California's Gestapo-3

On 19 June 2010 I got the California State Board of Accountancy's Spring 2010 Update. From page 18, "Do you presently live and work out of state, but continue to maintain an active California CPA license? The CBA has some important tax-related information for you. Required by law, the CBA must provide the FTB, upon request, specific information including your name, address, social security number, and license status. The FTB may then use its authority under the Revenue and Taxation Code to generate a request for tax return information from any California-licensed CPA who does not file a California tax return, regardless of his/her state of residence, and require you to provide proof that you did not earn income in California. Failure to respond to the FTB request for tax return information for any reason, including non-receipt of the request, can result in the FTB filing a lien against you. The CBA does not receive any notification when such a demand letter is generated by the FTB and the CBA does not have access to any information in this regard. if you have any questions, regarding this process or want information, please contact the FTB at (916) 845-7057", my emphasis.

The FTB is desperate. Imagine, shifting the burden of production to an out-of-state resident. Is the FTB kidding? The FTB may wind up in federal court over this. Would the FTB knowingly and wilfully mail "requests" for "tax return information" to wrong addresses then file liens? Will the DOJ then pursue the FTB for mail fraud, 18 USC 1341? Don't hold your breath. What would the FTB accept as proof? An affidavit from a Texas Ranger that I did not set foot in California during 2009? Should each California CPA who lives out-of-state CPA have a "cop" follow him around all year to provide the affidavit? This is another FTB abuse. If you are financially solvent and can leave California, do. Why doesn't the CBA get notification? The CBA claims among other things to protect the interests of CPAs. Good luck.

One of my tax clients is in a dispute with Massachusetts about interstate tax allocation. Taxachusetts wants to tax his earnings in New Hampshire and Texas. He may wind up in court over this.

Yves Smith and Junior on TARP

Yves Smith (YS) has a 23 June 2010 post at her Naked Capitalism blasting "Timmy Boy" Geithner's recent comments about TARP's "success". YS's got this knocked. Here's a link: http://www.nakedcapitalism.com/2010/06/geithner-yet-again-misrepresents-tarp-performance.html. YS notes that to make TARP look successful the Fed and Treasury sanctioned accounting fraud. What else is new? Remember, the SEC, part of the Treasury, controls the PCAOB. Doesn't that give you the "warm and fuzzies"? The supposed "police force" of the CPA profession must ignore banks' accounting fraud. Think about it.

Junior at Junior Deputy Accountant delivers a Sonny Liston-like left hook on 23 June 2010 to Timmy Boy, here:

http://www.jrdeputyaccountant.com/2010/06/tim-geithner-has-completely-forgotten.html. Go Junior!

The SEC and DOJ Fold

"The Justice Department's decision last week to abandon a criminal probe against current and former exectuives at [AIG] underscores the difficulty facing prosecutors who want to hold individuals criminally accountable for the financial crisis. ... But, late last Friday, Mr. Cassano and two colleagues who were also investigated were told through their lawyers that they wouldn't face criminal charges after prosecutors found evidence supporting Mr. Cassano's account, people familar with the matters said. ... The conclusion of the two-year criminal investigation marks a setback for prosecutors who have come under public and political pressure to find evidence of criminal conduct in the wake of the recession. ... The travails aren't over for Mr. Cassano. The [SEC], which has to meet a lower standard of proof, is considering whether to file civil charges, according to people familiar with the matter. Mr. Cassano's lawyers declined to comment on the civil probe. ... For months, they believed Mr. Cassano hadn't disclosed to senior AIG executives or its auditors, PricewaterhouseCoopers LLC, that an accounting adjustment allowed his unit to avoid writing down the value of its swaps by billions of dollars, these people said. PwC declined to comment", Amri Efrati at the WSJ, 24 May 2010: http://online.wsj.com/article/SB10001424052748704904604575262942729708122.html.

"The [SEC] dropped its investigation of a former [AIG] executive who ran a subsidiary at the center of AIG's problems, following a similar move last month by prosecutors. ... Federal investigtors looked into whether [Joseph] Cassano misled investors with reassuring statements about AIG's exposure to mortgage losses, people familiar with the matter have said. A turning point came when prosecutors found evidence Mr. Cassano did make key disclosures. ... Mr. Cassano's lawyers called the SEC's move 'completely appropropriate in light of the facts.' They said the SEC staff 'realized that our client acted in good faith, kept his superiors informed, and was honest with investors", Kara Scannell at the WSJ, 17 June 2010, link: http://online.wsj.com/article/SB10001424052748703513604575311350142446886.html.

Well SEC? Will you now go after PWC for its wonderful AIG audit? Well PCAOB?

I expected this after the DOJ folded.

Are CPAs Racist?

"Thomas Jones decided to go into accounting when a CPA spoke about the profession at his high school's career day. ... But Jones' story is uncommon. African-Americans make up only about 1 percent of all certified public accountants, according to a paper published this year by Howard University. ... Frank Ross, director of the Howard University School of Business Center for Accounting Education and one of the founders of the NABA, said lack of awareness about accounting, low success with the Uniform CPA Exam [UCPAE] and difficulty retaining African-Americans all contribute to the small number of African-American accountants. ... Often, young people in minority communities don't have the role models or mentors to teach them what accounting is about, said Gregory Johnson, executive director and chief operating officer of the NABA. ... The CPA Bound program, for example, supports people working to become certified, tracks their progress and recognizes them at NABA conferences after passing the [UCPAE]", my emphasis, Salvador Rodriguez at the Houston Chronicle, 15 June 2010, link:

http://www.chron.com/disp/story.mpl/headline/biz/7053295.html.

What percentage of CPAs does Jones expect to be black? 13%? Estimating you need at least 120 IQ to pass the UCPAE, that's 1.33 STDV above the caucasian mean or thanks to hyperstaz, the .909 level. It's also 2.40 STDV above the black mean, the .992 black level, so why be surprised with the result?

Accounting Onion Almost Makes Me Cry

Tom Selling's 15 June 2010 post at Accounting Onion applies SFAS 52, Foreign Exchange Accounting, giving an absurd result. He slams the SEC, FASB and Big 87654 all at once for this. Good show Tom. Here's a link:

http://accountingonion.typepad.com/theaccountingonion/2010/06/asu-2010-19-when-a-dollar-of-cash-is-more-than-a-dollar-on-the-balance-sheet.html. Thank you Hugo Chavez for creating this anomaly. In rereading Tom's post I got an idea for Citigroup's treasury department. Incorporate a Venezuelan subsidiary; put $50 billion USD in it and presto, instant profits. Well Vikram Pandit, whaddayasay? I figure this idea is worth 1%. I'll expect my $500 million check within 30 days. Tom: If I get the $500 million, half is yours. I'll let you know.

More Self-Serving AICPA Claptrap

I got an e-mail from the AICPA's "Center for Audit Quality" on 16 June 2010, saying it opposes a permanent exemption for companies with market capitalizations under $75 million from compliance with SOX section 404. The Center opposes this to protect investors. Would an AICPA organ favor creating make-work projects for CPAs? No. The Center is the old AICPA SEC Practice Section in new garb. Consider how much the AICPA has improved audit quality since 1976. Not much. Here's a link to the letter sent Congress:

http://www.thecaq.org/publicpolicy/pdfs/CAQCIICFAInstitutelettertoConfereesRESOX404b61510.pdf. Don't laugh too hard in reading this.

Mary Schapiro's Mythology

Tom Selling (TS) at Accounting Onion, blasts SEC Chairwoman Mary Schapiro (MS) with respect to her support of IFRS convergence, 26 May 2010, link:

http://accountingonion.typepad.com/theaccountingonion/2010/05/mary-schapiro-mythbuster-or-myth-maker.html. I agree with TS and expect MS to do nothing which will improve the quality of financial reporting during her SEC tenure.

LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Forbes Exposes DOJ Extortion Racket

"In 2007 Weatherford International, an oil service firm with roots in Houston, discovered it might have a bribery problem on its hands--one or more of its employees might have paid bribes in Europe. ... By that time [William] Jacobson had left Justice to join Fulbright [& Jaworski] as a partner and started doing compliance work for none other than Weatherford. ... Nice work if you can get it--and to the tune of billions of dollars, lawyers, accountants and consultants, many with past ties to the Justice Department, are getting it. ... Whether it's having any impact on reducing bribery is another matter. Instead, companies can find themselves getting extorted in foreign lands, only to get extorted again by Washington. ... More likely, the company pays out huge fines and then hires more lawyers as government-mandated compliance monitors, a job that can stretch into years of legal billings. ... Mark Mendelsohn, 42, headed the [DOJ's] FCPA unit when the surge in enforcement largely occurred. ... 'At some point a new person will sit in my seat,' said Mendelsohn while on stage with a group of FCPA defense lawyers at a conference in February. 'I will join Peter and Richard and Mary on the other end of the dais.' ... For decades the FCPA, which prohibits bribery of foreign officials, was a sleepy statute, hardly enforced. ... In 2000 federal prosecutors brought no FCPA actions. In 2004 there were 3. Last year ther ewere 34 criminal FCPA actions. A lot more are in the pipeline. The [DOJ] has 150 open FCPA investigations. ... The prosecutors, though, are doing something else at the same time. They are creating a lucrative industry--FCPA defense work--in which they will someday be prime candidates for the cushy assignments. ... But there is nothing to stop prosecutors from ginning up cases that will feed the lawyers who used to have their jobs or from looking forward to a payday in the private sector that will be made possible by their busy successors at Justice. ... The grandaddy of cases is the one involving Siemens, Europe's biggest engineering firm. ... Debevoise and Deloitte charged $850 million in fees and expenses. ... Lawyers and accountants also made a fortune off a recently resolved Daimler bribery case. ... Deloitte, which has an FCPA practice headed by Edward Rial, a former federal prosecutor, got its time at the feeding trough. Delotte declines to comment. [Robert] Bennett says his work was in the bet interest of the company facing serious prosecution", my emphasis, Nathan Vardi at Forbes, 24 May 2010, link: http://www.forbes.com/forbes/2010/0524/business-weatherford-kbr-corruption-bribery-racket.html.

I supppose MM was creating a job for himself for the time he was to leave the DOJ. The FCPA was rarely enforced until MM decided he needed a post-DOJ position. AUSAs "ginning up cases"? "Say it ain't so, Joe". Gag me with a spoon. Until you've seen the DOJ at work, you can't believe how incompetent and corrupt the typical AU attorney and AUSA is. You can't believe it. Why did my "girlfriend" Mary Jo White threaten to indict Joe Jett? If couldn't be because GE's Jack Welch wanted it, could it? GE didn't pay off by hiring Debevoise & Plimption to represent it in various matters? How dare you think such a thing. See my 31 December 2008 and 1 May 2010 posts:

http://skepticaltexascpa.blogspot.com/2008/12/justice-department-extortion-racket-4.html.
http://skepticaltexascpa.blogspot.com/2010/05/justice-department-extortion-racket-6.html.

ObamaCare Accounting

"Earlier this week, House Democrats concluded that the deluge of corporate writedowns--amounting to $3.4 billion so far--were in fact the result of ObamaCare, not the nefarious conspiracy that the White House repeatedly cited when it was embarrased soon after the bill's passage. ... 'The companies acted properly and in accordance with accounting stndards in submitting filings to the SEC in March and April,' [staffers] write. ... The larger question is what motivated the White House to unleash the assault. Democrats were amply warned about the destructive consequences of these tax changes, and if they really thought these companies were acting out of political motives, then they didn't understand what was in their own bill. Or at least that's one possibility. More likely is that they did know and were simply trying to mislead the public in the early days of what was supposed to be the raptuous response to ObamaCare's passage", WSJ Editorial, 29 April 2010, link:

http://online.wsj.com/article/SB10001424052748704423504575212422971814134.html.

If the Democrats were serious, they should had the SEC look into these disclsoures. The Democrats were grandstanding.

Some Assets?

"No one likes taxes, and investors always should be wary of assets based on them. ... Deferred-tax assets and liabilities arise because of differences in tax accounting, which is based on cash payments, and accounting for financial-reporting purposes, which assigns revenue and expenses to the period in which they occur. ... Citigroup ... reported $46 billion in deferred-tax assets at the end of 2009, triple the level of two years earlier, a result of huge losses. The bank steadfastly has maintained there isn't doubt over its ability to use these assets, basing this on expectations of being able to return to profitability", David Reilly at the WSJ, 10 April 2010, link:

http://online.wsj.com/article/SB10001424052702304222504575174071159514594.html.

I wish Citigroup and its CPAs, KPMG, good luck. I last commented on Citi's deferred-tax assets on 16 March 2009: http://skepticaltexascpa.blogspot.com/2009/03/peter-wallison-advocate.html.

Another Impossible Product

"Some big changes are happening in funds favored by safety-seeking retirement savers. ... 'What the credit crisis exposed is that these vehicles are much more complex than people assumed,' says Steve Deutsch, who tracks the funds at investment-research firm Morningstar Inc. ... This added protection allows investors to trade in and out at a relatively stable value rather than at the underlying portfolio's actual market value, which can bounce around. ... Some funds' market value dropped sharply, making them more reliant on their wrap contracts to deliver book value to investors. That, combined with general bond-market upheaval, made issuers more reluctant to offer the protection. Though the market has stabilized, there is still a significant shortage of wrap contracts, causing higher fees and other headaches for stable-value funds [SVFs] and their investors. ... The Employees Retirement System of Texas, which administers 401(k) and 457 plans for state employees, late last year decided not to renew its contract with its stable-value provider. Its fund's market value early last year dropped to just 89% of book value--helping to push the 'crediting rate,' essentially the yield investors receive, to 3% currently, down from 4% at the start of 2009. ... The shortage of wrap contracts is causing come managers to hold bigger cash stakes, a drag on performance. ... Given the great demand and limited supply of wrap contracts, the issuers of these contracts have plenty of power to dictate their own terms, which aren't always favorable to investors. One outcome: higher fees. ... The wrap provides 'can be as strict as their want to be on terms,' says Chris Tobe, a senior consultant at Bridenbach Capital Consulting who helps employers review [SVFs]. ... All this adds up to lower returns for investors. The average [SVF] delivered 3.1% last year, down from 4.6% in 2008, according to Hueler Cos., which tracks the stable-value industry. ... Investors may also find tighter restrictions on their ability to move from the funds to other investments. Many [SVFs] have long considered certain other investment options, such as money-market funds 'competing funds.' ... Stable-value investors also are vulnerable to rising interest rates. When rates start to rise, yields of money-market mutual funds will likely tick up faster than those on [SVFs]. ... Many newer stable-value products have a number of different wrap-contact issuers, ensuring that investors can trade in and out at book value. Amid the shortage of wrap insurance, though, some firms are seizing the opportunity to reintroduce older types of stable-value products that are backed by a single insurer and carry considerable risks", my emphasis, Eleanor Laise at the WSJ, 1 May 2010, link:

http://online.wsj.com/article/SB10001424052748703572504575214723494032604.html.

SVFs always struck me as a scam. They are sold as if they are bank deposits. If you want to be able to redeem your "investment" at par, you should hold bank deposits. But they pay lower interest rates than other "investments". Precisely. The limit to how "strict" the wrap providers can be is the bank interest rate. The existence of SVFs is another result of Zimbabwe Ben's zero interest rate policy. Of course SVF interest rates change slower than money-market funds. SVFs have longer maturities than money-market funds. Mencius Moldbug has done some fine work describing maturity transformation, which is what SVFs try to sell.

Banks and CPAs

"With all the attention to banking regulation, it seems strange that something called Basel III has escaped widespread notice, even though its various new rules have been up for public discussion since January and the window closed on that opportunity on Friday, April 16. Maybe it's because the Basel Accords, a set of rules agreed to by bank regulators around the world, have been something of an embarrasment to the authors. ... The idea was to give an increasingly globalized financial-services industry a common set of rules so that bankers could have more confidence in the solidity of their global counterparties. ... In an unsuprisingly generous gesture toward national treasuries, banks were allowed to regard government-issued securities as zero risk, meaning they would require not offsetting capital. ... Japanese banks were boasting that they were over-compliant with Basel standards right before they tanked in 1990. ... But the Basel standards proved to be largely irrelevant to the factors that caused the fall 2008 near-meltdown of global finance. For example, Lehman Brothers had close to triple the core capital required by the Basel standards when it crashed. ... The 2008 crisis resulted when the Fed-created credit bubble collapsed and soaring housing prices deflated as well. ... One of the great ironies of our times is that the two strongest defenders of the Fannie-Freddie shell game, Chris Dodd and Barney Frank, are now in charge of reforming banking regulation. ... Aside from giving Washington an even tighter grip on the banking industry, the Dodd bill partly institutionalizes what Ben Bernanke at the Fed and Henry Paulson at Treasury, and Timothy Geithner at the New York Fed did ad hoc in the fall of 2008. It permits backdoor bailouts and gives enormous powers to the same Fed that crafted the housing bubble", my emphasis, George Melloan at the WSJ, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192534100550538.html.

The Dodd bill stinks. It's more of the same and more TBTF bailout. I agree with Melloan. There is virtually no rule that banks can't "engineer" around. Irony? Or as Yves Smith says, "Feature, not bug".

What Loophole?

"As it neared collapse in 2008, Lehman used an accounting gimmick to move $50 billion in assets off its books. The firm did this thanks to a more-than-questionable interpretation of accounting rules governing the treatment of repo transactions. ... Yet this apparently didn't raise red flags with the firm's auditor, Ernst & Young LLP, or the [SEC]. The lesson: Regulators should move toward a system where companies are judged by the substance of what they are trying to achieve, rather than meeting the definition of accounting rules", my emphasis, David Reilly (DR) at the WSJ, 13 March 2010, link: http://online.wsj.com/article/SB10001424052748704131404575117733017612228.html.

"The UK's Financial Reporting Council, the regulator for accounting and auditing, said Monday it had started looking at how Lehman Brothers Holdings Inc. repo transactions were accounted for and audited in the UK. It said it was seeking extra information from Lehman's former auditor, [E&Y]", Greg Manuel at the WSJ, 16 March 2010, link: http://online.wsj.com/article/SB10001424052748703909804575123913796112340.html.

DR, here's news for you: that's what we supposedly have now! The lawyer-infested SEC can't function at a level beyond that of "summary judgement". I don't know how many times I discussed "substance vs. form" with SEC personnel. They just don't get. Or do they? The IRS has a "step transaction doctrine" and realizes the substance and form of transactions may differ. The SEC apparently doesn't.

It's good to see someone look at this aside from the SEC.

Crony Capitalism's Foundation

"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepeneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited to (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. ... Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the [SEC] the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. ... Are we to believe that regualtors were unaware? ... The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. ... Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated... In a paper for [Fed's] Jackson Hole Conference in 2008, economist William Buiter described 'cognitive capture,' by which regulators become incapable of thinking in terms other than that of the industry. ... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. ... We call that system not the free market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ... Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. ... Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html.

I have said things like GO for decades.

What New Rule?

"Discover Financial Services Inc. will implement a new accounting rule requiring companies to bring their off-the-books securitized loans onto their balance sheet in fiscal 2010. The rule would result in a $1.3 billion after-tax charge to equity in the first quarter, the company said in December. As a result of this change, Discover will bring on its books $21 billion of assets and increase reserves by $2.1 billion. ... In a report published Friday, analysts at Barclays Capital said, 'We believe the reserve build is one-time in nature and could lead to more rapid earnings improvement in subsequent quarters as the company front-loads reserves'," Aparajita Saha-Bubna at the WSJ, 15 March 2010, link:

http://online.wsj.com/article/SB10001424052748704131404575117730637019818.html.

What new rule? Likely Discover kept these assets off its books by misapplying existing rules. See my 6 February 2008 post:

http://skepticaltexascpa.blogspot.com/2008/02/treasury-and-banks.html.

Lehman's Whistleblower

"Lehman Brothers Holdings Inc. ousted a whistle-blower just weeks after he raised red flags about the securities firm's accounting in 2008. Matthew Lee, a 14-year Lehman veteran, was let go in late June 2008 amid steep losses at the firm as it tried to maneuver through the global financial crisis. Earlier that month, he had raised concerns with Lehman's auditor, Ernst & Young, that the securities firm was temporarily moving $50 billion is assets off its balance sheet. ... Erwin Shutak, Mr. Lee's lawyer in San Diego, asserts that 'it was easier to just shut him up and let him go'," Michael Corkery at the WSJ, 16 March 2010, link:

http://online.wsj.com/article/SB10001424052748704588404575124134271085018.html.

Sure it was. Where was E&Y hiding when this went on? Don't you know Lehman's firing Lee discredited him? Sure. Ask E&Y. ML's firing could be an overt act to support a RICO claim against Lehman and E&Y if some attorney wanted to pursue it. It could be an early act in a fraud scheme. Aren't you impressed with how effective Sarbox was in protecting ML?

COYOTE

"Matthew Lee, a Lehman Brothers Holdings senior vice president, warned in a May 2008 letter that he believed 'senior management' may have violated Lehman's internal code of ethics by misleading investors and regulators about the true value of the firm's assets. ... A full version of the letter was reviewed Friday by the [WSJ]. Ms. Callan didn't return a phone call seeking comment. ... Mr. Lee, a 14-year veteran who headed the firm's global balance-sheet and legal-entity accounting, said Lehman had 'tens of billions of dollars of unsubstantiated balances, which may or may not be "bad," or non-performing assets.' ... At the time, India investment was drawing scrutiny from Lehman critics, including David Einhorn of hedge fund Greenlight Capital Inc. ... Lehman said in the spring of 2008 that it booked the gains because an investor had invested in the venture at a higher valuation than Lehman's investment. ... Mr. Lee's lawyer, Erwin Shustak, of San Diego, said his client had complained orally for several months to his boss, Martin Kelly, Lehman's former global financial controller, about many of the same issues he raised 'formally' in his letter. ... Mr. Shustak said his client was demoted about two months before he wrote the letter, which was drafted with help from the attorney. Mr. Lee was terminated a few days after he wrote the letter. ... In a statement, Ernst & Young said Lehman management determined that Mr. Lee's 'allegations were unfounded.' ... Mr. Lee and Lehamn ultimately negotiated a severance agreement which his lawyer said precluded him from filing a lawsuit or a whistle-blower complaint under the Sarbanes-Oxley Act", my emphasis, Michael Corkery at the WSJ, 20 March 2010, link:

http://online.wsj.com/article/SB10001424052748704534904575132120222684184.html.

Since when can a contract abrogate a law? The lawyers who drafted the severance agreement should be disabarred. Now. All lawyers who practice in front of the SEC should get a latter from the SEC stating that any lawyer involved in drafting such an agreement in the future will have his entire firm barred from practice in front of the SEC. Immediately. Aren't you impressed with E&Y's work? It asked Lehman management if Lee was right. Amazing. Tens of billions? What did E&Y look at?

Sue a Bank?

"A court ruled Thursday that investors who lost money in Bernard Madoff's Ponzi scheme through funds set up by UBS AG can't sue the Swiss bank and its adviser Ernst & Young for the losses they incurred. ... Instead, they must rely on the fund liquidator to obtain compensation for them from UBS. ... One state court in Palm Beach County, Fla., last mont allowed some claims to proceed by investors against a Madoff feeder fund firm, Tremont Group Holdings Inc., and its auditor, KPMG LLP. The court hasn't ruled on the merits of the lawsuit, which alleges professional malpractice, among other things. ... Responding to the ruiling, UBS said only that it welcomes the clarification of the Luxembourg law. The bank has maintained that it set up the fund at the request of wealthy clients who wanted it to invest in Madoff products and doesn't have any responsibility for the result", Mike Gordon at the WSJ, 5 March 2010, link:

http://online.wsj.com/article/SB10001424052748704187204575100932943214368.html.

This ruling may not be that bad if the liquidator vigorously pursues the claims. If. As to UBS responsibility, was it acting only as a broker or as an adviser?

Now They Ask?

"Unlike past market meltdowns, auditors have so far escaped much of the blame in the current financial crisis. The focus on Ernst & Young LLP [E&Y] in the report released last week by the bankruptcy examiner for Lehman Brothers Holdings Inc. [LBHI] has changed that. ... In a statement Friday, a spokesman for E&Y said the firm reviewed the accounting for Lehman's Repo 105 deals 'on a number of occasions. Out view was, and continues to be, that Lehman's accounting policy for these repo transactions complied with generally accepted accounting principles. The Examiner has not concluded otherwise.' ... That has precluded the kind of in-depth bankruptcy-court examination that resulted after Lehman's collapse. This approach contrasts with the bursting of the tech-stock bubble, when the implosion of Enron Corp. and WorldCom Inc. put auditors directly on the hot seat. ... Those scandals led to the Sarbanes-Oxley Act, which changed some key ways in which accounting firms operate and are regulated. ... While E&Y maintains its audits were proper, the accounting for Lehman's Repo 105 deals appears dubious to some outside experts. 'Unless it's in "Alice in Wonderland," I've never seen this,' said Lynn Turner, former chief accountant of the [SEC]. Even if the deals are within the technical bounds of the accounting rules, experts say it appears they failed to reflect the deals' true purpose. .... These are usually accounted for as a financing arrangement akin to a loan. ... One possible proof of a lack of control is that the securities being exchanged are worth far more than the cash being received. ... Guidance in the accounting rules suggests that an exchange of securities in excess of 102% of the cash value would show a lack of control. ... And Lehman should have had some reason for the 105% level, said Jack Ciesielski, editor of the Analysts's Accounting Observer. ... The problem, accounting experts said, is that in an accounting treatment isn't allowed for a US parent company, transferring a deal to an overseas subsidiary isn't likely to pass muster", my emphasis, David Reilly at the WSJ, 15 March 2010: http://online.wsj.com/article/SB10001424052748703457104575121920770049774.html.

Another Big 87654 disgrace. Had E&Y ever heard of substance over form? The Repo 105 deals were clearly financings. What did E&Y think motivated Repo 105? Answer: end run the 102% rule! E&Y must be full of craven idiots? What should we expect from E&Y which sanctioned the '.001 standard", in another context? See my 20 March 2010 post: http://skepticaltexascpa.blogspot.com/2010/03/lehmans-fiddles.html.