Family Week for SEC Actions (sort of)

Clayton Peterson, a member of the board of directors and chairman of the audit committee of Mariner Energy, Inc., and his son Drew Peterson, who worked as an investment adviser in Denver, Colorado, pleaded guilty to criminal insider trading charges and were named as defendants in an SEC suit. Clayton Peterson learned at board meetings that his firm would be acquired by Apache Corporation in a deal that was announced on April 15, 2010. After first learning about the deal he repeatedly tipped his son, instructing him to trade through an account belonging to his sister. The son traded and tipped a hedge fund manager who also traded. Following the announcement of the deal the share price of Mariner Energy rose about 42%. The hedge fund manager liquidated his positions, yielding a profit of $5 million. Within days Drew Peterson, and the various accounts for which he traded, liquidated their positions yielding a profit of $150,000. Clayton Peterson and his son Drew each pleaded guilty to one count of conspiracy to commit securities fraud and one count of securities fraud. Sentencing is scheduled for January 12, 2012. The SEC brought a civil injunctive action against Clayton Peterson and his son.

 

Questions:

1. What is a civil injunctive action? What does the term disgorgement mean?

2. What ethical responsibilities does a board of director have regarding the company for which he/she serves?

3. Explain the tip that was acted upon in the insider trading.  Do you think Clayton and Drew would have been caught if the son had not tipped off a hedge fund manager?

 

Source:

Staff. (2011). Father and Son Plead Guilty to Insider Trading Charges, Lexis/Nexis: Corporate & Securities Law Community, August 8 (Retrievable online at http://www.lexisnexis.com/community/corpsec/blogs/corporateandsecuritieslawblog/archive/2011/08/08/father-and-son-plead-guilty-to-insider-trading-charges.aspx)

Barry Minkow UPDATE

Barry Minkow, a sixteen year old wonder-boy of Wall Street in 1983 created ZZZ Best as a carpet cleaning and later insurance restoration business.  He took the company public in 1986, making him the youngest CEO of a public company and had a net worth exceeding $100 million at age 21.  The only problem was that these millions were part of a fraud, with the boy-wonder indicted in 1988 for various counts of securities fraud, mail fraud, tax evasion, and credit card fraud.

Sentenced to 25 years in prison plus restitution, Minkow was released in 1995.  Upon release he started an anti-fraud business and assisted the FBI and SEC in capturing white collar criminals.  He also became a senior pastor at San Diego’s Community Bible Church and appeared to have redeemed himself. 

However, he recently was accused of securities fraud (specifically insider trading) again involving his dealings with Lennar, a construction company.  He pleaded guilty and his sentencing was to take place on June 16, but was postponed while the judge reviews his objections to the pre-sentence investigation report.    

Questions:

1.  What is a “presentence investigation report”?  Who can waive this in a fraud trial and why?  Find an example by Googling the terms “presentence investigation report” and “fraud.”

2. What were Minkow’s objections?

3. Which of these, if any, do you believe have relevance to his sentencing? Discuss.

 

Source:

Catanach, A.H. and J.E. Ketz (2010). Update on Barry Minkow’s Sentencing, Grumpy Old Accountants, June 27 (Retrievable only at http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/201).

 

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)

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)

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)

Amazon.com Must Anticipate Profits in Diapers & Baby Care Products

Amazon.com Inc. agreed to buy Quidsi Inc., the owner of Diapers.com and Soap.com, for $500 million in cash, expanding in baby-care products and gaining merchandise- management expertise. Amazon will also assume about $45 million of closely held Quidsi’s debt and similar obligations, according to a statement from the companies today. They expect to close the deal in December.

Question:

1. Based on the article, what were the sales for Quidsi last year?
2. Based on the article, what was the U.S. e-commerce market last year?
3. Based on the article, what percent of the U.S. e-commerce market does Quidsi comprise?
4. Based on the information given in the article, discuss the accounting treatment  Amazon will record for the Quidsi acquisition.   

Source:

Galante, J. and Serena Saitto (2010). Amazon.com Agrees to Buy Diapers.com Owner for $500 Million, Bloomberg.com, November 8. (Retrievable online at http://www.bloomberg.com/news/2010-11-08/amazon-com-agrees-to-buy-diapers-com-owner-for-500-million.html)

Mortgage Buybacks

Mortgage Buybacks

According to Standard & Poor’s, the top U.S. banks could face up to $31 billion in losses from buying back bad mortgages. Bank of America Corp and JPMorgan Chase & Co have the most exposure to such potential repurchase obligations, followed by Wells Fargo & Co, Citigroup Inc, US Bancorp and PNC Financial Services Group, according to S&P analyst Vandana Sharma. In partcular, analysts believe that Bank of America has lost so much credibility with investors that the stock’s decline might start feeding on itself.

Question:

1. According to the article, what percentage of losses from mortgage buybacks have the six companies already accounted for?
2. Besides the losses, what reason do analysts propose will lead to decreases in net interest income?
3. Based on Weil’s article, how did Bank of America record the transaction when it purchased Countrywide? 
4. Rewrite Weil’s 1^st paragraph after the “Tipping Point” subtitle, in simple terms, as if you were explaining it to your grandmother or your roommate.

Source:

Staff. (2010). Banks Face $31 Billion Loss on Mortgage Buybacks: Report, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/04/banks-face-31-billion-los_n_779115.html)
Youtube.com (2010). BofA Under Pressure to Buy Back $47B in Debt (Retrievable online at http://www.youtube.com/watch?v=apMyLwOJ7nU)

Weil, J (2010). Bank of America Edges Closer to Tipping Point: Jonathan Weil, Bloomberg News, Nov. 3.

Citibank under the Microscope

The SEC has probed certain Citigroup Inc debt funds to assess whether the bank made adequate disclosure to investors about the funds’ risk levels. Three California-based brokers, who worked for the then Citigroup unit Smith Barney, concluded the bank did not adequately disclose the funds’ risks and had also mismanaged them, the newspaper said, citing people familiar with the regulatory probe. Citigroup declined to comment in detail, citing the regulatory probe. However, Citi, denied misleading investors in a WSJ report.

Questions:
1. Assume a small business purchased $200,000 of Citigroup debt funds as an investment for its employee pension fund. What journal entry would it make?
2. Assume the same facts as in question 1. If the company still held these funds at March 2008, how would they account for the 77% decline?
3. Assume the same facts as in question 1 & 2. If the company was lucky enough to be offered the share buyback mentioned in the article, how would they record this transaction?

Source:

Staff. (2010). SEC Probes Citigroup Mortgage Debt Funds, Reuters, November 8. (Retrievable online at http://www.huffingtonpost.com/2010/11/08/sec-probes-citigroup-mort_n_780207.html)

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