal
profession imploded.” The New York Times found the same school is ranked in
the bottom third of all law schools in the country and has tuition and fees
set at $47,800 a year but reported to prospective students median starting
salaries rivaling graduates of the best schools in the nation “even though
most of its graduates, in fact, find work at less than half that amount.”
Other reports question whether or not law schools
are properly disclosing their graduation rates to prospective students.
Inside Higher Ed recently highlighted several pending lawsuits which “argue
that students were essentially robbed of the ability to make good decisions
about whether to pay tuition (and to take out student loans) by being forced
to rely on incomplete and inaccurate job placement information.
Specifically, the suits charge the law schools in question (and many of
their peers) mix together different kinds of employment (including jobs for
which a J.D. is not needed) to inflate employment rates.”
Media exposes also reveal possible concerns about
whether tuition and fees charged by law schools are used directly for legal
education, or for purposes unrelated to legal education. For example, The
New York Times reports “law schools toss off so much cash they are sometimes
required to hand over as much as 30 percent of their revenue to
universities, to subsidize less profitable fields.” The Baltimore Sun
recently reported on the resignation of the Dean of the University of
Baltimore (UB) Law School, who said he resigned, in part, over his
frustration that the law school’s revenue was not being retained to serve
students at the school. In his resignation letter, UB’s Dean noted: “The
financial data [of the school] demonstrates that the amount and percentage
of the law school revenue retained by the university has increased,
particularly over the last two years. For the most recent academic year (AY
10-11), our tuition increase generated $1,455,650 in additional revenue. Of
that amount, the School of Law budget increased by only $80,744.”
To better understand trends related to law schools
over the most recent ten-year window, we request your office provide the
following information:
1. The current enrollments, as well as the
historical growth of enrollments, at American law schools – in the
aggregate, and also by sector (i.e., private, public, for-profit).
2. Current tuition and fee rates, as well as the
historical growth of tuition and fees, at American law schools – in the
aggregate, and also by sector (i.e., private, public, for-profit).
3. The percentage of law school revenue generated
that is retained to administer legal education, operate law school
facilities, and the percentage and dollar amount used for other, non-legal
educational purposes by the broader university system. If possible, please
provide specific examples of what activities and expenses law school
revenues are being used to support if such revenue does not support legal
education directly.
4. The amount of federal and private educational
loan debt legal students carried upon graduation, again in the aggregate and
across sectors.
5. The current bar passage rates and graduation
rates of students at American law schools, again in the aggregate and across
sectors.
6. The job placement rates of American law school
graduates; indicating whether such jobs are full- or part-time positions,
whether they require a law degree, and whether they were maintained a year
after employment.
In your final analysis, please include a
description of the methodology the IG employed to acquire and analyze
information for the report. Please also note any obstacles to acquiring
pertinent information the agency may encounter.
We thank you in advance for your time and attention
to this matter. Please feel free to contact us if you have any questions
concerning this request.
Sincerely,
Tom A. Coburn,
M.D. United States Senator
Barbara Boxer
United States Senator
Jensen Comment
Faculty urged not to be “too choosy” in admitting new cash-cow graduate students
"Not So Fast," by Lee Skallerup Bessette, Inside Higher Ed, August
29, 2011 ---
http://www.insidehighered.com/views/2011/08/29/essay_suggesting_faculty_members_should_be_dubious_of_drive_for_new_graduate_programs
Bob Jensen's threads on Turkey Times for Overstuffed Law Schools ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#OverstuffedLawSchools
Student Financial Aid Fraud
"Hitting Hard on Fraud," by Paul Fain, Inside Higher Ed, October
11, 2011 ---
http://www.insidehighered.com/news/2011/10/11/community_colleges_push_back_on_proposed_regulations_targeting_fraud_rings
A fast-moving effort by the U.S. Education
Department to crack down on financial aid fraud faces a common dilemma in
higher education: how to protect the integrity of government aid coffers
without harming students.
Fraud rings that use “straw students” to pilfer
federal financial aid are a growing problem, particularly in online programs
at largely open-access community colleges and for-profit institutions. But
proposed regulatory fixes, even if well-meaning, could create layers of red
tape for colleges and make it harder for some students to receive financial
aid.
“It’s a balancing act,” said Evan Montague, dean of
students for Lansing Community College. Montague said the fraud rings are a
threat, but that his college has adequate safeguards in place, thanks to a
recent upgrade. He worries that the proposed federal policies would be an
added “regulatory burden.”
The department’s Office of the Inspector General
has seen a dramatic increase in online education scams, according to a
report released last month. The crimes typically feature a ringleader and
phony students who enroll, receive federal aid and split the proceeds with
the ringleader. Community colleges may be targeted more often than
for-profits because they typically charge less in tuition, leaving more of a
leftover aid balance for thieves to pocket.
Continued in article
Jensen Comment
Much of the student financial aid fraud takes place amongst for-profit
universities operating in the gray zone of fraud ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#ForProfitFraud
But there is substantial fraud among the non-profit universities as well. One
recent example is Chicago State University that clung to students who never
passed a course.
"Chicago State Let Failing Students Stay," Inside Higher Ed, July 26,
2011 ---
http://www.insidehighered.com/news/2011/07/26/qt#266185
Chicago State University officials have been
boasting about improvements in retention rates. But an investigation by
The Chicago Tribune found that part of the
reason is that students with grade-point averages below 1.8 have been
permitted to stay on as students, in violation of university rules. Chicago
State officials say that they have now stopped the practice, which the
Tribune exposed by requesting the G.P.A.'s of a cohort of students. Some of
the students tracked had G.P.A.'s of 0.0.
Question
How does the government use fraudulent accounting to hide the cost of student
loan defaults?
"Washington's Quietest Disaster Student loan defaults are growing, and the
worst is still to come," The Wall Street Journal, September 30, 2011
---
http://online.wsj.com/article/SB10001424053111903703604576587103028334580.html#mod=djemEditorialPage_t
When critics warned about rising defaults on
government-backed student loans two years ago, the question was how quickly
taxpayers would feel the pain. The U.S. Department of Education provided
part of the answer this month when it reported that the default rate for
fiscal 2009 surged to 8.8%, up from 7% in 2008.
This rising default rate doesn't even tell the
whole story. The government allows various "income contingent" and
"income-based" repayment options, so the statistics don't count kids who
were given permission to pay less than they owed. Taxpayers shouldn't expect
relief any time soon. Thanks to policy changes in recent years and
fraudulent government accounting, the pain could be excruciating.
Readers who followed the Congressional birth of
ObamaCare in 2010 may recall that student lending was the other industry
takeover that came along for the legislative ride. Private lenders used to
originate federally guaranteed loans, but the new law required all such
loans to come directly from the feds. Combined with earlier changes that
discouraged private loans sold without a federal guarantee, the result is a
market dominated by Washington.
The 2010 changes did not happen simply because
President Obama and legislators like Rep. George Miller and Sen. Tom Harkin
distrust profit-making enterprises. The student-loan takeover also advanced
the mirage that ObamaCare would save money.
Thanks to only-in-Washington accounting, making the
Department of Education the principal banker to America's college students
created a "savings" of $68 billion over 11 years, certified by the
Congressional Budget Office. Even CBO Director Douglas Elmendorf admitted
that this estimate was bogus because CBO was forced to use federal rules
that ignored the true cost of defaults. But Mr. Miller had earlier laid the
groundwork for this fraud by killing amendments in the House that would have
required honest accounting and an audit.
Armed in 2010 with their CBO-certified "savings,"
Democrats decided they could finance a portion of ObamaCare, as well as an
expansion of Pell grants. But as Bernie Madoff could have told them, frauds
break down when enough people show up asking for their money. That's
happening already, judging by recent action in the Senate Appropriations
Committee, where lawmakers apparently realize that the federal takeover
isn't going to deliver the promised riches.
To preserve Team Obama's priority of maintaining a
maximum Pell grant of $5,550 per year and doubling the total annual funding
to $36 billion since President Obama took office, Democrats recently decided
to make student-loan borrowers pay interest on their loans for their first
six months out of college. Washington used to give the youngsters an
interest-free grace period. Taxpayers might cheer this change if the money
wasn't simply being transferred to another form of education subsidy. But it
seems almost certain to raise default rates as it puts recent grads under
increased financial pressure.
None of these programs has anything to do with
making it easier to afford college. Universities have been efficient in
pocketing the subsidies by increasing tuition after every expansion of
federal support. That's why education is a rare industry where prices have
risen even faster than health-care costs.
This is also the rare market where the recent trend
of de-leveraging doesn't apply. An August report from the Federal Reserve
Bank of New York found that Americans cut their household debt from a peak
of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion.
Consumers have reduced their debt on houses, cars, credit cards and nearly
everything except student loans, where debt has increased 25% in the three
years.
Perhaps this is because most federal student loans
are made without regard to income, assets or credit history. Much like the
federal obsession to finance a home for every American regardless of ability
to pay, the obsession to finance higher education for every high school
student ignores inconvenient facts. These include the certainty that some of
these kids will take jobs that don't require college degrees and may not
support timely repayment.
For this school year, even the loans that pay on
time aren't necessarily winners for the taxpayer. That's because of a 2007
law that Mr. Miller and Nancy Pelosi pushed through Congress—and George W.
Bush signed—that cut interest rates on many federally backed student loans.
Stafford loans, the most common type, have been available since July at a
fixed rate of 3.4%, barely above the historically low rates at which the
Treasury is currently borrowing for the long term. The student loan rates
are scheduled to rise back to 6.8% next year. But if our spendthrift
government ends up borrowing money above 7% and lending it to kids at 6.8%,
taxpayers will suffer even before the youngsters go delinquent.
Efforts to clean up this debacle are stirring on
Capitol Hill, with House Republicans moving to limit Pell grants to students
who have a high school diploma or GED. Oklahoma Sen. Tom Coburn would go
further and have government leave the business of subsidizing the education
industry via student loans and let private lenders finance college. That may
be too radical at the moment, but it won't be if taxpayers ever figure out
how much subsidized loans will cost them
The fact is, some schools represent terrific
investments. At Caltech, financial aid recipients can expect to spend $91,250
for a degree that over 30 years will allow them to repay that investment and
out-earn a high school graduate by more than $2 million. But schools like
Caltech are the exception that proves the rule: most students would be better
off investing their college nest eggs in the S&P 500 rather than a college
education. So if you are going to choose college, it pays to choose wisely.
Louis Lavelle, Business Schools Editor Bloomberg Business Week,
April 14, 2011
"The New Math: College
Return on Investment," Bloomberg Business Week Special Report, April 2011
---
http://www.businessweek.com/bschools/special_reports/20110407college_return_on_investment.htm?link_position=link1
The Case Against College
Education ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CaseAgainst
From The Wall Street Journal on October 7, 2011
U.S.-Chinese Progress on Accounting Is Dealt Setback
by:
Michael Rapoport
Oct 04, 2011
Click here to view the full article on WSJ.com
TOPICS: Auditing, Fraud, Fraudulent Financial Reporting,
International Auditing, PCAOB
SUMMARY: The Public Company Accounting Oversight Board (PCAOB) had
previously announced that negotiations to allow U.S. auditing inspectors
into Chinese accounting firms-those which audit U.S.-traded companies-would
continue with a meeting in Washington this month. The talks began in Beijing
in July and were to have continued with visitors from China's regulatory
agencies coming to Washington. "No reason was given for the delay, [but
it]...comes only a few weeks after the Securities and Exchange Commission's
move to bypass Chinese regulators and take action directly against the
Chinese arm of accounting giant Deloitte Touche Tohmatsu...." Chinese
regulators have cited concerns over maintaining sovereignty as a reason for
not allowing the U.S. regulators in for inspections. The article follows
PCAOB issuance of a Staff Audit Practice Alert No. 8, Audit Risks in Certain
Emerging Markets, on Monday, October 3, 2011. The link to this audit alert
is given below and also in the questions.
http://pcaobus.org/Standards/QandA/2011-10-03_APA_8.pdf
CLASSROOM APPLICATION: The article is useful in auditing classes to
cover the role of the PCAOB, international issues, and/or fraud concerns in
financial statement audits.
QUESTIONS:
1. (Introductory) What is the role of the Public Company Accounting
Oversight Board (PCAOB) in the U.S.? When was this organization established?
2. (Introductory) How does the PCAOB execute oversight
responsibilities over the auditing profession in the U.S?
3. (Introductory) Why does the PCAOB visit auditing firms in other
countries? What limitations does the PCAOB face in doing so in China?
4. (Advanced) Access the PCAOB Staff Audit Practice Alert issued
Monday, October 3, 2011 (http://pcaobus.org/Standards/QandA/2011-10-03_APA_8.pdf).
What is the purpose of an audit alert in general and of this audit alert in
particular?
5. (Advanced) What circumstances has the PCAOB observed that
indicate risks of fraud in an audit? From what U.S. regulatory filings has
the PCAOB observed these circumstances?
6. (Introductory) What is the auditor's responsibility for
detecting fraud in an engagement to audit financial statements? How does
this information in this practice alert help auditors to fulfill that
responsibility?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Norway and U.S. Strike Deal on Accounting Oversight
by Michael Rapoport
Sep 14, 2011
Online Exclusive
"U.S.-Chinese Progress on Accounting Is Dealt Setback," by: Michael Rapoport,
The Wall Street Journal, October 4, 2011 ---
http://online.wsj.com/article/SB10001424052970204524604576609183570744552.html?mod=djem_jiewr_AC_domainid
U.S.-Chinese negotiations to allow American
audit-firm inspectors into China suffered a setback Monday, as U.S.
regulators indicated that a planned visit to Washington by their Chinese
counterparts to continue the talks has been postponed.
Regulators previously said the Chinese were slated
to visit Washington this month for a second round of the talks, which began
in Beijing in July. The two countries are negotiating on whether to allow
inspectors from the Public Company Accounting Oversight Board, the U.S.'s
auditing regulator, into China to scrutinize the work of Chinese accounting
firms which audit U.S.-traded companies.
But dates for the meeting "are not set," a
spokeswoman for the accounting board said Monday. No new meeting date was
disclosed. "We remain hopeful that we will be able to meet with the Chinese
regulators in the near future," the spokeswoman said.
No reason was given for the delay, and officials
from the China Securities Regulatory Commission, one of the agencies that
was to have participated in the talks this month, couldn't be immediately
reached for comment.
The delay comes only a few weeks after the
Securities and Exchange Commission's move to bypass Chinese regulators and
take action directly against the Chinese arm of accounting giant Deloitte
Touche Tohmatsu to seek documents related to a former Deloitte client the
SEC is investigating.
Joseph Carcello, a University of Tennessee
professor who serves on two advisory panels for the accounting watchdog,
said he didn't know whether the delay was China's way of retaliating for the
Deloitte matter. But he said "there has been great hesitation on the part of
the Chinese to allow the PCAOB to do inspections. I think this is further
indication a resolution of this issue is not close."
Jacob Frenkel, a former SEC enforcement attorney
now in private practice, said that because the SEC had "thrown down the
gauntlet" against Deloitte, the Chinese may have decided it's better for
them not to meet in the U.S. right now. From their perspective, "this is not
a time when they want to be meeting and negotiating," he said.
An SEC spokesman declined to comment.
The accounting board's chairman, James Doty, has
made it a priority to negotiate a China-inspection agreement, saying it is
critical to protection of U.S. investors. Inspectors for the watchdog
conduct regular evaluations of accounting firms that audit companies listed
on U.S. markets, even if the firms and their clients are based overseas, but
Chinese authorities haven't allowed U.S. inspectors into China, citing
sovereignty concerns.
Continued in article
"CONSISTENCY IN ACCOUNTING AND LEGAL DISCOURSES: THE OVERTIME CASES,"
by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants, October
10. 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/336
For several years battles have raged in several
courtrooms concerning whether accounting firms have a legal obligation to
pay junior accountants overtime. We are sympathetic to the position of the
accounting firms, but worry about the soundness of their legal reasoning and
conclusions. Do accounting firms have to be consistent in different
domains? For example, does the logic in legal briefs and oral arguments
have to be congruent with ethical principles and auditing standards?
There are a number of accounting overtime cases,
including Campbell and Sobek v. PwC (California) and Litchfield v. KPMG
(Washington). Essentially the facts in these cases are the same.
Plaintiffs are unlicensed employees of a Big Four firm in the attestation
unit or division who serve as associates or senior associates. They worked
long hours but were not paid overtime; the plaintiffs seek damages in the
amount of the unpaid overtime work.
On September 20, in Ho v. Ernst & Young, the court
partially certified a class of junior tax accountants at E&Y in California.
These overtime cases now include other areas of accounting besides
attestation.
Details of these cases can be found at: Orey’s
BusinessWeek article “Wage
Wars,” Francine McKenna’s “PwC
Hit with Overtime Lawsuit Wave” and “Auditors
Want Overtime: California Lawsuit Against PwC Could Change Model,”
Caleb Newquist’s “Plaintiffs
File Brief in Overtime Lawsuits Against PricewaterhouseCoopers,”
and Kim Lacata’s “Another
Accounting Firm Hit With Overtime Suit.” Similar
suits were filed in
Canada as well, where three of the four large
accounting firms settled.
We are sympathetic to the position of the large
accounting firms because these firms generally have been open and honest
with potential recruits. While they do promise busy periods involving long
hours with no overtime pay, they historically have held out the prospect of
other rewards (e.g., bonuses, extra vacation time, etc.). If these cases
pivoted about contracts, they would be a slam dunk in favor of the large
accounting firms. Recruits cannot claim they did not know what awaited
them.
Further, if the plaintiffs prevail, it is easy to
conclude that the Big Four will most likely change the pay model in the
future. The base compensation will be significantly reduced so that the
base pay plus estimated overtime will equal the current levels. If the
plaintiffs prevail, they and their attorneys will be the only ones to
benefit.
Be that as it may, we have read some of the legal
filings and are disturbed by the defense counsel arguments.
Federal and
state labor laws require overtime pay, but allow for various exemptions.
One exemption is for “professionals,” but unlicensed
accountants may not be viewed as “professional.” Only licensed CPAs can
perform audits, so the license appears to be a demarcation whether this
exemption can be applied.
Defense attorneys in many of these cases utilize
the administrative exemption, which essentially states the firm does not
have to pay overtime if the employees have duties and responsibilities that
require them to exercise discretion and independent judgment. This is a
peculiar thing to argue for a junior accountant working on an attest
function, because he or she does not have the authority to issue an audit
opinion. How much discretion and judgment can these individuals exercise
without simultaneously having the authority to form and write audit
opinions?
Continued in article
Bob Jensen's threads on miscellaneous litigation in the large accounting
firms ---
http://www.trinity.edu/rjensen/Fraud001.htm#BigFirms
"Dismissed' partner accuses Ernst & Young of corruption: Accountant
Ernst & Young is facing an allegation of corruption at one of its global
headquarters as part of a whistleblowing case brought by one of its ex-managing
partners," by Jonathan Russell, The Telegraph, December 4, 2011 ---
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8933219/Dismissed-partner-accuses-Ernst-and-Young-of-corruption.html
The allegation is made in a High Court case brought
against the Big Four accountant by former employee Cathal Lyons. The ex-E&Y
partner claims he was dismissed from the company and had hundreds of
thousands of pounds worth of medical cover withdrawn after he reported the
alleged corruption to the practice’s director of global tax.
Mr Lyons’ claim in the High Court relates to his
employment by E&Y’s Russian practice.
In 2006 he suffered a serious road accident
resulting in permanent disabilities and partial amputation. Despite
suffering serious medical complications Mr Lyons continued to work for Ernst
& Young, albeit in a reduced capacity, until he claims he was dismissed in
2010.
Following his dismissal, the medical insurance
cover provided by Ernst & Young was withdrawn. Mr Lyons claims this was in
direct breach of an agreement he had reached with E&Y that he would be
covered by the medical insurance for life.
His dismissal and the subsequent removal of his
medical insurance were a direct result of him reporting his concerns about
corruption, he claims.
Continued in article
Bob Jensen's threads on Ernst & Young are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Police Tactic: Keeping Crime Reports Off the Books," by Al Baker and
Joseph Goldstein, The New York Times, December 30, 2011 ---
http://www.nytimes.com/2011/12/31/nyregion/nypd-leaves-offenses-unrecorded-to-keep-crime-rates-down.html?_r=2&pagewanted=1&hp
Jill Korber walked into a drab police station in
Queens in July to report that a passing bicyclist had groped her two days in
a row. She left in tears, frustrated, she said, by the response of the first
officer she encountered.
“He told me it would be a waste of time, because I
didn’t know who the guy was or where he worked or anything,” said Ms. Korber,
34, a schoolteacher. “His words to me were, ‘These things happen.’ He said
those words.”
Crime victims in New York sometimes struggle to
persuade the police to write down what happened on an official report. The
reasons are varied. Police officers are often busy, and few relish
paperwork. But in interviews, more than half a dozen police officers,
detectives and commanders also cited departmental pressure to keep crime
statistics low.
While it is difficult to say how often crime
complaints are not officially recorded, the Police Department is conscious
of the potential problem, trying to ferret out unreported crimes through
audits of emergency calls and of any resulting paperwork.
As concerns grew about the integrity of the data,
the police commissioner, Raymond W. Kelly, appointed a panel of former
federal prosecutors in January to study the crime-reporting system. The move
was unusual for Mr. Kelly, who is normally reluctant to invite outside
scrutiny.
The panel, which has not yet released its findings,
was expected to focus on the downgrading of crimes, in which officers
improperly classify felonies as misdemeanors.
But of nearly as much concern to people in law
enforcement are crimes that officers simply failed to record, which one
high-ranking police commander in Manhattan suggested was “the newest
evolution in this numbers game.”
It is not unusual for detectives, who handle
telephone calls from victims inquiring about the status of their cases, to
learn that no paperwork exists. Detectives said it was hard to tell if those
were administrative mix-ups or something deliberate. But they noted their
skepticism that some complaints could simply vanish in the digital age.
Detective Louis A. Molina, president of the
National Latino Officers Association, said that for some officers, the
desire of supervisors to keep recorded crime levels low was “going to be on
your mind,” and that it “can play a role in your decision making.”
“For police officers,” he added, “it’s gotten to
the point of what’s the most diplomatic way to discourage a crime report
from being taken.”
Some public officials have said they have received
more complaints from constituents that their reports of crime were not being
recorded. State Assemblyman Hakeem Jeffries of Brooklyn said his office had
to contact “local precincts directly to make sure that criminal complaints
were filed and processed appropriately.”
In the case of Ms. Korber, the police did
eventually take a report of her being groped, but only after her city
councilman, Peter F. Vallone Jr., intervened, she and Mr. Vallone said. In
fact, Mr. Vallone said that he had grown so alarmed over how many women were
being groped in his district that he contacted the 114th Precinct; his staff
then asked Ms. Korber to go there again.
Paul J. Browne, the Police Department’s chief
spokesman, said each precinct must audit police responses to radio
dispatches four times a month “to assure that crime complaints are taken
when necessary and prepared accurately.”
Continued in article
If audit reform swaggered into a Luckenbach, Texas saloon, it would be "all
hat and no horse"
The ladies of the night would die laughing at that "itty-bitty thang" that
walked in
And it would need a ladder to peek over the top of the spittoon
"Recent Comments On European and U.S. Audit Reform," by Francine
McKenna, re:TheAuditors, October 4, 2011 ---
http://retheauditors.com/2011/10/04/recent-comments-on-european-and-u-s-audit-reform/
The topic of audit industry reform is hot again.
OK, that’s relative to where you stand on what’s hot. But in the world of
legal and regulatory compliance and auditors the only thing hotter would be
a significant development in the
New York Attorney General’s case against Ernst & Young.
Here in the U.S. the PCAOB has been busy. I’ll
give them – mostly Chairman James Doty and the Investor Advisory Group led
by Board Member Steve Harris – credit for that. The Investor Advisory Group
– rather, the boldest amongst them – recently sent
a letter to the PCAOB to provide comments on the
PCAOB’s June 21, 2011 Concept Release entitled Possible Revisions to
PCAOB Standards Related to Reports on Audited Financial Statements and
Related Amendments to PCAOB Standards.
It is worth noting that a number of other
parties agree that the current form of the auditor’s report fails to
meet the legitimate needs of investors. First, the U.S. Treasury
Advisory Committee on the Auditing Profession (ACAP) called for the
PCAOB to undertake a standard-setting initiative to consider
improvements to the standard audit report. The ACAP members support “…
improving the content of the auditor’s report beyond the current
pass/fail model to include a more relevant discussion about the audit of
the financial statements.”
Second, surveys conducted by the CFA Institute
in 2008 and 2010 indicate that research analysts want auditors to
communicate more information in their reports.
Finally, even leaders of the accounting
profession have acknowledged that the audit report needs to become more
relevant. In testimony before ACAP, Dennis Nally, Chairman of PwC
International stated, “It’s not difficult to imagine a world where the …
trend to fair value measurement — lead one to consider whether it is
necessary to change the content of the auditor’s report to be more
relevant to the capital markets and its various stakeholders.”
Finally, leaders of the accounting profession
have previously stated that changes to the audit report should reflect
investor preferences. In their 2006 White Paper, the CEOs of the six
largest accounting firms stated, “The new (reporting) model should be
driven by the wants of investors and other users of company
information …” (their emphasis).
Before we turn to a discussion of the IAG
investor survey, we believe it is important to underscore the
fundamental but often overlooked fact that the issuer’s investors,
not its audit committee or management team or the company itself, are
the auditor’s client. It is therefore not only appropriate, but
essential, that investors’ views and preferences take center stage as
the PCAOB considers possible changes to the format and content of the
audit report.
In the meantime, I’ve written two articles about
the proposals on auditor regulation before the European Commission.
In Forbes, I told you not to count on
Europe to reform the audit model or auditors, in general.
The audit industry is reportedly under siege in
Europe and on the verge of being broken up, restrained, and rotated
until all the good profit is spun out.
This is neither a foregone conclusion nor
highly likely.
The European Commission’s internal markets
commissioner Michel Barnier is talking tough, but the rhetoric should be
no surprise to those who have been following the European response to
the financial crisis closely…
Please read the rest at Forbes.com,
“Don’t Count On Europe To Reform Auditors And Accounting”.
In American Banker, I focused on the
impact of auditor reforms on financial services. Why is the European
Commission taking such strong action now? Why is the U.S. lagging so far
behind?
The clamor for accountability from the auditors
for financial crisis failures and losses has been much louder, much
stronger, and going on much longer in the U.K. and Europe, than in the
United States. Barnier’s most dramatic proposals are viewed by most
commenters as a reaction to the bank failures. “Auditors play an
essential role in financial markets: financial actors need to be able to
trust their statements,” Barnier told the Financial
Times. “There are weaknesses in the way
the audit sector works today. The crisis highlighted them.”
There’s is a concern on both sides of the
Atlantic over long-standing auditor relationships.
The average auditor tenure for the largest 100
U.S. companies by market cap is 28 years. The U.S. accounting regulator,
the PCAOB, highlighted the auditor tenure trap in its recent Concept
Release on Auditor Independence and Auditor Rotation. According to The
Independent, quoting a recent House of
Lords report, only one of the FTSE 100 index’s members uses a non-Big
Four firm and the average relationship lasts 48 years. Some of the U.S.
bailout recipients — General Motors, AIG, Goldman Sachs, Citigroup — and
crisis failure Lehman had as
long or longer relationships with their
auditors…
Please read the rest at American Banker,
“Bank Debacles Drive Europe to Raise the Bar on Audits”.
Continued in article
Bob Jensen's threads on auditor professionalism and
independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm
Trust No one, Particularly Not Groupon's Accountants and Auditors (Ernst &
Young)
From The Wall Street Journal Weekly Accounting Review on September 30,
2011
Groupon Unsure on IPO Time
by:
Shayndi Raice and Randall Smith
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Accounting Changes and Error Corrections, Audit Report,
Auditing, Disclosure, Disclosure Requirements, Financial Accounting,
Financial Reporting, SEC, Securities and Exchange Commission
SUMMARY: This article presents financial reporting and auditing
issues stemming from the Groupon planned IPO. Groupon originally filed for
an initial public offering in June 2011. At the time, the filing contained a
measure Adjusted Consolidated Segment Operating Income that is a non-GAAP
measure of performance. The SEC at the time required the company to change
its filing to use GAAP-based measures of performance. The SEC has continued
to scrutinize the Groupon financial statements and has required the company
to report revenue based only on the net receipts to the company from sales
of its coupons after sharing proceeds with the businesses for which it makes
the coupon offers.
CLASSROOM APPLICATION: The article is useful in financial
accounting and auditing classes. Instructors of financial accounting classes
may use the article to discuss reporting of the change in measuring revenues
and related costs. Instructors of auditing classes may use the article to
discuss non-standard audit reports. Links to SEC filings are included in the
questions. The video is long; discussion of Groupon's issues stops at 5:30.
QUESTIONS:
1. (Introductory) According to the article, what accounting and
disclosure issues have delayed the initial public offering of shares of
Groupon, Inc.? What overall economic and financial factors are also
affecting this timing?
2. (Introductory) What was the problem with Groupon CEO Andrew
Mason's letter to Groupon employees? Do you think Mr. Mason intended for
this letter to be made public outside of Groupon? Should he have reasonably
expected that to happen?
3. (Advanced) What accounting change forced restatement of the
financial statements included in the Groupon IPO filing documents? You may
access information about this restatement directly at the live link included
in the online version of the article.
http://online.wsj.com/public/resources/documents/grouponrestatement20110923.pdf
4. (Introductory) According to the article, by how much was revenue
reduced due to this accounting change?
5. (Introductory) Access the full filing of the IPO documents on
the SEC's web site at
http://sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm
Proceed to the Consolidated Statements of Operations on page F-5. How are
these comparative statements presented to alert readers about the revenue
measurement issue?
6. (Advanced) Move back to examine the consolidated balance sheets
on page F-4. Do you think this accounting change for revenue measurement
affected net income as previously reported? Support your answer.
7. (Advanced) Proceed to footnote 2 on p. F-8. Does the disclosure
confirm your answer? Summarize the overall impact of these accounting
changes as described in this footnote.
8. (Advanced) What type of audit report has been issued on the
Groupon financial statements in this IPO filing? Explain the wording and
dating of the report that is required to fulfill requirements resulting from
the circumstances of these financial statements.
Reviewed By: Judy Beckman, University of Rhode Island
Groupon's Fast-growing Business Faces a Churning Point
by:
Rolfe Winkler
Sep 26, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Cost Accounting, Cost Management, Disclosure, Financial
Statement Analysis, Managerial Accounting
SUMMARY: This article focuses on financial statement analysis of
the Groupon IPO filing documents including some references to cost measures.
"Forget the snappy 'adjusted consolidated segment operating income.' That
profit measure...was rightly rejected by regulators. It is the complete
absence of details on subscriber churn that is more problematic. How often
are folks unsubscribing from Groupon's daily emails?...The issue is
important since...the cost of adding new subscribers has increased quickly."
CLASSROOM APPLICATION: The article may be used in a financial
statement analysis or managerial accounting class.
QUESTIONS:
1. (Introductory) What is the overall concern about Groupon's
business condition that is expressed in this article?
2. (Advanced) The author states that the cost of adding new
subscribers has increased. How was this cost determined? How does this
calculation make the cost assessment comparable from one period to the next?
3. (Advanced) What does Groupon CEO Andrew Mason say about the
company's cost of acquiring customers? What income statement expense item
shows this cost? How does the increasing unit cost discussed in answer to
question 2 above bring the CEO's assertion into question?
4. (Advanced) In general, how does the author of this assess the
quality of the filing by Groupon for its initial public offering? Why should
that assessment impact the thoughts of an investor considering buying the
Groupon stock when it is offered?
Reviewed By: Judy Beckman, University of Rhode Island
"Groupon: Comedy or Drama?" by Grumpy Old Accountants Anthony H.
Catanach Jr. and J. Edward Ketz, SmartPros, July 2011 ---
http://accounting.smartpros.com/x72233.xml
"Trust No one, Particularly Not Groupon's Accountants," by Anthony H.
Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, August 24,
2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/
"Is Groupon "Cooking Its Books?" by Grumpy Old Accountants Anthony
H. Catanach Jr. and J. Edward Ketz, SmartPros, September 2011 ---
http://accounting.smartpros.com/x72233.xml
Teaching Case
When Rosie Scenario waved goodbye "Adjusted Consolidated Segment Operating
Income"
From The Wall Street Journal Weekly Accounting Review on August 19,
2011
Groupon Bows to Pressure
by:
Shayndi Raice and Lynn Cowan
Aug 11, 2011
Click here to view the full article on WSJ.com
TOPICS: Advanced Financial Accounting, SEC, Securities and Exchange
Commission, Segment Analysis
SUMMARY: In filing its prospectus for its initial public offering
(IPO), Groupon has removed from its documents "...an unconventional
accounting measurement that had attracted scrutiny from securities
regulators [adjusted consolidated segment operating income]. The unusual
measure, which the e-commerce had invented, paints a more robust picture of
its performance. Removal of the measure was in response to pressure from the
Securities and Exchange Commission...."
CLASSROOM APPLICATION: The article is useful to introduce segment
reporting and the weaknesses of the required management reporting approach.
QUESTIONS:
1. (Introductory) What is Groupon's business model? How does it
generate revenues? What are its costs? Hint, to answer this question you may
access the Groupon, Inc. Form S-1 Registration Statement filed on June 2,
011 available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
2. (Advanced) Summarize the reporting that must be provided for any
business's operating segments. In your answer, provide a reference to
authoritative accounting literature.
3. (Advanced) Why must the amounts disclosed by operating segments
be reconciled to consolidated totals shown on the primary financial
statements for an entire company?
4. (Advanced) Access the Groupon, Inc. Form S-1 Registration
Statement filed on June 2, 011 and proceed to the company's financial
statements, available on the SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm#dm79801_selected_consolidated_financial_and_other_data
Alternatively, proceed from the registration statement, then click on Table
of Contents, then Selected Consolidated Financial and Other Data. Explain
what Groupon calls "adjusted consolidated segment operating income" (ACSOI).
What operating segments does Groupon, Inc., show?
5. (Introductory) Why is Groupon's "ACSOI" considered to be a
"non-GAAP financial measure"?
6. (Advanced) How is it possible that this measure of operating
performance could be considered to comply with U.S. GAAP requirements? Base
your answer on your understanding of the need to reconcile amounts disclosed
by operating segments to the company's consolidated totals. If it is
accessible to you, the second related article in CFO Journal may help answer
this question.
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Groupon's Accounting Lingo Gets Scrutiny
by Shayndi Raice and Nick Wingfield
Jul 28, 2011
Page: A1
CFO Report: Operating Segments Remain Accounting Gray Area
by Emily Chasan
Aug 15, 2011
Page: CFO
"Groupon Bows to Pressure," by: Shayndi Raice and Lynn Cowan, The Wall
Street Journal, August 11, 2011 ---
https://mail.google.com/mail/?shva=1#inbox/131e06c48071898b
Groupon Inc. removed from its initial public
offering documents an unconventional accounting measurement that had
attracted scrutiny from securities regulators.
The unusual measure, which the e-commerce had
invented, paints a more robust picture of its performance. Removal of the
measure was in response to pressure from the Securities and Exchange
Commission, a person familiar with the matter said.
In revised documents filed Wednesday with the SEC,
the company removed the controversial measure, which had been highlighted in
the first three pages of its previous filing. But Groupon's chief executive
defended the term Wednesday. [GROUPON] Getty Images
Groupon, headquarters above, expects to raise about
$750 million.
Groupon had highlighted something it called
"adjusted consolidated segment operating income", or ACSOI. The measurement,
which doesn't include subscriber-acquisitions expenses such as marketing
costs, doesn't conform to generally accepted accounting principles.
Investors and analysts have said ACSOI draws
attention away from Groupon's marketing spending, which is causing big net
losses.
The company also disclosed Wednesday that its loss
more than doubled in the second quarter from a year ago, even as revenue
increased more than ten times.
By leaving ACSOI out of its income statements, the
company hopes to avoid further scrutiny from the SEC, the person familiar
with the matter said. The commission declined comment.
Groupon in June reported ACSOI of $60.6 million for
last year and $81.6 million for the first quarter of 2011. Under generally
accepted accounting principles, the company generated operating losses of
$420.3 million and $117.1 million during those periods.
Wednesday's filing included a letter from Groupon
Chief Executive Andrew Mason defending ACSOI. The company excludes marketing
expenses related to subscriber acquisition because "they are an up-front
investment to acquire new subscribers that we expect to end when this period
of rapid expansion in our subscriber base concludes and we determine that
the returns on such investment are no longer attractive," the letter said.
There was no mention of when that expansion will
end, but the person familiar with the matter said the company reevaluates
the figures weekly.
Groupon said it spent $345.1 million on online
marketing initiatives to acquire subscribers in the first half and that it
expects "to continue to expend significant amounts to acquire additional
subscribers."
The latest SEC filing also contains new financial
data. Groupon on Wednesday reported second-quarter revenue of $878 million,
up 36% from the first quarter. While the company's growth is still rapid,
the pace has slowed. Groupon's revenue jumped 63% in the first quarter from
the fourth.
The company's second-quarter loss was $102.7
million, flat sequentially and wider than the year-earlier loss of $35.9
million.
Groupon expects to raise about $750 million in a
mid-September IPO that could value the company at $20 billion.
The path to going public hasn't been easy. The
company had to file an amendment to its original SEC filing after a Groupon
executive told Bloomberg News the company would be "wildly profitable" just
three days after its IPO filing. Speaking publicly about the financial
projections of a company that has filed to go public is barred by SEC
regulations. Groupon said the comments weren't intended for publication.
Continued in article
"Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter,
Townhall, September 2011 ---
http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations
Jensen Comment
In the 1990s, high tech companies resorted to various accounting gimmicks to
increase the price and demand for their equity shares ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm
Bob Jensen's threads about cooking the books
---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation
Question
How can a company that's "technically insolvent" have any sort of IPO success?
"GROUPON IS TECHNICALLY INSOLVENT,"
by Anthony H. Catach Jr. and J. Edward Ketz, Grumpy Old Accountants,
October 21, 2011 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/362
Two Update Teaching Cases on Groupon: IPO, Working Capital, and Cash
Flow
From The Wall Street Journal Weekly Accounting Review on November 11,
2011
Case 1
Exclusive Deal Floats Groupon
by:
Rolfe Winkler
Nov 05, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: business combinations, Financial Analysis, Goodwill,
Impairment
SUMMARY: Groupon filed its initial public offering (IPO) on Friday,
November 4, 2011, selling only a total of 6.4% of the company's total
shares. The IPO proceeds brought in $805 million, the third smallest total
for all IPOs since 1995, only larger than the IPOs of Vonage Holdings and
Orbitz in total proceeds. In terms of the percent of outstanding shares
sold, only Palm has sold a smaller percentage in that same time frame.
Quoting from the related article, "Silicon Valley and Wall Street took
Groupon's stock market debut as a sign that investors are still willing to
make risky bets on fast-growing but unprofitable young Internet
companies....Groupon shares rose from their IPO price of $20 by 40% in early
trading, and ended at the 4 p.m. market close at $26.11, up 31%. The closing
price valued Groupon at $16.6 billion...."
CLASSROOM APPLICATION: Questions focus on measuring the implied
fair value of an entire business from the value of only a portion. The
concept is used in accounting for business combinations and in goodwill
impairment testing.
QUESTIONS:
1. (Introductory) Summarize the Groupon initial public offering
(IPO). How many shares were sold? At what price?
2. (Introductory) Describe the market activity of the stock on its
first day of trading. How does that activity show that "investors
are...willing to make risky bets on...young Internet companies"?
3. (Advanced) How has the Groupon stock fared to the date you write
your answer to this question?
4. (Advanced) Define the term "implied fair value". How did sale of
only 6.3% of the shares outstanding translate into an overall firm valuation
of $12.8 billion? Show your calculation.
5. (Advanced) Given the range of trading reported in the article
and your answer to question 3 above, what is the range of total firm value
shown during this short time of public trading of Groupon stock? Again, show
your calculations. How does the small percentage of shares contribute to the
size of this range?
Reviewed By: Judy Beckman, University of Rhode Island
RELATED ARTICLES:
Groupon IPO Cheers Valley
by Shayndi Raice and Randall Smith
Nov 05, 2011
Page: B3
"Exclusive Deal Floats Groupon," by: Rolfe Winkler, The Wall Street
Journal, November 5, 2011 ---
http://online.wsj.com/article/SB10001424052970203716204577017892088810560.html?mod=djem_jiewr_AC_domainid
Even by dot-com standards, Groupon's initial public
offering is puny in terms of the number of shares it actually sold to the
public. According to Dealogic, dating back to 1995 just three U.S. tech
companies floated a smaller percentage of their shares in their IPOs. Palm
sold 4.7% of its shares in a $1 billion offering; Portal Software sold 6.2%
in a tiny $64 million offering, and Ciena sold 6.2% in a $132 million
offering. Then comes Groupon, which sold 6.3% this week as part of its $805
million offering.
That is well below the median of 21% for the 50
largest technology IPOs dating back to 1995, according to Dealogic.
Groupon's limited float strategy isn't new. Two of
this year's other big Internet IPOs, LinkedIn and Pandora Media also sold a
limited number of shares, just 9.4% of the total outstanding for both
companies. Those deals were also led by Morgan Stanley.
Considering doubts about Groupon's business model,
in order to ensure a strong first day's trading, the underwriters not only
limited the free-float, but they also scaled back their original valuation
target.
At Friday's close of trading, Groupon shares were
at $26.11 apiece, 31% above the IPO price. That puts Groupon's market
capitalization at about $17 billion, or roughly eight times next year's
likely revenue. That is steep, considering that the daily-deals Internet
company is still unprofitable and that growth appears to be slowing quickly.
Case 2
Groupon Holds Cash Tight
by:
Sarah E. Needleman and Shayndi Raice
Nov 10, 2011
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com
TOPICS: Cash Flow, Cash Management, Financial Statement Analysis
SUMMARY: Groupon finally completed its IPO on Friday, November 4,
2011, and interest in the company is therefore naturally high. Competitors
to Groupon attempt to obtain market share from the newly public company by
offering quicker payment terms to the small business which provide the
merchant benefits offered by Groupon. Small businesses need their working
capital as fast as possible and therefore some complain about the Groupon
terms. Groupon argues that its terms are designed to ensure that merchant
suppliers cannot use Groupon for a quick infusion of cash just prior to
closing operations.
CLASSROOM APPLICATION: Questions ask students to analyze Groupon's
financial statements-particularly its working capital components-to assess
the issues with the company's payment terms.
QUESTIONS:
1. (Introductory) What are Groupon's payment terms? How do those
terms help Groupon's customers, the buyers of its electronic coupons?
2. (Introductory) How do Groupon's payment terms help Groupon's own
financial position and operating results? In your answer, define the
financial concepts of cash flow and working capital mentioned in the
article.
3. (Advanced) Groupon issued its initial public offering of stock
(IPO) on Friday, November 4, 2011. Access the S-1 registration statement
filed with the SEC for this offering on June 2, 2011. It is available on the
SEC web site at
http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
Click on the link to the Table of Contents, then on Index to Consolidated
Financial Statements, then on Consolidated Balance Sheets. As of December
31, 2010, how much working capital did the company have? Did this amount
improve through the quarter ended March 31, 2011?
4. (Advanced) Given your measurement of Groupon's working capital,
how easy do you think it would be for Groupon to address its competition by
changing its payment terms? Support your answer.
5. (Advanced) Continue working with the Groupon audited
consolidated financial statements as of December 31, 2010 and the unaudited
quarterly statements. What items comprise Groupon's Accounts Receivable? How
collectible are these amounts?
6. (Advanced) What items comprise Groupon's Accounts Payable,
accrued Merchants Payable, and Accrued Expenses? Given your knowledge of
Groupon's payment terms, can you identify how soon each of these payments
must be made?
7. (Advanced) Consider how you would schedule a detailed estimate
of the timing of Groupon's cash flows for the three current liabilities
discussed above.
Reviewed By: Judy Beckman, University of Rhode Island
"Groupon Holds Cash Tight by: Sarah E. Needleman and Shayndi Raice, The
Wall Street Journal, November 10, 2011 ---
http://online.wsj.com/article/SB10001424052970204358004577027992169046500.html?mod=djem_jiewr_AC_domainid
Rivals of Groupon Inc. are threatening the daily
deal site leader by offering quicker payment to merchants, possibly
jeopardizing a key part of Groupon's business model.
Groupon keeps itself in cash by collecting money
immediately when it sells its daily coupons to consumers while extending
payments to the merchants over 60 days. For instance, a hair salon might run
a deal offering $100 of services for just $50 on Groupon's website, which
then keeps as much as half of the total collected and sends the remainder to
the salon in three installments about 25 to 30 days apart.
"The payment timing is so erratic you can't count
on any of that money helping to pay your bills," says Mark Grohman, owner of
Meridian Restaurant in Winston-Salem, N.C.
After running three Groupon promotions this year
and last, Mr. Grohman says he won't use the service again in part because it
puts too big a strain on his cash flow. "With smaller margins in
restaurants, you need that capital in the bank as fast as possible," he
says.
Heissam Jebailey, co-owner of two Menchie's
frozen-yogurt franchises in Winter Park, Fla., says he also has begun to
view Groupon's installment payments as too slow.
Enlarge Image SBGROUPON SBGROUPON
"You want to get paid in full as quickly as
possible," says Mr. Jebailey, who has run deals with both Groupon and its
rival LivingSocial Inc. offering customers $10 of frozen yogurt for $5. He
says both promotions were successful but that he'd only use Groupon again if
the service promises to pay faster. "We're the ones that have to cover the
cost of goods for giving away everything at half price," he says. "I will
not do another deal with Groupon unless they agree to my terms."
Groupon executives have no plans to change payments
terms, said a person familiar with the matter. Because Groupon has a backlog
of 49,000 merchants in line to offer a deal with the site, executives feel
confident that they don't need to make any changes to payment terms, said
another person.
While Groupon pays merchants in installments of 33%
over a period of 60 days, LivingSocial and Amazon.com Inc.'s Amazon Local
pay merchants their full share in 15 days. Google Inc.'s Google Offers
promises 80% of the merchant's cut within four days, and the remainder over
90 days.
Groupon pays in installments for a reason,
according to a person familiar with the matter: It has seen some merchants
try to use Groupon to get a quick infusion of cash before going out of
business, leaving customers with vouchers that can't be redeemed.
The Chicago-based start-up has a policy of offering
refunds to customers who aren't satisfied, and as a result it is cautious
about doing deals with merchants who may not carry through on their end,
says the person familiar with the matter.
Groupon also says it pays merchants before they
provide services to customers and will accelerate payments if merchants
experience unusually fast consumer redemption.
"We believe Groupon's payment terms are fair to
merchants and important to protect consumers," says Julie Mossler, director
of communications for Groupon.
It also is in Groupon's best interest to stretch
out payments to its customers for as long as possible, says John Hanson, a
certified public accountant and executive director at Artifice Forensic
Financial Services LLC in Washington, D.C. "It makes their cash position
look stronger on their books."
Steady cash flow has helped fuel the valuation of
Groupon, which first sold shares to the public last week. Groupon's stock
was down nearly 4% Wednesday, bringing its share price of $23.98 closer to
the company's IPO price of $20 a share. Based on the 5.5% of shares that
trade, the company has a valuation of about $15 billion. But its
working-capital deficit has ballooned to $301.1 million as of Sept. 30, and
the amount it owes its merchants is also way up.
Groupon's "accrued merchant payable" balance
increased to $465.6 million as of Sept. 30, from $4.3 million at year-end
2009, its filings say. This merchant payable balance exceeded Groupon's cash
and contributed to the company's working capital deficit, according to the
company's filing.
Offering merchants faster payment terms could hurt
its cash flow and force it to raise funds to cover its day-to-day cash
needs, Groupon said in a recent securities filing. In international markets,
the company pays merchants only once a coupon has been redeemed.
Every one-day reduction in Groupon's merchant
payables represents a risk of about $14 million in free cash flow, according
to estimates by Herman Leung, a Susquehanna analyst. "It's a key driver of
cash flow dollars and a key assumption in the Groupon model," he says of the
60-day payment period. "It's highly sensitive."
To be sure, Groupon has faced waves of competition
for more than a year, and many of those challengers already have come and
gone.
Continued in article
Teaching cases on the accounting scandals at Groupon (especially
overstatement of revenues) and its auditor (Ernst & Young) ---
http://www.trinity.edu/rjensen/Fraud001.htm#Ernst