Robo-Signers Forge The Foreclosure Mess

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Bank of America, the nation’s largest bank by assets, is placing a moratorium on all foreclosure proceedings and sales across the United States, according CNBC and a report on The Wall Street Journal’s Web site. The postponement takes effect Saturday, October 9. JPMorgan and Ally’s GMAC Mortgage unit have delayed foreclosures in 23 states where courts have jurisdiction over home seizures.

 
Questions:
1. What is a “hydra?” Why does Dr. Henning say that the foreclosure mess is going to “become a hydra?” What ethical breaches are part of this story?
2. What is a defective title? Who will be sued for this and why?  What are the potential avenues of liability in this crisis?
3. The article mentions civil suits. Do you think there will be criminal court actions also? Is this fraud?
4. How do you think this story came to the media’s attention?

 

Source:

Fisk, M. C., and K. M. Howley. (2010) Why the Foreclosure Mess Could Last for Years. Businessweek, October 8 (Retrievable online at http://msnbc.msn.com/id/39562824/ns/business-real_estate)

The Lion that Wimpers

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MGM Bankruptcy news is still coming in, but at the moment we know that Metro-Goldwyn-Mayer Inc. said it has begun seeking its creditors’ approval on a prepackaged bankruptcy plan in which they will exchange more than $4 billion in debt for equity in a new company that has rights to the James Bond franchise and the upcoming two-part movie series “The Hobbit.” Creditors would hold 95.3 percent of the company after it exits from Chapter 11. Only approved holders of secured debt as of Oct. 4 will be allowed to vote.

Questions:

1. Why do you think that MGM chose bankruptcy over a sale?

2. What is secured debt?

3. According to the video, what were the strategic reasons that MGM has deteriorated over the years? What are some of the risks it has faced?

 

Source:

Staff. (2010). MGM Bankruptcy Details: $4 Billion in MGM Studio Bankruptcy Deal, ThirdAge.com, October 8 (Retrievable online at http://www.thirdage.com/news/mgm-bankruptcy-details-4-billion-mgm-studio-bankruptcy-deal_10-8-2010).

CNN Video (2010). What Caused MGM’s decline?, Oct. 8 ( Retrievable online at  http://www.cnn.com/video/)

Accept Credit Cards at Garage Sales and Bake Sales

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Why can’t everyone accept credit cards? Now there is no good reason because the Square Up system eliminates card reading equipment by providing cell phone users with an app that snaps into a headphone jack. The plug is free and you are spared the contracts, the minimums and the monthly fees. For each transaction, Square charges you 2.75 percent of the total, plus 15 cents. Alternatively, you can accept credit card payments without the card itself — over the phone, for example. You just need the card number, expiration date and security code, although these transactions cost you more (3.5 percent).

Questions:

1. Assume that you sold a surfboard on Craigs List to someone who paid you $100 and gave you a credit card. If you swipe the card, how much would you pay to Square for the use of their system?
2. Assume the same facts as in Question 1, except that you do not have the card to swipe, but enter the number, expiration date and security code. How much would you pay for Square to process the transaction?
3. Assume that you sold the surfboard from your small business. What journal entry would you make in Questions 1 & 2?
4. Why do you think that Square has restrictions on deposits over $1,000 for first time users?

Source:
Pogue, D. (2010). A Simple Swipe on a Phone, and You’re Paid, The New York Times, September 30 (Retrieved online at http://www.cnbc.com/id/39438067/)

Mickey D’s in the News: Which story is right?

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According to the Wall Street Journal, McDonald’s Corp. has warned federal regulators that it could drop its health insurance plan for nearly 30,000 hourly restaurant workers unless regulators waive a new requirement of the U.S. health overhaul.  However, less than an hour after that release, ABC News  and Reuters reported that McDonald’s and the Obama administration said the claims of the  Wall Street Journal are false, regarding the dropping of its “mini-med” health insurance for hourly workers because of the new health care reform law.

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Question:

1.  Why do you think the stories are so different and why do you think there was such a quick response from McDonalds and the Obama administration?

2.  What is the medical loss ratio in the new legislation?

3. What effects do you think the new legislation will have on the financial statements of companies?

4.  What do you see as the costs and the benefits of this new legislation?

Sources:

 Adamy, J. (2010). McDonald’s May Drop Health Plan, Wall Street Journal, September 30 (Retrieved online at http://online.wsj.com/article/SB10001424052748703431604575522413101063070.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird)

Arnall, D. and H. Khan. (2010). McDonald’s Fights Back Against Report It Will Drop Health Care Plan, ABC News, September 30 (Retrieved online at http://abcnews.go.com/Politics/HealthCare/mcdonalds-fights-back-report-drop-health-care-plan/story?id=11764596)

Reuters. (2010). McDonald’s Denies Its Cutting Health Insurance, MSNBC, September 30 (Retrievable online at http://www.cnbc.com/id/39435771)

WSJ Video. (2010). AM Report: McDonald’s May Drop Health Plan, September 30.  (Retrievable online at http://online.wsj.com/public/page/0_0_WP_3001.html?currentPlayingLocation=37&currentlyPlayingCollection=The%20News%20Hub&currentlyPlayingVideoId={088AC31E-1087-428F-AD84-62AA9E6D5EA6})

The Fabulous Fab is Back in the News

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Fabrice Tourre, a controversial personality in the Goldman Sachs Group Inc transaction of 2007, asked a judge to throw out a U.S. regulator’s fraud lawsuit against him.  About two and a half months ago, the bank settled its part of the case for $550 million.

In his filing, Tourre asked that the U.S. Securities and Exchange Commission case be dismissed because the 2007 “Abacus” transaction, which involved collateralized debt obligations (CDOs) tied to subprime mortgages, took place outside the United States.

Questions:

1. What are collateralized debt obligations?

2. Where would CDOs appear in the financial statements of the bank that bought them?

3. Do you think he will prevail in his dismissal of the charges?

4.  How do you think the Goldman Sachs Group reported the $550 million settlement in its financial records?  

Source:

Stempel, J. (2010). Goldman’s Tourre says SEC suit should be dismissed, Reuters, September 30 (Retrieved online at http://www.reuters.com/article/idUSTRE68T3L120100930?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+%28News+%2F+US+%2F+Business+News%29)

No MBA for Insider Trading

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In a recent ruling, U.S. District Judge Lewis Kaplan held that a certified public accountant who hid his conviction for insider trading from his teachers at NYUs Stern School of Business wasn’t entitled to the MBA degree that he thought he earned. The former PricewaterhouseCoopers employee, Ayal Rosenthal, pleaded guilty in February 2007 to one count of conspiracy to commit securities fraud after he was accused of disclosing confidential information to his brother about a 2005 transaction between two public companies. This conviction came three months after he finished taking the necessary classes to earn his masters degree in business administration and he was sentenced to 60 days in prison. Once the faculty found out about his conviction, a committee voted to withhold the MBA from him and to alter his grade to F in his professional responsibility course, where he had been a teaching assistant. Subsequently, Rosenthal sued the Stern faculty in 2008.

Questions:

1. What constitutes insider trading? (Hint:  Look at the SEC news release http://www.sec.gov/news/press/2007/2007-17.htm)

2.  Do you think there was anything Rosenthal could have done differently to receive his MBA?

3. Do you agree with the judge’s ruling?

4.  Is Rosenthal still a CPA?

Sources:

SEC. (2007). SEC Charges Family-Run Hedge Fund With a $3.7 Million Insider Trading Scheme, February 8 (Retrievable online at http://www.sec.gov/news/press/2007/2007-17.htm)

Glovin, David (2010). Convicted Accountant Loses Legal Bid for MBA Degree, Bloomberg.com, September 13 (Retrievable online at http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=a.8EbO2qqNcQ)  

Stempel, J. (2010). No MBA for NYU student in insider trading scheme, Reuters, September 13 (Retrievable online at http://www.reuters.com/article/idUSN1319494020100913)

Losing a Trademark Battle

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Danish toy brick maker Lego Juris A/S has failed in its bid to overturn a European trade mark decision canceling European trade mark protection for its standard 2 by 4 red Lego brick in a September 14 ruling of the European Court of Justice. Lego went to court after a Canadian firm had made blocks that were so like lego blocks that they even fit the real blocks made by Lego. The European judge decided that the design of the lego blocks is not protected by European trademarks and so anyone can make the blocks.  Struggling toy maker Mega Brands Inc. is the winner in this battle as it is attempting to restore the company’s financial health through the introduction of new products.

Questions:

1. Lego patented its design in 1958.  When did those patents expire?  How is a trademark different from a patent? How are they similar? 

2. Lego is the overall world leader in construction blocks for all ages, selling C$1.6 billion worth of the blocks each year, with half the sales located in Europe. It is estimated that MegaBlocks sells about $250 million worth of the plastic blocks annually, with about one-third being bought in Europe.  If you assume that these two companies make up the total market of blocks, what percentage does each control?

3.  What type of journal entries or financial disclosures would either company have in connection with this court decision?  

4.  Do you think the court was right in its decision?  Discuss.  Why or why not?

Source:

CNN Video. (2010). Lego loses big battle, September 15 (Retrievable online at http://www.cnn.com/video/)

Gordon, M. (2010). EU Court: Lego Red Brick Trademark Not Registrable, Wall Street Journal, September 14 (Retrievable online at http://online.wsj.com/article/BT-CO-20100914-707120.html)

A New Type of Insurance

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WedLock is a new type of casualty insurance that gives the unhappily married policyholder a payout after he or she is divorced. It costs about $16 a month for every $1,250 of coverage. John Logan, founder of the company, figured there must be a market for those who want to hedge their marital bets. But to discourage people from signing up just prior to their divorce, policyholders must apply four years before the policy will pay out. It adds a premium of $250 per unit for every year the marriage survives beyond four.

Questions:

1.  Assume that a policyholder bought $12,500 worth of coverage and divorced after 10 years.  What would be the expense of the policy?  Show your work.

2.  Assume the same facts as in # 1.  What would be the payout of the policy? Show your work.

3.  Assume that a couple who owned a small sole proprietorship company.  After a year of successful operations, they married and bought this insurance.  Their company paid the premiums.  After buying a $20,000 policy, they divorced after 7 years.  What would be the expense to the company?  What would be the payout and how should the company record this? Give the journal entries and show your work.

Source:

Luscombe, B. (2010).Divorce Insurance: Get Unhitched, Get a Pay-Out, Time, September 19  (Retrievable at http://www.time.com/time/magazine/article/0,9171,2015772,00.html?hpt=C2)

What a Tale!

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During the boom, Wachovia banker Robert Verrone made money by slicing and dicing billions of dollars in commercial real estate loans. After the crash, he made money by restructuring those loans before they blew up. As Wachovia’s No. 1 underwriter of securitized commercial real estate debt between 2002 and 2007, Verrone resigned just months before Wachovia nearly collapsed and was acquired by Wells Fargo at the fire sale price of $15.1 billion.

 Questions:

 1.  Why is/was he called “Large Loan” Verrone?

2.  What does his company called Iron Hound Management do? What is your opinion of his ethics as portrayed in the article?

3.  In the article, he says “”We sold every penny of cash flow to anybody in the world who wanted to buy it.”  What is he referring to?

 Source:

 Leonard, D. (2010). The Ballad of “Large Loan” Verrone, BusinessWeek, September 9 (Retrievable online at http://www.businessweek.com/magazine/content/10_38/b4195070500566.htm)

Star Power Fraud

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Kenneth Starr, a celebrity financial adviser to stars including actors Wesley Snipes and Sly Stallone, was charged with carrying out a massive $30 million fraud on his clients and then spending the money on a luxury apartment and jewelry, federal prosecutors said. Starr, head of the Manhattan-based Starr and Co., was charged with wire fraud, fraud by an investment advisor, money laundering, making false statements to the IRS and lying to federal agents. On September 13, he pleaded guilty to three counts of wire fraud, money laundering, and adviser fraud as part of a $50 million fraud and faces 20 additional counts and charges by the SEC.

Questions:

1. In general, how did Starr perpetrate this fraud? 

2. What “red flags” should have been recognized by alert investors?

3. Read the criminal complaint at http://www.nypost.com/r/nypost/2010/05/27/news/media/Starr,%20Kenneth%20and%20Stein,%20Andrew%20Complaint.pdf. Based on the complaint and the articles, can you figure out who any of the personalities are in terms of their specific-numbers as Associates or Clients? What purpose did the Wind River LLC account serve and how much money went through this account? Why are the amounts in the complaint and the pleading different?

4. Based on the criminal complain, how long did this fraud last and how does that compare with the average length of time for most similar types of schemes? (Hint: Go to the Association for Certified Fraud Examiners website to obtain the average length.) What types of charges (20 additional charges) do you think he faces with the SEC?

Sources:

Barney, L. (2010). ‘Mini Madoff’ Starr Pleads Guilty to $50 Million Fraud, OnWallStreet.com, September 13 (Retrievable at http://www.onwallstreet.com/news/starr-madoff-2668709-1.html)  

Southern District of New York, (2010). The U.S. versus Kenneth Starr and Andrew Stein (18 U.S.C. 1001, 1343 & 1956; 15 U.S.C. 80b-6 & 80b-17; 26 U.S.C. 7206 (1), May 26 (Retrievable at http://www.nypost.com/r/nypost/2010/05/27/news/media/Starr,%20Kenneth%20and%20Stein,%20Andrew%20Complaint.pdf)

Weiss, M.,  L. Cartwright, and B. Golding. (2010) Manhattan Financial Adviser to Celebs is Charged with Scamming Clients, New York Post, May 28 (Retrievable at http://www.nypost.com/p/news/local/nyc_financial_adviser_to_celebrities_DXslLxEwDlkAkxcooYs4pN#ixzz0zET4uSO5)