Book reviews – Page 7 – Compliance Building

Unraveled: The Fall of Marc Dreier

Had it not been for Bernie Madoff, Marc Dreier would likely have been the most notorious fraudster of recent memory. The press coverage was stolen away from Mr. Dreier’s $3/4 billion scam by the billions Madoff stole. But Dreier’s theft was much more brazen and a lot crazier.

Over the weekend, between shuttling the kids to activities, mowing the lawn, and football, I managed to watch Unraveled. It tells the Dreier story and interviews him during the 60 days between the day he plead guilty and his sentencing hearing.

Trapped in his gilded cage, an Upper East side apartment with breathtaking views, Dreier struggles with his uncertain future. He knows he will be in prison for a long time. The prosecution wants over 100 years and he is asking for 12 years. He is hoping that he will be imprisoned close enough to Manhattan that his family could visit more often. And he is hoping his sentence will offer some hope that he could live long enough to once again be free.

The movie offers a great deal of insight into the mind of fraudster and the motivations to start criminal activity.

Dreier was an ambitious lawyer, with dreams of running a big law firm. He has an outsized ego and wanted to drape himself with expensive things that showed success: expensive art, expensive cars, mingling with celebrities, and big donations to charity. His rapidly expanding law firm was sucking in capital and all of those expensive things were… expensive.

Dreier wanted to be perceived as being successful and wanted others to recognize his success.

Dreier had drained his credit and was desperate for another $1 million. So desperate that he created a fictitious note from one of his clients and found a buyer. He thought he could invest the cash in his law firm and create enough income that he could pay back the note. A year later when the note matured, he didn’t have the capital and needed to roll it over. And he needed more capital. So he faked a bigger note. This steamrolled over the next few years enough that he ended up with $740 million in stolen cash.

Dreier used one of his real estate company clients as the front. He knew enough about its business that he could make financial statements that were credible enough. He felt that this client owed him. Dreier had been sanctioned by a judge for being too aggressive. Dreier felt the client should have spoken out in favor of him, but instead stayed silent. Dreier repaid that perceived betrayal by having that company be the one issuing Dreier’s fake notes.

If you have any interest in financial fraud or compliance, it’s worth 90 minutes of your time to watch the movie. It’s currently streaming on Netflix.

Discovering Empty Mansions

If you’ve ever been house hunting, you’ve likely spent some time looking at houses way out of your price range. Bill Dedman did the same thing. He discovered Le Beau Chateau, a $24 million mansion containing almost 15,000 square feet on 52 acres. The property taxes alone were $161,000 per year. But what really caught his eye was that the property had been unoccupied since the owner bought it. In 1951.

Dedman, a Pulitzer Prize–winning journalist, smelled a story.

He discovered the owner of the property was Huguette Clark, and she owned another, bigger mansion in Southern California that had also sat vacant for decades. There was definitely a story here. It became Empty Mansions.

Ms. Clark’s father was W.A. Clark, a copper miner, railroad entrepreneur, and a U.S. Senator. In the early 20th century he was one of the wealthiest men in America.

Ms. Clark’s homes had not sat vacant because she was dead. Dedman found her alive, “happily” living for the prior two decades in a New York City hospital room.

Dedman puts together a great history of W.A. Clark, how he amassed his fortune, and how he extravagantly spent some of that wealth. The middle of the story focusing on the decades of Huguette’s life runs a bit flat. That would seem to happen because she lived such an intensely private life and lived as a recluse. The story loses some flair because there is no flair there.

The story once again gets interesting as Ms. Clark gets admitted to the hospital after her health deteriorated, her staff had all retired, and there was no one to take care of her. She seemed to enjoy the hospital and took up permanent residence, even though there seemed to be no medical reason to stay.

Ms. Clark is over 100 years old by the time the her story comes out. Everyone starts wondering what will happen to her fortune and many want a piece of it. Many of the likely beneficiaries want a bigger piece. Her relatives had little contact with her over the prior decades. It’s a mess that I’m sure a trust and estates lawyer could use as a learning tool for recalcitrant clients.

The ethical and compliance issues come to the front. Ms. Clark begins giving millions to her nurse. It seems to be a violation of hospital policy. Dedham portrays the hospital to be itself looking to be a recipient of Ms. Clark’s generosity. Perhaps they are even hiding her from auditors who would question why she has not been discharged.

I think Dedham pulls some punches at the end because the estate is still unsettled and the potential liability is still in play. It’s hard tell if Ms. Clark was of sound mind when she was writing her will or whether she was unduly influenced by her advisers and caregiver.

It’s an interesting story and a well-written book.

Finding the Signal Though the Noise

Nate Silver came into fame for his forecast of the presidential election in 2012. That matched his success in 2008 for also getting the presidential election correct. His book, The Signal and the Noise, is built upon that success.

We learn that Silver is not a political pundit, but a numbers geek. He started with statistical analysis of baseball while toiling away for the accounting firm KPMG. The next step was online poker, using his analysis to be a better poker player. That made him a lot of money, for a while. Then he turned to political analysis where he caught broader attention.

But the book is not a biography, or pages of Silver trumpeting his own horn. It’s a book about the success and failures of using data to forecast future events. Silver slices the data into two categories. The Signal is the truth and the Noise it what distracts us from the truth. In today’s market, information is not a scarce commodity. However, we perceive it selectively and subjectively. Our biggest failure is not paying attention to our own distortion. We never make perfectly objective predictions. They are always tainted by our subjective point of view.

Silver looks at the statistical analysis used in several fields:

the housing bubble and mortgage securities crisis
television political pundits
baseball
weather
earthquakes
economic forecasts
flu epidemics
poker

Taken from a scientific perspective, predictions can be tested. Silver tests them.

For example, look at weather forecasts. If the forecast calls for a 20% chance of rain, it should rain on 20% of the days that have that prediction. Silver backtests the performance of weather forecasters. He finds that some consistently over-forecast rain, raising a 5% chance to 20%. That way the audience will be less disappointed if it rains. Silver also compares long term forecasts to average conditions for that day. It turns out that the long term forecast is more likely to be wrong than merely relying on the historic average.

But weather forecasting has improved. Hurricane prediction is an area that has seen measurable improvement. Over the past 25 years the hurricane landfall prediction for three days in advance has decreased from a 350 mile radius to a 100 mile radius.

There is plenty in this book for compliance professionals. The first topic in The Signal and the Noise is the rating agencies and the financial crisis of 2008. He uses an example of S&P’s rating of CDO tranches. In achieving the AAA rating, S&P predicted that there was only a 0.12% probability that it would fail to pay out in the next five years. The reality is that the failure was 28%. The actual default rate was more than 200 times higher than predicted.

The Fall of Sam Israel

Sam Israel is a scumbag. He is a liar and a cheat. He admits so in Octopus by Guy Lawson. Israel was the nefarious trader behind the Bayou Funds, one of biggest hedge fund ponzi schemes, at least until Bernie Madoff finally fell to Earth.

Lawson met with Israel while Israel was in prison. He want to write about Israel’s fraud at the Bayou Fund. Lawson found him to be devious, defiant, impossible to not like.

Israel started as a trader, not an investor. He made his money on the short movements of stocks. He made his big money by cheating. He would front run client trades. He would trade on inside information.

Then he decided he want to be his own boss, so he started the Bayou Fund. But he was not successful. Rather than disclose this to investors, he rebated a big chunk of brokerage fees to show a good return. He figured he could make it up in the next trade.

Then he missed again. Again, he didn’t want to admit his shortcomings so he chose the path of deceit. But now the amount was too much to fix with creative bookkeeping. He turned to a complete fabrication of financial results. Israel called this “The Problem.”

He kept trading to try to fix The Problem. He thought the next trade could make enough to fix The Problem. But it kept getting bigger as his actual results continued to be well below the result he was telling investors.

Then Israel ran into a shadowy figure that told him about a secret market for prime government bonds sold at huge discounts. He could get enormously wealthy by trading in the secret market. Israel thought he had found a solution to The Problem.

The publisher was nice enough to send me a copy of the book. It caught my eye because it offered an insight into the mind of a fraudulent fund manager and the machinations of a ponzi scheme. It’s a twisted mind. The tale of trying to fix The Problem is even more twisted.

Action in Congress

Robert Kaiser was granted rare access to the action behind the scenes of the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Act of Congress is an enjoyable study of the enactment of that law, used as tool to explore how Congress works, and largely how it it doesn’t work.

Kaiser was already an associate editor and senior correspondent with the Washington Post and had just finished a book on lobbying and money in Washington. He proposed to Congressman Frank that Kaiser become the historian of the congressional response to the Great Crash of 2008. Frank was planning a big legislative changes to the financial services industry and the new president shared this goal. Senator Chris Dodd and Representative Barney Frank let Kaiser talk on the record with staff.

Act of Congress lives by the famous remark “Laws are like sausages, it is better not to see them being made.” The book’s goal is to be both entertaining and educational as it sneaks behind the curtain to watch the sausage production.

“Of the 535 members of the House and Senate, those who have a sophisticated understanding of the financial markets and their regulation could probably fit on the twenty-five man roster of a Major League Baseball team.”

Kaiser lets the stupidity of some Congress make it to the pages. He lets their public statements stand for themselves, although he tosses the phrase “intellectual lightweight” at a few. I sense he had a lot of personal perspective some of the congressmen that did not make it to the pages.

I found the book to be well-written and interesting. I suspect the interesting part may be governed more by my interest in the Dodd-Frank Act. It’s an enormous piece of legislation with profound impact on the financial services industry. In places it is poorly written and in others it’s full of exemptive holes. This books will enlighten you to some of the compromises that were made to get the law enacted.

I suspect those who have that interest may be limited. If you have made it this far, perhaps you share that interest. In which case you should add Act of Congress to your reading list.

Sources:

A Manual of Style for Compliance

I’ve seen some poorly drafted compliance policies. The source of the problem is usually that they were written by lawyers, for lawyers. That is good when it comes to defending your firm against a lawsuit. But it’s a bad thing if the policy does not clearly tell the employees what they can do and what they can’t do.

This problem has been running through the legal industry for years. The Securities and Exchange Commission even published A Plain English Handbook: How to Create Clear SEC Disclosure Documents. The SEC was hoping a non-lawyer could read a corporate filing. There is still little hope of that five years later.

I don’t think it’s the fault of law schools. Like many young lawyers, I was taught in law school to avoid most of the archaic legalisms and to write in a manner closer to plain English.

But for most young lawyers, that writing style is discarded as they start practicing as a junior associates. You quickly realize that you need to write in way that pleases the partner or senior associate you are working for. You are in no position to tell the more senior lawyer that the contract would be better with less legalese and more plain English. You are responsible for one little piece of the transaction. Whatever you draft or edit needs to look and read like the rest. That means lots of legalese.

As you gain experience, you get more direct contact with clients and take the next step of writing to please the client. But clients don’t like having their forms changed. That implies that something was wrong with the old forms. Clients generally don’t want to pay for a lawyer to re-draft the form that they had already paid to have drafted years ago. They especially do not want to pay for style changes or removal of legalese.

Eventually you become senior enough that you can start making changes, but it’s generally on the fringes. You may get a bespoke agreement to draft that is not based on a precedent or form. You don’t have the free time to recreate the form documents to remove the legalese and adopt a more sensible legal writing style.

Ken Adams advocates a more sensible approach to contract drafting. I’m not sure when I became a fan of Ken’s thoughts on contract drafting. It was probably during some wasted time arguing over whether a contract performance standard should have “reasonable efforts”, “best efforts“, or “commercially reasonable best efforts”. I studied his approach and tried using some of his well-reasoned and well-researched approaches. But it was mostly at the fringes.

Now that I have left corporate law to join the world of compliance, there are still many useful aspects of his thoughts on contract drafting that apply to compliance. When he offered me a review copy of his latest, A Manual of Style for Contract Drafting, I thought it would useful to look at his style approach in the context of compliance.

There are lots of lessons in the book for compliance professionals who are tasked with drafting policies and procedures. There is the obvious lesson of not using a dollar word to do a “nickel’s worth of work.” Policies and procedures need to be clearly written and easy to understand. You want to avoid the problem that could lead to a law suit. You don;t want to have to rely on a lawyer for interpretation.

For compliance, you probably don’t need to spend much time in Chapter 8 exploring “reasonable efforts and its variants.” Here’s the spoiler: U.S. courts have overwhelmingly rejected the notion that best efforts represents a more onerous standard than reasonable efforts.

Chapter 12 is full of great lessons on syntactic ambiguity that will improve your policies. While there are a few chapters that are applicable only to contracts, the bulk of the book has lessons applicable to drafting policies and procedures.

Many lawyers will disagree with some (or many) of the approaches that Ken proposes. His substantive positions are backed up by legal research and grammar expertise. It’s hard to argue with facts

My biggest disagreement is on a style approach. I prefer more depth to my numbering scheme. Ken stops at the second level. You can see that approach in the layout of A Manual of Style for Contract Drafting. Each paragraph is numbered. But with the flat numbering, concepts appear scattered. For example I would have preferred the MCSD enumeration scheme to be section 4.53, with each of the paragraphs discussing the scheme to be 4.53.1, 4.53.2, …, instead of 4.53, 4.54.

Even if you don’t adopt Ken’s approach you should at least learn about the substance behind the approach. You can purchase A Manual of Style for Contract Drafting from the American Bar Association.

A Manual of Style for Contract Drafting, Third Edition

Product Code:	5070661
Author:	Kenneth A. Adams
Publication Date:	February 2013
ISBN:	978-1-61438-803-6
Page Count:	511


Pricing:	$99.95 (Regular)
Pricing:	$74.95 (Business Law Section) ABA Members, Log in now to receive this discount!
	Purchase 5-49 and save 10% Purchase 50-99 and save 15% Purchase 100-199 and save 20% Purchase 200+ and save 25%

A Look Inside a Money Laundering Investigation

In The Infiltrator, Robert Mazur provides an encyclopedic account of his undercover work. Mazur spent years undercover infiltrating the criminal hierarchy of Colombia’s drug cartel, and the dirty bankers and businessmen willing to launder drug cash. His work led to the arrest of dozens of drug traffickers and money launders. It also led to the dismantling of BCCI, a large banking operation that seemed focused on dirty money.

The undercover operation concluded with a fake wedding that was attended by BCCI officers and drug dealers from around the world. The bank officers were all too willing to continue the banking relationship even after Mazur explicitly told them he was moving drug money from the United States to Columbia.

I was interested in the book to see if I could get a better sense of how criminals found targets for money laundering operations. Unfortunately, The Infiltrator provided little insight on how money laundering works. I was hoping for more. BCCI was all too willing to take big piles of cash and assist with money laundering.

I didn’t expect the book to be exceptionally well written or to have a strong narrative. It was written by a federal agent from his first hand experience. Most of the book reads like a police report, dictating the story in a very matter-of-fact manner.

Given the time-frame of the book, it pre-dates the current regulatory restrictions on Know-Your-Customer and predates the internet. That makes it feel very dated and very Miami Vice.

Antifragile – Things That Gain from Disorder

antifragile

Taleb is back, and he is even more brash and brilliant. Nassim Nicholas Taleb’s fame grew from his second book, The Black Swan, being timely released just before the 2008 financial crisis. Antifragile continues his narrative on probability and risk. The Black Swan took on the theory that the highly improbable was a lot more probable than we thought. Antifragile takes the next step and proposes that it’s good to be subject to black swan events and other disorder.

He coins the term “antifragile” to address the situation where something improves as it is subject to disorder or stress. I goes beyond robust. I thought the best explanation was through the use of mythology.

The sword of Damocles is fragile. All it takes is a small amount of damage to sever the horsehair and send the sword plummeting into the person sitting beneath it.

The phoenix is robust. Once it dies, it is reborn from its ashes to live again.

The hydra is antifragile. If you mange to cut off one of its heads, two sprout in its place. The more damage it takes, the more powerful it becomes.

The next step is to realize that the effects of fragility are not linear. As the overload increases, the damage increases dramatically. Getting hit by by one rock weighing 50 pounds will hurt a lot more than getting hit by 1000 rocks that weigh 0.05 pounds. There is an acceleration of harm. The black swan comes when you get hit by the 50 pound rock, when you had been expecting another pebble.

The book is an excellent reading choice for anyone involved in compliance or risk management

The publisher sent me a free copy of the book in hopes of a review.

A History and Analysis of Con Artists and Victims: The Ponzi Scheme Puzzle

Professor Tamar Frankel of Boston University School of Law tackles investment fraudsters and their victims in her book, The Ponzi Scheme Puzzle. As a scholar of investment fraud, Frankel has studied cases for years to find common themes and patterns. The books offers descriptions of the offers and red flags the ways in which fraudsters mask their deception through their methods of advertising and pitching their “product”.

There is a lot in the book. I just wish there were more. It’s hard to lump Enron, Madoff, Multi-level marketing, selling the Brooklyn Bridge, and selling fake securities fraud schemes into one book, especially one as short as this. Frankel skips from subject to subject and fraud to fraud very quickly, drawing broad conclusions.

Perhaps I’m naive, but I think many Ponzi schemes start off as legitimate investment opportunities, but derail as they grow and the strategy falters. Charles Ponzi himself saw a legitimate opportunity. He saw a potential for profit in the difference in currency for return stamps. He failed to execute on the vision and failed to tell his investors when the investments didn’t work.

Enron started off a legitimate company taking an innovative approach to energy. It became so focused on hitting its earnings that it started doctoring the books to hit the numbers. The guy on the street corner trying to sell foreign tourists an interest in the Brooklyn Bridge is a different kind of criminal.

Professor Frankel does point out some interesting ways that society views investment fraudsters and their victims. We take a much harsher view of the scam artist that convinced an elderly pensioner to invest her small amount of lifetime savings, than millionaire scam artists skimming millions from other millionaires.

Sources:

Examining the Ponzi Scheme Through the Mind of the Con Artist in DealBook
Ponzi Scheme Puzzles in the SEC Historical Society
Four Signs Your Awesome Investment May Actually Be A Ponzi Scheme in NPR’s Planet Money

Buy the Book:

What I Read in 2012

The Goal

One of my recurring annual goals is to finish reading at least 26 books for the year. In 2012, I managed to finish 36. Although, 6 of those were lighter reads. So maybe I should discount those and bring it down to 30. In any event, I exceeded my goal. The full list is below.

Reviews

Some of the titles will look familiar since I gave them a longer write up here on Compliance Building. I also mentioned a few on Wired.com’s GeekDad and my personal blog. There are links that will take you to my reviews.

GoodReads versus LibraryThing

I’m still tracking my books in two parallel systems. Library Thing has a superior platform for cataloging books. GoodReads has a better platform for interacting with other readers, sharing reviews, and sharing booklists. Each has their strengths and weaknesses. I’d like to jettison one of them to quit duplicating efforts. So far, neither one has made a compelling move to improve and elbow the other out of the way.

2012 Reading List

Title	Author	Rating
How: Why How We Do Anything Means Everything	Dov Seidman	Review
Defending Jacob: A Novel	William Landay	Review
The Big Roads: The Untold Story of the Engineers, Visionaries, and Trailblazers Who Created the American Superhighways	Earl Swift	Review
Ten Tea Parties: Patriotic Protests That History Forgot	Joseph Cummins
A Dance with Dragons: A Song of Ice and Fire: Book Five	George R.R. Martin
Why the Law Is So Perverse	Leo Katz	Review
The Power of Habit: Why We Do What We Do in Life and Business	Charles Duhigg	Review
A Visit from the Goon Squad	Jennifer Egan
The Richer Sex: How the New Majority of Female Breadwinners Is Transforming Sex, Love and Family	Liza Mundy	Review
Eden on the Charles: The Making of Boston	Michael Rawson	Review
The Walking Dead, Book 7	Robert Kirkman
Ruin Nation: Destruction and the American Civil War	Megan Kate Nelson
Catching Fire (The Hunger Games, Book 2)	Suzanne Collins
Mockingjay (The Hunger Games, Book 3)	Suzanne Collins
Show Time	Phil Harvey	Review
The First Tycoon: The Epic Life of Cornelius Vanderbilt	T.J. Stiles	Review
Cutting-Edge Cycling	Hunter Allen
Gone Girl	Gillian Flynn
Pines	Blake Crouch
Amazing Gracie: A Dog’s Tale	Dan Dye
The Age of Miracles	Karen Thompson Walker
Sharp Objects	Gillian Flynn
Already Gone	John Rector
Nine Steps to Sara	Lisa Olsen
The Walking Dead, Book 8	Robert Kirkman
The American Alpine Journal 2012	John III Harlin
Moby-Duck: The True Story of 28,800 Bath Toys Lost at Sea and of the Beachcombers, Oceanographers, Environmentalists, and Fools, Including the Author,Who Went in Search of Them	Donovan Hohn
Apocalypse Z: The Beginning of the End	Manel Loureiro
The Dead Room	Robert Ellis
Make Magic! Do Good!	Dallas Clayton	Review
xkcd: volume 0	Randall Munroe
Save Yourself, Mammal!: A Saturday Morning Breakfast Cereal Collection	Zach Weinersmith
The Physics of Wall Street: A Brief History of Predicting the Unpredictable	James Owen Weatherall	Review
The Most Dangerous Game: A Saturday Morning Breakfast Cereal Collection	Zach Weinersmith
The Remaining	D.J. Molles
No-Man’s Lands: One Man’s Odyssey Through The Odyssey	Scott Huler	Review