No More “Neither Admit or Deny”

The Securities and Exchange Commission, in a fundamental policy shift, said Friday, January 6, that it would no longer allow defendants to say they neither admit nor deny civil fraud or insider trading charges when, at the same time, they admit to or have been convicted of criminal violations. This has been a longstanding practice of allowing companies to settle fraud charges by paying a fine without admitting wrongdoing.

Questions
1. In what types of cases will “neither admit or deny” still be allowed?
2. According to the article, who at the SEC decides whether to use relevant facts from the criminal case in its own court documents for the civil case?
3. In November, what high-publicity case was critical of the “neither admit or deny” settlements and who was the judge that made that point?

Source:

Wyatt, E. (2012). S.E.C. Changes Policy on Firms’ Admission of Guilt, The New York Times, Jan. 6 (Retrievable online at http://www.nytimes.com/2012/01/07/business/sec-to-change-policy-on-companies-admission-of-guilt.html?_r=2&hp)

OK, tell me again, how is this NOT a prosecutable felony?

In late June 2004, a plant manager in charge of a Mexican plant of Tyson Foods sent a memo to his headquarters in Springdale, Arkansas about 2 women who did not work for Tyson’s but were being paid from his payroll, the equivalent of $2,700 per month (and had been for years). The women happened to be the wives of two veterinarians stationed at the plants as part of Mexico’s effort to meet high sanitary and processing standards. The veterinarians certified products as suitable for export, a step required by countries like Japan and increasingly sought after by Mexican consumers as an assurance of quality and safety for locally produced processed meats.  The purpose of the payments was “to keep the veterinarians from making problems,” according to a subsequent memo — in short, bribes. 

At headquarters, executives convened, including the president of Tyson International, the vice president for operations, and the vice president for internal audit and  evidently agreed the payments to the wives had to stop. A company lawyer said he was seeking advice on “possible exposure” from the payments, evidently referring to potential liability for maintaining fraudulent records and bribing foreign officials, which are felonies under the Foreign Corrupt Practices Act (FCPA). And then, having identified the serious ethical and legal lapses, and the need to stop the bogus payments, this group of executives “were tasked with investigating how to shift the payroll payments to the veterinarians’ wives directly to the veterinarians,” according to a subsequent statement of facts negotiated by Tyson’s lawyers and the Department of Justice.

The issue of the payments resurfaced in November 2006, and this time, Tyson  retained an outside law firm, who conducted an internal investigation and, under a government program intended to encourage voluntary disclosure of white-collar crime, turned the results over to the Justice Department and the Securities and Exchange Commission. In February 2011, the government’s investigation ended when Tyson was charged with conspiracy and violating the Foreign Corrupt Practices Act . Tyson agreed to resolve the charges with a deferred prosecution agreement in which it “admits, accepts and acknowledges” the government’s statement of facts, and paid a $4 million criminal penalty. The company paid an additional $1.2 million and settled related S.E.C. charges that it maintained false books and records and lacked the controls to prevent payments to phantom employees and government officials.

In the 23-page letter agreement between Tyson and the Department of Justice, the criminal information, and the S.E.C.’s public statement of facts all withheld names, identifying the participants only as “senior executive,” “VP International,” “VP Audit” and so on. The FCPA specifically provides for fines of up to $5 million and a prison term of up to 20 years for individuals, as well as fines of up to $25 million for companies. However, no one will be charged.

Questions:

1. Do you think this agreement without prosecution is sufficient to stop these types of ethical breaches? Discuss.

2. The article mentions that settlement costs would be passed on to the shareholders.  What types of costs would these include?

3. Where would these costs show up in the financial statements? 

4.  Research Tyson Foods on the Internet.  Do you see any other incidents that provide positive or negative evidence as to the “tone-at-the top” and the ethical environment at the company? Discuss.

Source:

Stewart, J.B. (2011) Bribery, but Nobody was Charged. The New York Times, June 24 (Retrievable online at http://www.nytimes.com/2011/06/25/business/25stewart.html?_r=1&hp)

Not too squeaky clean

A suit called GSP Finance LLC v. KPMG LLC was filed on March 29 with GPS alleging that KPMG “was well aware of the desperate financial condition of Hicks Sports” — specifically, the Texas Rangers and Dallas Stars — when it was hired to conduct the ’08 audit. The suit says Hicks Sports Group suffered losses of $113 million in 2002, $67.8 million in ’03 and $95 million in ’04. Till the Stars are sold, it won’t be clear exactly how much Hicks’s lenders have lost.

Questions:

1. What issues are in question regarding the clean audit?
2. What was the related party issue that is coming to light?
3. Identify all the financial statement users impacted by this clean opinion.

Source:
Wilonsky, R. (2011)KPMG Sued For Giving Tom Hicks “Clean Audit” a Year Before $525-Million Loan Default, March 30 (Retrieved at http://blogs.dallasobserver.com/unfairpark/2011/03/kpmg_sued_for_giving_tom_hicks_clean_audit_a_year_before_525-million_loan_default.php)

Where’s the paper trail?

As more and more Americans face mortgage foreclosure, banks’ crucial ownership documents for the properties are often unclear and are sometimes even bogus, a condition that’s causing lawsuits and hampering an already weak housing market. Docx, and companies like it, were recreating missing mortgage assignments for the banks and providing the “legally required signatures” of bank vice presidents and notaries, signed by minimum wage employees that knew they were signing someone’s   names other than their own.

Docx was owned by a company called LPS, a $2 billion firm that calls itself the nation’s leading provider of mortgage processing services. LPS told us that when it found out about the phony signatures in 2009 being signed in a boiler room environment, it shut Docx down. The FBI and several states are investigating.

Questions:

1.  Based on the article and video, do you think this is a case of fraud?  Discuss in terms of intent.

2. What are all of the costs you think will be litigated in this situation? What was missing in the system that allowed this to happen? Discuss.

3.  Assuming this will be litigated and you are asked to write a financial footnote disclosure regarding contingent litigation against LPS, what would you include? Discuss.

Source:

CBS video. (2011) The next housing shock, April 3(Retrievable online at http://www.cbsnews.com/video/watch/?id=7361572n&tag=related;photovideo)

Anderson, R.  and D. Ruetenik (2011) Mortgage Paperwork Mess: Next Housing Shock?, CBSNews.com, April 1 (Retreivable online at http://www.cbsnews.com/stories/2011/04/01/60minutes/main20049646.shtml?tag=contentMain;contentBody)

Is the Game Rigged? Say it ain’t so!

The Securities and Exchange Commission has filed civil charges against a former director of Goldman Sachs and Procter & Gamble, accusing him of passing illegal tips about those companies to Raj Rajaratnam, the hedge fund manager set to go on trial next week for insider trading. Rajat K. Gupta, former Goldman director, is the highest-profile business executive charged by the government in its sweeping investigation into insider trading on Wall Street.

Questions:
1. The article mentions that Goldman has had three run-ins with the Securities and Exchange Commission in the past year. What were they? Research and discuss.

2. What is the difference between civil and criminal charges? Why do you think Raj Rajaratnam is facing criminal charges and Rajat K. Gupta is being charged with civil charges?

3. What do they mean by “loss avoidance” for Galleon funds?

Source:

Lattman, P. and J. Cane (2011). Former Goldman Director Charged With Insider Trading, Deal Book, March 1 (Retrieved online at http://dealbook.nytimes.com/2011/03/01/former-goldman-director-charged-with-insider-trading/)

Bloomberg Video. (2011). SEC Says Ex-Goldman Director Gupta Tipped Rajaratnam, March 1 (Retrieved online at http://www.bloomberg.com/video/67189564/)

2011 Prediction

According to William K Black, the FBI and the DOJ will not be likely to prosecute the elite bank officers that ran the enormous ”accounting control fraudss that drove the financial crisis. While over 1,000 elites were convicted of felonies arising from the savings and loan crisis from the 1980′s and 1990′s , there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.

Black proposes that the U.S. needs to take three major steps to be effective against the epidemic of accounting control fraud. First, DOJ needs to realize that it is dealing with accounting control fraud. That task is not terribly difficult. The criminology, economics, and regulatory literature — as well as the data on fraud and analytics are all readily available. The FBI must end its “partnership” with the MBA. Second, the regulators need new leadership picked for a track record of success as vigorous regulators and a willingness to hold elites accountable regardless of their political allies. Third, the regulators and the DOJ need to partner with the SEC and the state AGs to share data (where appropriate under Grand Jury rule 6e). The federal regulators need to end their unholy war against state regulatory efforts and the SEC needs to end its disdain for the state AGs.

Questions:

1. According to the author, what is the four-part recipe for maximizing fraudulent accounting income in the short-term?

2. According to the author, what is the downfall of the FBI in the role of successful investigation and prosecution of accounting control fraud?

3. What are liar’s loans and what is their role in the financial crisis? 

4.  How do you see this lack of criminal prosecution affecting the accounting and finance profession? Do you agree with Black’s proposals?

Source: Black, W.K. (2010). 2011 Will Bring More de Facto Decriminalization of Elite Financial Fraud, The Huffington Post.com, December 28 (Retrievable online at http://www.huffingtonpost.com/william-k-black/the-role-of-the-criminal_b_802115.html)

Cooking the Books for Lehman?

N.Y. Attorney General Cuomo filed charges against Ernst & Young on December 21, 2010, alleging that the firm helped Wall Street Investment bank Lehman Brothers conceal its deteriorating financial condition before the bank’s historic collapse in the fall of 2008.  The civil lawsuit, which seeks more than $150 million, is the first law enforcement action to stem from Lehman’s failure. The bankruptcy of the firm, which was an important cog in the machinery of the capital markets, caused immense collateral damage. The allegations center on sham trades that allowed Lehman to window-dress its balance sheet before filing quarterly financial reports, making it seem like it had more cash than it actually did. Cuomo’s lawsuit aims to hold accountable one of the less-mentioned players in the saga – Ernst & Young, Lehman’s auditor, which allegedly turned a blind eye to the accounting machinations. The case does not resolve the fate of senior Lehman executives, such as former chief executive Richard Fuld, who have been under investigation by the Securities and Exchange Commission.

Questions:

1.  Explain the boomerang trade referred to as “Repo 105″ that is at the heart of the allegations.

2.  Explain leverage and what impact it played in the scenario.

3. Based on what you know about the Lehman situation, do you think they should have been included in the government bailout?  Why or why not?

4.  Read Matthew Lee’s letter  and critique it. Do you agree with the way he handled the situation as a whistleblower?  Based on what you know, would you have handled it any differently? 

Source:

Goldfarb, Zachary A. (2010). N.Y. Attorney General Cuomo Sues Ernst and Young, alleging Lehman Accounting Fraud, The Washington Post, December 22 (Retrievable online at http://www.washingtonpost.com/wp-dyn/content/article/2010/12/21/AR2010122103973.html?sid=ST2010122106931)

Lee, Matthew. (2010). The Lehman Whistleblower Letter Everyone Ignored. Hereisthecity.com, December 21, 2010 (Retrievable online at http://news.hereisthecity.com/news/business_news/10215.cntns)  

The Alyona Show,  The Next Arthur Andersen?, Dec. 22, 2010. (Retrievable at http://www.youtube.com/watch?v=5B_esTl9FS8&feature=related) 

SWAT (Successful Whistleblowers Advocating Against Tax Payer Fraud)

A group of elite whistleblowers met in Washington, D.C. There was no media coverage of these men and women whose exploits have been heralded on 60 Minutes and Dateline, and, not incidentally, helped enrich the U.S. Treasury by more than $16 billion since 1986.

This particular group known as SWAT (Successful Whistleblowers Advocating Against Tax Payer Fraud) met to share and celebrate their stories of exposing fraudulent health-care  and pharmaceutical companies, as well as dishonest manufacturers.

Questions:

1. What is the biggest single cash recovery ever for the U.S. government, who was it against, and who was the whistleblower that aided in the recovery?

2. Based on what you read in the article, do you think the laws need to be changed as they relate to corporate fraud? Explain.

3.   If you were faced with a corporate fraud as a potential whistleblower, what are some of the things pointed out about whistleblowers in this article that you would consider? Explain.

Source:

Kelly, K. (2010). Whistleblowers: Cynical Idealists or Idealistic Cynics? Huffington Post, November 19 (Retrievable online at http://www.huffingtonpost.com/kitty-kelley/whistleblowers-cynical-id_b_785968.html)

Hiding The Truth?

Jane Buchan is a rarity on Wall Street. Not only has she built a hugely successful hedge fund investment firm but the firm is also the only one that is, on paper, owned and run by women. Unfortunately, it now appears that the firm Pacific Alternative Asset Management Company (PAAMCO) was bankrolled by some of the biggest (male) names in the business, in order to disguise aspects of the business from customers, partners and federal regulators.

Questions:
1. What is this scandal all about in terms of ill-gotten gains? (Include some red flags of fraud and/or motives to commit this type of fraud.)
2. The case centers on whether Mr. Sussman had the right to convert a $2 million loan he made to Paamco’s founding partners in 2000 into an equity stake in Paamco’s parent company. What journal entry would Mr. Sussman make for this transaction, if credible?
3. What was Mr. Sussman’s previous history with the SEC and why is this important?

Source: Creswell, Julie. (2010). A Hedge Fund Controlled By Women, So It Claimed. The New York Times, October 18 (Retrievable online at http://www.nytimes.com/2010/10/19/business/19hedge.html)

We’re Number One

According to Joshua Bamfield, author of the 2010 Global Retail Theft Barometer report from the U.K.-based Center for Retail Research, U.S. retailers lost about $40 billion in stolen goods in 2010.  This is about 1.5% of the nation’s sales. Even though this sounds really bad, the losses are down by 6.8% from the prior year. Still, losses passed onto consumers added about $423 to the average American family’s shopping bill this year.

Questions:

1.  What are the most stolen goods?  Explain why you think these are targeted.

2.  Why do you think that employee thefts are greater than shoplifting thefts in the U.S.?

3.  According to the video, while employers have increased their prevention efforts by 12%, why doesn’t that result in a 12% reduction in losses?

4. What roles do accountants play in the prevention of retail theft? Explain.

Source:

Video. (2010) U.S. Families Lose $400 to Theft, October 19.

Kavilanz,  Parija, (2010). Thieves Will Cost You $423 At The Mall This Year. CNNMoney.com, October 19. (Retrievable online at http://money.cnn.com/2010/10/18/news/economy/store_theft_drain_on_your_wallet/index.htm)

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