Another possible life sentence in the Madoff case

The NY Times reports that Bernie Madoff's former chief of operations, Daniel Bonventre, has been charged with "conspiracy, securities fraud, falsifying books and records of a broker-dealer, false filings with the Securities and Exchange Commission and four counts of filing false federal-tax returns."

In other news, the WSJ reported that "one of Bernard Madoff's daughters-in-law says she and her children shouldn't have to bear the burden of his name. Stephanie Madoff filed court papers in Manhattan on Wednesday asking to change her last name to Morgan. She made the same request for her two children. She is married to the jailed financier's son, Mark. She says her family has gotten threats, and she wants to drop the Madoff name to avoid "additional humiliation" and harassment."

Ever wonder what's in your tomato paste?

When bribes are paid to get business deals, the real losers are often the consumer who ends up paying either higher prices or gets lower quality goods or both. The NY Times reports that an investigation shows that the food industry has had significant, if not, widespread corruption. For example, a tomato vendor, SK Foods, paid bribes to numerous food companies, including Kraft, to sell their tomatoes at inflated prices and sometimes to give the company tainted, moldy tomatoes. Here are some juicy excerpts from the NY Times article:

The scheme, as laid out by federal prosecutors, has two parts. Officials say that (officials) at SK Foods greased the palms of a handful of corporate buyers in exchange for lucrative contracts and confidential information on bids submitted by competitors. This most likely drove up ingredient prices for the big food companies.

In addition ... SK Foods shipped its customers millions of pounds of bulk tomato paste and puree that fell short of basic quality standards... Often that meant mold counts so high the sale should have been prohibited under federal law...

The scope of the tainted shipments was much broader than the bribery scheme, touching more than 55 companies. In some cases...the tainted ingredients wound up in food sold to consumers.

The article also talks about how tone at the top appears to have affected some major companies in the food industry and perhaps the entire industry. The article reads: “If you have a couple of people who are willing to bend the rules and they set that tone from the top, that can spread very quickly in that company and in that niche of the industry, and that’s what happened here,”

This shows how corruption in business can even taint your spaghetti sauce!

Who Blows the Whistle on Corporate Fraud?

A forthcoming study in the Journal of Finance focuses on improving our understanding of fraud detection methods.  The authors discuss their paper at the Harvard Law School Corporate Governance Blog.  Here is a sampler of their discussion:

The main result emerging from our analysis is that in the United States fraud detection relies on a wide range of, often improbable, actors. No single one of them accounts for more than 20 percent of the cases detected. These findings suggest that to improve corporate governance abroad one needs to adopt a broader view than implied by the legal or private litigation approaches to corporate governance.

... 

The second main result is that the incentives for the existing network of whistleblowers are weak. Auditors, analysts, and employees do not seem to gain much and, in the cases of employees, seem to lose outright from whistleblowing. The two notable exceptions regarding who benefits from whistleblowing are journalists involved in large cases and employees who have access to a qui tam suit.

A natural implication of our findings is that the role of monetary incentives should be expanded. We find that the use of monetary rewards provides positive incentives for whistleblowing. As the evidence in the healthcare industry shows, such a system appears to be able to be fashioned in a way that does not lead to an excessive amount of frivolous suits.

Former Healthsouth CFO to participate in FASRI roundtable

This upcoming Wednesday, February 17 at 11am ET, FASRI will be hosting a roundtable with Aaron Beam, former CFO of HealthSouth, who served four years in federal prison for his role in Healthsouth's accounting fraud.  Past roundtables have been very insightful and I highly recommend you set aside some time to sit in on this discussion--this is a unique opportunity to pick the brain of a convicted fraudster (details on how to sit in here).  If you are busy during the roundtable, you will be able to view the archived session here afterward.

Surprise: people are finding more ways to steal from the U.S. government

Two whistle blowers have accused the private security company and government contractor Blackwater Worldwide (now called Xe) of defrauding the U.S. government.  Perhaps unsurprisingly, most of the accusations seem to hint at a general lack of oversight by the government.  Basically it looks like the government didn't do much to verify expense reimbursements submitted by Blackwater.  This isn't the first time the government has had issues like those alleged by these whistle blowers, and it probably won't be the last.  Weak internal controls and inadequate oversight by the government do not in any way justify fraud, but how many taxpayer dollars need to be stolen before we make a greater effort to eliminate these opportunities?

Anyone want to buy some snake oil?

Today I got an email from a neighbor who is promoting a new product that is supposed to relieve pain. The "amazing product" shown in the picture is touted as an energy wand that uses "breakthrough amized fusion technology." The claim is that the wand will "turn on your body's own source energy within" so you can "experience your aches and pains leaving your body."

In the email, the wand is said to be responsible for immediately relieving the pain of a man whose ribs were sore for three years since his second open heart surgery. Sounds pretty good, right? Well, additionally, the wand was able to make lemons taste sweeter and make bitter olive oil lose its bitterness and become “quite pleasant.”

Now, these claims were only the beginning. Migraines went away; knee pain vanished, back pain immediately gone, broken noses healed, nasal steroids were no longer needed! I know that some people will actually find relief when using it. Why?

Goldman helps Greece lube their balance sheet

It looks like the investment bankers are back devising deals to create off-balance sheet debt. They were very instrumental in helping Enron figure out how to hide their true debt and it looks like Greece was in need of this expertise in order to meet the European Union deficit rules. It seems that whenever a financial rule is made there are some bright guys figuring out how to design transactions that get around the rule. I think this is another example of too many bright finance experts on Wall Street who have dim moral compasses. You can read more about Greece and Goldman Sachs here.

Modern Snake Oil?

A recent NYT opinion piece serves as a reminder of how important it is to be on the lookout for trumped up marketing claims:

The full history of war profiteering in Iraq may never be known, but it will be hard to top the magic wand known as ADE 651 as a symbol of corruption. The hand-held wand, wielded by Iraq’s security teams at hundreds of checkpoints, is supposed to detect car bombs and weapons. But the battery-free device — supposedly powered by the static electricity of a soldier’s body — turns out to be a very expensive hoax, no more reliable than a coin flip or a Ouija board.

After widespread doubts, including warnings by American military officials who never used ADE 651s, Britain finally banned the devices’ export and arrested the manufacturer for fraud. But not before Iraq bought more than 800 wands, which cost $250 each to make but drew up to $60,000 each from the Baghdad government.

Perhaps the most surprising thing about this scam is the fact that it ensnared a military organization.  I would have thought that if a military force wanted to rely on such a product that they would have done some independent testing (or some form of reliable assurance) before choosing to rely on this device as a security measure.

As an aside, this story got me thinking about some of my favorite Dilbert comics:

Bank of America charged with fraud in Merrill deal

This is hot off the press (see today's WSJ). NY Attorney General, Andrew Cuomo has charged Bank of America (BofA) and its executives with fraud in regards to BofA's purchase of Merrill Lynch in December 2008. Cuomo argues that BofA knew of but did not disclose the ($16 billion) losses at Merrill to shareholders when it was seeking approval to purchase Merrill.

Today's WSJ says that Cuomo is claiming that BofA also defrauded the U.S. Government (i.e., you and me) by exploiting "the economic fear that existed in late 2008" so that it could get $20 billion in aid from the U.S. Government by saying the losses at Merrill were worse than anticipated.

This quote from today's WSJ summarizes Cuomo's claims:

"We believe bank management understated the Merrill Lynch losses to shareholders to get shareholders to approve the deal then overstated their ability to terminate the agreement to get $20 billion from federal government," Mr. Cuomo said on a conference call.

Sounds like those BofA executives deserve a hefty bonus don't you think?!

TARP and fraud

In his quarterly report to Congress, Neil Barofsky, the special inspector general for the trouble asset relief program (TARP) says: "The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse."

According to an article published yesterday by National Public Radio (NPR), Barofsky's report said:

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Here are a few more quotes from NPR:

The (financial) institutions that were deemed "too big to fail" have grown larger and failed to restrain the lavish pay for their executives...the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

This sounds like a serious conflict of interest. As such, whenever there is a lot of money floating around, stretched resources to oversee the funds and conflicts of interest, you can bet fraud is around the corner. In this regard, here's more from NPR's article:

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky's investigation.