Letter of Apology » Accounting Fraud

The Continuing Lehman Nightmare: One Thing You Can Bank On

Solomon Wisenberg — Fri, 02 Apr 2010 16:29:33 +0000

Earlier this week the SEC sent letters to more than 20 financial firms inquiring whether they use or used accounting methods similar to Lehman’s now notorious Repo 105, in order to book transactions as sales. Marie Leone of CFO.com has the story here. Marian Wang, at ProPublica.org, has a good piece on this as well. Meanwhile Floyd Norris at the New York Times attempts here to demystify the alleged “Lehman Shell Game.” To this reader, he merely succeeds in showing that FASB considers it a “gray area” when companies characterize as a “sale” a ”loan” secured by assets worth 105% percent of the loan amount. Memo to prosecutors: this regulatory ambiguity will make your criminal case more difficult. On the other hand, published reports that several U.S. law firms refused to bless the Repo 105 transactions should, if true, be troubling to any potential defendants who were contemporaneously aware of these refusals. The Wall Street Journal had an excellent story several days back, by Mike Spector and Michael Corkery, about “What Lehman’s Central Players Knew.”

Most of this recent journalistic and regulatory activity has been occasioned by bankruptcy examiner, and former U.S. Attorney, Anton Valukas’ massive report on the Lehman collapse. The press reporting has generally been outstanding. But there is one aspect of the matter that I have not seen covered. Why were so many former Lehman execs even talking to Valukas? Don’t they understand that many of their number are potential criminal defendants? Haven’t they heard of the Fifth Amendment? Haven’t their attorneys explained that alleged cover-ups and alleged Section 1001 false statements are almost always easier to prove than alleged underlying crimes? Are they really that astoundingly arrogant? Valukas’ report details significant differences in recollection among the major players regarding who knew what and when. All of this will be eagerly poured over by federal prosecutors and agents. You can bank on it.

Sir Allen Update: Indictment Against Stanford and Others Expected To Be Unsealed Today

Solomon Wisenberg — Fri, 19 Jun 2009 13:51:40 +0000

Mary Flood and Tom Fowler of the Houston Chronicle report here on the latest developments.

Connecticut Housing Market Collapses: $5 Million Mansion Goes For 10 Bucks!

Solomon Wisenberg — Thu, 18 Jun 2009 14:56:22 +0000

Well, not exactly. Former Cendant Corp. CEO Walter Forbes is doing 12 years in Allenwood for accounting fraud. His sentence included a $3.275 billion restitution order. The federal government moved, post-sentencing, to liquidate Forbes’ assets in order to satisfy the restitution order. The feds wanted Forbes’ $5 million house, claiming that it was purchased with ill-gotten gains. Now Forbes’ wife Caren has filed for divorce seeking equitable division of the couple’s property. But the mansion is currently held in Caren’s name only, having been sold to her by Walter for a mere $10. Our government is not amused. Nora Dannehy, Acting U.S. Attorney for the District of Connecticut, has taken the highly unusual step of moving to intervene in the Bridgeport Superior Court divorce action. According to Dannehy’s motion: “This court should not allow the Forbes family to undermine the government’s work to enforce the restitution order under the guise of a simple, uncontested, family court matter.” The Connecticut Post story by Daniel Tepfer is here.

SEC Files Complaint Against Danny Pang

Solomon Wisenberg — Mon, 27 Apr 2009 22:49:21 +0000

The SEC has filed a securities fraud complaint against Danny Pang and Private Equity Management Group in the Central District of California. Henry Blodget has the story here in businessinsider.com. This is another case containing allegations of a classic Ponzi scheme.

The Petters Variation

Solomon Wisenberg — Wed, 22 Apr 2009 21:45:13 +0000

Susan Carey of the Wall Street Journal has an excellent background story here on the Tom Petters federal fraud prosecution, being handled out of Minnesota. As in so many of the recent Wall Street scandles, there are claims that Petters’ alleged fraud contained “elements” of a classic Ponzi scheme. There are also stories of investment advisors who were sharp enough to steer their clients away from Petters after doing rather rudimentary research. The heart of the charged fraud centers around purportedly phony purchases and sales of surplus audio/video products by Petters’ company–phony in the sense that no actual equipment existed. Several persons and entities have already pled guilty.

OTS Chief On Temporary Leave As Treasury Inspector General Reviews BankUnited Backdating

Solomon Wisenberg — Sat, 28 Mar 2009 14:43:31 +0000

Today’s Wall Street Journal reports here that Acting Office of Thrift Supervision (”OTS”) Director Scott Polakoff has been placed on leave pending Treasury OIG’s investigation into whether the OTS approved BankUnited Financial Corporation’s backdating of a capital transfer in August 2008.

According to the story by Damien Paletta and David Enrich:

“In August, BankUnited transferred $80 million from the parent company to its thrift subsidiary, which was running low on funds, according to people familiar with the matter. BankUnited officials said at the time that the transfer was effective as of June 30. The move had the effect of burnishing its capital levels for the quarter that ended June 30.”

“At the end of that quarter, BankUnited’s recorded Tier 1 capital — the measure regulators use to judge a bank’s health — was at 7.6%. That fell to 1.34% by Dec. 31. Regulators typically want a bank to have at least 6% in Tier 1 capital.”

Polakoff is a highly-regarded career federal employee. Treasury OIG revealed in December that the OTS had improperly allowed a similar backdated capital infusion by IndyMac Bank.

The whole scenario of OTS-approved backdating highlights a problem often faced by federal prosecutors when they are called to investigate fraud in the wake of financial debacles. These debacles typically occur during periods of lax regulation. Law enforcement agents discover during their investigations that regulators/examiners have tacitly approved, or at least failed to stop, actions that look like classic fraud to the FBI or an Assistant United States Attorney (”AUSA”).

This makes prosecution more difficult–and with reason. It is hard to justify criminally charging someone who did nothing to hide his/her questionable activities from on-the-scene regulators/examiners. But there are also situations where massive multi-year fraud occurred and the perpetrators sought to cover their actions by obtaining regulatory approval, without full disclosure, to an overworked examiner or regulatory official.

It is the task of the ethical federal fraud prosecutor to determine which of these two types of cases he/she has. The thing to be avoided is a rush to prosecute (in the wake of public rage and hysteria) people who took actions that, however negligent, greedy, or misguided, were entirely within the acceptable regulatory ethos of their times.

Skilling Asks For En Banc Review

Solomon Wisenberg — Thu, 22 Jan 2009 13:25:55 +0000

The Houston Chronicle reports here that former Enron CEO Jeff Skilling has asked the full Fifth Circuit to review the panel decision, authored by Ed Prado, affirming his convictions. The main thrust of the motion apparently pertains to the honest services fraud question, with Skilling claiming that the panel strayed from recent Fifth circuit precedent.

Fifth Circuit Affirms Jeff Skilling Conviction

Solomon Wisenberg — Wed, 07 Jan 2009 05:27:02 +0000

Judge Ed Prado’s 104 page opinion affirms the guilty verdicts in toto. The case is remanded for re-sentencing, however, in light of an improper enhancement for substantially jeopardizing a financial institution. Jerry Smith and District Judge Alia Ludlum (sitting by designation) rounded out the panel.

Sunday Fed Fraud Roundup….

Solomon Wisenberg — Sun, 21 Dec 2008 19:03:50 +0000

Former GSA Chief of Staff David Safavian was convicted on Friday for obstruction of justice and lying to federal officials concerning his dealings with disgraced former lobbyist Jack Abramoff. Safavian didn’t testify or call any witnesses. His original convictions were thrown out by the U.S. Court of Appeals for the D.C. Circuit. U.S. District Judge Paul Friedman presided at the trial and Lawrence Robbins was lead defense attorney. Justin Schur represented DOJ. Jesse Holland’s AP story is here. . . . For five years the FBI improperly instructed its agents in Iraq to over-report hours, resulting in at least $6 million dollars in improper overtime and Sunday payments, according to the DOJ Inspector General’s report. Ben Corey’s Washington Times story is here. The FBI has admitted wrongoing and says it has stopped these deceptive practices. Spencer Hsu’s Washington Post piece reports that six straight counter-terrorism chiefs condoned the false reporting. Apparently not one of these officials consulted with the FBI’s General Counsel’s Office. Agents were told, among other things, to report time spent at cocktail parties and doing laundry as overtime. One FBI employee took the position that, “When you’re in that environment, anything you do to survive is work for the FBI.” No doubt this is true in some sense. But I don’t see DOJ applying that principle to its various criminal investigations of contractor fraud in Iraq. Apparently there are special rules in Iraq for special people. . . . Meanwhile, Washington Post Personal Finance Columnist Jane Bryant Quinn here discusses two obvious red-flags that should have been apparent to Bernard Madoff’s victims: 1) His fund was audited by an obscure, allegedly rinky-dink, accounting firm with no website; and 2) The funds were held in Madoff’s own advisory firm rather than with “a large, independent financial institution that reports cash flows and trading activity to you directly.”

Madoff Fraud: A Taste Of Things To Come?

Solomon Wisenberg — Sun, 14 Dec 2008 15:48:52 +0000

Rob Cox of breakingviews.com has an excellent column placing the Madoff Ponzi Scheme Fraud within the context of boom and bust economic cycles. Big frauds (or “bezzles”) like Madoff’s remain hiddden in speculative boom years and typically come to light during downturns. The dowturns are in part caused by the excesses and scams of the boom years. The bezzle theory was developed by economist John Kenneth Galbraith. According to Cox, Galbraith taught that the first frauds uncovered are seldom the largest. Thanks to Dave Westheimer for shooting this article to me.