Doping in Sports and Financial Statement Fraud

I just read an interesting article titled: "Instead of punishing dirty cyclists, should we reward the clean?" The idea is to certify pro cyclists who are willing to be thoroughly tested for doping. The tests would go beyond what is currently used to look for drugs and involve many mechanisms to detect doping.

BYU Radio Interview

Mark was interviewed on BYU Radio today and talked about Enron, auditing, Lance Armstrong, and other fraud-related topics.

The full show is here, with Mark's 27 minute interview starting just before the 31 minute point, or you can also listen to Mark's segment specifically here.

Fraud in the Detroit Bankruptcy and the Role of Investment Banks

I read an interesting analysis of what's happening in the Detroit Bankruptcy proceedings. In a nutshell, it appears to be another case where the investment banks were able to take out millions of dollars in fees as they structured deals that ended up crippling the economy. In this case, the deals may be considered fraudulent according to this analysis. This seems to be business as usual in the investment banking world for about two decades or more.

Enron and WorldCom were frauds that were fueled by investment bankers and ended up becoming the largest bankruptcies in history. The mortgage meltdown was also fueled by investment bankers and that led to even larger bankruptcies and the world economy being brought to its knees in what is now known as the Great Recession. Now, the largest municipal bankruptcy in history also appears to have been fueled by some cleaver investment bankers who undoubtedly made out like bandits as it appears that they structured deals that gave them huge fees.

Lance Armstrong Investigation: I can't believe it's come to this....

Here we are, nearly three and a half years after Floyd Landis's first confession came out and I posted that I was 99.9% confident that pro cyclists had been doping for the past 15-20 years. I ended that first post by saying "Sadly, what would be surprising to me is if someone who is dominating pro cycling such as Alberto Contador was actually not doping!" Of course, soon after that, Alberto failed a doping test in the Tour de France and was suspended from racing.

Since that first post, there have been many posts to follow (this makes number 150 with the label of Lance Armstrong Investigation) and

Enron CEO, Jeff Skilling, Received Shorter Jail Sentence

Various news agencies reported last week that a federal judge reduced Jeff Skilling's prison sentence by about ten years. If Skilling is found to be on good behavior and take a drug and alcohol rehabilitation course, he could be out of prison within four years. Part of the agreement is for Skilling to quit trying to get his conviction overturned. This new ruling also frees up some money from Skilling's estate that will be used to compensate victims of the fraud, including former Enron employees who lost their retirement when the company went bankrupt. Diana Peters is one of many former Enron employees who was at the latest trial and is quoted as follows:

"I pray that your decision is to give Jeff Skilling the maximum sentence for his crimes." 

Fraud always ends in a sad story as innocent victims deal with the aftermath by experiencing serious devastation, suffering and heartache. My heart goes out to these former Enron employees who had nothing to do with the crazy games Skilling, Fastow, Lay and others were playing...

Former Enron CEO Working a Deal to Get out of Prison

Mainstream news sources are saying that Jeffrey Skilling, former Enron CEO, is working a deal to cut his prison sentence by more than a decade. The reports say that...

Wall Street Justice: An Oxymoron?

It looks like the U.S. Department of Justice has decided to give Wall Street firms and their top executives a "get out of jail free" card over the last several years. The latest example of this is the MF Global scandal with the former governor of New Jersey, Jon Corzine, and company appearing to get away with $1.6 billion of customer assets that are "missing." An Op-Ed in the NY Times explains Corzine's crimes this way:

WikiLeaks versus the SEC

No, (to my knowledge) Wikileaks hasn't released detailing corruption in the SEC.  Instead, Sherron Watkins, the primary whistleblower in the Enron fraud, weighed in on the SEC's new incentives for whistleblowers.  In a panel discussion about whistleblowers held by the New York State Society of Public Accountants, Watkins said the following (via the PaperTrail):

Skilling and the Supreme Court

The WSJ just reported that the U.S. Supreme Court has ruled that at least part of Skilling's conviction in the Enron fraud case needs a closer look. The article is quite short right now but the key quote is as follows:

The justices sent the cases back to two different lower courts to determine whether portions of Skilling and Black's convictions should be thrown out.

An AP news release explained further that:

"Enron: The Smartest Guys in The Room," to premiere on CNBC tonight

Tonight (April 1) at 9pm ET, CNBC will premiere a documentary on the Enron fraud.  The Enron story continues to be relevant, as the Supreme Court is currently reviewing former CEO Jeffrey Skilling's appeal.  You can find more info on the documentary here, and here is a preview:



Note: although this is a fraud blog where we frequently discuss deception, as far as I know, this is not an April Fool's joke.

Skilling and the Supreme Court

The LA Times has more information on the Skilling appeal to the Supreme Court. Based on this article, it appears that Skilling has a good chance of getting a reduced sentence because of a vague law called the "honest services" law. Whether he has a chance of being set free is unclear in my opinion. Here are a few key quotes:

The justices, both conservatives and liberals, agree on the principle that a criminal law must clearly state what is a crime. And the law that makes it a crime to "scheme . . . to deprive another of the intangible right of honest services" is anything but clear.

During Monday's argument, a lawyer for Skilling said that under the government's approach, it could be a crime for an employer to use an office computer for his personal use.

... It was the third time in recent months the justices have voiced doubt about the "honest services" law. However, even if part of Skilling's conviction were overturned, government lawyers say some of his conviction for securities fraud should stand.

Most crooked CEOs

Time Magazine online lists their top ten most crooked CEOs (Criminal Executive Officers). At the top of the list is Bernie Madoff. Also on the list are the CEOs of the major financial statement frauds of the past decade including Enron's Lay and Skilling (2nd), Tyco's Kozlowski (3rd), Adelphia's Rigas (4th) and WorldCom's Ebbers (10th).

Could Skilling be set free?

Today's WSJ reported that the U.S. Supreme Court has agreed to hear arguments that Jeffrey Skilling's trial for fraud at Enron was not fair since it took place in Houston. The juror selection process appears to have been weak. I guess we'll have to see if Skilling will be set free by the Supreme Court.

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.

SEC to require disclosures on global warming risks

Yes, that's right, the SEC has announced that it wants public companies to try to estimate the risk that global warming poses for their assets or operations! No, I didn't get this off The Onion News Network either! Just do a Google Search and you will see articles in The NY Times and elsewhere.

So what does this mean? I suppose, for example, if the company believes it is too close to the rising oceans and could be under water sometime in the next millennium then it needs to disclose that risk! Also, if a company believes legislation on global warming could negatively impact future earnings then the company needs to disclose that risk.

I personally think that the effects of global warming are so hard to predict that companies could comply with this requirement in one sentence: "The effects of global warming or legislation related to global warming on the Company's assets or operations are not estimable in any reliable way." Seems like some wasted ink to me. Maybe the SEC wants companies to say something like: "The impact on the environment from the extra paper necessary to disclose the possible effects of global warming will not lead to any serious litigation since the company is required by the SEC to go through this silly exercise!"

We can only assume that the SEC will be spending time and money reviewing these disclosures to determine if companies are sufficiently complying. Never mind that they had their hands full and failed to regulate some huge Ponzi schemes such as those operated by Bernie Madoff and R. Allen Stanford before investors lost tens of billions in these schemes! Is this really a priority?!

It seems that investors have serious risks of fraud in this world. Scammers such as Madoff, Pang, Stanford, and companies such as Enron, Worldcom and Satyam need to be regulated and shut down. The SEC needs adequate resources to do these jobs and it has appeared to lack the necessary funding for decades. However, if this is their focus in the future then I question whether voters will sympathize with their calls for additional funding!

Fraudster of the year award...

Have you ever wondered what Bernie Madoff, Ken Lay and Tiger Woods have in common? This NY Times Op Ed makes the connection and nominates Tiger Woods as the fraudster of the year!

Enron Update

The WSJ reports that the Supreme Court will consider the appeal of Jeffrey Skilling, former President, CEO, and COO of Enron:

The justices agreed to look at two issues in the Skilling appeal. Both could have broader repercussions in criminal cases, say legal observers. One has to do with the government's contention that Mr. Skilling violated his legal obligation of providing "honest services" to Enron shareholders because he lied to the public about the company's financial condition. Enron collapsed into bankruptcy in December 2001. The second issue involves Mr. Skilling's claim that he wasn't able to get a fair trial in Houston, Enron's headquarters, because of anger in the community over the company's collapse.

I find it curious that eight years after Enron's collapse we still see some ambiguity regarding the legal consequences of the Enron scandal.  If nothing else, this highlights the increased opportunity that managers have to get away with fraud, as financial statement fraud appears to be a difficult crime to prove/prosecute.

Huron and Arthur Andersen

Some of you probably have heard about Huron Consulting Group Inc's restatement recently. You should read this article about Huron's connection to Arthur Andersen. Here are a few tidbits:

You can take the accountant out of Arthur Andersen. You can’t take the Arthur Andersen out of the accountant....Huron was founded by about two dozen Arthur Andersen LLP partners in March 2002...Today, Huron is better known as the forensic-accounting shop that couldn’t keep its own books straight, and blew up its business model in the process...There hasn’t been an accounting fiasco this rich with irony since the tax-return preparer H&R Block Inc. had to redo its financial reports in 2006 to correct errors in its accounting for corporate taxes.