Category: Fraud

National Consumer Protection Week

National Consumer Protection Week

National Consumer Protection Week 2010 is March 7-13.

Take advantage of the FTC’s free resources, which can help you protect your privacy, manage money and debt, avoid identity theft, understand credit and mortgages, and steer clear of frauds and scams.

This year’s theme is Dollars & Sense: Rated “A” for All Ages. The idea is to highlight the importance of using good consumer sense at every age, from grade school to retirement.

In the meantime, Congress still seems to be thinking about whether there should be a federal consumer protection agency and who should be in charge of it. Senator Dodd appears to want it under the umbrella of the Federal Reserve. US Representative Barney Frank wants a Consumer Financial Protection Agency to be an independent watchdog on financial issues.

For a more light-hearted view:

Sources:

Madoff Losses Down from $65 Billion to $20 Billion

How do you value fraud?

When the Madoff ponzi scheme collapsed the claim was that there was $65 billion in losses. That was the total dollar value on the account statements given to investors. Of course, that number was fictional because there were not real assets behind those numbers.

The trustee overseeing the liquidation of the assets looked at the cash that came into Madoff and the cash that came out. The bankruptcy judge agreed. In a decision filed on Monday, Federal Bankruptcy Judge Burton R. Lifland ruled that losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.

The Madoff trustee, Irving H. Picard, took the position that “the only verifiable amounts” reflected in the Madoff records are the differences between how much investors put into their accounts and how much they took out.

The result is that those investors who didn’t pull out their initial capital will get a greater percentage of their money out than those who took withdrawals from their accounts.

To put it another way, the people are getting the greatest percentage of money back are:

  1. Those who least need the money. Since they took less money out they presumably have other income or capital to support their needs.
  2. Those most trusting of Madoff.  Since they trusted Madoff, they did not pull money out of their investment accounts. They rode those returns and let their fictional returns keep accumulating.

Those who took out more cash from Madoff than they put in were labeled the “net winners” and get nothing. Even worse, it looks like the “net winners” may have to give back some of their “winnings” to the bankruptcy estate to pay off the net losers.

Of course, the opposite ruling is just as bad since the early investors would be paid by later investors, effectively extending the Ponzi scheme.

The judge is taking the position that people should be put back to their position as if they had not invested with Madoff. In the end its going to bad for all the investors. It’s just a question of who feels the most pain.

Sources:

Fraud Charges Against Ken Lewis and Joseph Price

Bloomberg News

New York Attorney General Andrew Cuomo filed securities fraud charges against former Bank of America CEO Kenneth Lewis and former Chief Financial Officer Joseph Price. The Attorney General claims that the two decided not to disclose the enormous losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.

The Complaint is full of newsbites:

“Ultimately, this was an enormous fraud on taxpayers who ended up paying billions for Bank of America’s misdeeds. Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them. Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.” (#1)

From the Frontline Report, Breaking the Bank, it sounded like Bank of America was strong-armed into completing the merger with Merrill Lynch. Ken Lewis had the choice of going ahead with the merger or losing the bank. The complaint addresses this point

“The evidence further demonstrates that almost immediately upon reviewing the December 12 loss analysis, the Bank planned to seek taxpayer aid to save the merger, and to use the empty threat of a MAC claim as leverage with the government in negotiations.” (#21.)

Politicians have been looking for heads to roll. That bloodlust has gotten even frothier with year-end bankers’ bonuses getting readied for distribution. Lewis and Price have their heads in the civil lawsuit guillotine.

Sources:

SEC Goes After Sub-Prime Lender

new-century

The Securities and Exchange Commission charged three former top officers of New Century Financial Corporation with securities fraud for misleading investors as New Century’s subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation.

In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. However, New Century failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase.

The SEC’s complaint names as defendants:

  • Former CEO and co-founder Brad A. Morrice
  • Former CFO Patti M. Dodge
  • Former Controller David N. Kenneally

It was interesting to see the SEC bring this case after the Department of Justice lost a similar case against two former Bear Stearns hedge fund managers. In both cases, there were some public statements about how they would weather the subprime crisis. In the Bear Stearns case, it was a private fund. In this New Century it was a public company. The argument is both cases is that the principals were hiding their knowledge of the underlying losses.

The SEC is charging the New Century trio with accounting fraud as part of their scheme to hide the losses from the subprime loans going bad. Part of the downfall may have been its conversion in 2004 to become a mortgage REIT. While this structure reduces the amount of taxes it needs to pay, it also requires the company to distribute at least 90% of its annual taxable income. That means New Century would have trouble accumulating capital for operations and keeping reserves for future losses.

The complaint is a fun read because it takes you through the greed of the subprime marketplace as New Century introduces new products that, in hindsight, are increasingly riskier. As the losses accumulated, the disclosure got murkier and murkier. The SEC sees the disclosure as “false and misleading.”

New Century’s trademarked byline was “A new shade of blue chip.” It seems like red (as in the ink) would have been a better color choice.

References:

subprime 25

How Fraudsters Try to Look Legitimate

Investor.gov

The SEC is putting its new investor-focused website to good use: Investor.gov.

The first item that caught my eye was their article on how fraudsters use fake SEC registrations and bogus seals to make them look legitimate: Fake Seals and Phony Numbers: How Fraudsters Try to Look Legit.

They offer these five pieces of advice:

  • Deal Only With Real Regulators
  • Be Skeptical of Government “Approval”
  • Look Past Fancy Seals and Impressive Letterheads
  • Check Out the Broker and the Firm
  • Be Wary of “Advance Fee” or “Recovery Room” Schemes

“If you want to invest wisely and steer clear of frauds, you must get the facts. Never, ever, make an investment based solely on a promoter’s promises or what you see on the Internet”

The other thing that caught my eye as a blogger, was the SEC’s use of an out of the box WordPress blog deployment to run the Investor.gov website. Just like I use here at Compliance Building.

It’s Tough Being Green… And Charged With Fraud

mantria

Mantria Corporation is a “diversified and progressive business enterprise that seeks out emerging sectors with a passionate focus on sustainability and the commercialization of socially responsible products and services.” At least that’s what their website says.

The SEC says: “In reality, the only green these promoters seemed interested in was investors’ money.”

According to the latest SEC press release, green is the new fraud. The feds charged Wayde and Donna McKelvy and Mantria Corporation with defrauding investors to invest in green initiatives like a supposed “carbon negative” housing community in rural Tennessee and a “biochar” charcoal substitute made from organic waste.

The SEC alleges that the “green” representations were laced with bogus claims, and investors were falsely promised enormous returns on their investments ranging from 17 percent to “hundreds of percent” annually. In fact, Mantria’s environmental initiatives have not generated any significant cash, and any returns paid to investors have been funded almost exclusively from other investors’ contributions.

The SEC also charged Troy Wragg and Amanda Knorr along with a related company called Speed of Wealth. According to the website: “Speed of Wealth and Mantria have joined forces once again to save the environment while helping middle America secure its financial future!”

For me, I scratch my head wondering why they have all the symbols for a half dozen Chamber of Commerce sites on their webpage. I found it really odd that these included the American Chamber of Commerce in Shanghai and the London Chamber of Commerce and Industry.

I suppose slapping some labels on the webpage is supposed to add some credibility. Of those sites, only the Sequatchie County-Dunlap Chamber of Commerce lists them as members.

Mantria also state that they are an “Accredited Business” with the Better Business Bureau. It says so on their home page. When I searched the Better Business Bureau site (DC Eastern PA) for Mantria it still had them listed as an accredited business and gives them a rating of “A-. ” BB Accreditation only means that Mantria hass made a commitment to make a good faith effort to resolve any consumer complaints and paid a fee for accreditation, review and monitoring.

I also checked out the Speed of Wealth on the Denver Better Business Bureau. They have them listed as an “Accredited Business” with a rating of “A.”

Of course, none of the SEC claims have yet been proven. I wonder the Better Business Bureau monitors SEC claims?

SEC Press Release: SEC Charges Promoters of “Green” Investments With Operating $30 Million Ponzi Scheme Based in Denver Area

The SEC is Going After the Geeks

sec-seal

First, Bernie the boss turned himself in, saying he did it all by himself. Nobody believed that, including the SEC. So the SEC went after Madoff’s right-hand man, DiPascali, and Madoff’s accountant, Friehling. Now the SEC is going after the geeks.

The Securities and Exchange Commission charged two computer programmers for their role in helping Bernie Madoff cover up the fraud at Bernard L. Madoff Investment Securities LLC for more than 15 years. The SEC alleges that Jerome O’Hara of Malverne, N.Y., and George Perez of East Brunswick, N.J., provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible.They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. Bernie used a separate computer internally known as “House 17” to process advisory account data. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

According to the complaint, the two geeks tried to escape from Bernie’s clutches. Apparently a salary increase of 25% and a $60,000 bonus was enough to buy their silence.

References:

The Dark Side of Aggressive Goal Setting in the Workplace: A Shortcut to Unethical Behavior

ordonez

EthicsPoint sponsored a webinar by Dr. Lisa Ordóñez, University of Arizona, Professor of Management and Organizations in the Eller College of Management at The University of Arizona

“Applied managerial experience and hundreds of academic research studies have catalogued the positive impacts of goal setting on performance. Challenging, specific goals compared to instructions to “do your best” have been shown to increase effort, persistence, and performance. Goal setting theory has led to consultants training managers on how to use SMART (Specific, measurable, attainable, realistic, and timely) goals in their organizations. However, as Ordóñez, Schweitzer, Galinsky, & Bazerman (2009a, 2009b) point out, goals can have systematic, negative effects and can focus attention too narrowly, increase risk taking, and lead to unethical behavior.”ethicspoint-logo

These are my notes from the webinar.

Dr. Ordóñez discussed some of the findings from her research where she found that goal-setting can lead to bad results and bad outcomes.

She started with some examples of how goal-setting ended up with bad results.

Why is hard to find a cab on rainy days in New York? The cabdrivers go home early. Their goal each day is to reach 2X their cost. They reach the goal faster on rainy days, so they go home earlier. they could have made money if they worked a full day.

General Motors focused on reaching 29% of the US Market. Executives even wore lapel pins with “29” on them. They focused on hitting the number (for example offering short term incentives) and not the long term goals of the company.

Fannie Mae was looking to expand the home ownership by low-income people. That resulted in them underwriting riskier loans.

Billable hours and ethics. If management sets utilization goals, people are more likely to pad their hours.

They ran a lab experiment in 2004 that tested people on test-taking. participants checked their own work. When the goal was to “do their best” their was less cheating than when their was a specific goal for correct answers.

She raised some questions to ask before setting goals:

  • Are the goals too specific? Narrow goals can blind people to important aspects of a problem.
  • Are the goals too challenging?
  • Who sets the goal? People are more committed to goals they help to set.
  • Is the time horizon appropriate? Short term goals can hurt long term performance.
  • How might the goals influence risk taking? Unmet goals may induce risk taking.
  • How might goals motivate unethical behavior?
  • Can the goals be tailored for individual abilities while preserving fairness?
  • How will the goals influence organizational behavior?
  • Are individual intrinsically motivated? People may not like the activity anymore when their a goal tied to the activity.
  • What type of goal is most appropriate given the ultimate objective? By focusing on the goal, employees may fail to search for better strategies.

So how do you motivate employees without goals?

You don’t. You can only link to what the employee wants to the desired performance.

Goals can be effective for direct effort, they can communicate the values of the organization and are very useful for menial tasks that simply need to be completed.

She ends with a warning:

goals warning

Thanks to EthicsPoint (my company’s hotline provider) for putting on this great webinar.

References:

International Fraud Awareness Week

International Fraud Awareness Week

November 8-14, 2009 is International Fraud Awareness Week. This weeklong campaign, sponsored by the Association of Certified Fraud Examiners, encourages business leaders and employees to proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education.

Test your knowledge about fraud with this Fraud IQ Test, which includes 20 actual questions from the CFE Exam

Fraud Prevention Check-uppdf-icon
How vulnerable is your company to fraud? Do you have adequate controls in place to prevent it? Find out by using the ACFE’s Fraud Prevention Check-Up, a simple yet powerful test of your company’s fraud health.

Managing the Business Risk of Fraud: A Practical Guide
This guidance paper, developed jointly by the ACFE, IIA and AICPA, provides key principles for proactively establishing an environment to effectively manage an organization’s fraud risks. It also provides tools, recommendations and real-life examples of how fraud risk management principles are applied.

How Did Madoff Go Bad?

madoff

Last Friday, the SEC published the exhibits for Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (Report No. OIG-509). That was 536 separate exhibits tying to fill in the background on what happened with the SEC and Madoff.

The one that caught my eye was exhibit 104pdf-icon that summarized a June 17, 2009 interview of Mr. Madoff while he sat in Metropolitan Correctional Center. Inspector General H. David Kotz and Deputy Inspector General Noelle Frangipane were the interviewers.

For me, one of the issues with Madoff was “What made him go bad?”

Personally, I don’t think he intended to start off with a Ponzi scheme. Most Ponzi schemes start off legitimate, then something goes wrong. They fudge the returns hoping to make it up later. Those later returns are elusive and the promoter keeps the lie going.

According to the summary on page 8 of exhibit 104pdf-icon that is what happened to Madoff. The problem occurred when Madoff “made commitments for too much money” and “couldn’t put his strategy to work.” he could not get the returns he wanted. Then he thought:

“Fine, I’ll just generate these trades and then the market will come back and I’ll make it back… and it never happened. … It was my mistake not to just be out a couple hundred million dollars and get out of it.”

Unfortunately, the summary does state when this transgression happened. So we don’t know when his company began the Ponzi scheme. At least as far as Madoff is claiming

Personally, I think this may have been the biggest transgression and the one that clearly put it into the Ponzi scheme category. But that sounds like a big position for your first lie.

Hopefully, we will hear more about what really happened. Until then, here are some other takes on the Madoff information: