Sir Allen Stanford to stay jailed

The WSJ reported that the courts have decided that Allen Stanford needs to remain in jail until his court case is completed. The judge said:

"Stanford is a serious flight risk and there is no condition or combination of conditions of pretrial release that will reasonably assure his appearance as required for trial."

Apparently, evidence was presented to the judge that Stanford had a friend get his Antigua passport and bring it to him in Houston and that he had withdrawn $100 million from a Swiss bank account.

More on Satyam's Auditors

Following up on Satyam's auditors, the Times of India reports that Satyam was not audited by PwC (emphasis added):

The questioning of Ramesh Rajan, chairman and CEO of PricewaterhouseCoopers, India (PwC) by CBI last week, has revealed that the Satyam balance sheets were in fact audited by Lovelock & Lewes and not Price Waterhouse (PW). It is also learnt that the auditing fees, though deposited in the name of Price Waterhouse, Bangalore, was later transferred into the account of Lovelock & Lewes. "It is from here that the partners S Gopalakrishnan and Srinivas Talluri withdrew the money," sources involved in the investigation of the case told TOI.

Apart from Rajan, other senior partners of PW, from Delhi and Kolkata, were also summoned by the CBI last week. The partners denied any association with PW, Bangalore and said that Gopalakrishnan and Talluri were not entitled to sign any balance sheet on behalf of PW. "So as it turns out, the auditors who are partners with PW, Bangalore, wrongly signed under the name of PW, and also outsourced the work to Lovelock & Lewes," said sources adding that investigations confirm that the entire auditing team at Satyam is from Lovelock & Lewes.

I am left wondering how all of this could happen without the knowledge of PwC India...

Ruth Madoff breaks her silence.

Ruth Madoff issued a statement (see this link or the full statement below). Among other things, she implies that she is leaving him and has been devastated by the revelation of the fraud. Assuming she is sincere, it appears Bernie even deceived his wife for decades. What a guy! Here is her statement:

I am breaking my silence now, because my reluctance to speak has been interpreted as indifference or lack of sympathy for the victims of my husband Bernie's crime, which is exactly the opposite of the truth.

From the moment I learned from my husband that he had committed an enormous fraud, I have had two thoughts -- first, that so many people who trusted him would be ruined financially and emotionally, and second, that my life with the man I have known for over 50 years was over. Many of my husband's investors were my close friends and family. And in the days since December, I have read, with immense pain, the wrenching stories of people whose life savings have evaporated because of his crime.

My husband was the one we (and I include myself) respected and trusted with our lives and our livelihoods, often for many, many years, and who was respected in the securities industry as well. Then there is the other man who stunned us all with his confession and is responsible for this terrible situation in which so many now find themselves.

Lives have been upended and futures have been taken away. All those touched by this fraud feel betrayed; disbelieving the nightmare they woke to. I am embarrassed and ashamed. Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.

In the end, to say that I feel devastated for the many whom my husband has destroyed is truly inadequate. Nothing I can say seems sufficient regarding the daily suffering that all those innocent people are enduring because of my husband. But if it matters to them at all, please know that not a day goes by when I don't ache over the stories that I have heard and read.

Mrs. Madoff's sacrifices and Bernie's prison sentence.

The WSJ reports that Mrs. Madoff has agreed to relinquish her fur coats (valued at $49k), linens and bedding ($18k) and silverware ($9k). Stripped of the means to stay warm, sleep, or eat, life will be burdensome for her now...

Meanwhile, another report says that Bernie was given the maximum sentence of 150 years. That sounds like a new precedent for white collar criminals.

Judge to decide if $500 k bail bond is enough to stop Stanford from fleeing

If he really is the mastermind behind a $7 billion Ponzi scheme, do you think he would be worried about losing $500k?

More on the $134.5 billion bond smuggers

Read this for a follow up to the counterfeit bond story posted on June 18th. In short, the bonds were obvious fakes, the Treasury Department is stumped by it all, the counterfeiters are free and nobody knows where they are!

A dozen years for a $50 billion Ponzi scheme

Get this, Madoff's attorneys are asking that Bernie be sentenced to a mere 12 years in prison for running the World's largest Ponzi Scheme (other than Social Security that is)! They are arguing that because Bernie turned himself in to his sons and is cooperating with officials, 12 years is sufficient. One of his attorneys, Ira Sorkin, also argued that because the norm is 15 years for white collar crimes, Bernie's sentence shouldn't deviate from that time frame by much.

Meanwhile, Bernie's prosecutors are asking for the maximum sentence for the crimes he has admitted to -- 150 years. They are arguing that since this fraud went on for a generation and was so enormous in scope that Bernie should get the maximum sentence. Apparently, Bernie's victims wrote numerous letters that appear to agree with the prosecutors.

Skepticism and Common Sense

While changes in financial regulation (both changes in enforcement and structure) may provide additional comfort to investors in this post-Madoff era, regulation will never eliminate the need for skepticism and common sense. Via BusinessWeek:

Right now, fraud is at the forefront of everyone's mind, and many investors are taking due diligence seriously. But even so, some advisers notice their clients slipping back into the sort of habits that got Madoff investors in trouble in the first place. Peter Turecek, a senior managing director at risk-consulting firm Kroll, says people are desperate to make back the money they lost in the past 18 months. That makes them susceptible to Madoff-like scams. "It's almost a catch-22," Turecek says.

Jason Thomas, chief investment officer at wealth manager Aspiriant, says he already has clients coming to him with investments that appear too good to be true. When he asks them why they want in, the answer is inevitably the same: A smart friend is making a bundle in it. It's human nature, Thomas says. "We're greedy," he says. "We don't want to be riding the bus. We want to be in the town car."

Investors would do well to remember not to let greed outweigh common sense and a healthy dose of skepticism when considering possible investment options.

The latest Madoff news...

Speaking of penalties for fraud perpetrators and their families, the Wall Street Journal just reported that Ruth Madoff, Bernie's wife, has agreed to give up about $80 million in assets while she will be able to keep $2.5 million in cash. I wonder if some of the many less fortunate victims of Madoff's $50 billion Ponzi scheme who are now broke would like to have $2.5 million in cash right now...

Penalties of Fraud

Fraud perpetrators can be especially difficult to prosecute. As a result, many fraudsters lose their jobs, but face little or no other repercussions. The fraudsters then get a job at a new company that usually has no idea that their new employee has been involved in suspicious behavior. The individual defrauds this new employer, gets fired and the cycle continues. Eventually the fraudster gets caught doing something that produces enough evidence to prosecute the individual. Many times, fraud prosecutions dig up a history of fraudulent behavior at several previous employers. By keeping the penalties for fraudulent acts fairly low, we encourage future frauds.

Because of this, I get concerned when I read the following (via LAT):

Los Angeles County’s top prosecutor has warned that a budget proposal by Gov. Arnold Schwarzenegger would so weaken court sentencing guidelines that if a swindler such as Bernard Madoff were to be brought to justice in California he would not face state prison time.

The soap opera fraudster: Danny Pang

Danny Pang is in the news again having reportedly taken $83 million from his firm before it was seized earlier this year. Watch out for this guy as he appears to leave dead bodies wherever he goes (literally)...

Election fraud in Iran -- check the digits...

A former student of mine, Dan Leslie, pointed out an article in The Washington Post that analyzes the frequency of the last two digits in the votes reported for the recent Iranian election to see if the vote counts appear random. The authors conclude that:

Each of these two tests provides strong evidence that the numbers released by Iran's Ministry of the Interior were manipulated. But taken together, they leave very little room for reasonable doubt. The probability that a fair election would produce both too few non-adjacent digits and the suspicious deviations in last-digit frequencies described earlier is less than .005. In other words, a bet that the numbers are clean is a one in two-hundred long shot.

As many fraud investigators know, digital analysis has been used to look for financial chicanery too. However, traditional digital analysis generally looks at the first two digits and compares them with Benford's Law to see if they are distributed randomly. The approach used to investigate election fraud is an interesting twist on digital analysis.

Ever heard of click fraud?

Check out this article to read about the latest evidence that whenever there is money involved there will be some fraud perpetrators trying to get it through unscrupulous means...

International Audit Quality

Among those charged in the Stanford fraud is a former chief of Antigua's financial regulatory commission. From USA Today:

Leroy King allegedly was paid more than $100,000 in bribes in exchange for his positive reports on Stanford's Antigua banking operation before it collapsed earlier this year, according to a federal indictment unsealed in Houston Friday.

Even though the U.S. Justice Department is stepping up FCPA enforcement, bribery seems to be becoming even more prevalent overseas. With businesses embracing a more global focus, audit firms must have the network and resources to service global clients. However, I imagine that audit firms face major challenges in ensuring audit quality overseas, especially in less-developed nations.

In many less-developed nations, audit firms face the prospect of hiring employees who have been raised in a culture that views bribery as acceptable. Also, accounting education may be of lower quality and audit standards may be less stringent in such countries. Further, because salaries are lower in less-developed nations, firm employees are more likely to be enticed by a bribe from a client.

Leroy King's alleged price, $100,000 in bribes, seems like a very small price to pay to keep a $7 billion fraud running. With huge incentives and a high likelihood of rationalization for international employees to accept bribes from clients, I hope that audit firms have been able to establish effective controls to ensure audit quality overseas. Perhaps the scarcity of cases where auditors have been accused of accepting bribes is indirect evidence that audit firms are able to prevent such behavior.